CPFM - Certified Professional in Financial Management Cost Management and Analysis Questions and Answers 1

Question 1

A company is preparing its master budget for the upcoming fiscal year. After completing the sales budget, which of the following budgets is logically prepared next to determine the required level of manufacturing activity?

Accepted Answer

Production Budget

Answer

The master budget follows a specific sequence. The sales budget is the foundation, as it forecasts demand. The production budget is prepared next to determine the number of units that must be produced to meet sales needs and achieve desired ending inventory levels. All subsequent manufacturing-related budgets (direct materials, direct labor, overhead) are dependent on the figures established in the production budget.

Question 2

In a make-or-buy decision analysis, a company must evaluate the relevant costs of each alternative. Which of the following would be considered an irrelevant cost in this decision?

Accepted Answer

The portion of fixed factory overhead that will continue even if the part is purchased externally.

Answer

Relevant costs are future costs that differ between alternatives. Unavoidable fixed factory overhead is an irrelevant cost because it will be incurred regardless of whether the company makes the part or buys it from a supplier. Therefore, it does not influence the decision. Variable costs, avoidable fixed costs, and opportunity costs all differ between the 'make' and 'buy' options and are thus relevant.

Question 3

A manufacturing firm uses a standard costing system. An analysis of its direct materials variances reveals a significant favorable price variance and a significant unfavorable quantity variance. Which scenario is the most probable cause of this combination of variances?

Accepted Answer

The purchasing manager acquired lower-quality materials at a discounted price, which led to increased waste during production.

Answer

A favorable price variance occurs when the actual price paid for materials is less than the standard price. An unfavorable quantity variance occurs when more material is used than the standard amount allowed for the actual output. A common reason for this combination is the purchase of cheaper, lower-quality materials (creating a favorable price variance) that are difficult to work with, resulting in more scrap, spoilage, or rework (creating an unfavorable quantity variance).

Question 4

A company wants to determine the number of units it must sell to achieve a target pre-tax profit of $80,000. The company's product sells for $120 per unit, variable costs are $70 per unit, and total fixed costs are $220,000. How many units must be sold?

Accepted Answer

6,000 units

Answer

The formula to calculate the number of units for a target profit is (Fixed Costs + Target Profit) / Contribution Margin per Unit. The contribution margin per unit is the selling price minus the variable cost per unit ($120 - $70 = $50). Therefore, the calculation is ($220,000 + $80,000) / $50 = $300,000 / $50 = 6,000 units.

Question 5

Which of the following is a primary advantage of Activity-Based Costing (ABC) compared to traditional costing methods that use a single, volume-based overhead allocation rate (e.g., direct labor hours)?

Accepted Answer

It provides a more accurate assignment of overhead costs to products, leading to better decision-making.

Answer

The main advantage of ABC is its ability to provide a more accurate allocation of indirect (overhead) costs to products by using multiple cost drivers based on the activities that cause those costs. This leads to more precise product costing, which can improve strategic decisions related to pricing, product mix, and process improvement. Traditional systems can distort costs by arbitrarily spreading overhead based on a single, often unrelated, volume metric.

CPFM Practice Test

CPFM Practice Test

CPFM - Certified Professional in Financial Management Cost Management and Analysis Questions and Answers 1