IAB Management Accounting & Analysis 3 — Questions and Answers
Question 1: When using activity-based costing (ABC), cost drivers are used to:
- Allocate overhead to products based on their consumption of activities (Correct answer)
- Calculate direct material variances
- Determine the payback period of capital investments
- Set transfer prices between divisions
Correct answer: Allocate overhead to products based on their consumption of activities
ABC assigns overhead costs to products by identifying activities and using cost drivers that reflect each product's actual resource consumption.
Question 2: A company's sales budget shows 10,000 units. Beginning inventory is 500 units and desired ending inventory is 800 units. How many units should the production budget show?
- 10,300 (Correct answer)
- 9,700
- 10,800
- 9,200
Correct answer: 10,300
Production = Sales + Ending inventory − Beginning inventory = 10,000 + 800 − 500 = 10,300 units.
Question 3: Which variance measures the difference between actual labor hours worked and standard hours allowed, multiplied by the standard rate?
- Labor rate variance
- Labor efficiency variance (Correct answer)
- Variable overhead efficiency variance
- Fixed overhead volume variance
Correct answer: Labor efficiency variance
Labor efficiency variance = (Standard hours − Actual hours) × Standard rate, reflecting workforce productivity.
Question 4: Under the net present value (NPV) method, a project should be accepted when:
- NPV is zero
- NPV is negative
- NPV is positive (Correct answer)
- IRR equals the hurdle rate
Correct answer: NPV is positive
A positive NPV means the project's returns exceed the required rate, adding value to the firm.
Question 5: Transfer pricing is primarily used to:
- Determine the selling price to external customers
- Assign costs between departments or divisions within the same organization (Correct answer)
- Calculate the cost of goods sold on financial statements
- Measure gross profit margin on product lines
Correct answer: Assign costs between departments or divisions within the same organization
Transfer prices establish the internal price at which goods or services are exchanged between segments of the same entity.
Question 6: Which budgeting approach starts from zero each period, requiring managers to justify all expenditures from scratch?
- Incremental budgeting
- Rolling (continuous) budgeting
- Zero-based budgeting (Correct answer)
- Flexible budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting (ZBB) requires every line item to be justified anew each cycle rather than simply adjusting prior-year figures.
Question 7: Which of the following best describes a flexible budget?
- A budget that is adjusted for the actual level of activity achieved (Correct answer)
- A budget that allows managers to spend freely without limits
- A long-range strategic plan expressed in financial terms
- A budget that allocates costs using activity-based drivers only
Correct answer: A budget that is adjusted for the actual level of activity achieved
A flexible budget recalculates expected costs at the actual activity level, enabling meaningful variance analysis.
IAB Management Accounting & Analysis 3
When using activity-based costing (ABC), cost drivers are used to: