IAB Management Accounting & Analysis 4 — Questions and Answers
Question 1: What is the primary purpose of a cash budget?
- To project net income for the period
- To forecast cash inflows and outflows and identify potential shortfalls (Correct answer)
- To allocate manufacturing overhead to products
- To record actual cash transactions in the ledger
Correct answer: To forecast cash inflows and outflows and identify potential shortfalls
A cash budget projects timing of receipts and payments, ensuring the business maintains adequate liquidity.
Question 2: The payback period method of capital budgeting is criticized mainly because it:
- Requires too much data to compute
- Ignores cash flows beyond the payback cutoff and the time value of money (Correct answer)
- Uses discounted cash flows incorrectly
- Always selects projects with the highest NPV
Correct answer: Ignores cash flows beyond the payback cutoff and the time value of money
Payback ignores profitability after the payback date and does not account for the time value of money, making it incomplete as a sole criterion.
Question 3: In segment reporting, a direct fixed cost is best described as:
- A cost that disappears if the segment is eliminated (Correct answer)
- An allocated cost shared equally across all segments
- A cost driven by variable activity within the segment
- A corporate overhead cost benefiting all segments
Correct answer: A cost that disappears if the segment is eliminated
Direct (traceable) fixed costs are specifically identified with a segment and are avoidable if that segment is dropped.
Question 4: A company reports a contribution margin of $200,000 and operating income of $50,000. What is the degree of operating leverage (DOL)?
- 0.25
- 4 (Correct answer)
- 2.5
- 0.4
Correct answer: 4
DOL = Contribution margin ÷ Operating income = $200,000 ÷ $50,000 = 4.
Question 5: Which cost behavior pattern remains constant in total regardless of activity level within a relevant range?
- Variable cost
- Mixed (semi-variable) cost
- Fixed cost (Correct answer)
- Step cost
Correct answer: Fixed cost
Fixed costs (e.g., rent) do not change in total as production volume rises or falls within the relevant range.
Question 6: What is the formula for Return on Investment (ROI) as used in divisional performance evaluation?
- Net income ÷ Total assets
- Operating income ÷ Sales revenue
- Operating income ÷ Average operating assets (Correct answer)
- Net income ÷ Shareholders' equity
Correct answer: Operating income ÷ Average operating assets
In management accounting, divisional ROI = Operating income ÷ Average operating assets, measuring asset utilization efficiency.
Question 7: Which of the following is an example of a qualitative factor in a make-or-buy decision?
- Variable cost per unit of the component
- Total fixed overhead that will be eliminated
- Supplier reliability and quality control (Correct answer)
- Opportunity cost of idle capacity
Correct answer: Supplier reliability and quality control
Supplier reliability is non-quantifiable but critical; quantitative factors include unit costs, fixed cost savings, and opportunity costs.
IAB Management Accounting & Analysis 4
What is the primary purpose of a cash budget?