IAB Management Accounting & Analysis 5 — Questions and Answers
Question 1: Residual income (RI) is calculated as:
- Operating income − (Required rate of return × Average operating assets) (Correct answer)
- Net income − Dividends paid
- Sales revenue − Variable costs
- Operating income ÷ Average operating assets
Correct answer: Operating income − (Required rate of return × Average operating assets)
RI subtracts an imputed capital charge (required return × assets) from operating income, measuring value earned above the minimum required.
Question 2: In throughput accounting, which resource is referred to as the 'constraint' or 'bottleneck'?
- The resource with the lowest unit cost
- The resource with the highest utilization that limits overall output (Correct answer)
- The resource responsible for the most scrap
- The resource with the largest budget allocation
Correct answer: The resource with the highest utilization that limits overall output
The bottleneck (constraint) is the resource whose capacity limits the system's overall throughput rate.
Question 3: A company spends $5,000 on a machine that is now obsolete. This $5,000 is BEST classified as a:
- Opportunity cost
- Differential cost
- Sunk cost (Correct answer)
- Avoidable cost
Correct answer: Sunk cost
A sunk cost is already incurred and cannot be recovered; it is irrelevant to future decisions.
Question 4: What does a favorable fixed overhead volume variance indicate?
- Actual fixed overhead was less than budgeted fixed overhead
- Actual production exceeded the standard volume used to set the overhead rate (Correct answer)
- Actual hours worked were less than standard hours allowed
- Actual variable overhead rate was below the standard rate
Correct answer: Actual production exceeded the standard volume used to set the overhead rate
Fixed overhead volume variance = Budgeted − Applied overhead; a favorable result means actual output exceeded the denominator volume.
Question 5: Which type of standard is considered most motivating because it is achievable with reasonable efficiency?
- Ideal (perfection) standard
- Basic (historical) standard
- Currently attainable standard (Correct answer)
- Maximum capacity standard
Correct answer: Currently attainable standard
Currently attainable (practical) standards assume efficient but realistic performance, motivating employees without setting impossible targets.
Question 6: In a joint cost allocation using the net realizable value (NRV) method, NRV is defined as:
- Selling price at split-off point
- Final selling price minus separable costs after split-off (Correct answer)
- Total joint cost divided by total units produced
- Gross profit percentage multiplied by sales price
Correct answer: Final selling price minus separable costs after split-off
NRV = Final selling price − Estimated separable processing and selling costs beyond the split-off point.
Question 7: A company's target profit is $80,000 and fixed costs are $40,000. The contribution margin per unit is $5. How many units must be sold to achieve the target profit?
- 16,000
- 8,000
- 24,000 (Correct answer)
- 32,000
Correct answer: 24,000
Units required = (Fixed costs + Target profit) ÷ CM per unit = ($40,000 + $80,000) ÷ $5 = 24,000 units.
IAB Management Accounting & Analysis 5
Residual income (RI) is calculated as: