IFA Management Accounting & Budgeting 3 — Questions and Answers
Question 1: Which variance measures the difference between the actual price paid for materials and the standard price, multiplied by actual quantity purchased?
- Material usage variance
- Material mix variance
- Material price variance (Correct answer)
- Material yield variance
Correct answer: Material price variance
The material price variance = (Standard price – Actual price) × Actual quantity purchased.
Question 2: A rolling budget is best described as:
- A budget that cannot be changed once approved
- A budget continuously updated by adding a new period as the most recent period ends (Correct answer)
- A budget based entirely on prior-year actuals rolled forward by inflation
- A long-term capital budget reviewed every five years
Correct answer: A budget continuously updated by adding a new period as the most recent period ends
Rolling budgets extend the planning horizon by appending a new future period each time a current period closes.
Question 3: Under marginal costing, which of the following costs is treated as a period cost and NOT included in closing inventory valuation?
- Direct materials
- Direct labour
- Variable production overhead
- Fixed production overhead (Correct answer)
Correct answer: Fixed production overhead
Marginal costing charges fixed production overheads as period costs in the income statement rather than carrying them in inventory.
Question 4: Activity-based costing (ABC) improves overhead allocation by:
- Spreading all overheads equally across all products regardless of complexity
- Using cost drivers that reflect the actual consumption of resources by each product (Correct answer)
- Eliminating fixed costs from product costs entirely
- Applying a single plant-wide overhead rate based on direct labour hours
Correct answer: Using cost drivers that reflect the actual consumption of resources by each product
ABC traces overhead costs to activities and then to products using cost drivers that reflect how each product demands those activities.
Question 5: A company budgeted sales of 5,000 units but actually sold 4,500 units at a higher-than-budgeted price. The sales volume variance is:
- Favourable, because the higher price compensated for lower volume
- Adverse, because fewer units were sold than budgeted (Correct answer)
- Zero, because price and volume variances cancel out
- Favourable, because total revenue may still exceed budget
Correct answer: Adverse, because fewer units were sold than budgeted
The sales volume variance depends solely on the difference in units sold (4,500 vs. 5,000), making it adverse; price effects are captured separately.
Question 6: When preparing a cash budget, depreciation is:
- Included as a cash outflow equal to the annual charge
- Excluded because it is a non-cash item (Correct answer)
- Added back as a positive cash inflow
- Split equally over the useful life of the asset as monthly outflows
Correct answer: Excluded because it is a non-cash item
Depreciation does not involve a cash transaction, so it is omitted from cash budgets entirely.
Question 7: The margin of safety expressed as a percentage equals:
- (Budgeted sales – Break-even sales) ÷ Break-even sales × 100
- (Budgeted sales – Break-even sales) ÷ Budgeted sales × 100 (Correct answer)
- Fixed costs ÷ Contribution margin ratio × 100
- Contribution per unit ÷ Selling price × 100
Correct answer: (Budgeted sales – Break-even sales) ÷ Budgeted sales × 100
Margin of safety % = (Budgeted sales – Break-even sales) ÷ Budgeted sales × 100, showing how far sales can fall before a loss occurs.
IFA Management Accounting & Budgeting 3
Which variance measures the difference between the actual price paid for materials and the standard price, multiplied by actual quantity purchased?