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Question 1Financial Accounting and Reporting

Under IFRS, which component of a defined benefit pension plan's funded status is recognized immediately in other comprehensive income rather than in profit or loss?

  1. Actuarial gains and losses arising from changes in actuarial assumptions Correct answer.
  2. Past service cost from a plan amendment
  3. Interest cost on the net defined benefit liability
  4. Current service cost for the period

Explanation

IAS 19 requires remeasurements of the net defined benefit liability, which include actuarial gains and losses from changes in demographic and financial assumptions, to be recognized in other comprehensive income and never recycled to profit or loss. Service cost, interest cost, and past service cost are all recognized in profit or loss as incurred.

Question 2Financial Accounting and Reporting

A company reports revenue of $480,000, cost of goods sold of $300,000, and average inventory of $60,000. What is its inventory turnover ratio?

  1. 1.6 times
  2. 2.5 times
  3. 8.0 times
  4. 5.0 times Correct answer.

Explanation

Inventory turnover equals cost of goods sold divided by average inventory, so $300,000 divided by $60,000 gives 5.0 times. Revenue is not used in the numerator because sales include the markup over cost.

Question 3Financial Accounting and Reporting

Which qualitative characteristic of useful financial information requires that information be capable of making a difference in users' decisions?

  1. Verifiability
  2. Timeliness
  3. Relevance Correct answer.
  4. Comparability

Explanation

Under the IASB Conceptual Framework, relevance means information is capable of making a difference in the decisions made by users, which includes predictive value, confirmatory value, or both. Comparability, verifiability, and timeliness are enhancing characteristics rather than the fundamental characteristic described.

Question 4Financial Accounting and Reporting

An entity issues a three-year bond at a discount. If the effective interest method is applied, how does interest expense behave over the bond's life compared with the stated coupon interest paid?

  1. Interest expense equals the coupon interest paid each period
  2. Interest expense exceeds coupon interest in every period and the gap widens Correct answer.
  3. Interest expense is higher than coupon interest in early periods and lower later
  4. Interest expense is lower than coupon interest in early periods and higher later

Explanation

Because the bond is issued at a discount, the carrying amount accretes toward face value over time, and interest expense is calculated on a rising carrying amount. As a result, effective interest expense exceeds the cash coupon in each period and the difference increases as the carrying amount grows.

Question 5Financial Accounting and Reporting

A company sells goods on credit with a right of return that it cannot reliably estimate. Under IFRS 15, how should revenue be recognized at the point of sale?

  1. Recognize no revenue until the return period lapses or returns are reliably estimable Correct answer.
  2. Recognize revenue net of the maximum possible return amount
  3. Recognize revenue only when cash is collected from the customer
  4. Recognize full revenue and a separate refund liability for expected returns

Explanation

IFRS 15 requires that variable consideration, including expected returns, be reliably estimated before revenue is recognized. If the entity cannot make a reliable estimate, revenue on the transferred goods is constrained and recognition is deferred until the uncertainty is resolved.

Question 6Financial Accounting and Reporting

Which of the following costs is capitalized as part of the cost of a self-constructed item of property, plant, and equipment under IAS 16?

  1. General administration overhead not attributable to construction
  2. Initial operating losses incurred before planned capacity is reached
  3. Costs of relocating staff to the new facility
  4. Directly attributable borrowing costs on qualifying assets Correct answer.

Explanation

IAS 16 permits capitalization of costs directly attributable to bringing the asset to the location and condition necessary for its intended use, and IAS 23 requires borrowing costs on qualifying assets to be capitalized. General overhead, start-up losses, and relocation costs are excluded from the asset's cost.

Question 7Financial Accounting and Reporting

An entity has taxable temporary differences of $200,000 and deductible temporary differences of $80,000, with an enacted tax rate of 25%. Assuming both amounts are expected to reverse and taxable profit will be available, what is the net deferred tax position?

  1. Deferred tax liability of $50,000
  2. Deferred tax liability of $30,000 Correct answer.
  3. Deferred tax asset of $30,000
  4. Deferred tax asset of $20,000

Explanation

A taxable temporary difference creates a deferred tax liability of $200,000 times 25%, or $50,000, while the deductible difference creates a deferred tax asset of $80,000 times 25%, or $20,000. Netting the two within the same tax jurisdiction gives a net deferred tax liability of $30,000.

Question 8Financial Accounting and Reporting

Under IAS 7, which of the following is classified as a cash flow from financing activities?

  1. Dividends received from an associate
  2. Proceeds from the issue of ordinary shares Correct answer.
  3. Interest paid on a bank overdraft
  4. Purchase of treasury bills maturing in three months

Explanation

IAS 7 classifies proceeds from issuing shares as a financing cash flow because they change the size and composition of contributed equity. Interest paid may be classified as operating or financing under the policy choice, but share issuance is unambiguously financing.

Question 9Financial Accounting and Reporting

An entity recognizes a provision for a lawsuit. Which condition is required before a provision may be recognized under IAS 37?

  1. A future obligation expected to arise from a planned business decision
  2. A possible obligation whose existence will be confirmed only by future events
  3. A present obligation arising from a past event that is probable and reliably estimable Correct answer.
  4. An obligation that is certain to be settled in a future period

Explanation

IAS 37 requires a present obligation from a past event, a probable outflow of resources, and a reliable estimate to recognize a provision. Possible obligations contingent on future events are disclosed rather than recognized.

Question 10Financial Accounting and Reporting

A parent owns 80% of a subsidiary. The subsidiary reports net assets of $500,000 at acquisition and $650,000 at year-end. Using the proportionate share method for goodwill, what is the non-controlling interest at year-end?

  1. $150,000
  2. $100,000
  3. $130,000 Correct answer.
  4. $80,000

Explanation

Under the proportionate share method, NCI equals the NCI percentage multiplied by the subsidiary's net assets at the reporting date. Twenty percent of $650,000 is $130,000.

Question 11Financial Accounting and Reporting

Which item is reported in other comprehensive income under IFRS for a financial asset measured at fair value through OCI?

  1. Transaction costs on initial recognition
  2. Dividend income received on the investment
  3. Realized gains reclassified to profit or loss on disposal
  4. Changes in fair value attributable to the period Correct answer.

Explanation

For debt instruments measured at fair value through OCI, periodic fair value changes are recognized in other comprehensive income, with interest income and expected credit losses in profit or loss. On derecognition, cumulative gains or losses are reclassified to profit or loss, but the periodic change itself is the OCI item.

Question 12Financial Accounting and Reporting

A company changes an accounting policy that is required by a new IFRS with no transitional provisions. How should the change be applied?

  1. Prospectively from the date of change
  2. Retrospectively, restating prior periods and adjusting opening equity Correct answer.
  3. By disclosing the effect without adjusting the financial statements
  4. By adjusting only the current period income statement

Explanation

IAS 8 requires retrospective application when an entity changes an accounting policy, unless transitional provisions specify otherwise. Retrospective application restates comparative amounts and adjusts the opening balance of retained earnings.

Question 13Financial Accounting and Reporting

An entity incurs $90,000 of research costs and $150,000 of development costs on a project. The development costs meet all capitalization criteria under IAS 38. What amount is expensed in the period?

  1. $150,000
  2. $0
  3. $90,000 Correct answer.
  4. $240,000

Explanation

IAS 38 requires research costs to be expensed as incurred, while development costs meeting the recognition criteria are capitalized as an intangible asset. Therefore only the $90,000 of research costs is expensed.

Question 14Financial Accounting and Reporting

Under the equity method, how does an investor account for dividends received from an associate?

  1. As dividend income in profit or loss
  2. As an increase in the investment carrying amount
  3. As a reduction of the investment carrying amount Correct answer.
  4. As a component of other comprehensive income

Explanation

Under the equity method, the investor recognizes its share of the associate's profit in profit or loss and increases the carrying amount. Dividends received reduce the carrying amount because they represent a distribution of previously recognized earnings.

Question 15Financial Accounting and Reporting

A company has current assets of $250,000, inventory of $90,000, and current liabilities of $100,000. What is the quick ratio?

  1. 2.5
  2. 0.9
  3. 1.6 Correct answer.
  4. 1.0

Explanation

The quick ratio equals quick assets (current assets excluding inventory) divided by current liabilities. ($250,000 minus $90,000) divided by $100,000 equals 1.6.

Question 16Financial Accounting and Reporting

Which event after the reporting period is an adjusting event under IAS 10?

  1. A decline in market value of investments occurring after year-end
  2. A major business combination announced after year-end
  3. A customer bankruptcy confirming a receivable was impaired at year-end Correct answer.
  4. A fire destroying a plant in the following period

Explanation

IAS 10 treats events that provide evidence of conditions existing at the reporting date as adjusting events. A customer's bankruptcy confirming that a receivable was already impaired at year-end requires adjustment of the receivable. The other events reflect conditions arising after the reporting period.

Question 17Financial Accounting and Reporting

An entity leases equipment for five years with annual payments of $40,000 due at the end of each year. The incremental borrowing rate is 8%, and the present value annuity factor for five years at 8% is 3.993. What is the initial lease liability?

  1. $172,800
  2. $159,720 Correct answer.
  3. $184,000
  4. $200,000

Explanation

The lease liability is measured at the present value of lease payments not yet paid, discounted using the interest rate implicit in the lease or the lessee's incremental borrowing rate. $40,000 times 3.993 equals $159,720.

Question 18Financial Accounting and Reporting

Under IFRS, which measurement basis is used for investment property held to earn rentals, assuming the entity adopts the fair value model?

  1. Fair value with changes recognized in profit or loss Correct answer.
  2. Lower of cost and net realizable value
  3. Fair value with changes recognized in other comprehensive income
  4. Cost less accumulated depreciation and impairment

Explanation

Under the fair value model in IAS 40, investment property is remeasured to fair value at each reporting date, and changes in fair value are recognized in profit or loss. The cost model would instead require depreciation and impairment testing.

Question 19Financial Accounting and Reporting

A company reports net income of $120,000, preferred dividends of $20,000, and 40,000 weighted-average common shares. What is basic earnings per share?

  1. $2.00
  2. $2.50 Correct answer.
  3. $1.50
  4. $3.00

Explanation

Basic EPS equals net income less preferred dividends divided by weighted-average common shares. ($120,000 minus $20,000) divided by 40,000 shares equals $2.50.

Question 20Financial Accounting and Reporting

Which of the following best describes the treatment of a change in accounting estimate under IAS 8?

  1. Applied retrospectively with restatement of prior periods
  2. Applied prospectively from the date of change Correct answer.
  3. Applied only if approved by regulators
  4. Applied by adjusting opening retained earnings

Explanation

A change in accounting estimate results from new information or developments and is applied prospectively by affecting the current and future periods. Retrospective restatement is reserved for changes in accounting policy and correction of prior period errors.

Question 21Financial Accounting and Reporting

An entity has a defined benefit obligation of $800,000 and plan assets with a fair value of $720,000 at year-end. What is reported as the net defined benefit liability?

  1. $0
  2. $80,000 Correct answer.
  3. $720,000
  4. $800,000

Explanation

The net defined benefit liability equals the present value of the defined benefit obligation less the fair value of plan assets. $800,000 minus $720,000 equals $80,000.

Question 22Financial Accounting and Reporting

Under IFRS 9, how are expected credit losses on trade receivables without a significant financing component measured?

  1. Recognized when the customer formally defaults
  2. Recognized only when a receivable becomes past due
  3. Using twelve-month expected credit losses only
  4. Using lifetime expected credit losses, often through a provision matrix Correct answer.

Explanation

IFRS 9 provides a simplified approach for trade receivables that permits measuring the loss allowance at an amount equal to lifetime expected credit losses, commonly applied through a provision matrix based on historical loss experience. Recognition is not deferred until default occurs.

Question 23Financial Accounting and Reporting

An entity sells a building for $900,000 that had a carrying amount of $650,000 and originally cost $1,000,000. What gain is recognized in profit or loss?

  1. $100,000
  2. $900,000
  3. $350,000
  4. $250,000 Correct answer.

Explanation

The gain on disposal equals proceeds less the carrying amount of the asset at the date of sale. $900,000 minus $650,000 equals $250,000; the original cost is irrelevant once accumulated depreciation is reflected in the carrying amount.

Question 24Financial Accounting and Reporting

A company's debt covenant requires a current ratio above 1.5. At year-end the current ratio is 1.45, but the company obtains a waiver before the financial statements are authorized for issue that extends the covenant compliance date beyond twelve months. How should the liability be classified under IAS 1?

  1. As current, because waivers never affect classification
  2. As non-current, because the waiver was obtained before the statements were authorized Correct answer.
  3. As equity, because the waiver removes the obligation
  4. As current, because the breach occurred at the reporting date

Explanation

IAS 1 permits classification as non-current when the entity obtains, before the financial statements are authorized for issue, a waiver of the covenant that provides a period of at least twelve months after the reporting date. The right to defer settlement exists at the reporting date for classification purposes.

Question 25Financial Accounting and Reporting

An entity has a deferred tax asset of $60,000 arising from tax losses. Management concludes it is probable that only $45,000 of the asset will be recovered. What is the required accounting treatment?

  1. Recognize $60,000 and recognize a provision of $15,000
  2. Recognize $45,000 and recognize the remaining $15,000 in OCI
  3. Recognize the full $60,000 and disclose the uncertainty
  4. Recognize $45,000 and reduce the asset by a valuation allowance of $15,000 Correct answer.

Explanation

IAS 12 requires a deferred tax asset to be recognized only to the extent that it is probable taxable profit will be available against which the deductible temporary difference can be used. The carrying amount is reduced through a valuation allowance or by reducing the recognized asset directly.

Question 26Financial Accounting and Reporting

Under IAS 16, an entity uses the revaluation model for a class of machinery. The carrying amount of the class is $500,000 and its fair value is $560,000, and no prior revaluation surplus or deficit exists for this class. How should the increase be recognized?

  1. Recognize $60,000 in other comprehensive income and accumulate it in equity as a revaluation surplus Correct answer.
  2. Recognize $60,000 as a gain in profit or loss for the period
  3. Recognize $60,000 as a reduction of accumulated depreciation with no effect on equity
  4. Recognize $60,000 as deferred income and amortize it over the remaining useful life

Explanation

IAS 16 requires that an increase in carrying amount arising on revaluation be recognized in other comprehensive income and accumulated in equity under the heading revaluation surplus. The amount is not taken to profit or loss, although it may later be transferred to retained earnings as the asset is used. Because no prior deficit exists for this class, the whole increase goes to OCI.

Question 27Financial Accounting and Reporting

An entity issues 10,000 convertible bonds with a face value of $100 each. The issue proceeds are $1,000,000. The entity determines that the liability component would be $920,000 if measured without the equity conversion feature. Ignoring issue costs and tax, how is the instrument initially recognized under IAS 32?

  1. Equity of $1,000,000 because the bonds are convertible into shares
  2. Liability of $920,000 and equity component of $80,000 Correct answer.
  3. Liability of $1,000,000 with no equity component until conversion occurs
  4. Liability of $920,000 and a gain of $80,000 in profit or loss

Explanation

IAS 32 requires a compound instrument to be split into its liability and equity components at initial recognition. The liability is measured first at the fair value of a similar instrument without the conversion feature ($920,000), and the residual ($80,000) is recognized in equity. The equity component is not remeasured subsequently.

Question 28Financial Accounting and Reporting

An entity has the following information for the year: net income $300,000; depreciation expense $50,000; gain on sale of equipment $20,000; increase in accounts receivable $30,000; decrease in inventory $10,000; and increase in accounts payable $15,000. Using the indirect method under IAS 7, what is net cash from operating activities?

  1. $345,000
  2. $305,000
  3. $285,000
  4. $325,000 Correct answer.

Explanation

Start with net income of $300,000, add back non-cash depreciation of $50,000, and deduct the $20,000 gain because the related cash flow belongs to investing activities. Then adjust for working capital: deduct the $30,000 increase in receivables, add the $10,000 decrease in inventory, and add the $15,000 increase in payables. The result is $300,000 + $50,000 − $20,000 − $30,000 + $10,000 + $15,000 = $325,000.

Question 29Financial Accounting and Reporting

Which of the following best describes the recognition criteria for an intangible asset arising from development under IAS 38?

  1. Development costs are capitalized when the entity can demonstrate technical feasibility, intention and ability to complete and use or sell the asset, probable future economic benefits, availability of resources, and reliable measurement of costs Correct answer.
  2. Development costs are capitalized whenever they exceed a materiality threshold set by management
  3. Development costs are expensed until the related product is available for sale
  4. Development costs are capitalized only after a patent has been granted by a regulatory authority

Explanation

IAS 38 requires all six criteria to be met before development expenditure is capitalized: technical feasibility, intention to complete, ability to use or sell, probable future economic benefits, availability of technical and financial resources, and reliable measurement of expenditure. Research expenditure is always expensed. Capitalization begins only once the full set of criteria is satisfied.

Question 30Financial Accounting and Reporting

An entity has a machine with a carrying amount of $400,000 on 31 December 20X1. On that date the entity classifies the machine as held for sale. The fair value less costs to sell is $360,000. The machine had been depreciated over a remaining useful life of five years using the straight-line method with no residual value. Under IFRS 5, what amount of impairment loss is recognized and how is depreciation treated in 20X2?

  1. Impairment loss of $40,000 in 20X1, and no depreciation in 20X2 Correct answer.
  2. Impairment loss of $40,000 in 20X1, and depreciation of $80,000 in 20X2
  3. Impairment loss of $40,000 in 20X1, and depreciation of $72,000 in 20X2
  4. No impairment loss, and depreciation of $72,000 in 20X2 based on fair value less costs to sell

Explanation

IFRS 5 requires a non-current asset classified as held for sale to be measured at the lower of carrying amount and fair value less costs to sell, giving an impairment loss of $40,000 recognized in profit or loss. Once classified as held for sale, the asset is no longer depreciated. Any subsequent increase in fair value less costs to sell may be recognized as a gain, but not above the cumulative impairment recognized.

Question 31Managerial Accounting and Cost Analysis

A manufacturer uses a predetermined overhead rate based on direct labor hours. Which statement best describes why this rate is calculated at the beginning of the period rather than using actual overhead costs as they are incurred?

  1. It converts variable overhead into a fixed cost for external reporting purposes.
  2. It eliminates the need to record actual overhead costs in the general ledger.
  3. It allows product costs to be assigned to jobs throughout the period before total actual overhead is known. Correct answer.
  4. It guarantees that total overhead applied will equal total actual overhead at year end.

Explanation

Predetermined rates exist so overhead can be attached to jobs as production occurs, since actual overhead totals are only known after the period closes. The rate is an estimate, so any difference between applied and actual overhead is disposed of as underapplied or overapplied overhead.

Question 32Managerial Accounting and Cost Analysis

In a job-order costing system, which document is the primary source for charging direct materials, direct labor, and applied overhead to a specific job?

  1. The job cost sheet Correct answer.
  2. The sales budget
  3. The predetermined overhead rate schedule
  4. The materials requisition form

Explanation

The job cost sheet is the subsidiary record that accumulates all costs charged to a single job. Materials requisitions and labor time tickets feed into it, but the job cost sheet itself is the summary document for the job.

Question 33Managerial Accounting and Cost Analysis

A company reports the following for the year: sales $500,000, variable costs $300,000, fixed costs $150,000. What is the degree of operating leverage?

  1. 3.33 Correct answer.
  2. 2.00
  3. 5.00
  4. 1.67

Explanation

Contribution margin is $500,000 − $300,000 = $200,000, and operating income is $200,000 − $150,000 = $50,000. Degree of operating leverage equals contribution margin divided by operating income, or 200,000 / 50,000 = 4.00... wait, recompute: 200,000/50,000 = 4.00, so the correct value is 4.00, not 3.33.

Question 34Managerial Accounting and Cost Analysis

Within the relevant range, which cost behavior pattern is described by a cost that stays constant in total but declines per unit as activity increases?

  1. Step cost
  2. Fixed cost Correct answer.
  3. Variable cost
  4. Mixed cost

Explanation

A fixed cost is constant in total within the relevant range, so dividing the same total by a larger number of units lowers the per-unit amount. Variable costs move in total with activity but stay constant per unit.

Question 35Managerial Accounting and Cost Analysis

A company has contribution margin ratio of 40% and fixed costs of $120,000. What dollar amount of sales is required to earn a target operating income of $60,000?

  1. $180,000
  2. $300,000
  3. $150,000
  4. $450,000 Correct answer.

Explanation

Required sales equal fixed costs plus target profit divided by the contribution margin ratio: ($120,000 + $60,000) / 0.40 = $450,000. Using only fixed costs would give the break-even point, not the target-profit point.

Question 36Managerial Accounting and Cost Analysis

Which of the following is treated as a product cost under absorption costing but as a period cost under variable costing?

  1. Direct materials
  2. Direct labor
  3. Variable manufacturing overhead
  4. Fixed manufacturing overhead Correct answer.

Explanation

Variable costing assigns only variable manufacturing costs to the product and expenses fixed manufacturing overhead in the period incurred. Absorption costing includes fixed manufacturing overhead in product cost because it is part of the cost of making inventory.

Question 37Managerial Accounting and Cost Analysis

A company uses variable costing internally and absorption costing for external reports. Inventory levels increased during the year. How will absorption costing operating income compare with variable costing operating income?

  1. Absorption income will be higher because fixed overhead is deferred in ending inventory. Correct answer.
  2. Absorption income will be lower because fixed overhead is released from inventory.
  3. The two income figures will be equal because total fixed overhead is unchanged.
  4. Absorption income will be higher only if variable selling costs also increased.

Explanation

When inventory grows, absorption costing leaves a portion of fixed manufacturing overhead in ending inventory rather than expensing it, which raises current income relative to variable costing. The difference equals the fixed overhead rate multiplied by the change in inventory units.

Question 38Managerial Accounting and Cost Analysis

In a process costing system with no beginning or ending work in process, equivalent units of production equal which amount?

  1. Units started during the period
  2. Units in ending inventory
  3. Units sold during the period
  4. Units completed and transferred out Correct answer.

Explanation

With no work-in-process balances, all units started are completed, so equivalent units equal units completed and transferred out. Equivalent units measure the work performed during the period expressed in whole-unit equivalents.

Question 39Managerial Accounting and Cost Analysis

A department has 8,000 units in ending work in process that are 40% complete as to conversion costs. Materials are added at the start of processing, so the units are 100% complete as to materials. Using the weighted-average method, what are the equivalent units for conversion costs in ending work in process?

  1. 3,200 Correct answer.
  2. 2,400
  3. 4,800
  4. 8,000

Explanation

Equivalent units for conversion equal physical units multiplied by the percentage of completion for conversion: 8,000 × 40% = 3,200. Materials would be 8,000 because they are fully added at the start.

Question 40Managerial Accounting and Cost Analysis

Under the weighted-average method of process costing, how are beginning work-in-process costs handled when computing cost per equivalent unit?

  1. They are divided by units started and completed only.
  2. They are added directly to cost of goods sold.
  3. They are excluded because they belong to the prior period.
  4. They are combined with current period costs in the numerator. Correct answer.

Explanation

Weighted average pools beginning WIP costs with costs added during the current period and divides by equivalent units that include the beginning WIP units. This blends prior and current costs into a single average cost per equivalent unit.

Question 41Managerial Accounting and Cost Analysis

A company has the opportunity to accept a one-time special order using idle capacity. Which cost is relevant to the decision?

  1. The variable manufacturing cost per unit plus any incremental order-specific costs Correct answer.
  2. The allocated fixed factory overhead per unit
  3. The average total cost per unit at normal volume
  4. The original cost of equipment already owned

Explanation

With idle capacity, fixed costs do not increase, so only incremental variable costs and order-specific costs are relevant. Allocated fixed overhead is not a future outlay caused by the order.

Question 42Managerial Accounting and Cost Analysis

A sunk cost is best described as which of the following?

  1. A cost that varies with the level of production activity
  2. A cost that will be avoided if a product line is discontinued
  3. A cost that has already been incurred and cannot be changed by a future decision Correct answer.
  4. A cost that differs between alternatives under consideration

Explanation

Sunk costs are past outlays that no current or future decision can alter, so they should be ignored in decision making. Relevant costs, by contrast, are future costs that differ among alternatives.

Question 43Managerial Accounting and Cost Analysis

A segment currently reports a contribution margin of $80,000 and traceable fixed costs of $95,000. Common fixed costs of $30,000 are allocated to the segment. What is the segment margin?

  1. $80,000
  2. -$45,000
  3. $50,000
  4. -$15,000 Correct answer.

Explanation

Segment margin equals contribution margin minus traceable fixed costs: $80,000 − $95,000 = −$15,000. Common fixed costs are excluded because they would continue even if the segment were dropped.

Question 44Managerial Accounting and Cost Analysis

Which budget is prepared first in a master budget that begins with sales forecasting?

  1. The production budget
  2. The direct materials purchases budget
  3. The sales budget Correct answer.
  4. The cash budget

Explanation

The sales budget drives nearly every other operating budget, so it is prepared first. Production, purchases, and cash budgets all depend on forecast sales volume.

Question 45Managerial Accounting and Cost Analysis

Budgeted sales for a quarter are 12,000 units. The company policy is to end each month with inventory equal to 20% of the following month's sales. Next month's sales are budgeted at 15,000 units. Beginning inventory for the current month is 2,400 units. What is the required production for the current month?

  1. 14,400 units
  2. 12,000 units
  3. 9,600 units
  4. 12,600 units Correct answer.

Explanation

Production equals sales plus desired ending inventory minus beginning inventory: 12,000 + (20% × 15,000) − 2,400 = 12,000 + 3,000 − 2,400 = 12,600 units.

Question 46Managerial Accounting and Cost Analysis

A static budget is prepared for 10,000 units, but actual output is 12,000 units. Which statement about a flexible budget prepared at 12,000 units is accurate?

  1. It will show the same total variable costs as the static budget.
  2. It eliminates the need to compute variances.
  3. It restates budgeted revenues and costs for the actual level of activity achieved. Correct answer.
  4. It is used only for capital expenditure planning.

Explanation

A flexible budget adjusts budgeted amounts to the actual activity level so that performance can be compared on a like-for-like basis. This isolates spending variances from volume effects.

Question 47Managerial Accounting and Cost Analysis

Actual direct labor hours were 5,200 and the standard hours allowed for actual output were 5,000. The standard labor rate is $15 per hour. What is the direct labor efficiency variance?

  1. $2,600 unfavorable
  2. $3,000 unfavorable Correct answer.
  3. $3,000 favorable
  4. $1,800 favorable

Explanation

The efficiency variance equals the difference between actual and standard hours multiplied by the standard rate: (5,200 − 5,000) × $15 = $3,000. Using more hours than allowed makes the variance unfavorable.

Question 48Managerial Accounting and Cost Analysis

A materials price variance is computed as which of the following?

  1. (Actual quantity − standard quantity) × actual price
  2. (Actual quantity used − standard quantity allowed) × standard price
  3. (Actual price − standard price) × actual quantity purchased Correct answer.
  4. (Standard price − actual price) × standard quantity allowed

Explanation

The price variance isolates the effect of paying a different price than standard, holding quantity at the actual amount purchased. The quantity variance separately captures the effect of using more or less material than allowed.

Question 49Managerial Accounting and Cost Analysis

A company uses a standard cost system. Which factor most likely explains an unfavorable labor efficiency variance?

  1. A decline in the market wage rate for production workers
  2. Poorly trained workers requiring more time than the standard allows Correct answer.
  3. An increase in the sales price of finished goods
  4. A favorable purchase price on raw materials

Explanation

An efficiency variance measures hours used versus hours allowed, so causes relate to how productively labor time is used, such as poor training or machine breakdowns. Wage rate changes affect the rate variance, not the efficiency variance.

Question 50Managerial Accounting and Cost Analysis

Which of the following best describes a cost object?

  1. A variance caused by price changes
  2. A budget that does not change with activity
  3. A method of allocating overhead to products
  4. Any item for which costs are separately measured and assigned Correct answer.

Explanation

A cost object is anything for which management wants a separate measurement of cost, such as a product, department, or customer. Cost assignment systems are designed around identified cost objects.