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CMA Part 1 study materials
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CMA Part 1 practice questions

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Question 1External Financial Reporting Decisions

An entity enters into a contract with a customer to build a customized machine. Under the revenue standard's five-step model, which step does the entity perform first?

  1. Identify the performance obligations in the contract
  2. Identify the contract with the customer Correct answer.
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations

Explanation

The five-step model begins with identifying the contract with a customer, because a contract must exist before any accounting analysis can proceed. Only then does the entity identify performance obligations, determine the transaction price, allocate it, and recognize revenue as obligations are satisfied.

Question 2External Financial Reporting Decisions

During a period of consistently rising prices, which inventory cost flow method reports the lowest cost of goods sold?

  1. Specific identification
  2. Last-in, first-out
  3. Weighted average
  4. First-in, first-out Correct answer.

Explanation

When prices rise, FIFO charges the oldest and therefore lowest unit costs to cost of goods sold, leaving the most recent higher costs in ending inventory. This produces the lowest cost of goods sold and the highest reported income of the flow methods listed.

Question 3External Financial Reporting Decisions

Under U.S. GAAP, cash dividends paid to a company's own shareholders are classified in the statement of cash flows as:

  1. Investing activities
  2. Financing activities Correct answer.
  3. A noncash disclosure only
  4. Operating activities

Explanation

Dividends paid are a distribution to providers of capital and are reported as a financing cash outflow under U.S. GAAP. Investing activities relate to long-term assets and lending, while operating activities under U.S. GAAP include interest paid but not dividends paid.

Question 4External Financial Reporting Decisions

Which of the following costs is expensed as incurred under U.S. GAAP?

  1. Registration fees paid to obtain a trademark
  2. The cost of testing a prototype built for a research project Correct answer.
  3. The purchase price of a patent acquired from an inventor
  4. Legal fees incurred to successfully defend a patent

Explanation

Research and development costs, including the cost of testing prototypes and conducting pilot studies, are expensed as incurred because future benefits are uncertain. Acquired intangibles and successful legal defense costs, by contrast, are capitalized.

Question 5External Financial Reporting Decisions

On January 1, a company purchases equipment for $50,000. The equipment has an estimated salvage value of $5,000 and a five-year useful life. Using straight-line depreciation, what is depreciation expense for the first year?

  1. $10,000
  2. $5,000
  3. $11,250
  4. $9,000 Correct answer.

Explanation

Straight-line depreciation equals depreciable cost divided by useful life, so ($50,000 - $5,000) / 5 years = $9,000. Salvage value is excluded from the depreciable base because it is expected to be recovered at disposal.

Question 6External Financial Reporting Decisions

How is an intangible asset with an indefinite useful life treated after initial recognition?

  1. It is written off immediately against retained earnings
  2. It is amortized over a maximum of 40 years
  3. It is amortized only in periods in which related revenue is recognized
  4. It is not amortized but is tested for impairment at least annually Correct answer.

Explanation

Because an indefinite-life intangible has no determinable period over which to allocate its cost, no amortization is recorded. Instead, it is tested for impairment at least annually and whenever events suggest the asset may be impaired.

Question 7External Financial Reporting Decisions

A company using the allowance method writes off a specific customer account as uncollectible. What is the effect of the write-off on net accounts receivable and on working capital?

  1. Both net accounts receivable and working capital decrease
  2. Net accounts receivable increases and working capital increases
  3. Neither net accounts receivable nor working capital changes Correct answer.
  4. Net accounts receivable decreases and working capital decreases

Explanation

Writing off an account reduces both gross receivables and the allowance for doubtful accounts by the same amount, so the net carrying amount is unchanged. Because both current assets and liabilities are unaffected, working capital does not change.

Question 8External Financial Reporting Decisions

Basic earnings per share is computed by dividing income available to common stockholders by:

  1. Diluted weighted-average shares
  2. Weighted-average common shares outstanding Correct answer.
  3. Common shares outstanding at year-end
  4. Common shares issued during the year

Explanation

Basic EPS uses the weighted-average number of common shares outstanding during the period so that shares issued or repurchased partway through the year are weighted for the time they were outstanding. The numerator is income available to common stockholders after preferred dividends.

Question 9External Financial Reporting Decisions

Bonds are issued at a discount and are accounted for using the effective interest method. Over the life of the bonds, the carrying amount of the bond liability and the annual interest expense, respectively:

  1. Decrease; decrease
  2. Remain constant; increase
  3. Increase; increase Correct answer.
  4. Increase; decrease

Explanation

Amortizing a discount adds to the carrying amount each period until it reaches face value at maturity. Because interest expense equals the carrying amount multiplied by the market rate, a rising carrying amount produces rising interest expense.

Question 10External Financial Reporting Decisions

On January 1, a company issues $100,000 face value of 5% bonds at 96, receiving $96,000. Interest is paid annually each December 31 and the market rate is 6%. Using the effective interest method, interest expense for the first year is:

  1. $6,000
  2. $5,760 Correct answer.
  3. $5,000
  4. $4,800

Explanation

Under the effective interest method, interest expense equals the carrying amount at the start of the period multiplied by the market rate: $96,000 x 6% = $5,760. The $1,000 coupon of $5,000 plus the $760 discount amortization makes up that amount.

Question 11External Financial Reporting Decisions

At year-end a company holds inventory costing $80,000 with a net realizable value of $72,000. How should the inventory be reported?

  1. At $72,000, with an $8,000 write-down recognized in income Correct answer.
  2. At $72,000, with an $8,000 charge recorded directly against retained earnings
  3. At $80,000, because losses are recognized only when goods are sold
  4. At $76,000, the average of cost and net realizable value

Explanation

Inventory is measured at the lower of cost and net realizable value, so a decline to $72,000 requires an $8,000 write-down. The write-down is recognized in the income statement as a loss or an increase in cost of goods sold.

Question 12External Financial Reporting Decisions

A component of an entity meets the criteria to be reported as a discontinued operation. How is the result of its operations presented?

  1. As a component of other comprehensive income
  2. Within income from continuing operations
  3. As an adjustment to opening retained earnings
  4. Separately, net of tax, below income from continuing operations Correct answer.

Explanation

The results of operations of a discontinued component, including any gain or loss on disposal, are presented in a separate section net of tax after income from continuing operations. This lets users assess the ongoing earnings of the entity apart from the discontinued business.

Question 13External Financial Reporting Decisions

Which of the following items is reported in other comprehensive income rather than in net income?

  1. A realized gain on the sale of equipment
  2. A foreign currency gain on a transaction settled during the period
  3. An unrealized gain on available-for-sale debt securities Correct answer.
  4. A loss from discontinued operations

Explanation

Unrealized holding gains and losses on available-for-sale securities are recognized in other comprehensive income until the securities are sold. Items that are realized or that relate to ordinary and discontinued operations flow through net income.

Question 14External Financial Reporting Decisions

A company borrows funds specifically to finance construction of a building for its own use. Interest incurred on that borrowing during the construction period is:

  1. Charged directly to retained earnings
  2. Expensed as incurred
  3. Capitalized as part of the cost of the building Correct answer.
  4. Recorded as a deferred charge amortized over 40 years

Explanation

Interest cost incurred during the period in which a qualifying asset is being prepared for its intended use is capitalized as part of the asset's cost. Capitalization stops when the asset is substantially complete and ready for use.

Question 15External Financial Reporting Decisions

Under U.S. GAAP, a lessee recognizes the cost of an operating lease on a:

  1. Straight-line basis over the lease term Correct answer.
  2. Basis equal to the cash payments made each period
  3. Basis determined by applying the implicit rate each year
  4. Declining basis over the lease term

Explanation

A lessee records a single lease cost for an operating lease on a straight-line basis over the lease term, even when the contractual cash payments escalate. The difference between straight-line cost and cash paid adjusts the lease liability.

Question 16External Financial Reporting Decisions

A company uses accelerated depreciation for income tax purposes and straight-line depreciation for financial reporting. This difference gives rise to:

  1. A current tax payable only
  2. A deferred tax liability Correct answer.
  3. A deferred tax asset
  4. A permanent difference that never reverses

Explanation

Accelerated tax depreciation produces lower taxable income now and higher taxable income later, a taxable temporary difference. The tax saved today will reverse in future periods, so a deferred tax liability is recognized.

Question 17External Financial Reporting Decisions

A company revises the estimated useful life of a depreciable asset. How is the change accounted for?

  1. As a component of other comprehensive income
  2. As a change in estimate applied prospectively Correct answer.
  3. As a prior-period adjustment to opening retained earnings
  4. As a change in accounting principle applied retrospectively

Explanation

A revision of an estimated useful life results from new information about the asset and is treated as a change in accounting estimate. It is applied prospectively by allocating the remaining carrying amount over the revised remaining life, with no restatement of prior periods.

Question 18External Financial Reporting Decisions

A company overstates ending inventory at the end of Year 1 because of a counting error, and the error is not discovered until after Year 2. What is the effect of the uncorrected error on Year 2 net income?

  1. Year 2 net income is overstated
  2. Year 2 net income is understated because beginning inventory is overstated Correct answer.
  3. Year 2 net income is unaffected because inventory errors self-correct within one year
  4. Year 2 net income is understated because ending inventory is understated

Explanation

The overstatement carries into Year 2 as an overstated beginning inventory, which raises cost of goods sold and understates Year 2 income. The counterbalancing effect means the two years' combined income is correct, but Year 2 taken alone is misstated.

Question 19External Financial Reporting Decisions

A company is the defendant in a lawsuit. Legal counsel concludes that a loss is probable and the amount can be reasonably estimated. The company should:

  1. Recognize a gain on the expected settlement
  2. Accrue the estimated loss and disclose the contingency Correct answer.
  3. Disclose the contingency without recording a liability
  4. Wait until the lawsuit is settled before recording any loss

Explanation

A loss contingency is accrued when the loss is both probable and reasonably estimable, with disclosure of the nature of the contingency. If only one of those conditions is met, disclosure alone is required.

Question 20External Financial Reporting Decisions

Employee share-based payment awards are measured at fair value on the grant date. The resulting compensation cost is:

  1. Expensed in full on the grant date
  2. Capitalized as an intangible asset
  3. Recorded as a reduction of retained earnings when the options are exercised
  4. Recognized as compensation expense over the vesting period Correct answer.

Explanation

The grant-date fair value of equity-classified awards is recognized as compensation expense over the period the employees must provide services to earn the award. At exercise, the proceeds and the accumulated equity credit are recorded in equity, with no further charge to retained earnings.

Question 21External Financial Reporting Decisions

An operating segment is a component of an entity whose operating results are regularly reviewed by the chief operating decision maker. To be separately reportable, the segment generally must meet a quantitative threshold of at least 10% of the combined:

  1. Number of employees of the entity
  2. Cash flows from operating activities
  3. Revenue, profit or loss, or assets of all operating segments Correct answer.
  4. Total equity of the entity

Explanation

The 10% tests apply to combined revenue (external and intersegment), combined reported profit or loss, and combined assets of all operating segments. Meeting any one of the three tests makes the segment reportable.

Question 22External Financial Reporting Decisions

A contractor has a fixed-price contract for $1,000,000. Costs incurred to date are $300,000 and estimated costs to complete are $500,000. Using the cost-to-cost method to measure progress, revenue recognized to date is:

  1. $300,000
  2. $400,000
  3. $375,000 Correct answer.
  4. $500,000

Explanation

Progress is measured as costs incurred of $300,000 divided by total estimated costs of $800,000, or 37.5% complete. Applying that percentage to the $1,000,000 transaction price gives revenue to date of $375,000.

Question 23External Financial Reporting Decisions

Equipment has a carrying amount of $500,000, expected undiscounted future cash flows of $460,000, and a fair value of $400,000. Under U.S. GAAP, the impairment loss to be recognized is:

  1. $40,000
  2. $100,000 Correct answer.
  3. $0
  4. $460,000

Explanation

An impairment exists because the undiscounted cash flows of $460,000 are less than the $500,000 carrying amount. The loss is measured as carrying amount minus fair value, or $500,000 - $400,000 = $100,000.

Question 24External Financial Reporting Decisions

A U.S. company buys inventory for 100,000 euros on November 1, when the exchange rate is $1.10 per euro, and pays the supplier on December 31, when the rate is $1.16 per euro. What does the company report on its December 31 income statement?

  1. No gain or loss, because the purchase is recorded at the November 1 rate
  2. A foreign currency loss of $10,000
  3. A foreign currency loss of $6,000 Correct answer.
  4. A foreign currency gain of $6,000

Explanation

The payable is recorded at $110,000 and remeasured at year-end to $116,000, so settling it costs more dollars than originally recorded. The $6,000 increase is a foreign currency transaction loss reported in income.

Question 25External Financial Reporting Decisions

A company sells equipment for $100,000 together with a two-year service contract. The equipment's standalone selling price is $90,000 and the service's standalone selling price is $30,000. How much of the transaction price is allocated to the equipment at contract inception?

  1. $70,000
  2. $90,000
  3. $100,000
  4. $75,000 Correct answer.

Explanation

The transaction price is allocated in proportion to standalone selling prices: $100,000 x ($90,000 / $120,000) = $75,000 to the equipment. The remaining $25,000 is allocated to the service and recognized as the service is provided.

Question 26External Financial Reporting Decisions

A company receives a $40,000 cash deposit from a customer in December for goods that will be delivered in February of the following year. In the company's December 31 balance sheet, the deposit should be reported as:

  1. A reduction of retained earnings
  2. A noncurrent liability
  3. A current asset
  4. A current liability Correct answer.

Explanation

Cash received before the revenue recognition criteria are met creates a contract liability (deferred revenue), because the entity still owes the customer goods or services. The obligation will be settled within the next operating cycle, so it is presented as a current liability rather than as revenue or equity.

Question 27External Financial Reporting Decisions

Under U.S. GAAP, cash dividends paid to shareholders are reported in the statement of cash flows as:

  1. An operating outflow
  2. A financing outflow Correct answer.
  3. An investing outflow
  4. A noncash transaction disclosed separately

Explanation

Dividends are a distribution to the providers of equity capital, so they are classified as a financing activity under U.S. GAAP. Only transactions with a company's owners or creditors that affect capital structure are reported as financing activities.

Question 28External Financial Reporting Decisions

Which inventory cost flow method is acceptable under U.S. GAAP but prohibited under IFRS?

  1. First-in, first-out (FIFO)
  2. Specific identification
  3. Last-in, first-out (LIFO) Correct answer.
  4. Weighted average cost

Explanation

IAS 2 expressly prohibits the LIFO method because it does not represent a reliable measure of the inventory's most recent cost. U.S. GAAP permits LIFO, while specific identification, FIFO, and weighted average cost are acceptable under both frameworks.

Question 29External Financial Reporting Decisions

A company holds an investment in a private entity with no quoted market price. It measures the investment at fair value using a discounted cash flow model based on the company's internally developed projections of future cash flows and an internally developed risk premium. The fair value measurement is classified in the hierarchy as:

  1. Level 1 inputs
  2. Level 3 inputs Correct answer.
  3. Level 1 or Level 2 inputs, depending on the discount rate used
  4. Level 2 inputs

Explanation

Level 3 inputs are unobservable inputs that reflect the reporting entity's own assumptions about what market participants would use to price the asset. Because the cash flow projections and risk premium are developed internally rather than obtained from observable market data, the measurement is Level 3.

Question 30External Financial Reporting Decisions

At December 31, a company has 100,000 common shares outstanding and 20,000 stock options outstanding with an exercise price of $20 per share. The average market price of the common stock during the year was $25 per share. Assuming no other potentially dilutive instruments, the incremental shares added to the denominator in computing diluted earnings per share are:

  1. 16,000
  2. 20,000
  3. 5,000
  4. 4,000 Correct answer.

Explanation

Under the treasury stock method, assumed exercise proceeds of $400,000 (20,000 options x $20) are used to repurchase shares at the $25 average market price, or 16,000 shares. The incremental shares are 20,000 issued minus 16,000 repurchased, or 4,000.

Question 31External Financial Reporting Decisions

During the year, a company incurred the following costs: $50,000 of salaries for scientists working on a project with no alternative future use, $30,000 for laboratory equipment that has alternative future uses in other projects, and $20,000 of legal fees to successfully register a patent on technology developed by the research. Under U.S. GAAP, the amount expensed as research and development cost this year is:

  1. $100,000
  2. $50,000 Correct answer.
  3. $70,000
  4. $80,000

Explanation

Research and development costs are expensed as incurred, so the $50,000 of scientist salaries is R&D expense. Equipment with alternative future uses is capitalized and depreciated, and legal fees to successfully register a patent are capitalized as an intangible asset, so neither is charged to R&D expense.

Question 32External Financial Reporting Decisions

A company reports sales revenue of $800,000 for the year. Accounts receivable increased by $60,000 during the year, and there were no write-offs or other changes in the receivable balance. The amount of cash collected from customers during the year is:

  1. $800,000
  2. $860,000
  3. $740,000 Correct answer.
  4. $700,000

Explanation

Cash collected equals sales revenue adjusted for the change in receivables: an increase in receivables means some sales were not yet collected, so the increase is subtracted. $800,000 minus $60,000 equals $740,000.

Question 33External Financial Reporting Decisions

On February 10, before the financial statements for the year ended December 31 are issued, a customer that had experienced severe financial difficulty throughout the prior year files for bankruptcy. The customer's $200,000 receivable was outstanding at December 31 and had been assessed as fully collectible. The bankruptcy should be reflected as:

  1. An adjustment of the December 31 financial statements Correct answer.
  2. Recognition in the following year, when the bankruptcy was filed
  3. Disclosure only; the receivable remains at face amount
  4. A prior-period adjustment to opening retained earnings

Explanation

A subsequent event that provides evidence of conditions that existed at the balance sheet date is a recognized (adjusting) event. Because the customer's deteriorating financial condition existed at year-end, the receivable was impaired at that date and the loss is recorded in the December 31 statements.

Question 34External Financial Reporting Decisions

On January 1 of the current year, a company voluntarily changes from the FIFO method to the weighted average method for inventory costing, and the change is considered preferable. The cumulative before-tax effect of the change on prior years' income is $120,000. How should the change be reported?

  1. Retrospectively, with prior periods restated Correct answer.
  2. As an item of other comprehensive income in the current year
  3. As a cumulative-effect adjustment reported in current-year income
  4. Prospectively, in the current and future periods

Explanation

A change in accounting principle is applied retrospectively: prior-period statements presented are restated as if the new method had always been used, and the cumulative effect is adjusted against beginning retained earnings. Disclosure of the nature of and reason for the change is also required.

Question 35Planning, Budgeting and Forecasting

Which of the following is a primary purpose of an organization's budget?

  1. To replace the need for departmental performance reports
  2. To guarantee that actual results will equal planned results
  3. To coordinate the plans of separate departments Correct answer.
  4. To fix the organization's tax liability for the year

Explanation

Budgets communicate expectations, coordinate the plans of separate units, motivate employees, and provide the benchmark against which performance is evaluated. They are plans rather than guarantees, and they supplement rather than replace performance reports.

Question 36Planning, Budgeting and Forecasting

Which budget is normally prepared first when an organization builds its master budget?

  1. Cash budget
  2. Sales budget Correct answer.
  3. Production budget
  4. Direct materials purchases budget

Explanation

Because almost every other budget depends on expected sales volume, the sales budget is the starting point. Production, materials, labor, and cash budgets all follow from it.

Question 37Planning, Budgeting and Forecasting

Which of the following is a financial budget rather than an operating budget?

  1. Direct labor budget
  2. Production budget
  3. Selling and administrative expense budget
  4. Budgeted balance sheet Correct answer.

Explanation

Financial budgets include the cash budget, the budgeted balance sheet, and the capital expenditure budget. Operating budgets cover sales, production, materials, labor, and expenses.

Question 38Planning, Budgeting and Forecasting

A flexible budget is best described as a budget that:

  1. is prepared only after the fiscal year has ended
  2. covers only variable costs and excludes fixed costs
  3. is adjusted to the actual level of activity achieved Correct answer.
  4. is fixed at the start of the year and never revised

Explanation

A flexible budget restates revenues and costs for the actual activity level, so performance can be compared at a common volume. The budget that stays at the original planned volume is the static budget.

Question 39Planning, Budgeting and Forecasting

Zero-based budgeting requires managers to:

  1. reduce every budget line by a fixed percentage
  2. base each period's budget on the prior year's amounts
  3. set the budget equal to the prior period's actual results
  4. justify every cost from a starting point of zero Correct answer.

Explanation

Under zero-based budgeting each activity must be justified in a decision package built from a zero base rather than from the prior period's spending. Incremental budgeting, by contrast, begins with last year's amounts.

Question 40Planning, Budgeting and Forecasting

A rolling (continuous) budget is one that:

  1. covers a single activity level only
  2. adds a new period as the current period expires Correct answer.
  3. remains unchanged for the entire fiscal year
  4. is prepared only when a major capital project begins

Explanation

A rolling budget always covers a fixed future horizon, such as twelve months, by adding a new period whenever the oldest one expires. This keeps planning current throughout the year.

Question 41Planning, Budgeting and Forecasting

In a top-down (authoritative) budgeting process:

  1. front-line supervisors set their own targets independently
  2. senior management sets targets with limited input from lower levels Correct answer.
  3. each department negotiates its budget with its suppliers
  4. budgets are constructed only from historical expenditures

Explanation

In top-down budgeting senior management establishes the targets and passes them down, with limited participation from operating levels. Bottom-up budgeting, in contrast, builds the budget from lower-level input.

Question 42Planning, Budgeting and Forecasting

Activity-based budgeting differs from traditional budgeting mainly because it:

  1. uses the prior year's costs as the starting point
  2. builds costs from the activities that drive them Correct answer.
  3. focuses only on capital expenditures
  4. eliminates the need for a sales forecast

Explanation

Activity-based budgeting identifies the activities performed, estimates the demand for each, and then budgets the resources those activities require. This links budgeted costs directly to their cost drivers.

Question 43Planning, Budgeting and Forecasting

A company plans to sell 5,000 units in May and wants 800 units in ending finished goods inventory. Beginning finished goods inventory is 600 units. Budgeted production for May is:

  1. 6,400 units
  2. 5,200 units Correct answer.
  3. 5,000 units
  4. 4,800 units

Explanation

Budgeted production equals budgeted sales plus the desired ending finished goods inventory minus the beginning finished goods inventory. Here 5,000 + 800 − 600 = 5,200 units.

Question 44Planning, Budgeting and Forecasting

Budgeted production is 4,000 units, and each unit requires 3 pounds of material. The company plans 2,500 pounds of ending raw materials inventory and has 1,800 pounds on hand at the beginning. Budgeted material purchases are:

  1. 11,300 pounds
  2. 12,700 pounds Correct answer.
  3. 12,000 pounds
  4. 16,300 pounds

Explanation

Materials needed for production equal 4,000 × 3 = 12,000 pounds. Purchases equal usage plus the desired ending inventory minus the beginning inventory: 12,000 + 2,500 − 1,800 = 12,700 pounds.

Question 45Planning, Budgeting and Forecasting

Budgeted production is 6,000 units. Each unit requires 0.5 direct labor hours, and the wage rate is $18 per hour. The direct labor budget is:

  1. $108,000
  2. $27,000
  3. $54,000 Correct answer.
  4. $48,000

Explanation

Budgeted hours equal 6,000 × 0.5 = 3,000 hours. At $18 per hour, budgeted direct labor cost is 3,000 × $18 = $54,000.

Question 46Planning, Budgeting and Forecasting

Credit sales are collected 60% in the month of sale and 40% in the following month. Sales were $120,000 in February and $150,000 in March. Budgeted cash collections for March are:

  1. $120,000
  2. $90,000
  3. $150,000
  4. $138,000 Correct answer.

Explanation

March collections consist of 60% of March sales plus 40% of February sales. That is $90,000 + $48,000 = $138,000.

Question 47Planning, Budgeting and Forecasting

A company's flexible budget shows variable cost of $6 per unit and fixed cost of $40,000 per month. At an actual volume of 9,000 units, the total flexible budget cost is:

  1. $100,000
  2. $54,000
  3. $40,000
  4. $94,000 Correct answer.

Explanation

Total flexible budget cost equals variable cost per unit times actual units plus total fixed cost. Here (9,000 × $6) + $40,000 = $54,000 + $40,000 = $94,000.

Question 48Planning, Budgeting and Forecasting

Kaizen budgeting is characterized by:

  1. building in planned cost reductions each period Correct answer.
  2. setting targets equal to the prior year's actual costs
  3. allowing departments to add a contingency margin
  4. preparing the budget only once every several years

Explanation

Kaizen budgeting builds continuous improvement into the budget by setting explicit cost-reduction targets for each successive period. Managers are expected to meet a tighter standard each time the budget is prepared.

Question 49Planning, Budgeting and Forecasting

Budgetary slack is most likely created when a manager:

  1. prepares a budget with no input from subordinates
  2. reports actual results that differ from the budget
  3. overstates expected costs and understates expected revenues Correct answer.
  4. adjusts the budget for the actual activity level

Explanation

Slack is the cushion built into a budget by understating revenues or overstating costs, which makes the resulting targets easier to achieve. It is most common where managers who are evaluated against the budget also influence how it is set.

Question 50Planning, Budgeting and Forecasting

At 10,000 machine hours total cost was $85,000, and at 6,000 machine hours total cost was $65,000. Using the high-low method, the variable cost per machine hour is:

  1. $5.00 Correct answer.
  2. $8.50
  3. $3.33
  4. $6.50

Explanation

The high-low method divides the change in total cost by the change in activity. That gives ($85,000 − $65,000) ÷ (10,000 − 6,000) = $20,000 ÷ 4,000 = $5.00 per machine hour.