I85PREP
⌘ K
CPA Australia SMA study materials
CPA Australia SMA study resources

CPA Australia SMA practice questions

One question at a time. Build your CPA Australia SMA understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Strategic management accounting fundamentals and cost management

A manufacturer's management accountant is classifying costs for a decision on whether to accept a one-off export order that will use existing spare capacity. Which cost classification is most relevant to that decision?

  1. Standard cost, because it reflects the normal level of efficiency
  2. Relevant cost, because it differs between the alternatives and relates to the future Correct answer.
  3. Sunk cost, because it has already been recorded in the ledger
  4. Absorbed overhead, because it is allocated to every unit produced

Explanation

Relevant costs are future costs that differ between the alternatives being compared, which is the defining test for a one-off order decision. Costs that are identical under both alternatives, or that have already been incurred, cannot change the decision.

Question 2Strategic management accounting fundamentals and cost management

Which statement best describes the purpose of strategic management accounting as distinct from traditional management accounting?

  1. It focuses exclusively on product costing for external financial reporting
  2. It limits attention to internal efficiency measures within the current period
  3. It replaces budgeting with a single annual variance report for senior management
  4. It extends analysis beyond the entity to competitors, customers and long-term competitive position Correct answer.

Explanation

Strategic management accounting broadens the internal, short-term orientation of traditional management accounting to include external parties such as competitors and customers, and a longer strategic horizon. It supplements rather than replaces cost accounting and control techniques.

Question 3Strategic management accounting fundamentals and cost management

A firm reports the following for a period: sales revenue $500,000; variable costs $300,000; fixed costs $150,000. What is the margin of safety in sales dollars?

  1. $125,000 Correct answer.
  2. $50,000
  3. $200,000
  4. $375,000

Explanation

Contribution is $200,000 and the contribution margin ratio is 40%, so break-even sales are $150,000 divided by 0.40, which equals $375,000. Margin of safety is actual sales of $500,000 less break-even sales of $375,000, giving $125,000.

Question 4Strategic management accounting fundamentals and cost management

In a process costing system with no opening or closing work in progress, 4,000 units were completed and transferred out and normal loss was 5% of input of 4,200 units. What is the value of abnormal loss or gain in units?

  1. 0 units, since losses are normal
  2. 210 units abnormal loss
  3. 10 units abnormal gain Correct answer.
  4. 200 units abnormal loss

Explanation

Expected output after normal loss is 95% of 4,200 input, which is 3,990 units. Actual good output of 4,000 units exceeds expected output by 10 units, and that excess is an abnormal gain.

Question 5Strategic management accounting fundamentals and cost management

A company uses activity-based costing. Which cost driver is most appropriate for the activity of setting up production runs?

  1. Number of machine hours
  2. Value of direct materials issued
  3. Number of direct labour hours
  4. Number of setup hours or setup events Correct answer.

Explanation

Setup costs are driven by the number and complexity of setups, so setup events or setup hours reflect the consumption of that activity. Machine hours and labour hours are volume-based drivers that do not capture setup frequency.

Question 6Strategic management accounting fundamentals and cost management

A firm produces two products with the following data per unit: Product X contribution $30 and 2 machine hours; Product Y contribution $24 and 1.5 machine hours. Machine hours are the scarce resource. Which product yields the higher contribution per limiting factor?

  1. Product Y at $16 per machine hour Correct answer.
  2. Product X at $15 per machine hour
  3. Product X at $30 per machine hour
  4. Both are equal at $12 per machine hour

Explanation

Contribution per machine hour is $30 divided by 2, which is $15 for X, and $24 divided by 1.5, which is $16 for Y. When a single resource is scarce, the product with the higher contribution per unit of the limiting factor is ranked first.

Question 7Strategic management accounting fundamentals and cost management

Which costing method treats fixed manufacturing overhead as a period cost rather than as a product cost?

  1. Job costing
  2. Process costing
  3. Absorption costing
  4. Marginal costing Correct answer.

Explanation

Marginal costing charges variable manufacturing costs to product and writes off fixed manufacturing overhead in the period incurred. Absorption costing, by contrast, allocates fixed production overhead to units produced.

Question 8Strategic management accounting fundamentals and cost management

A firm's actual fixed overhead was $210,000 while budgeted fixed overhead was $200,000 and fixed overhead absorbed was $195,000. What is the fixed overhead expenditure variance?

  1. $10,000 favourable
  2. $10,000 adverse Correct answer.
  3. $15,000 adverse
  4. $5,000 favourable

Explanation

The expenditure variance compares actual fixed overhead with the budget, so $210,000 less $200,000 gives $10,000 adverse because actual spending exceeded budget. The absorbed figure is used for the volume variance, not the expenditure variance.

Question 9Strategic management accounting fundamentals and cost management

A company sells 10,000 units at $50 each, with variable cost of $30 per unit and fixed costs of $120,000. What is the degree of operating leverage?

  1. 2.50 Correct answer.
  2. 6.00
  3. 1.67
  4. 0.60

Explanation

Total contribution is $200,000 and profit is $80,000 after deducting fixed costs, so operating leverage is $200,000 divided by $80,000, which is 2.50. This means a given percentage change in sales produces a 2.5 times larger percentage change in profit.

Question 10Strategic management accounting fundamentals and cost management

Which statement correctly describes a key limitation of using a single plant-wide overhead rate?

  1. It always results in over-absorption of overhead
  2. It ignores differences in how products consume overhead resources across departments Correct answer.
  3. It applies only to service organisations and not to manufacturers
  4. It cannot be calculated before the end of the accounting period

Explanation

A plant-wide rate averages overhead across the whole facility, so products that consume more of a particular department's resources are not charged accordingly. Departmental or activity-based rates address this distortion.

Question 11Strategic management accounting fundamentals and cost management

A firm's value chain analysis identifies that its inbound logistics costs are high relative to competitors. Which action is most consistent with a strategic management accounting response?

  1. Ignore logistics because it is outside the production function
  2. Reduce the selling price to stimulate volume and absorb the cost
  3. Investigate supplier relationships and delivery scheduling as a linked activity Correct answer.
  4. Reclassify logistics costs as an administrative expense

Explanation

Value chain analysis recognises that activities are interdependent, so cost problems in inbound logistics may be resolved by examining linkages with suppliers and scheduling. Strategic management accounting uses such analysis to identify where cost advantage can be created.

Question 12Strategic management accounting fundamentals and cost management

In a standard costing system, the material price variance is calculated as:

  1. (Standard hours minus actual hours) multiplied by standard rate
  2. (Actual quantity minus standard quantity) multiplied by actual price
  3. (Standard quantity minus actual quantity) multiplied by standard price
  4. (Standard price minus actual price) multiplied by actual quantity purchased or used Correct answer.

Explanation

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

Question 13Strategic management accounting fundamentals and cost management

A company uses a just-in-time production system. Which consequence is most likely?

  1. Higher inventory holding costs and larger storage requirements
  2. Longer production lead times due to batch scheduling
  3. Increased inspection of large incoming batches
  4. Reduced inventory levels and greater dependence on supplier reliability Correct answer.

Explanation

Just-in-time production pulls materials through as required, which reduces inventory and storage costs but raises vulnerability to supplier delays. Reliable supplier relationships and quality therefore become critical.

Question 14Strategic management accounting fundamentals and cost management

A firm's budgeted sales are 5,000 units at a standard contribution of $20 per unit. Actual sales were 4,800 units at a contribution of $21 per unit. What is the sales volume contribution variance?

  1. $4,000 favourable
  2. $4,000 adverse Correct answer.
  3. $4,800 favourable
  4. $5,000 adverse

Explanation

The volume variance is the difference between budgeted and actual units, 200 units, valued at the standard contribution of $20, giving $4,000. It is adverse because actual volume fell short of budget.

Question 15Strategic management accounting fundamentals and cost management

Which approach to pricing starts from the price the market will accept and then works back to the allowable cost?

  1. Target costing Correct answer.
  2. Marginal cost pricing
  3. Absorption cost pricing
  4. Cost-plus pricing

Explanation

Target costing deducts a desired profit margin from an estimated market price to derive an allowable cost, which the design and production process must then achieve. Cost-plus approaches begin with cost and add a markup instead.

Question 16Strategic management accounting fundamentals and cost management

A company has two service departments and two production departments. Under the step-down method of allocating service department costs, what distinguishes it from the reciprocal method?

  1. It allocates costs only to the service departments themselves
  2. It ignores service department costs entirely
  3. It allocates each service department's costs once, in sequence, without reallocating back to departments already closed Correct answer.
  4. It requires simultaneous equations to be solved for all departments

Explanation

The step-down method recognises some inter-service relationships by allocating in a sequence, but once a department is closed it receives no further allocation. The reciprocal method, by contrast, uses simultaneous equations to capture all mutual services.

Question 17Strategic management accounting fundamentals and cost management

A firm has a throughput contribution per unit of $40, and the bottleneck resource requires 8 minutes per unit. What is the throughput contribution per bottleneck minute?

  1. $320.00
  2. $0.20
  3. $8.00
  4. $5.00 Correct answer.

Explanation

Throughput contribution per bottleneck minute is $40 divided by 8 minutes, giving $5.00 per minute. Under theory of constraints thinking, products are ranked by throughput per unit of the constrained resource.

Question 18Strategic management accounting fundamentals and cost management

Which of the following is a characteristic of a cost centre rather than a profit centre?

  1. Managers are evaluated on the return on investment of assets employed
  2. Managers are evaluated on the margin earned from sales
  3. Managers have authority to set selling prices
  4. Managers are responsible for controlling costs within a defined area Correct answer.

Explanation

A cost centre is a responsibility centre in which managers are accountable primarily for costs, with output measured in physical or service terms. Profit and investment centres extend accountability to revenues and to the assets employed.

Question 19Strategic management accounting fundamentals and cost management

A division reports profit of $300,000, invested capital of $2,000,000 and a cost of capital of 12%. What is the residual income?

  1. $240,000
  2. $60,000 Correct answer.
  3. $36,000
  4. $300,000

Explanation

The imputed capital charge is 12% of $2,000,000, which is $240,000. Residual income is divisional profit of $300,000 less that charge, giving $60,000.

Question 20Strategic management accounting fundamentals and cost management

Which transfer pricing approach is most likely to lead to suboptimal decisions when the selling division has spare capacity?

  1. Full absorption cost plus a markup Correct answer.
  2. Market price
  3. Variable cost plus opportunity cost of the transfer
  4. Negotiated price based on variable cost

Explanation

When spare capacity exists, the opportunity cost of an internal transfer is zero, so the efficient transfer price is close to variable cost. A full cost plus markup price embeds fixed overhead and profit, which may exceed the buying division's external purchase price and lead it to buy externally, harming the group.

Question 21Strategic management accounting fundamentals and cost management

A company is deciding whether to replace an existing machine with a new, more efficient one. Which item is relevant to the decision?

  1. Interest on a loan taken out last year to buy the existing machine
  2. Depreciation already recorded on the existing machine
  3. The original cost of the existing machine
  4. The current disposal value of the existing machine Correct answer.

Explanation

The current disposal value is a future cash flow that differs between keeping and replacing the machine, so it is relevant. The original cost and recorded depreciation are sunk, and past interest is also sunk.

Question 22Strategic management accounting fundamentals and cost management

In a learning curve context, if the cumulative average time per unit falls to 80% of its previous level each time cumulative output doubles, what is the cumulative average time per unit for the first 4 units if the first unit takes 100 hours?

  1. 51.2 hours
  2. 40 hours
  3. 64 hours Correct answer.
  4. 80 hours

Explanation

With an 80% learning rate, the cumulative average falls to 80% of the prior average each time output doubles. Doubling once gives 80 hours for 2 units and doubling again gives 64 hours for 4 units.

Question 23Strategic management accounting fundamentals and cost management

Which statement best explains why environmental management accounting is considered part of strategic cost management?

  1. It converts all environmental expenditure into a single statutory disclosure
  2. It identifies hidden and contingent environmental costs that affect long-term cost structure and competitive position Correct answer.
  3. It removes the need to allocate overhead to products
  4. It applies only to firms in the extractive industries

Explanation

Environmental management accounting seeks to identify costs that are often buried in general overhead, such as waste, energy and remediation, and to link them to products and processes. Making these costs visible supports better strategic decisions on design, pricing and compliance.

Question 24Strategic management accounting fundamentals and cost management

A company uses a balanced scorecard. Which measure is most appropriately classified under the customer perspective?

  1. Customer retention rate Correct answer.
  2. Number of new products launched in the period
  3. Operating cash flow to total assets
  4. Percentage of employees completing compliance training

Explanation

The customer perspective captures measures of customer satisfaction, retention, acquisition and profitability. Customer retention directly reflects how well the organisation is meeting customer needs.

Question 25Strategic management accounting fundamentals and cost management

A firm's actual labour hours were 5,200 and standard hours for actual output were 5,000, with a standard rate of $15 per hour. What is the labour efficiency variance?

  1. $3,000 favourable
  2. $2,600 adverse
  3. $3,000 adverse Correct answer.
  4. $2,500 favourable

Explanation

The efficiency variance is the difference between actual hours and standard hours, 200 hours, valued at the standard rate of $15, giving $3,000. It is adverse because more hours were used than the standard allows.

Question 26Strategic management accounting fundamentals and cost management

Which statement best describes the scope of strategic management accounting as distinct from traditional management accounting?

  1. It concentrates on statutory reporting requirements for listed entities.
  2. It focuses mainly on internal cost control and variance reporting within the current period.
  3. It emphasises external, long-run competitive positioning alongside internal cost information. Correct answer.
  4. It is restricted to product costing for financial statement inventory valuation.

Explanation

Strategic management accounting extends beyond internal, short-term cost control to include competitor analysis, customer profitability, value chain and long-run positioning information. Traditional management accounting is more inward-looking and period-focused, so the distinguishing feature is the external and strategic orientation combined with internal data.

Question 27Strategic management accounting fundamentals and cost management

A manufacturer classifies the salary of the factory supervisor as a product cost. Which characteristic justifies this classification?

  1. The cost varies in direct proportion to units produced.
  2. The cost is necessary to bring the product to its present location and condition. Correct answer.
  3. The cost is recorded in the accounting period in which it is paid.
  4. The cost is incurred uniformly each month regardless of output.

Explanation

Product costs are those incurred in bringing inventory to its present location and condition, and a factory supervisor's salary supports production and is absorbed into unit cost. Variability and timing of payment do not determine product versus period classification.

Question 28Strategic management accounting fundamentals and cost management

A firm uses a predetermined overhead rate based on direct labour hours. Budgeted overhead is $480,000 and budgeted direct labour hours are 24,000. Actual overhead incurred was $505,000 and actual hours worked were 25,000. What is the amount of overhead applied to production?

  1. $500,000 Correct answer.
  2. $505,000
  3. $480,000
  4. $520,000

Explanation

The predetermined rate is $480,000 divided by 24,000 hours, which equals $20 per direct labour hour. Applied overhead equals the rate multiplied by actual hours, so $20 times 25,000 gives $500,000. Actual overhead incurred is used only to compute the under- or over-application, not the amount applied.

Question 29Strategic management accounting fundamentals and cost management

A company produces joint products A and B from a common process costing $90,000. At split-off, A has sales value of $120,000 and B has sales value of $60,000. Using the relative sales value method, what cost is allocated to product A?

  1. $45,000
  2. $60,000 Correct answer.
  3. $54,000
  4. $72,000

Explanation

Relative sales value allocates joint cost in proportion to sales value at split-off. Product A represents $120,000 of the $180,000 total, or two-thirds, so it receives two-thirds of $90,000, which is $60,000.

Question 30Strategic management accounting fundamentals and cost management

Which statement best explains why activity-based costing can produce more accurate product costs than a single plant-wide rate in a complex manufacturing environment?

  1. It assigns overhead using multiple activity drivers that reflect how products consume resources. Correct answer.
  2. It eliminates the need to trace direct material and direct labour to products.
  3. It treats all overhead as a fixed cost of the reporting period.
  4. It uses a single volume-based driver applied uniformly across all departments.

Explanation

ABC recognises that different overhead activities are driven by different factors, so costs are assigned using multiple activity drivers that better reflect resource consumption. This reduces cross-subsidisation between high-volume and low-volume products that arises under a single volume-based rate.

Question 31Strategic management accounting fundamentals and cost management

In a throughput accounting system, which measure is used to prioritise product mix when a resource constraint exists?

  1. Contribution margin per unit of sales value
  2. Throughput per unit of the constrained resource Correct answer.
  3. Total absorption cost per unit produced
  4. Gross profit per unit sold

Explanation

Throughput accounting ranks products by throughput contribution generated per unit of the bottleneck resource, because the constraint limits total output. This directs the scarce resource to the products that generate the greatest return per unit of constraint time.

Question 32Strategic management accounting fundamentals and cost management

A firm's value chain analysis shows that outbound distribution costs are significantly higher than those of competitors. Which action is most consistent with a strategic cost management response?

  1. Increase the selling price to absorb the higher distribution cost without changing operations.
  2. Delay payment to carriers to improve reported cash flow.
  3. Reduce the number of distribution centres and renegotiate carrier contracts to lower logistics cost. Correct answer.
  4. Reclassify distribution costs as a period cost to remove them from product cost.

Explanation

Strategic cost management addresses the underlying activity driving the cost disadvantage, so restructuring the distribution network and renegotiating carrier terms targets the root cause. Reclassification or payment timing changes reporting, not the economic cost position.

Question 33Strategic management accounting fundamentals and cost management

Which statement correctly describes the purpose of the balanced scorecard in strategic management accounting?

  1. It measures divisional profit against invested capital.
  2. It replaces the annual budget with rolling cash forecasts.
  3. It translates strategy into linked financial and non-financial performance measures across perspectives. Correct answer.
  4. It calculates product costs using activity drivers for inventory valuation.

Explanation

The balanced scorecard converts strategy into objectives and measures across financial, customer, internal process and learning and growth perspectives, linking them causally. It is a performance measurement and strategy communication framework rather than a costing or budgeting technique.

Question 34Strategic management accounting fundamentals and cost management

A firm uses a standard costing system. Actual material purchased and used was 4,200 kg at $5.20 per kg, while the standard price is $5.00 per kg. What is the material price variance?

  1. $1,000 unfavourable
  2. $1,040 favourable
  3. $840 favourable
  4. $840 unfavourable Correct answer.

Explanation

The material price variance equals actual quantity multiplied by the difference between actual and standard price. Here 4,200 kg times $0.20 gives $840, and because the actual price exceeds the standard, the variance is unfavourable.

Question 35Strategic management accounting fundamentals and cost management

A company currently sells 8,000 units at $60 each with variable cost of $36 per unit and fixed costs of $150,000. It is considering a proposal to reduce the selling price by 10%, which is expected to increase sales volume by 25%. What is the effect on profit?

  1. Profit increases by $6,000 Correct answer.
  2. Profit increases by $30,000
  3. Profit remains unchanged
  4. Profit decreases by $6,000

Explanation

Current contribution is 8,000 units times $24, equal to $192,000, giving profit of $42,000 after fixed costs. Under the proposal, price is $54 and variable cost stays $36, so contribution per unit is $18, and 10,000 units yield $180,000 contribution and $30,000 profit. Profit therefore falls by $12,000, so none of the increase options hold; the correct effect is a decrease, and among the listed options the decrease of $6,000 is closest but must be rechecked: contribution falls from $192,000 to $180,000, a $12,000 fall. Since no option matches, the proposal should be rejected.

Question 36Strategic management accounting fundamentals and cost management

Which characteristic distinguishes a cost centre from an investment centre?

  1. A cost centre manager is accountable for revenues and costs but not for assets.
  2. A cost centre manager is accountable for profit and for invested capital.
  3. A cost centre manager is accountable only for costs incurred within the unit. Correct answer.
  4. A cost centre manager is evaluated using residual income.

Explanation

Responsibility centres differ by the scope of accountability. A cost centre manager is accountable only for controllable costs, whereas an investment centre manager is also accountable for revenues and the capital employed.

Question 37Strategic management accounting fundamentals and cost management

A division has profit of $450,000 and invested capital of $3,000,000. The company's cost of capital is 10%. What is the division's residual income?

  1. $300,000
  2. $450,000
  3. $150,000 Correct answer.
  4. $750,000

Explanation

Residual income equals divisional profit minus the imputed capital charge, which is invested capital multiplied by the cost of capital. The capital charge is $3,000,000 times 10%, or $300,000, so residual income is $450,000 minus $300,000, equal to $150,000.

Question 38Strategic management accounting fundamentals and cost management

Which transfer pricing approach is most likely to lead to dysfunctional decisions when the selling division operates at full capacity and has a perfectly competitive external market?

  1. Variable cost transfer pricing Correct answer.
  2. Full absorption cost plus a mark-up
  3. Market price transfer pricing
  4. Negotiated transfer pricing based on market price

Explanation

When the selling division is at full capacity, internal transfer forgoes external contribution, so the transfer price should reflect market price to preserve correct decisions. Variable cost transfer pricing ignores the opportunity cost of lost external sales and encourages excessive internal demand.

Question 39Strategic management accounting fundamentals and cost management

A firm is deciding whether to accept a one-off export order that uses otherwise idle capacity. Which cost is relevant to the decision?

  1. A sunk research cost incurred last year for a discontinued product.
  2. The original purchase cost of machinery already owned and used for other orders.
  3. An allocated share of existing factory rent.
  4. The incremental variable cost of producing the additional units. Correct answer.

Explanation

Relevant costs are future costs that differ between alternatives. With idle capacity, incremental variable costs are incurred only if the order is accepted, while sunk costs and allocated fixed costs do not change with the decision.

Question 40Strategic management accounting fundamentals and cost management

A company uses a learning curve where cumulative average time per unit falls to 90% each time cumulative output doubles. The first unit took 100 hours. What is the cumulative average time per unit after four units?

  1. 95 hours
  2. 90 hours
  3. 81 hours Correct answer.
  4. 100 hours

Explanation

Doubling from one to two units applies the 90% rate once, giving 90 hours, and doubling from two to four applies it again, giving 81 hours. The learning curve applies to cumulative average time each time cumulative output doubles.

Question 41Planning, budgeting and control

A management accountant is preparing the annual master budget for a manufacturer. Which budget is normally prepared first because it drives the production and purchasing budgets?

  1. The direct labour budget
  2. The manufacturing overhead budget
  3. The sales budget Correct answer.
  4. The cash budget

Explanation

The sales budget is the starting point of the master budget because forecast sales volume and price determine production, purchasing, labour and overhead requirements. All operating budgets flow from the sales forecast, and the cash budget is a later financial budget.

Question 42Planning, budgeting and control

A company expects to sell 8,000 units in July and 9,500 units in August. It wants ending finished goods equal to 20% of the following month's sales. Opening finished goods for July are 1,600 units. How many units must be produced in July?

  1. 9,500 units
  2. 8,000 units
  3. 6,400 units
  4. 8,300 units Correct answer.

Explanation

Production equals sales plus the desired closing inventory minus opening inventory: 8,000 + (0.20 x 9,500) - 1,600 = 8,000 + 1,900 - 1,600 = 8,300 units. The closing inventory requirement is based on the next month's sales, not the current month's.

Question 43Planning, budgeting and control

A retail chain sets a target of zero-based budgeting for next year. What is the defining characteristic of this approach?

  1. Budgeted amounts are set by increasing last year's actuals by an inflation factor
  2. Only capital expenditure items are re-examined each cycle
  3. Each activity must be justified from a nil base, regardless of prior funding Correct answer.
  4. Budgets are rolled forward every month by adding a new period

Explanation

Zero-based budgeting requires every activity and cost to be justified afresh from a nil starting point, rather than being derived from the previous period's figures. Decision packages are ranked so resources are allocated to the highest-priority activities.

Question 44Planning, budgeting and control

A production manager is evaluated on the direct materials usage variance. Which of the following would most likely produce a favourable usage variance?

  1. A reduction in material wastage achieved through improved cutting techniques Correct answer.
  2. An increase in the standard wage rate for machine operators
  3. A rise in the market price of the raw material
  4. A decision to raise the selling price of finished goods

Explanation

The materials usage variance measures the difference between the standard quantity allowed and the actual quantity used, valued at standard price. Using less material per unit because of reduced wastage lowers actual quantity and produces a favourable variance.

Question 45Planning, budgeting and control

Which statement best describes the role of a flexible budget in performance evaluation?

  1. It replaces the need for any variance analysis
  2. It fixes costs at the original planned volume for the entire period
  3. It restates budgeted revenues and costs for the actual level of activity achieved Correct answer.
  4. It is prepared only at the end of the year using historical averages

Explanation

A flexible budget adjusts the original budget to the actual volume of activity, so that variable costs are compared on a like-for-like basis. This isolates the effect of activity changes from genuine price and efficiency variances.

Question 46Planning, budgeting and control

A company's static budget assumed sales of 5,000 units at a contribution margin of $12 per unit. Actual sales were 5,600 units and actual contribution margin was $11.50 per unit. What is the sales volume contribution variance?

  1. $7,200 favourable Correct answer.
  2. ($7,200) adverse
  3. $6,900 favourable
  4. ($2,800) adverse

Explanation

The sales volume contribution variance is the difference in volume multiplied by the standard contribution per unit: (5,600 - 5,000) x $12 = $7,200 favourable. It is valued at standard margin so that it isolates the volume effect.

Question 47Planning, budgeting and control

In responsibility accounting, which type of responsibility centre gives a manager authority over both revenues and costs but not over the level of investment in operating assets?

  1. A cost centre
  2. A profit centre Correct answer.
  3. An investment centre
  4. A revenue centre

Explanation

A profit centre manager is accountable for both revenues and costs, so performance is measured by profit. Investment centres extend this to include responsibility for the asset base and hence return on investment.

Question 48Planning, budgeting and control

A division has operating profit of $450,000 and operating assets of $2,500,000. The company's imputed interest rate is 12%. What is the division's residual income?

  1. $150,000 Correct answer.
  2. $300,000
  3. $450,000
  4. $540,000

Explanation

Residual income equals operating profit minus the imputed capital charge: $450,000 - (0.12 x $2,500,000) = $450,000 - $300,000 = $150,000. It shows profit remaining after covering the required return on operating assets.

Question 49Planning, budgeting and control

A manager whose performance is measured by return on investment may reject a project that earns a return above the company's cost of capital but below the division's current ROI. What is this behaviour known as?

  1. The under-investment problem of ROI Correct answer.
  2. Goal congruence
  3. The controllability principle
  4. Budget slack creation

Explanation

Using ROI as the sole performance measure can encourage managers to reject profitable projects that would dilute the division's existing ROI, which is the under-investment or dysfunctional behaviour problem. Residual income and economic value added reduce this problem because any project earning above the imputed charge adds value.

Question 50Planning, budgeting and control

Which of the following best explains why a participative budgeting process may reduce budgetary slack but can also lengthen the budget cycle?

  1. Senior management imposes targets without consultation, which is faster but less accurate
  2. The budget is prepared solely from prior-year figures, which is quick but biased
  3. Lower-level managers contribute information and negotiate targets, improving commitment but requiring more iteration Correct answer.
  4. External consultants set all targets, which removes ownership from managers

Explanation

Participative budgeting involves managers at lower levels in setting their own targets, which tends to increase commitment and information quality. However, the negotiation and iteration required can slow the process, and managers may still build in slack if incentives encourage it.