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CPA BAR practice questions

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Question 1Business Analysis

A company's contribution margin ratio is 40% and fixed costs are $120,000. What is the break-even point in sales dollars?

  1. $300,000 Correct answer.
  2. $200,000
  3. $48,000
  4. $480,000

Explanation

Break-even sales in dollars equals fixed costs divided by the contribution margin ratio, so $120,000 / 0.40 = $300,000.

Question 2Business Analysis

Which cost remains constant in total within the relevant range of activity?

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

Explanation

A fixed cost stays constant in total across the relevant range, though it declines per unit as volume rises. Variable costs change in total with volume.

Question 3Business Analysis

A firm has sales of $500,000, variable costs of $300,000, and fixed costs of $150,000. What is its degree of operating leverage?

  1. 1.67
  2. 0.40
  3. 2.50 Correct answer.
  4. 3.33

Explanation

Contribution margin is $200,000 and operating income is $50,000, so DOL = $200,000 / $50,000 = 2.50.

Question 4Business Analysis

When using the high-low method, which two data points are selected?

  1. The highest and lowest total costs
  2. The two periods with the largest cost differences
  3. The most recent and earliest periods
  4. The highest and lowest activity levels Correct answer.

Explanation

The high-low method uses the observations with the highest and lowest activity (volume) levels to estimate the variable cost per unit and fixed cost.

Question 5Business Analysis

A company uses a standard cost system. Actual units produced were 1,000, and the standard allows 2 direct labor hours per unit at $15 per hour. Actual hours were 2,100 at $14 per hour. What is the direct labor rate variance?

  1. $1,400 favorable
  2. $1,500 unfavorable
  3. $2,100 favorable Correct answer.
  4. $2,100 unfavorable

Explanation

Rate variance = actual hours × (actual rate − standard rate) = 2,100 × ($14 − $15) = −$2,100, a favorable variance because the actual rate was below standard.

Question 6Business Analysis

A direct labor efficiency variance is calculated as:

  1. (Actual hours − standard hours allowed) × standard rate Correct answer.
  2. (Actual hours − standard hours allowed) × actual rate
  3. (Actual rate − standard rate) × actual hours
  4. (Actual rate − standard rate) × standard hours

Explanation

The efficiency variance isolates the quantity effect by valuing the difference between actual and standard hours at the standard rate.

Question 7Business Analysis

A company has a material price variance of $5,000 unfavorable and a material quantity variance of $3,000 favorable. What is the total material variance?

  1. $2,000 favorable
  2. $8,000 favorable
  3. $8,000 unfavorable
  4. $2,000 unfavorable Correct answer.

Explanation

Total variance is the sum of price and quantity variances: $5,000 unfavorable + $3,000 favorable = $2,000 unfavorable.

Question 8Business Analysis

In a flexible budget, which item changes when the actual volume of activity changes?

  1. Depreciation
  2. Variable costs Correct answer.
  3. Property taxes
  4. Fixed costs

Explanation

A flexible budget is adjusted to actual volume, so variable costs scale with the activity level while fixed costs remain unchanged.

Question 9Business Analysis

When deciding whether to drop a product line, which costs are relevant?

  1. Sunk costs
  2. Avoidable fixed costs Correct answer.
  3. Depreciation on shared facilities
  4. Allocated common fixed costs

Explanation

Only avoidable costs that disappear if the line is dropped are relevant; allocated common costs continue regardless of the decision.

Question 10Business Analysis

A company has excess capacity and receives a special order at a price below normal selling price. Which cost is most relevant to the decision?

  1. Full absorption cost
  2. Variable manufacturing cost Correct answer.
  3. Allocated fixed overhead
  4. Fixed selling expense

Explanation

With excess capacity, incremental variable costs are the relevant costs of accepting the order; fixed costs already exist and do not change.

Question 11Business Analysis

A constraint (bottleneck) limits production. To maximize total contribution margin, a company should prioritize products by:

  1. Lowest variable cost per unit
  2. Contribution margin per unit of the constrained resource Correct answer.
  3. Highest contribution margin per unit
  4. Highest selling price per unit

Explanation

When a resource is constrained, the goal is to maximize contribution margin per unit of that scarce resource, not per unit of product.

Question 12Business Analysis

Which budgeting approach starts from zero and requires each cost to be justified for every period?

  1. Kaizen budgeting
  2. Rolling budgeting
  3. Zero-based budgeting Correct answer.
  4. Incremental budgeting

Explanation

Zero-based budgeting builds each budget from a zero base and requires justification of all costs, rather than adjusting prior amounts.

Question 13Business Analysis

A company's sales budget shows 10,000 units for the next quarter. Desired ending finished goods inventory is 20% of the following quarter's sales of 12,000 units, and beginning inventory is 2,000 units. How many units should be produced?

  1. 8,400
  2. 10,000
  3. 12,400
  4. 10,400 Correct answer.

Explanation

Production = sales + desired ending inventory − beginning inventory = 10,000 + (20% × 12,000) − 2,000 = 10,400 units.

Question 14Business Analysis

A favorable labor rate variance combined with an unfavorable labor efficiency variance most likely indicates that:

  1. Highly skilled workers were used
  2. Less-skilled workers were used Correct answer.
  3. Actual hours were understated
  4. Standard rates were set too low

Explanation

Using less-skilled, lower-paid workers lowers the rate paid (favorable) but typically increases hours worked due to lower productivity (unfavorable efficiency).

Question 15Business Analysis

A company has sales of $200,000, variable costs of $120,000, and fixed costs of $50,000. What is the margin of safety in sales dollars?

  1. $75,000 Correct answer.
  2. $50,000
  3. $30,000
  4. $125,000

Explanation

Break-even sales = $50,000 / 0.40 = $125,000; margin of safety = $200,000 − $125,000 = $75,000.

Question 16Business Analysis

Which of the following is a characteristic of a just-in-time inventory system?

  1. Materials arrive shortly before they are needed in production Correct answer.
  2. Production is pushed through the plant on a fixed schedule
  3. Inventory is valued using the last-in, first-out method
  4. Large safety stock buffers protect against demand variability

Explanation

JIT seeks to minimize inventory by having materials delivered close to when they are required, relying on tight supplier coordination.

Question 17Business Analysis

Under a balanced scorecard, which perspective includes measures such as employee training hours and employee satisfaction?

  1. Learning and growth Correct answer.
  2. Internal business process
  3. Customer
  4. Financial

Explanation

The learning and growth perspective focuses on employee capabilities, information systems, and organizational alignment that enable future performance.

Question 18Business Analysis

A division reports operating income of $300,000 and average operating assets of $1,500,000. The company's minimum required return is 12%. What is the division's residual income?

  1. $60,000
  2. $300,000
  3. $120,000 Correct answer.
  4. $180,000

Explanation

Residual income = operating income − (minimum return × average operating assets) = $300,000 − (12% × $1,500,000) = $120,000.

Question 19Business Analysis

A manager evaluated on return on investment (ROI) may reject a project that earns more than the company's cost of capital but less than the division's current ROI because:

  1. The project's net present value is negative
  2. The project increases residual income
  3. The company requires all projects to exceed the division average
  4. Accepting it would lower the division's overall ROI Correct answer.

Explanation

Because ROI is an average, adding a project with a return below the current division ROI pulls the average down, creating a goal-congruence problem.

Question 20Business Analysis

In a decentralized organization, which responsibility center manager is accountable for both revenues and costs?

  1. Revenue center
  2. Investment center
  3. Profit center Correct answer.
  4. Cost center

Explanation

A profit center manager controls both revenues and costs, so performance is measured on profit.

Question 21Business Analysis

A company uses a predetermined overhead rate based on machine hours. Estimated overhead is $400,000 and estimated machine hours are 20,000. Actual overhead incurred was $410,000 and actual machine hours were 21,000. What is the amount of overhead applied?

  1. $400,000
  2. $390,476
  3. $420,000 Correct answer.
  4. $410,000

Explanation

The predetermined rate is $400,000 / 20,000 = $20 per machine hour; applied overhead = $20 × 21,000 = $420,000.

Question 22Business Analysis

A company produces two joint products. Joint processing costs total $90,000. At the split-off point, product A can be sold for $60,000 and product B for $30,000. Using the sales value at split-off method, how much joint cost is allocated to product A?

  1. $45,000
  2. $54,000
  3. $60,000 Correct answer.
  4. $30,000

Explanation

Product A's share of total split-off value is $60,000 / $90,000 = 2/3, so allocated joint cost is 2/3 × $90,000 = $60,000.

Question 23Business Analysis

Which transfer pricing method is most likely to be used when there is no external market for the intermediate product?

  1. Market-based transfer price
  2. Price set at the competitor's list price
  3. Cost-based transfer price Correct answer.
  4. Negotiated transfer price tied to market quotes

Explanation

When no external market exists, market prices are unavailable, so cost-based transfer prices are commonly used to value internal transfers.

Question 24Business Analysis

A company's static budget was based on 5,000 units, but it actually produced and sold 6,000 units. Comparing actual results to the static budget would produce a variance that is:

  1. Less meaningful because it mixes volume and price or spending effects Correct answer.
  2. Identical to the flexible budget variance
  3. Free of any volume effect
  4. More meaningful because it isolates spending control

Explanation

A static budget comparison does not adjust for actual volume, so differences reflect both volume effects and price or spending effects, reducing its usefulness for cost control.

Question 25Business Analysis

Which cost behavior pattern describes a cost that remains constant in total within the relevant range as activity volume changes?

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

Explanation

A fixed cost stays constant in total within the relevant range, so per-unit fixed cost declines as volume rises. Variable costs change in total with volume, mixed costs have both elements, and step costs jump at thresholds.

Question 26Business Analysis

A company has contribution margin of $60,000 and operating income of $15,000. What is its degree of operating leverage?

  1. 3.00
  2. 0.25
  3. 4.00 Correct answer.
  4. 1.25

Explanation

Degree of operating leverage equals contribution margin divided by operating income, or $60,000 ÷ $15,000 = 4.00. It measures the percentage change in operating income for a given percentage change in sales.

Question 27Business Analysis

Which analysis technique determines the change in a dependent variable caused by a change in one independent variable while holding other factors constant?

  1. Variance analysis
  2. Regression analysis Correct answer.
  3. Sensitivity analysis
  4. Scenario analysis

Explanation

Regression analysis models the relationship between a dependent variable and one or more independent variables, and the slope coefficient estimates the effect of a one-unit change in an independent variable. The other techniques examine outcomes under changed assumptions or compare actual to expected results.

Question 28Business Analysis

A company's sales are $500,000, variable costs are $300,000, and fixed costs are $150,000. What is the break-even point in sales dollars?

  1. $375,000 Correct answer.
  2. $450,000
  3. $250,000
  4. $300,000

Explanation

The contribution margin ratio is ($500,000 − $300,000) ÷ $500,000 = 40%. Break-even sales equal fixed costs ÷ contribution margin ratio, or $150,000 ÷ 0.40 = $375,000.

Question 29Business Analysis

Which document in the master budget is prepared first because it drives production, purchasing, and cash budgets?

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

Explanation

The sales budget is the starting point of the master budget because projected sales volume drives production, inventory, purchasing, and operating expense budgets. The cash budget is a later financial budget, and production and purchases budgets depend on sales forecasts.

Question 30Business Analysis

Which variance arises when actual production volume differs from the volume used in the original static budget?

  1. Labor rate variance
  2. Material price variance
  3. Sales volume variance Correct answer.
  4. Fixed overhead spending variance

Explanation

The sales volume variance measures the difference between the static budget and the flexible budget caused by producing and selling a different number of units than planned. Price, rate, and spending variances arise from differences in input prices or costs, not volume.

Question 31Business Analysis

In a cost-volume-profit graph, what does the point where the total revenue line crosses the total cost line represent?

  1. The operating leverage point
  2. The contribution margin ratio
  3. The break-even point Correct answer.
  4. The margin of safety

Explanation

At the intersection of total revenue and total cost, revenues exactly equal total costs, which is the break-even point. The margin of safety is a dollar or unit cushion above break-even, and the contribution margin ratio is a slope measure.

Question 32Business Analysis

Which budgeting technique is most appropriate when a company wants each manager to build a budget from a base of zero activity and justify every requested dollar?

  1. Kaizen budgeting
  2. Rolling budgeting
  3. Incremental budgeting
  4. Zero-based budgeting Correct answer.

Explanation

Zero-based budgeting requires each cost to be justified from a zero base rather than starting from prior-period amounts. Incremental budgeting adjusts prior budgets, rolling budgets update periodically, and kaizen budgeting targets continuous cost reduction.

Question 33Business Analysis

A company has fixed costs of $90,000, a unit selling price of $30, and unit variable costs of $18. How many units must be sold to earn a target operating income of $30,000?

  1. 10,000 units Correct answer.
  2. 15,000 units
  3. 7,500 units
  4. 12,000 units

Explanation

Unit contribution margin is $30 − $18 = $12. Required units equal (fixed costs + target income) ÷ unit contribution margin, or ($90,000 + $30,000) ÷ $12 = 10,000 units.

Question 34Business Analysis

A company has an unfavorable material price variance and a favorable material quantity variance. Which explanation best fits this pattern?

  1. Standard prices and quantities were both set too low
  2. Higher-quality material was purchased at a discount and used less efficiently
  3. Lower-quality material was purchased at a higher price but used more efficiently than standard Correct answer.
  4. The company purchased more material than it used

Explanation

An unfavorable price variance means materials cost more than standard, while a favorable quantity variance means less material was used than allowed. This combination is consistent with buying premium or lower-quality material at a higher price that requires less waste or fewer units per output.

Question 35Business Analysis

A company produces a product with unit contribution margin of $8 and requires 2 machine hours per unit. A second product has unit contribution margin of $18 and requires 6 machine hours per unit. Machine hours are the constrained resource. Which product should be emphasized?

  1. The first product, because its contribution margin per machine hour is $4.00 versus $3.00 Correct answer.
  2. The second product, because its unit contribution margin is higher
  3. The second product, because its contribution margin per machine hour is $3.00 versus $4.00
  4. The first product, because it requires fewer machine hours per unit

Explanation

When a resource is constrained, products should be ranked by contribution margin per unit of the constrained resource. The first product earns $8 ÷ 2 = $4.00 per machine hour, while the second earns $18 ÷ 6 = $3.00 per machine hour, so the first product is preferred.

Question 36Business Analysis

A company is deciding whether to accept a special order that would use existing idle capacity. Which cost is relevant to the decision?

  1. The fixed factory rent allocated to all production
  2. The variable cost of producing the special-order units Correct answer.
  3. The salary of the plant manager, which will not change
  4. The original cost of equipment purchased last year

Explanation

Relevant costs are future costs that differ between alternatives. With idle capacity, incremental variable production costs differ and are relevant, while allocated fixed rent, sunk equipment cost, and unchanged salaries do not differ.

Question 37Business Analysis

A company has average operating assets of $800,000, operating income of $96,000, and a minimum required return of 10%. What is the residual income?

  1. $96,000
  2. $80,000
  3. $16,000 Correct answer.
  4. $8,000

Explanation

Residual income equals operating income minus the minimum required return on operating assets. The required return is $800,000 × 10% = $80,000, so residual income is $96,000 − $80,000 = $16,000.

Question 38Business Analysis

Which responsibility center manager is accountable for controlling costs but not for generating revenue?

  1. Investment center manager
  2. Revenue center manager
  3. Cost center manager Correct answer.
  4. Profit center manager

Explanation

A cost center manager is evaluated on controlling costs within the assigned budget. Profit center managers are accountable for both revenues and costs, investment center managers also for assets employed, and revenue center managers for sales generation.

Question 39Business Analysis

A company's static budget was based on 8,000 units, but it actually produced and sold 9,000 units. Total static budget fixed costs were $120,000 and actual fixed costs were $118,000. What is the fixed overhead spending variance?

  1. $15,000 unfavorable
  2. $2,000 favorable Correct answer.
  3. $2,000 unfavorable
  4. $15,000 favorable

Explanation

The fixed overhead spending variance compares actual fixed overhead to the budgeted fixed overhead amount, which does not flex with volume. Actual of $118,000 is $2,000 below the $120,000 budget, so the variance is $2,000 favorable.

Question 40Business Analysis

A company has a current ratio of 2.0 and an acid-test (quick) ratio of 1.2. Which conclusion is best supported?

  1. Cash represents the majority of current assets
  2. The company cannot meet short-term obligations
  3. The company has excessive long-term debt
  4. A significant portion of current assets is inventory Correct answer.

Explanation

The gap between the current ratio and the quick ratio indicates that inventory, which the quick ratio excludes, is a meaningful share of current assets. Solvency on short-term obligations appears adequate because both ratios exceed 1.0.

Question 41Business Analysis

A company has annual credit sales of $1,200,000 and average accounts receivable of $200,000. What is the average collection period, assuming 360 days per year?

  1. 45 days
  2. 90 days
  3. 30 days
  4. 60 days Correct answer.

Explanation

Accounts receivable turnover equals credit sales divided by average receivables, or $1,200,000 ÷ $200,000 = 6. Average collection period equals 360 ÷ 6 = 60 days.

Question 42Business Analysis

Which method of allocating joint product costs is based on the relative sales value of each product at the split-off point?

  1. Physical units method
  2. Weighted average method
  3. First-in, first-out method
  4. Net realizable value method Correct answer.

Explanation

The net realizable value method allocates joint costs in proportion to each product's sales value at split-off, adjusted for separable processing costs. The physical units method allocates by volume, and the weighted average and FIFO methods are inventory cost-flow assumptions.

Question 43Business Analysis

A company reports operating income of $200,000 and sales of $2,000,000, with average operating assets of $1,000,000. What is the return on investment using the DuPont decomposition?

  1. 25.0%
  2. 20.0% Correct answer.
  3. 10.0%
  4. 5.0%

Explanation

ROI equals margin times turnover. Margin is $200,000 ÷ $2,000,000 = 10%, and turnover is $2,000,000 ÷ $1,000,000 = 2.0, so ROI is 10% × 2.0 = 20%.

Question 44Business Analysis

A company has sales of $400,000, a contribution margin ratio of 30%, and fixed costs of $90,000. What is the margin of safety in dollars?

  1. $30,000
  2. $100,000 Correct answer.
  3. $90,000
  4. $120,000

Explanation

Break-even sales equal fixed costs divided by the contribution margin ratio, or $90,000 ÷ 0.30 = $300,000. Margin of safety is $400,000 − $300,000 = $100,000.

Question 45Business Analysis

A company expects sales of 5,000 units in January, 6,000 in February, and 7,000 in March. It maintains ending finished goods equal to 25% of the next month's sales. What is the budgeted production for February?

  1. 6,000 units
  2. 6,500 units
  3. 5,750 units
  4. 6,250 units Correct answer.

Explanation

Production equals budgeted sales plus desired ending inventory minus beginning inventory. For February: 6,000 + (25% × 7,000 = 1,750) − (25% × 6,000 = 1,500) = 6,250 units.

Question 46Business Analysis

A company uses a standard cost system. Actual units produced were 2,000, and the standard allows 3 direct labor hours per unit at a standard rate of $15 per hour. Actual direct labor hours were 6,300, and actual cost was $91,350. What is the direct labor rate variance?

  1. $4,500 favorable
  2. $3,150 favorable
  3. $4,500 unfavorable
  4. $3,150 unfavorable Correct answer.

Explanation

The labor rate variance equals actual hours times the difference between the actual rate and the standard rate. Actual rate is $91,350 ÷ 6,300 = $14.50, so the variance is 6,300 × ($14.50 − $15.00) = $3,150 favorable. Wait-since actual is below standard, the variance is favorable.

Question 47Business Analysis

Which of the following best describes the primary purpose of the master budget?

  1. To serve as the basis for the annual external financial statements
  2. To provide a comprehensive financial plan that coordinates all functional budgets for a specific period Correct answer.
  3. To establish the maximum allowable spending for each department
  4. To determine the exact amount of cash that will be available at the end of the period

Explanation

The master budget is a comprehensive plan that integrates sales, production, purchasing, and financial budgets to coordinate activities across the organization. It is not a precise cash forecast, nor does it replace external reporting or simply set spending limits.

Question 48Business Analysis

When using a rolling (continuous) budget, what happens at the end of each period?

  1. The budget is completely recreated from a zero base for all periods
  2. The budget remains unchanged until the annual budget cycle begins
  3. Only the sales budget is updated, while other budgets remain static
  4. A new period is added to the end of the budget horizon and the earliest period is dropped Correct answer.

Explanation

A rolling budget is continually updated by adding a new period to the end of the budget horizon and removing the period just completed, so the budget always covers a fixed future time span. It is not a zero-based rebuild, nor does it remain static or update only sales.

Question 49Business Analysis

Which of the following is an advantage of using a participative budgeting approach?

  1. It ensures that budget slack is completely eliminated
  2. It eliminates the need for top management review
  3. It reduces the time required to prepare the budget
  4. It increases the likelihood that employees will accept and strive to achieve the budget Correct answer.

Explanation

Participative budgeting involves lower-level managers in the budgeting process, which tends to increase their commitment to the budget and motivation to meet it. It does not eliminate top management review, typically takes more time, and can actually encourage budgetary slack.

Question 50Business Analysis

Which of the following is a characteristic of a flexible budget?

  1. It is prepared only at the beginning of the year and remains unchanged
  2. It is based on the maximum capacity of the production facility
  3. It adjusts revenues and costs for the actual level of activity Correct answer.
  4. It includes only fixed costs because variable costs are managed separately

Explanation

A flexible budget is designed to change with the actual volume of activity, allowing for more meaningful performance evaluation by comparing actual results to a budget based on the same activity level. It is not static, not based on maximum capacity, and includes both fixed and variable costs.