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CPA Canada Core 2 - independent subject foundations study materials
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CPA Canada Core 2 - independent subject foundations practice questions

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Question 1Management costing, budgets and relevant decisions

A company sells a product for $40 per unit with variable costs of $24 per unit. Fixed costs are $96,000. How many units must be sold to break even?

  1. 6,000 units Correct answer.
  2. 16,000 units
  3. 2,400 units
  4. 4,000 units

Explanation

The contribution margin per unit is $40 - $24 = $16. Break-even units = Fixed costs / CM per unit = $96,000 / $16 = 6,000 units. At this volume total contribution exactly covers fixed costs and profit is zero.

Question 2Management costing, budgets and relevant decisions

Under a contribution-margin income statement, which cost behaviour classification is used to organize expenses?

  1. By function (cost of goods sold vs. operating)
  2. By variable vs. fixed behaviour Correct answer.
  3. By controllable vs. non-controllable
  4. By product vs. period

Explanation

A contribution-margin (variable costing) income statement separates costs by behaviour: variable costs are deducted from sales to derive contribution margin, then fixed costs are deducted to reach operating income. This format supports CVP and decision analysis.

Question 3Management costing, budgets and relevant decisions

A firm has a contribution margin ratio of 40% and fixed costs of $200,000. What sales revenue is required to earn a target operating income of $80,000?

  1. $280,000
  2. $500,000
  3. $700,000 Correct answer.
  4. $560,000

Explanation

Required sales = (Fixed costs + Target income) / CM ratio = ($200,000 + $80,000) / 0.40 = $280,000 / 0.40 = $700,000. The CM ratio converts required total contribution into required revenue.

Question 4Management costing, budgets and relevant decisions

Under activity-based costing (ABC), overhead is assigned to products primarily based on:

  1. The relative sales revenue of each product line
  2. Direct material cost as the sole allocation base
  3. A single plant-wide rate using direct labour hours
  4. Cost drivers that capture the activities consumed by each product Correct answer.

Explanation

ABC assigns overhead to cost pools by activity (e.g., setups, inspections, machine hours) and allocates each pool using a cost driver that reflects actual resource consumption. This improves accuracy for products that consume activities disproportionately to volume.

Question 5Management costing, budgets and relevant decisions

A company budgeted 10,000 units but produced 9,000. Budgeted fixed manufacturing overhead was $120,000. Using a denominator of 10,000 budgeted units, what is the fixed overhead production-volume variance?

  1. $12,000 unfavourable Correct answer.
  2. $12,000 favourable
  3. $120,000 unfavourable
  4. Zero

Explanation

The fixed overhead rate is $120,000 / 10,000 = $12 per unit. Volume variance = (Budgeted units - Actual units) x rate = (10,000 - 9,000) x $12 = $12,000 unfavourable, because fewer units absorbed the budgeted fixed overhead.

Question 6Management costing, budgets and relevant decisions

Standard direct materials are 3 kg per unit at $5/kg. The company produced 2,000 units using 6,300 kg costing $30,240. What is the direct materials price (rate) variance?

  1. $1,260 unfavourable
  2. $1,260 favourable Correct answer.
  3. $1,500 unfavourable
  4. $240 favourable

Explanation

Actual price = $30,240 / 6,300 = $4.80/kg. Price variance = (Standard price - Actual price) x Actual quantity = ($5.00 - $4.80) x 6,300 = $1,260 favourable, because the firm paid less than standard per kilogram.

Question 7Management costing, budgets and relevant decisions

A company can sell 5,000 units of a special order at $18 each. Variable cost is $13 per unit and there is idle capacity. Avoidable fixed costs of the order are $8,000. Should the order be accepted on financial grounds?

  1. Accept; it adds $17,000 to operating income Correct answer.
  2. Reject; it reduces income by $8,000
  3. Accept; it adds $25,000 to operating income
  4. Reject; the $18 price is below full cost

Explanation

With idle capacity, only incremental costs are relevant. Incremental contribution = 5,000 x ($18 - $13) = $25,000, less avoidable fixed costs of $8,000 = $17,000 net benefit. The order should be accepted.

Question 8Management costing, budgets and relevant decisions

Which of the following is a sunk cost in a decision to replace an old machine?

  1. The resale value of the old machine
  2. The original purchase price of the old machine Correct answer.
  3. The operating cost savings from the new machine
  4. The purchase price of the new machine

Explanation

A sunk cost is a past outlay that cannot be changed by any current decision. The original purchase price of the old machine has already been incurred and is irrelevant to the replacement decision. Its current resale value, however, is relevant.

Question 9Management costing, budgets and relevant decisions

A constrained resource produces two products. Product A has a contribution margin of $30 and uses 3 machine hours; Product B has a CM of $24 and uses 2 machine hours. Machine hours are the bottleneck. Which product should be prioritized?

  1. Both equally, since CM totals are similar
  2. Product A, because its CM per unit is higher
  3. Product B, because its CM per machine hour is higher Correct answer.
  4. Product A, because it uses more machine hours

Explanation

When a resource is constrained, maximize contribution per unit of the constraint. Product A earns $30/3 = $10 per machine hour; Product B earns $24/2 = $12 per machine hour. Product B yields more contribution per scarce machine hour and should be prioritized.

Question 10Management costing, budgets and relevant decisions

A division currently buys a component for $40 each. It can make the part for $22 variable cost plus $10 of avoidable fixed cost per unit. There is no alternative use for the freed capacity. Should the division make or buy?

  1. Buy; the $10 fixed cost makes it uneconomical
  2. Indifferent; both cost $40
  3. Buy; making costs $32 versus buying at $40
  4. Make; relevant cost to make is $32 versus $40 to buy Correct answer.

Explanation

Relevant cost to make = $22 variable + $10 avoidable fixed = $32, which is less than the $40 purchase price. Making saves $8 per unit, so the division should make the part. Only avoidable costs are relevant in the make-or-buy decision.

Question 11Management costing, budgets and relevant decisions

Which of the following best describes a 'cost pool' in an activity-based costing system?

  1. A grouping of overhead costs related to a single activity Correct answer.
  2. The direct labour assigned to one job
  3. A reserve for unexpected cost overruns
  4. The total budgeted profit for a product line

Explanation

A cost pool aggregates overhead costs associated with one activity (e.g., machine setups). Each pool is then allocated to products using a cost driver that measures consumption of that activity, improving cost accuracy over a single plant-wide rate.

Question 12Management costing, budgets and relevant decisions

Standard labour is 2 hours per unit at $20/hour. Actual production was 1,500 units using 3,200 hours at $19/hour. What is the direct labour efficiency (quantity) variance?

  1. $3,200 unfavourable
  2. $4,000 unfavourable Correct answer.
  3. $3,800 unfavourable
  4. $4,000 favourable

Explanation

Standard hours allowed = 1,500 x 2 = 3,000. Efficiency variance = (Standard hours - Actual hours) x Standard rate = (3,000 - 3,200) x $20 = $4,000 unfavourable, since more hours were used than the standard allowed.

Question 13Management costing, budgets and relevant decisions

In a process-costing system using the weighted-average method, equivalent units of production are calculated as:

  1. Units completed minus units in ending inventory
  2. Units started during the period only
  3. Units completed and transferred out plus equivalent units in ending work in process Correct answer.
  4. Units in beginning inventory only

Explanation

Under weighted-average process costing, equivalent units = units completed and transferred out + equivalent units in ending work in process. This spreads total costs (beginning plus current) over all equivalent work done, ignoring the stage of beginning inventory.

Question 14Management costing, budgets and relevant decisions

A cash budget primarily helps management to:

  1. Value ending inventory for the balance sheet
  2. Calculate income tax expense
  3. Measure net income for the period
  4. Anticipate cash shortages and surpluses for financing and investing decisions Correct answer.

Explanation

A cash budget forecasts cash receipts and disbursements so management can plan short-term borrowing for shortfalls and investment of surpluses. It is a financing-and-liquidity planning tool, distinct from accrual-based net income.

Question 15Management costing, budgets and relevant decisions

Budgeted sales are 8,000 units. The company wants ending finished goods inventory equal to 25% of next period's sales of 9,000 units, and beginning inventory is 1,800 units. How many units should be produced?

  1. 8,450 units Correct answer.
  2. 8,000 units
  3. 10,050 units
  4. 8,250 units

Explanation

Required production = Sales + Desired ending inventory - Beginning inventory = 8,000 + (0.25 x 9,000) - 1,800 = 8,000 + 2,250 - 1,800 = 8,450 units. The production budget reconciles sales demand with inventory policy.

Question 16Management costing, budgets and relevant decisions

A flexible budget differs from a static budget in that it:

  1. Is prepared before the period begins for one volume
  2. Adjusts budgeted revenues and costs to the actual level of activity achieved Correct answer.
  3. Excludes all fixed costs
  4. Reflects only the original planned activity level

Explanation

A flexible budget restates revenues and variable costs at the actual activity level, isolating the effect of cost control from the effect of volume changes. This permits a meaningful comparison of actual results with budgeted amounts for the level achieved.

Question 17Management costing, budgets and relevant decisions

Sales on credit are collected 60% in the month of sale and 40% in the following month. If sales are $200,000 in April and $250,000 in May, what are the budgeted cash collections in May?

  1. $210,000
  2. $250,000
  3. $230,000 Correct answer.
  4. $150,000

Explanation

May collections = 60% of May sales + 40% of April sales = (0.60 x $250,000) + (0.40 x $200,000) = $150,000 + $80,000 = $230,000. The collections schedule layers current-month and prior-month receipts.

Question 18Management costing, budgets and relevant decisions

Which budgeting approach requires each cost to be justified from a zero base every period rather than building on the prior period's amounts?

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

Explanation

Zero-based budgeting (ZBB) requires managers to justify every expenditure from scratch each cycle, evaluating activities for necessity and value rather than carrying forward prior amounts. It targets cost reduction but is resource-intensive to prepare.

Question 19Management costing, budgets and relevant decisions

A potential drawback of building budgetary slack into a department's budget is that it:

  1. Makes targets easier to beat but distorts resource allocation and performance evaluation Correct answer.
  2. Eliminates the need for variance analysis
  3. Increases the organization's cost of capital
  4. Improves the accuracy of forecasts

Explanation

Budgetary slack occurs when managers understate revenues or overstate costs to set easily achievable targets. It distorts planning and resource allocation, undermines performance evaluation, and can encourage inefficiency. Participative budgeting controls help limit slack.

Question 20Management costing, budgets and relevant decisions

A master budget is best described as:

  1. A single forecast of cash flows only
  2. A comprehensive set of interrelated operating and financial budgets for the organization Correct answer.
  3. The flexible budget adjusted to actual results
  4. A budget prepared solely by the board of directors

Explanation

The master budget integrates operating budgets (sales, production, costs, SG&A) and financial budgets (cash budget, budgeted income statement and balance sheet) into one coordinated plan. It expresses the organization's strategy in quantitative terms for the period.

Question 21Management costing, budgets and relevant decisions

Participative budgeting, in which lower-level managers help set their own targets, is most likely to:

  1. Eliminate the role of senior management
  2. Guarantee the budget is achieved
  3. Reduce goal congruence and motivation
  4. Increase commitment and buy-in but risk introducing budgetary slack Correct answer.

Explanation

Involving managers who own the results increases acceptance, motivation, and the use of local knowledge, improving goal congruence. The trade-off is the risk of budgetary slack, which senior review and benchmarking help to control.

Question 22Management costing, budgets and relevant decisions

A sales-volume variance measures the difference between:

  1. The flexible-budget and the static-budget amounts, caused by the difference in volume Correct answer.
  2. Actual cost and standard cost at standard volume
  3. Budgeted and actual fixed overhead
  4. Actual price and budgeted price at actual volume

Explanation

The sales-volume variance is the difference between the flexible-budget figure (at actual volume) and the static-budget figure (at planned volume), isolating the effect of selling more or fewer units than planned. The flexible-budget variance then captures price and cost effects.

Question 23Management costing, budgets and relevant decisions

A division has operating income of $180,000 and average operating assets of $1,200,000. What is its return on investment (ROI)?

  1. 6.7%
  2. 15% Correct answer.
  3. 12%
  4. 18%

Explanation

ROI = Operating income / Average operating assets = $180,000 / $1,200,000 = 15%. ROI measures how efficiently a division generates profit from the assets invested in it and is widely used to evaluate investment-centre performance.

Question 24Management costing, budgets and relevant decisions

A division earns operating income of $200,000 on average operating assets of $1,000,000. The company's minimum required rate of return is 12%. What is the division's residual income?

  1. $24,000
  2. $200,000
  3. $80,000 Correct answer.
  4. $120,000

Explanation

Residual income = Operating income - (Required rate x Average operating assets) = $200,000 - (0.12 x $1,000,000) = $200,000 - $120,000 = $80,000. Positive residual income means the division earned more than the minimum required return.

Question 25Management costing, budgets and relevant decisions

An advantage of residual income over ROI as a divisional performance measure is that residual income:

  1. Ignores the cost of capital
  2. Cannot be manipulated by managers
  3. Is always a percentage, making comparisons easier
  4. Encourages managers to accept all projects earning above the minimum required return Correct answer.

Explanation

With consistent measurement and a specified required capital charge, residual income increases when a project earns more than that charge. This can reduce the average-ROI incentive to reject such projects, but no single financial metric guarantees that every manager accepts every suitable project. Consider risk, authority, timing and other objectives as well.

Question 26Management costing, budgets and relevant decisions

A manager is evaluated as a cost centre. Which of the following is the most appropriate basis for evaluating that manager's performance?

  1. Control of costs against a flexible budget Correct answer.
  2. Revenue growth of the unit
  3. Residual income generated
  4. Return on investment of the unit

Explanation

A cost-centre manager controls costs but not revenues or investment decisions, so the manager should be evaluated on cost control relative to a flexible budget at the actual activity level. ROI and residual income apply to investment centres; revenue applies to revenue or profit centres.

Question 27Management costing, budgets and relevant decisions

In a balanced scorecard, which perspective is most directly linked to measures such as customer satisfaction, retention rate, and market share?

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

Explanation

The customer perspective tracks how the organization is viewed by customers, using metrics such as satisfaction, retention, acquisition, and market share. The balanced scorecard links these non-financial drivers to long-term financial performance.

Question 28Management costing, budgets and relevant decisions

Using the DuPont framework, ROI is decomposed into:

  1. Residual income divided by sales
  2. Operating income divided by equity
  3. Profit margin multiplied by asset turnover Correct answer.
  4. Profit margin plus the required rate of return

Explanation

DuPont expresses ROI = Profit margin (Operating income / Sales) x Asset turnover (Sales / Average operating assets). This reveals whether ROI is driven by margins or by efficient asset utilization, guiding targeted improvement actions.

Question 29Management costing, budgets and relevant decisions

A key risk of relying solely on short-term financial performance measures is that managers may:

  1. Underinvest in long-term initiatives such as R&D and training to boost current results Correct answer.
  2. Focus too heavily on customer satisfaction
  3. Ignore current-period profitability
  4. Overinvest in long-term research and development

Explanation

Short-term financial metrics can encourage myopic behaviour, such as cutting R&D, maintenance, or training to lift current profit at the expense of long-run value. Balanced scorecards add non-financial, forward-looking measures to counter this risk.

Question 30Management costing, budgets and relevant decisions

A profit centre manager should be held responsible for:

  1. The company's overall share price
  2. Only the costs incurred in the unit
  3. Both the revenues and the controllable costs of the unit Correct answer.
  4. The capital invested in the unit's assets

Explanation

A profit-centre manager controls both revenues and costs and is therefore evaluated on the unit's profit (contribution or controllable margin). Responsibility for invested capital characterizes an investment centre, and cost centres control costs only.

Question 31Management costing, budgets and relevant decisions

Two divisions of one company transact internally. The selling division has idle capacity. According to the general transfer-pricing rule, the minimum acceptable transfer price to the selling division is:

  1. The external market price
  2. The buying division's avoided purchase cost
  3. Full absorption cost plus a markup
  4. Variable cost per unit (incremental cost), since there is no opportunity cost Correct answer.

Explanation

Minimum transfer price = Incremental (variable) cost + Opportunity cost of the selling division. With idle capacity there is no lost outside sale, so opportunity cost is zero and the floor equals variable cost. Any price above variable cost benefits the selling division.

Question 32Management costing, budgets and relevant decisions

When the selling division is operating at full capacity and can sell all output externally at $50, what is the minimum transfer price it should accept for an internal transfer if variable cost is $30?

  1. $50 Correct answer.
  2. $20
  3. $80
  4. $30

Explanation

Minimum transfer price = Variable cost + Opportunity cost. At full capacity, transferring internally forgoes an external sale, so the opportunity cost equals the lost contribution. The floor equals the market price of $50, because the division can otherwise earn $50 outside.

Question 33Management costing, budgets and relevant decisions

A drawback of using full-cost-plus transfer pricing is that it can:

  1. Always equal the external market price
  2. Encourage the buying division to make decisions optimal for the whole company
  3. Transmit the selling division's inefficiencies and treat fixed costs as variable in downstream decisions Correct answer.
  4. Eliminate disputes between divisions

Explanation

Full-cost-plus pricing can pass the selling division's inefficiencies to the buyer and cause the buying division to treat fixed costs as if variable, leading to suboptimal pricing and output decisions for the company. It can also reduce incentives for the seller to control costs.

Question 34Management costing, budgets and relevant decisions

A company uses cost-plus pricing with a target markup of 25% on full cost. If the full cost of a product is $80, what is the selling price?

  1. $106.67
  2. $105
  3. $96
  4. $100 Correct answer.

Explanation

Cost-plus price = Full cost x (1 + Markup) = $80 x 1.25 = $100. The markup is applied to the cost base to recover desired profit. Note the markup-on-cost percentage differs from the resulting margin on sales.

Question 35Management costing, budgets and relevant decisions

Target costing begins by:

  1. Determining the price the market will bear, then deducting the required profit to derive an allowable cost Correct answer.
  2. Calculating the standard cost from engineering estimates
  3. Setting price equal to the competitor's highest price
  4. Adding a desired markup to expected production cost

Explanation

Target costing is market-driven: the firm sets a competitive target selling price, subtracts the required profit margin, and derives a target (allowable) cost. Product and process design is then managed to meet that cost, the reverse of cost-plus pricing.

Question 36Management costing, budgets and relevant decisions

A pricing strategy that sets a high initial price to capture customers willing to pay a premium for a new product, then lowers it over time, is known as:

  1. Penetration pricing
  2. Price skimming Correct answer.
  3. Predatory pricing
  4. Loss-leader pricing

Explanation

Price skimming sets a high launch price to maximize margins from early adopters, then reduces the price to reach more price-sensitive segments. It suits innovative products with limited initial competition and price-inelastic early demand.

Question 37Management costing, budgets and relevant decisions

Quality costs are commonly classified into four categories. The cost of inspecting incoming raw materials is an example of which category?

  1. External failure cost
  2. Prevention cost
  3. Appraisal cost Correct answer.
  4. Internal failure cost

Explanation

Appraisal (inspection) costs are incurred to detect defects before products reach customers, such as incoming materials inspection and testing. Prevention costs stop defects from occurring; failure costs arise after defects are produced.

Question 38Management costing, budgets and relevant decisions

Under just-in-time (JIT) inventory management, a primary objective is to:

  1. Increase batch sizes to gain economies of scale
  2. Eliminate supplier relationships
  3. Maximize safety-stock levels
  4. Minimize inventory by receiving materials only as needed for production Correct answer.

Explanation

JIT seeks to minimize inventory holding by coordinating deliveries so materials arrive just as they are needed for production. This reduces carrying costs and waste but requires reliable suppliers, short setup times, and high quality to avoid stockouts.

Question 39Management costing, budgets and relevant decisions

The theory of constraints (TOC) focuses management attention on:

  1. Identifying and managing the system's bottleneck to maximize throughput Correct answer.
  2. Eliminating all fixed costs
  3. Maximizing inventory to buffer all processes
  4. Reducing the cost of every activity equally

Explanation

TOC holds that a system's output is limited by its bottleneck, so managers should identify the constraint, exploit it, subordinate other processes to it, and then elevate it. Throughput (sales less truly variable cost) is maximized by managing the constraint.

Question 40Management costing, budgets and relevant decisions

A company produces a joint product. Joint costs incurred before the split-off point should be:

  1. Allocated to products and used to decide whether to process further
  2. Allocated for inventory valuation but treated as irrelevant to sell-or-process-further decisions Correct answer.
  3. Ignored entirely for all purposes
  4. Charged only to the highest-value product

Explanation

Joint costs are allocated (e.g., by net realizable value) for inventory and reporting, but they are sunk and irrelevant to the decision of whether to sell at split-off or process further. That decision compares incremental revenue with incremental further-processing cost.

Question 41Management costing, budgets and relevant decisions

Life-cycle costing is most useful because it:

  1. Is identical to standard costing
  2. Considers only manufacturing costs
  3. Tracks all costs from research and design through to end-of-life over the product's entire life Correct answer.
  4. Ignores upstream and downstream costs

Explanation

Life-cycle costing accumulates all costs across a product's life, including R&D, design, production, marketing, distribution, customer service, and disposal. It supports better pricing and design decisions by recognizing that much cost is committed early in design.

Question 42Management costing, budgets and relevant decisions

A company has a degree of operating leverage of 4 at its current sales level. If sales increase by 10%, operating income will increase by approximately:

  1. 4%
  2. 10%
  3. 14%
  4. 40% Correct answer.

Explanation

Percentage change in operating income = Degree of operating leverage x Percentage change in sales = 4 x 10% = 40%. A high degree of operating leverage magnifies the effect of sales changes on operating income because of the larger fixed-cost base.

Question 43Management costing, budgets and relevant decisions

Kaizen costing, as used in management accounting, emphasizes:

  1. Continuous, incremental cost reduction during the manufacturing phase Correct answer.
  2. Setting prices above competitors
  3. Allocating overhead using a single rate
  4. Large one-time cost reductions through redesign

Explanation

Kaizen costing focuses on continuous, incremental cost reduction during ongoing production, setting progressively tighter cost-reduction targets. It complements target costing, which drives cost out during the design phase before production begins.

Question 44Management costing, budgets and relevant decisions

A segmented income statement reports a divisional segment margin. The segment margin is most useful for:

  1. Allocating common corporate costs to divisions
  2. Assessing the long-run profitability of a segment after its own traceable fixed costs Correct answer.
  3. Measuring only variable costs of the segment
  4. Valuing inventory under IFRS

Explanation

Segment margin equals segment contribution margin less the segment's traceable fixed costs. It measures a segment's long-run profitability and its contribution to covering common costs and profit. Common (unallocated) corporate costs are excluded because they are not traceable.

Question 45Management costing, budgets and relevant decisions

For management decision making, an auditor's finding that internal controls over the costing system are weak is most concerning because it:

  1. Undermines the reliability of cost data used for pricing and performance decisions Correct answer.
  2. Only affects the external audit fee
  3. Improves the accuracy of standard costs
  4. Has no effect on management reports

Explanation

Weak controls over the costing system can produce unreliable cost data, which managers use for pricing, product-mix, and performance decisions. Poor data quality can lead to mispricing and flawed decisions, linking assurance findings directly to management accounting.

Question 46Management costing, budgets and relevant decisions

Throughput accounting defines throughput as:

  1. Contribution margin less fixed overhead
  2. Sales revenue less all manufacturing costs
  3. Sales revenue less totally variable costs (typically direct materials) Correct answer.
  4. Net income after tax

Explanation

In throughput accounting (linked to the theory of constraints), throughput equals sales revenue less totally variable costs, usually just direct materials. Direct labour and overhead are treated as operating expenses, focusing management on maximizing throughput through the constraint.

Question 47Management costing, budgets and relevant decisions

A flexible-budget variance for variable overhead that is unfavourable indicates that:

  1. Actual variable overhead cost exceeded the amount flexed to actual activity Correct answer.
  2. Fixed overhead was over-applied
  3. Sales volume exceeded forecasts
  4. Actual activity exceeded budgeted activity

Explanation

The flexible-budget variance compares actual variable overhead with the flexible-budget amount at the actual activity level. An unfavourable variance means actual variable overhead cost exceeded the budgeted cost for that activity, signalling spending or efficiency issues.

Question 48Management costing, budgets and relevant decisions

A company wants to decentralize decision making. A key benefit of decentralization is that it:

  1. Guarantees lower total costs
  2. Allows faster, better-informed decisions by managers closer to operations and develops managerial talent Correct answer.
  3. Eliminates the need for performance measurement
  4. Removes the risk of goal incongruence

Explanation

Decentralization empowers local managers who have better information to respond quickly to conditions, frees top management for strategy, and develops managerial capability. Its main drawback is potential goal incongruence, which responsibility accounting and aligned incentives mitigate.

Question 49Management costing, budgets and relevant decisions

A company's contribution margin is $600,000 and operating income is $150,000. What is its degree of operating leverage?

  1. 1.0
  2. 0.25
  3. 4.0 Correct answer.
  4. 2.5

Explanation

Degree of operating leverage = Contribution margin / Operating income = $600,000 / $150,000 = 4.0. This indicates that a 1% change in sales will produce roughly a 4% change in operating income at the current level.

Question 50Management costing, budgets and relevant decisions

A company sells two products in a fixed sales mix of 3 units of X to 1 unit of Y. X has a CM of $10 and Y has a CM of $30. What is the weighted-average contribution margin per unit of the mix?

  1. $40
  2. $10
  3. $20
  4. $15 Correct answer.

Explanation

Weighted-average CM = [(3 x $10) + (1 x $30)] / (3 + 1) = ($30 + $30) / 4 = $60 / 4 = $15 per unit. Multi-product break-even uses this weighted-average CM, assuming the sales mix remains constant.