CMA Part 1- Financial Planning, Performance and Control

Examination Practice Questions

08-2013
 Part 1 – Financial Planning, Performance and Control
Examination Practice Questions

1. SleepTight, a nationwide retail mattress firm, will begin selling high-end crib mattresses
next year. Management believes sales for this product will be driven primarily by birth
rates but will be influenced to a lesser extent by income levels. The best method for
SleepTight to use to predict next year’s sales is

a. simple regression.
b. time-series regression.
c. multiple regression.
d. maximum likelihood regression.
Answer (C) is correct. SleepTight management believes sales will be driven by birthrates and, to a lesser extent, income levels, which
matches the multiple regression independent variable. The two independent variables are (1) birthrates and (2) income levels.
2. True Form Toys is in the process of preparing budgets for the upcoming period. True Form
manufactures wooden toy trucks. Sales vary significantly, peaking in the holiday season.
Management wishes to maintain an ending inventory equal to 20% of the next month’s
sales. Following is True Form Toy’s anticipated sales for the upcoming period.

October 2,000 toy trucks

November 2,500 toy trucks
December 8,500 toy trucks
January 1,200 toy trucks
February 850 toy trucks

How many trucks should True Form Toys manufacture in November?

a. 1,300.
b. 1,700.
c. 3,700.
d. 4,200.

3. Jay Company uses a standard cost system. During the past year, the variances from
standard were significant. Jay is considering whether to allocate the variances among the
appropriate inventory accounts and cost of goods sold, or to allocate all of the variances
directly to cost of goods sold. Under which one of the following situations would reported
net income be largest?

a. All of the variances are favorable and are written off directly to cost of goods sold.
b. All of the variances are unfavorable and are written off directly to cost of goods sold.
c. All of the variances are favorable and are allocated among cost of goods sold and
ending inventory accounts.
d. All of the variances are unfavorable and are allocated among cost of goods sold and
ending inventory accounts.

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4. Trinity Corporation reported the following standard-to-actual cost information.
Actual Costs Total Variance

Direct Materials $19,250 $900 Favorable

Direct Labor $17,600 $800 Unfavorable

Which one of the following best explains both of Trinity’s variances?

a. Change in the collective bargaining agreement resulting in higher hourly wage rates.
b. Learning curve resulted in more efficient production.
c. Lower quality, lower cost materials resulted in higher than expected re-work costs.
d. Unexpected increase in electricity costs.

5. Based on the following information and a required rate of return of 12%, which location
has the best residual income?

Operating Income Investment Intangibles Depreciation

Madison $300,000 $1,000,000 $200,000 $120,000

Denver $490,000 $2,750,000 $600,000 $270,000

a. Denver at $160,000.
b. Madison at $180,000.
c. Madison at $204,000.
d. Denver at $232,000.

6. Which one of the following is the least likely reason that variances are computed within a
performance monitoring system?
Computing variances does not verify the accuracy
a. To trigger organization learning. of standards. The standards may be in fact correct,
b. To make continuous improvements. while the actual number could include unusual
c. To verify the accuracy of standards. events that require further investigation.
d. To alert management to existing problems.

7. The primary difference between absorption and variable costing is that variable costing
treats

a. only direct materials and direct labor as product cost.

b. direct materials, direct labor, the variable portion of manufacturing overhead, and an
allocated portion of fixed manufacturing overhead as product costs.
c. only direct materials, direct labor, the variable portion of manufacturing overhead,
and the variable portion of selling and administrative expenses as product cost.
d. only direct materials, direct labor, and the variable portion of manufacturing
overhead as product costs.

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8. Electronics Inc. manufactures an increasing variety of consumer communications devices.
The company has always used a traditional cost allocation system, but now the accounting
staff has proposed a change to an activity-based costing system. The vice president of
operations argues, “Costs are costs, rearranging them won’t save any money and those
systems are complicated and expensive.” The most logical response to this argument is
that activity-based costing systems

a. provide more accurate reporting of each product’s cost so that management can
make more informed pricing decisions.
b. are less expensive to use than traditional cost systems.
c. eliminate the use of arbitrary cost allocations that are used in traditional cost
systems.
d. focus on manufacturing activities and eliminate engineering, marketing and other
non-traceable activities from costing considerations.

9. Which one of the following is not a benefit of activity-based management?

a. Improved competitive advantage by using continuous improvement methods.

b. Improving the value the customer receives.
c. Better allocation of resources to key value-added activities.
d. Better costing information.

10. Isaac Toy Company management would like to determine profitability of its Alpha Doll
product line. To eliminate the possibility of profit distortion due to changes in production,
the managers should primarily review

a. variable (direct) costing income statements.

b. absorption costing income statements.
c. multi-step income statements.
d. cash flow statements.

11. At NC Corporation year-end bonuses at each branch office are based on branch
profitability. Due to a slow economy, profitability through the third quarter at the
Northeast branch is under budget. To address this issue the accounting staff at the
Northeast branch develops a list of end-of-year actions designed to boost earnings for the
year. Which one of the following is most likely to violate IMA’s Statement of Ethical
Professional Practice?

a. Requesting the branch’s advertising agency to delay billing third quarter

advertisements until January.
b. Deferring advertising expense by reducing the number of newspaper advertisements
run in the third quarter.
c. Deferring planned painting and refurbishment of the warehouse until the following
year.
d. Offering additional discounts to customers to entice them to increase purchases in
the third quarter.

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12. Calculate the exponential smoothing forecast for week 3 using a smoothing constant of
0.2. The forecast for week 1 is 32. The time series data follows.

Week Sales
1 32
2 36

a. 32.00.
b. 32.80.
c. 25.60.
d. 38.40.

13. Which one of the following best describes the capital budget?

a. It ensures that there are sufficient funds available for the operating needs of the
company.
b. It sets the long-range goals of the company including consideration of all available
resources.
c. It results in the cash requirements during the operating cycle.
d. It assesses the long-term needs of the company for plant and equipment purchases.

14. A company experiences a cumulative learning curve of 75% on the manufacturing of a

particular electrical product. It takes 100 hours to make the first 500 units. How many
hours will it take to make 2,000 units in total?

a. 225.00.
b. 231.25.
c. 250.00.
d. 300.00.

15. Herrington Industries is able to sell up to 50,000 units of product X each month. Engineers
are currently in the process of studying labor movement to determine the labor hours
standard for product X. Engineers have found that the fastest workers who take no breaks
can complete a unit of product X within 30 minutes. The average worker can complete one
unit of product X within 45 minutes, including time for company mandated breaks. For
Herrington, 0.75 hours per unit is known as the

a. theoretical standard.
b. average standard.
c. practical standard.
d. variance standard.

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16. Goode Theaters outsources the cleaning of its movie theaters. The cleaning vendor’s
charges are based upon the total hours needed to clean the facilities, and more cleaning
time is needed as more people attend the theater. Goode has accumulated the following
historical data.

Number of Movie
Month Cleaning Cost Tickets Sold
April $11,000 19,700
May 9,000 17,000
June 15,600 28,000
July 15,000 29,000

Goode anticipates selling 25,000 movie tickets in August. If Goode uses the high-low
method of separating costs into their fixed and variable components, the company’s budget
for August cleaning costs would be

a. $13,000.
b. $13,400.
c. $13,500.
d. $13,800.

17. Brown Veterinary Clinic schedules weekend staff based on the number of animals being
boarded. The clinic has a total of four staff available to work on weekends. Based on state
regulations, the clinic is required to have one staff member on site for up to 10 animals.
Two staff members are required for 11-23 animals, three staff for 24-36 animals and all
four staff members must work if there are 37-45 animals being boarded. The clinic has
experienced the following average number of animals in the past 12 weekends.

Average number of animals Number of weekends

12 1
20 4
25 3
35 2
40 2

Using expected value analysis, how many staff members should the clinic schedule for
each weekend during the upcoming month?

a. 1.
b. 2.
c. 3.
d. 4.

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18. Gooding Bicycles has begun using budgeting to evaluate performance. Budgets were
prepared for the current year based on anticipated sales of 40,000 units. Actual sales
totaled 45,000. What type of budgeting methodology should Gooding use to evaluate
performance this year?

a. Zero-based budgeting.
b. Continuous budgeting.
c. Static budgeting.
d. Flexible budgeting.

19. Breakfast Anytime produces and sells eight different varieties of cereal. The company has
eight marketing managers, each of whom is responsible for advertising one of the varieties.
Historically, the company has budgeted advertising costs as 10% of each product’s
anticipated revenues, and actual advertising costs have been very close to budgeted
amounts, yielding very insignificant variances. In order to provide for a more efficient
allocation of resources available for its advertising, Breakfast Anytime should

a. implement a balanced scorecard.

b. implement flexible budgeting.
c. implement zero-based budgeting.
d. maintain the current system.

20. Matsui Company’s sales have demonstrated a similar pattern for several years. Quarterly
sales data for the past two years (in millions) are shown below.

Year 1 Year 2
Quarter 1 $20.1 Quarter 1 $23.8
Quarter 2 18.3 Quarter 2 19.5
Quarter 3 21.5 Quarter 3 25.2
Quarter 4 21.7 Quarter 4 25.8

The type(s) of pattern(s) indicated by Matsui’s sales data could best be described as

a. cyclical and seasonal.

b. cyclical and trend.
c. seasonal and trend.
d. irregular.

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21. O’Hara Corporation has the opportunity to purchase land adjacent to its existing location
for $200,000. If purchased, the company would also spend $20,000 to level the property
to make it usable for building construction. Management believes there is an 80%
probability it will have enough cash to purchase the land outright and a 20% chance it will
need to borrow the $200,000. The dollar amount O’Hara should show on its initial capital
budget for the purchase of this land is

a. $220,000.
b. $200,000.
c. $180,000.
d. $160,000.

22. Tarleton Company operates several retail stores. To support the company’s long-term
goals, operating income should be at least 10% of sales. Tarleton’s abbreviated pro forma
income statement for next year is shown below.

Revenues $7,500,000
Cost of goods sold 3,750,000
Operating fixed costs 3,125,000
Operating income $ 625,000

The best action for Tarleton to take in order to meet its income goal is to

a. increase the advertising budget by $25,000 which would increase sales units by 5%.
b. raise the selling price by 2% which would reduce sales units by 2% but save $50,000
in operating costs.
c. require all managers to reduce their budgeted operating fixed costs by 3%.
d. wait until the end of next year’s first quarter to re-evaluate its situation.

23. Kennedy Corporation’s annual budget shows expected inventory purchases of $55,000,000
from its suppliers. Selected financial information from Kennedy’s pro forma beginning
and ending balance sheets are as shown below.

January 1 December 31
Inventory $6,000,000 $7,500,000
Accounts payable $4,000,000 $5,000,000

On Kennedy’s pro forma Statement of Cash Flows, the dollar amount that would be
shown for “Cash payments to suppliers” is

a. $56,000,000.
b. $55,500,000.
c. $54,500,000.
d. $54,000,000.

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24. Louis Diamonds manufactures diamond earrings and pendants. The company uses activity-
based budgeting and has established diamond inspection as one of its cost pools with
number of diamonds used as its cost driver. Inspection supplies for each diamond
inspected are $0.35. For the upcoming year, the company originally believed it would
produce and sell 10,000 pendants containing one diamond and 5,000 sets of earrings
containing two diamonds, resulting in the following inspection cost per diamond.

Salary of inspector $60,000

Equipment costs 3,000
Inspection supplies 7,000
Total $70,000
Cost per diamond $ 3.50

If the company now believes it will only be able to produce and sell 8,000 pendants, the
inspection cost per set of earrings would be

a. $6.30.
b. $7.00.
c. $7.70.
d. $7.78.

25. Bryan Corporation, a retailer, uses flexible budgeting as a planning tool. The company’s
original budget for the upcoming year is shown below.

Sales $90,000,000
Cost of goods sold 36,000,000
Administrative expenses (all fixed) 21,000,000
Advertising expense 9,000,000
Sales commissions 6,750,000
Other marketing expenses (all fixed) 9,250,000
Operating income $ 8,000,000

The manager of Bryan’s Marketing Department believes sales volume will increase by
10% if the advertising budget is increased by $5,000,000. Should Bryan approve the
increased advertising request?

a. Yes, because the increase in sales is $4,000,000 greater than the increase in
advertising costs.
b. No, because advertising is 10% of sales so the maximum increase in sales would be
$900,000.
c. Yes, because operating income would increase by $400,000.
d. No, because operating income would decrease by $275,000.

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26. All of the followings are advantages of the budgeting process except that the budget

a. forces management to assess the future objectives of the company.

b. establishes benchmarks to identify unsatisfactory organizational performance.
c. facilitates communication among organizational units.
d. allocates resources on an as-needed basis.

27. A company manufactures a line of products that vary with complexity: a basic model, a
standard model, and a deluxe model. The company uses 25 different activity cost drivers to
assign overhead costs to its products. The deluxe model typically uses more cost drivers
than the simpler models. The company encourages managers to focus on activities
performed for each product and to control the cost of those activities. Which budget
methodology would best meet this company’s need?

a. Traditional budgeting.
b. Zero-based budgeting.
c. Activity-based budgeting.
d. Flexible budgeting.

28. The Board of Directors is concerned that the budget committee has fallen into the practice
of applying a flat 3% growth to the prior year performance, placing too much emphasis on
the past and not focusing on the future opportunities and related activities required to
achieve them. The Board would like the committee to take a different approach: evaluate
the activities needed to meet the strategic goals of the company, and allocate resources
accordingly, requiring management to justify each function and associated costs. Which
budget methodology is the Board recommending?

a. Traditional budgeting.
b. Activity-based budgeting.
c. Zero-based budgeting.
d. Continuous budgeting.

29. Which of the following statements apply to the continuous budget methodology?

I. The current financial forecast reflects the most recent monthly results and any
material changes to the company’s outlook or economy.
II. Forecasts are updated every few months, reassessing the company’s outlook several
times a year.
III. The decision making process to develop the budget takes place during the fourth
quarter of the prior year being budgeted.

a. I and II only.
b. I and III only.
c. II and III only.
d. I, II, and III.

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30. Which budget is prepared after the creation of the cash budget?

a. Sales budget.
b. Capital expenditures budget.
c. Production budget.
d. Budgeted balance sheet.

31. Traditional budgeting methods look at historical data and current resources and then
project forward. Activity-based budgeting is different in that

I. it looks at desired outcomes and works back from there to determine resources
needed.
II. it uses current levels of activity to determine future levels without regard to
resources currently available.
III. being under budget in one year would not necessarily indicate that an operating unit
would have its budget cut the following year.
IV. the focus is on planning department by department based on resources available.

a. I only.
b. I and III only.
c. II and III only.
d. II and IV only.

32. Taylor Incorporated prepares cash budgets each month, including a forecast of monthly
cash collections. Collections are expected to be 65% in the month of sale, 25% in the first
month following the sale, and 10% in the second month following the sale. Sales for the
first six months of the year were as follows.

January $185,000 April $208,000

February $196,000 May $210,000
March $216,000 June $232,000

The total cash collected during the month of May is

a. $207,900.
b. $208,800.
c. $210,100.
d. $224,100.

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33. Crescent Hills Retirement Home provides accommodations for up to 200 residents on its 4
acre retirement community. Crescent Hills manager Rita Avery was disappointed to see
that last month’s actual results were quite different than the budget for March. The
retirement home charged $2,000 per resident as planned. Expenses are categorized by the
four departments that run the community home: Housekeeping, Maintenance, Dietary and
Nursing. Avery is not sure what went wrong and is concerned she will need to lay off
employees if this happens again in April. March’s budget and actual results are shown
below.

March Budget
Revenue ($2,000 per resident × 180 residents) $360,000
Less expenses:
Housekeeping ($65,000 plus $15 per resident) 67,700
Maintenance ($30,000 plus $23 per resident) 34,140
Dietary ($40,000 plus $180 per resident) 72,400
Nursing ($85,000 plus $300 per resident) 139,000
Operating income $46,760

March Actual Results

Revenue $400,000
Less expenses:
Housekeeping 97,800
Maintenance 59,200
Dietary 75,800
Nursing 144,900
Operating income $22,300

Using flexible budgeting, which one of the following statements is correct?

a. All four departments have an unfavorable variance.

b. Nursing is the department with the highest unfavorable variance.
c. The revenue variance is favorable.
d. Housekeeping and Maintenance departments have unfavorable variances.

34. Advantages of the full-cost method for determining transfer prices include all of the
following except that it

a. leads to goal congruence among departments.

b. leads to better external pricing based on cost behaviors.
c. is the least costly method to administer.
d. represents relevant costs for long-run decisions.

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35. Waterfall Industries is located in Kansas and has four branch offices throughout the state.
Following are the operating results from last year.

Kansas City Garden City Wichita Salina

Branch office sales $300,000 $420,000 $540,000 $606,000
Branch office profit 120,000 294,000 318,000 104,000
Average total assets 805,000 914,000 1,650,000 745,000

Waterfall has plans to invest $1,000,000 in one of the branch offices. The new investment
is estimated to earn sales of $350,000 and generate a profit of $210,000 for the branch.
Waterfall Industries’ targeted rate of return is 18%.

Which branch had the highest return on investment?

a. Kansas City.
b. Garden City.
c. Wichita.
d. Salina.

36. A cosmetics company is expanding its marketing presence by placing stores within a
national department store chain. The cosmetics company hires its own store managers who
are responsible for generating sales. The company pays rent per square foot to the
department store. For the purpose of assessing the managers’ performance, each cosmetics
store would most appropriately be considered a(n)

a. cost center.
b. revenue center.
c. profit center.
d. investment center.

37. Cogwin Corporation, a manufacturer of value-priced clothing, measures the performance

of its divisions based upon return on investment. If investment is defined as the book value
of all assets recorded on a division’s balance sheet, Cogwin will have the most difficulty
in comparing divisions that vary significantly in

a. age.
b. geographic location.
c. managerial style.
d. sales volume.

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 38. A company has three product lines: basic, deluxe, and limited. Total fixed costs are
allocated based on direct labor hours and remain unchanged in the short-term.

Basic Deluxe Limited

Units sold 10,000 7,000 2,500
Price per unit $10 $13 $21
Total variable costs 80,000 70,000 37,500
Total fixed costs 22,000 13,000 6,000

Based on the information above, which product line(s), if any, should be discontinued due
to lack of profitability?

a. Only the basic line should be discontinued.

b. Only the limited line should be discontinued.
c. Only the deluxe and limited lines should be discontinued.
d. None of the product lines should be discontinued.

39. For the first week of the month the Flour Shop Bakery budgeted to sell 100 cakes at $35
each. They actually sold 105 cakes at $40 each. The selling-price variance is

a. $525 favorable.
b. $525 unfavorable.
c. $700 favorable.
d. $700 unfavorable.

40. Which one of the following statements about management by exception is least likely to
be correct?

a. Managers can focus efforts on most critical areas.

b. It is especially useful when directed at controllable items.
c. It could result in changing a process all together.
d. Positive variances need not be investigated.

41. Which one of the following is least likely to be a reason to adopt a standard cost system?

a. Setting standards at an ideal level can motivate employees.

b. A standard cost system identifies the level of costs should be and who should be
responsible for the costs.
c. Utilizing standard costs tends to simplify record-keeping.
d. Costs of using standard costing are low relative to costs of using actual costing.

Answer (A) is correct. Setting standards at an ideal level can motivate employees. However, if
the standards are too high, employees may get discouraged. If the standards are too low,
employees will not be competitive or driven. Setting the correct level of standards is a difficult
task, but it can motivate employees when done correctly
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42. Sugar Plums Inc. manufactures dresses for children. The variable overhead costs are
allocated on the basis of budgeted direct labor hours. According to the December budget,
each dress takes four direct labor hours to produce. Budgeted variable manufacturing
overhead cost per labor hour is $12 and the budgeted number of dresses to be made is
1,040. Actual variable manufacturing costs in December were $52,164 for 1,080 dresses
produced. Actual direct labor hours were 4,536 hours. The variable overhead spending
variance is

a. $2,592 favorable.
b. $2,592 unfavorable.
c. $2,268 favorable.
d. $2,268 unfavorable.

43. When comparing its actual operating income to its master budget operating income, the
controller for Burke Corporation noted that actual total sales units equaled budgeted total
sales units and budgeted fixed costs equaled actual fixed costs. He also noted that both
products were sold for their budgeted selling prices per unit and each product had both a
budgeted and actual contribution margin ratio of 40%. However, Burke experienced a
favorable static budget variance for operating income for the period. Which one of the
following is a viable explanation for this variance?

a. The company produced fewer units than budgeted.

b. The company’s income tax rate was lower than budgeted.
c. The method used to allocate fixed selling and administrative costs to its products was
different than planned.
d. The product mix was different than budgeted.

44. Finnegan Corporation operates three distinct profit centers, each of which sells a unique
product. Each division currently rents its own warehouse with the following
characteristics.

Annual Cost Square Footage Required

Division 1 $325,000 65,000
Division 2 $145,000 30,000
Division 3 $ 30,000 5,000

Finnegan has the opportunity to rent a warehouse containing 110,000 square feet for
$480,700 per year. This facility would be shared by all three divisions with the additional
unused space reserved for the anticipated growth of Division 3. If Finnegan uses the
incremental cost allocation method to assign the $480,700 cost of the large warehouse, the
amount allocated to Division 3 would be

a. $10,700.
b. $24,035.
c. $28,842.
d. $65,550.

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45. Hometown Bowling Lanes has identified three revenue streams with the following income
statements.
Bowling Equipment Rental Food Sales
Revenues $9,000,000 $300,000 $1,200,000
Variable costs 1,100,000 150,000 1,150,000
Direct employee salaries 250,000 40,000 120,000
Common costs 6,400,000 35,000 365,000
Income (loss) $1,250,000 $ 75,000 ($ 435,000)

Hometown’s most important consideration in determining whether or not to discontinue

its food sales is

a. employee morale.
b. its interrelationships with other products.
c. the ability to increase food sales.
d. the ease of implementing activity-based costing to better assign costs.

46. When using return on investment (ROI) in local currency to evaluate divisional
performance, valuing assets at net book value would result in the highest ROI for

a. international divisions in countries with high inflation.

b. international divisions in countries with high deflation.
c. retail divisions purchasing goods from manufacturing divisions at fixed prices.
d. retail divisions purchasing goods from manufacturing divisions at negotiated prices.

47. A standard cost system is often used in variance analysis because standard costs

a. include past inefficiencies and take into account expected future changes.
b. exclude past inefficiencies and take into account expected future changes.
c. include past inefficiencies and exclude expected future changes.
d. exclude past inefficiencies and exclude expected future changes.

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48. Sampson Appliances manufactures dishwashers and incurs the following selected costs.

Monthly equipment maintenance $ 5,000

Labor to ensure the closed dishwasher doors form a tight seal 8,000
Unplanned manufacturing machinery repairs 9,000
Labor to reattach doors due to misalignment found during inspection 1,500
Labor to reattach doors due to misalignment found by customers 1,200

When preparing a cost of quality report, the amount spent in the internal failure category
would total

a. $1,500.
b. $10,500.
c. $11,700.
d. $23,500.

49. Morris Metal Fabricators specializes in the production of metal antennae. The fabrication
process includes three steps: cutting, bending and assembly. Cutting and bending processes
are completed together and then units are sent to the assembly department for completion.
Direct materials and conversion costs are added proportionately throughout the process.
Units are 50% complete for both direct materials and conversion costs when the units are
transferred from the cutting and bending process to assembly. Morris uses the FIFO (first
in, first out) inventory method. The activity report for the assembly department for the
current month is shown below.

Beginning inventory (60% complete) 240 units

Transferred in from cutting-bending department 680 units
Units completed and transferred out 800 units
Ending inventory (75% complete)

What is the assembly department’s equivalent units produced for the current month?

a. 734 units.
b. 746 units.
c. 824 units.
d. 890 units.

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50. Bandito Company sells product XRP for $180 per unit. Overhead is allocated based on
direct labor hours. Bandito estimates overhead to be $600,000 per month, which is 40%
variable and 60% fixed. Direct labor hours budgeted per month for the entire factory total
100,000 hours and the hourly direct labor rate is $9. Product XRP requires $64 of direct
material per unit and 2 hours of direct labor. Bandito has begun using throughput costing.
If Bandito produces and sells 20,000 units of XRP this month, the total throughput
contribution is

a. $3,240,000.
b. $2,320,000.
c. $1,960,000.
d. $1,864,000.

51. Stone Company manufactures two products that incur joint costs of $60,000. It costs an
additional $10,000 to produce 5,000 units of Product 1 and an additional $30,000 to
produce 10,000 units of Product 2. Product 1 is sold for $8 per unit and Product 2 is sold
for $10 per unit. If the company uses the net realizable value method to allocate joint costs,
the cost per unit of Product 1 is

a. $3.60.
b. $5.43.
c. $5.60.
d. $6.00.

52. Lemmon Corporation’s results for the past year are shown below.

Cost of goods available for sale $136,000

Ending balance, raw material inventory 6,000
Ending balance, work-in-process inventory 14,000
Ending balance, finished goods inventory 13,000
Manufacturing overhead applied 50,000
Actual manufacturing overhead 55,000

If Lemmon prorates any overapplied or underapplied overhead at the end of the year, cost
of goods sold after proration would total

a. $140,150.
b. $127,100.
c. $126,950.
d. $118,900.

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53. Augusta Company has accumulated its support costs into three pools that will be allocated
to numerous products using the step-down method. Usage of each pool’s services is shown
below.
Pool 1 Pool 2 Pool 3 All Products
Usage of Pool 1 0% 10% 8% 82%
Usage of Pool 2 6% 4% 10% 70%
Usage of Pool 3 10% 8% 10% 78%
Direct costs $150,000 $80,000 $55,000

If Augusta allocates Pool 1’s costs first, Pool 2’s costs second, and Pool 3’s costs third, the
amount of costs allocated from Pool 2 to Pool 3 is

a. $11,875.
b. $11,047.
c. $9,500.
d. $8,000.

54. Which one of the following best shows the sequence of business functions in the value
chain?

a. Research and Development, Design of Products and Processes, Production,

Marketing, Distribution, Customer Service.
b. Design of Products and Processes, Research and Development, Finance, Production,
Distribution, Customer Service.
c. Design of Products and Processes, Finance, Research and Development, Production,
Distribution, Customer Service.
d. Research and Development, Finance, Design of Products and Processes, Production,
Distribution, Customer Service.

55. Which one of the following statements about benchmarking is not correct?

a. A budget may provide a benchmark that motivates employees to meet a company’s

goals.
b. A company may appropriately use benchmarks to evaluate employee or unit
performance.
c. Benchmarking may include comparing a unit’s achievements against other units
within the company.
d. Comparing a unit’s results against industry benchmarks is not usually considered as
useful as comparing results to the budget.

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56. Bea's Upholstery produces unique tapestries and bedding for hotel chains and uses a job
order costing system. During the current month Bea's purchased $50,000 of direct
materials and incurred $22,000 in direct labor. Overhead is applied on the basis of direct
labor hours at a rate of 60%. Overapplied or underapplied overhead is closed to cost of
goods sold at the end of the period. The actual overhead incurred this month was $10,000.
Balances in Bea's inventory accounts are presented below.

Beginning of month End of month

Direct materials $2,000 $3,500
Work-in-process 5,000 9,000
Finished goods 2,500 1,700

What is the cost of goods manufactured this month?

a. $76,500.
b. $79,700.
c. $80,500.
d. $83,700.

57. Bauer Hangings needs to produce 100 holiday wreaths in November to meet customer
demand. The manufacturing facility has the capacity to produce 120 wreaths. The bill of
materials for holiday wreaths is as follows.

Material Quantity November 1 Inventory Level

Frame 1 100
Pine ribbon 3 feet 15 feet
Pinecones 6 24

To produce one foot of pine ribbon, Bauer needs four units of TRX and two units of RBX.
On November 1, Bauer has 80 units of TRX and 110 units of RBX on hand. Using
material requirements planning, how many units of TRX will Bauer need to purchase in
November to complete the orders for holiday wreaths?

a. 1,020.
b. 1,060.
c. 1,200.
d. 1,360.

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58. Navy Parks produced two new products last year. Sales and cost data for the two products
is summarized below.
BM2 SM4
Sales price per unit $ 100 $120
Quantity sold 1,500 970
Costs:
R&D $20,000 $28,000
Marketing 7,000 10,000
Direct materials 46,000 42,000
Direct labor 35,500 25,000
Manufacturing overhead 12,000 9,500
Warranties 4,000 5,500

a. Both managers conclude that BM2 is the more profitable product.

b. Manager A finds SM4 to be more profitable than BM2.
c. Both managers conclude that BM2 and SM4 are profitable products.
d. Manager B finds both BM2 and SM4 to be unprofitable products

59. If Moore Corporation used a normal cost system, applying overhead based on the number
of units produced, the variance that could arise that would not be present under an actual
cost system is the

a. direct material efficiency variance.

b. direct labor efficiency variance.
c. variable overhead efficiency variance.
d. fixed overhead production volume variance.

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60. Rainbow Company uses a job order cost system and applies overhead using a plant-wide
rate of $5.75 per direct labor hour. Rainbow is considering changing to two departmental
overhead rates with annual information shown below.

Machining Department Assembly

Department
Allocation base Machine hours Direct labor hours
Departmental overhead costs $850,000 $300,000
Machine hours used 250,000 30,000
Direct labor hours used 75,000 125,000

Rainbow tested its new system by comparing the plant-wide and departmental overhead
assigned to two different jobs. The first job’s allocated overhead using the plant-wide rate
totaled $23,000 and was $23,750 using the two departmental rates. The second job took
5,000 machine hours in the Machining Department and a total of 3,000 labor hours of
which 1,700 were used in the Assembly Department. Rainbow should

a. change to two departmental overhead rates because of the significant (more than
10%) difference between methods for the second job.
b. change to two departmental overhead rates regardless of the differences between
methods for better cause-and-effect relationships.
c. continue to use the plant-wide rate because of the insignificant (less than 10%)
difference between methods for the first job.
d. search for cost drivers that would present more consistent results when the two
methods are compared.

61. Information regarding Parrett Company’s year-end account balances is shown below.

Account Balance Allocated Overhead

(Before Proration) in Each Balance
Direct material inventory $ 100,000 $ 0
Work-in-process inventory 25,000 10,000
Finished goods inventory 225,000 100,000

Cost of goods sold 2,250,000 890,000

If Parrett’s overhead was overapplied by $90,000 and the company uses the most accurate
method of prorating overapplied or underapplied overhead, the balance in the cost of
goods sold account after proration would be

a. $2,169,000.
b. $2,169,900.
c. $2,172,115.
d. $2,330,100.

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62. Abbott Company is considering implementing a just-in-time system and would like to test
the system on its packaging materials purchases. An analysis indicated that Abbott could
reduce its carrying costs by $5,000 each month if the just-in-time system was
implemented. Before making this decision, Abbott should also consider a possible change
in all of the following costs except an increase in the cost of

a. ordering.
b. packaging labor.
c. packaging materials.
d. stockouts.

63. For purposes of cost control, process reengineering is most similar to

a. activity-based costing.
b. kaizen budgeting.
c. variance analysis.
d. value-chain analysis.

64. The COSO model component of Risk Assessment focuses on

a. identifying the risks in all areas and establishing the vulnerability of the
organization.
b. the attitude of management at all levels toward operations and the concept of risk.
c. the controls such as approvals and documentation that addresses an organization’s
risk.
d. the timely communication of information relative to identified risks to management.

65. The statement below that best illustrates the importance of personnel policies and
procedures is that personnel policies and procedures

a. are integral to an efficient control environment.

b. should be implemented where it is cost beneficial.
c. should be evaluated for compliance by an external firm.
d. should be implemented where risks have been identified.

66. Accounting control should provide reasonable assurance about the achievement of
management’s objectives. The concept of internal controls providing “reasonable
assurance” recognizes that

a. the auditor’s primary responsibility is the detection of fraud.

b. employee carelessness can weaken an internal accounting control system.
c. control procedures should not have an adverse effect on efficiency or profitability.
d. judgmentally selected samples do not meet the criteria for statistical validity.

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67. Which one of the following represents a technique that is most appropriate for an internal
auditor to use to test the effectiveness of accounting recordkeeping controls?

a. Verify a receivable by comparing it to the accounting documentation.

b. Test a loan amount by sending a confirmation to the bank.
c. Perform an inquiry as to the timeliness of reconciliation completion.
d. Analyze the actual results to the budget and identify variances.

68. Which one of the following statements about internal control risk is correct?

a. The establishment and maintenance of an internal control system within a company

can effectively eliminate internal control risk.
b. The internal audit function is responsible for the establishment and maintenance of a
company’s internal control system.
c. Management has the responsibility to maintain controls that provide reasonable
assurance that adequate control exists over the entity’s assets and records.
d. Management’s responsibility regarding internal control risk is limited to controls
which provide assurance regarding the reliability of financial reporting.

69. Which one of the following is not a requirement of Section 404 of the Sarbanes-Oxley
Act?

a. Management is required to issue an internal control report that explicitly accepts

responsibility for establishing and maintaining adequate internal control over
financial reporting.
b. Management is required to issue an assertion as to whether internal control over
financial reporting is effective as of the end of the fiscal year.
c. An entity’s auditor is required to audit management’s assertion about the
effectiveness of internal control over financial reporting and express an opinion on
its effectiveness.
d. An entity’s auditor is required to perform a completely separate audit of internal
control not related to the audit of the entity’s financial statements in order to achieve
objectivity.

70. The Foreign Corrupt Practices Act imposes which of the following requirements on
companies whose securities are publicly traded in the U.S.?

a. Devising and maintaining a system of internal accounting controls sufficient to

provide reasonable assurance that transactions are executed in accordance with
management’s authorization.
b. Disclosure of information needed for informed investment decisions to potential
investors of an initial public offering of the company’s securities.
c. Periodic filing of a SEC form 8K, whenever a significant event takes place affecting
the company’s internal controls.
d. Issuance of an assertion as to whether the company’s system of internal controls over
financial reporting is effective as of the end of the fiscal year.

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71. In a compliance audit, the internal auditor is most likely to

a. identify the causes of a shortfall in production output.

b. examine the production process to determine if it is possible to enhance the
efficiency or effectiveness of operations.
c. assist management with the internal control assessment required by the Sarbanes-
Oxley Act.
d. determine whether the company’s hiring practices are in conformity with laws
regarding fair hiring and proper dismissal of employees.

72. A company’s accounts payable supervisor assigned a vendor code to a storage facility
owned by the supervisor then instructed the company’s accounting system to pay monthly
rent for a storage unit allegedly leased from the storage facility. This situation is an
example of a failure of controls due to the lack of

a. commitment to competence in job skills and knowledge.

b. an effective internal audit function.
c. appropriate segregation of duties.
d. appropriate physical controls.

73. Which one of the following procedures functions primarily as an output control over a
company’s payroll processing?

a. The payroll process assigns each batch of timesheets a unique number recorded in a
batch register.
b. The payroll application program performs a limit test that subjects any transaction
involving more than 80 hours worked to review before processing.
c. The payroll files are assigned internal and external file labels that are checked by the
application program before processing.
d. The payroll distribution log contains a schedule of when checks and reports are
prepared with the names of individuals who are to receive the report.

74. Mark Tian, a staff accountant, becomes aware of an off-balance sheet bank account where
funds have been diverted with offsetting credits approved by his immediate supervisor. His
immediate supervisor refuses to discuss it and suggests Tian forget about it. Which one of
the following should be Tian’s next course of action in this circumstance?

a. Put concerns in writing to the immediate supervisor and copy the company’s
independent auditor.
b. Discuss concerns with the level of management above the immediate supervisor.
c. Communicate concerns confidentially to the company’s independent auditor.
d. Communicate concerns confidentially to the company’s external legal counsel.

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75. A company has a December 31 year end. Which one of the following options to increase
net income during the last month of the company’s fiscal year end would least likely result
in a violation of the IMA’s Statement of Ethical Professional Practice?

a. Persuade suppliers to postpone billing until January 1.

b. Delay the year-end closing until January 4 to capture sales over the New Year’s
holiday in the current year.
c. Reduce the calculated allowance for bad debts and bad debt expenses.
d. Postpone planned marketing expenditures until January.

76. You have examined your organization’s financial statements and determined that they
present a number of significant items in a fraudulent manner. You know that you should
report this situation to management, but are concerned that reporting it might result in your
employment being terminated. Failure to report this situation is a violation of which of the
ethical standard(s) outlined in IMA’s Statement of Ethical Professional Practice?

a. Credibility.
b. Confidentiality.
c. Competence.
d. Confidentiality and Integrity.

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Answers - CMA Part 1 Practice Questions

1. c 35. b 69. d
2. c 36. b 70. a
3. a 37. a 71. d
4. c 38. d 72. c
5. b 39. a 73. d
6. c 40. d 74. b
7. d 41. a 75. d
8. a 42. c 76. a
9. d 43. d
10. a 44. a
11. a 45. b
12. b 46. a
13. d 47. b
14. a 48. b
15. c 49. b .
16. a 50. b .
17. c 51. c
18. d 52. b
19. c 53. a
20. c 54. a
21. a 55. d
22. a 56. b
23. d 57. b
24. c 58. a
25. d 59. d
26. d 60. a
27. c 61. b
28. c 62. b
29. a 63. d
30. d 64. a
31. b 65. a
32. c 66. c
33. d 67. b
34. a 68. c

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