Certified Management Accountant (CMA) Exam 2

Explanation: ROI for an investment center is calculated by dividing operating income by average operating assets, measuring how efficiently assets are used to generate income.

Explanation: As the discount rate increases, the present value of future cash flows decreases, leading to a lower net present value (NPV).

Explanation: Operating leverage measures how changes in sales volume impact operating income due to the presence of fixed costs in the cost structure.

Explanation: Variance analysis involves comparing actual costs with standard costs to identify and analyze deviations, helping management understand cost performance and take corrective actions.

Explanation: Gross profit margin is calculated as: Gross Profit Margin=Sales Revenue−Cost of Goods SoldSales Revenue\text{Gross Profit Margin} = \frac{\text{Sales Revenue} - \text{Cost of Goods Sold}}{\text{Sales Revenue}}Gross Profit Margin=Sales RevenueSales Revenue−Cost of Goods Sold​ Rearranging to find Sales Revenue: Sales Revenue=Cost of Goods Sold1−Gross Profit Margin\text{Sales Revenue} = \frac{\text{Cost of Goods Sold}}{1 - \text{Gross Profit Margin}}Sales Revenue=1−Gross Profit MarginCost of Goods Sold​ Sales Revenue=700,0001−0.35=700,0000.65=1,084,615\text{Sales Revenue} = \frac{700,000}{1 - 0.35} = \frac{700,000}{0.65} = 1,084,615Sales Revenue=1−0.35700,000​=0.65700,000​=1,084,615

Explanation: Absorption costing is required for external financial reporting under generally accepted accounting principles (GAAP), as it includes both fixed and variable manufacturing costs in product costs.

Explanation: Traditional costing systems allocate overhead costs based on direct labor hours or machine hours, providing a broad allocation basis for indirect costs.

Explanation: Working capital is calculated as: $\text{Working Capital}=\text{Current Assets}-\text{Current Liabilities}$ It measures the short-term financial health and operational efficiency of a company.

Explanation: Fixed costs do not change with the level of production or sales volume, whereas variable costs fluctuate with changes in production levels.

Explanation: The EOQ model seeks to find the optimal order quantity that minimizes the combined total of ordering and carrying costs for inventory.

Explanation: Financial statement analysis involves examining financial statements to assess a company’s financial health, performance, and trends, aiding in decision-making and financial planning.

Explanation: The profitability index is calculated as: Profitability Index=Present Value of Future Cash FlowsInitial Investment\text{Profitability Index} = \frac{\text{Present Value of Future Cash Flows}}{\text{Initial Investment}}Profitability Index=Initial InvestmentPresent Value of Future Cash Flows​ It measures the value created per dollar invested.

Explanation: Responsibility accounting involves measuring and evaluating managers’ performance based on factors they can control, ensuring that they are held accountable for their specific areas of responsibility.

Explanation: Variance analysis focuses on measuring performance by comparing actual costs with standard costs and identifying the reasons for deviations.

Explanation: CVP analysis examines how changes in costs, volume, and sales affect a company's profit, helping in decision-making related to pricing, production levels, and product mix.

Explanation: Sunk costs are costs that have already been incurred and cannot be recovered; therefore, they are irrelevant in make-or-buy decisions.

Explanation: Operating income is calculated as: $\text{Operating Income}=\text{Sales}-\text{Cost of Goods Sold}-\text{Operating Expenses}$ $\text{Operating Income}=900,000-540,000-180,000=270,000$

Explanation: A variance report analyzes differences between budgeted figures and actual performance, helping to understand reasons for deviations and adjust future budgets.

Explanation: Return on Equity (ROE) measures how effectively a company uses shareholders' equity to generate profit: ROE=Net IncomeShareholders’ Equity\text{ROE} = \frac{\text{Net Income}}{\text{Shareholders' Equity}}ROE=Shareholders’ EquityNet Income​

Explanation: Activity-based costing (ABC) provides a more accurate allocation of overhead costs by linking them to specific activities that drive costs, as opposed to using broad averages.

Explanation: The Quick Ratio, also known as the acid-test ratio, measures a company’s ability to pay short-term liabilities using its most liquid assets: Quick Ratio=Current Assets−InventoryCurrent Liabilities\text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}}Quick Ratio=Current LiabilitiesCurrent Assets−Inventory​

Explanation: The sales value at split-off method allocates joint costs based on the relative sales value of products at the split-off point, providing a fair basis for cost allocation.

Explanation: Return on Assets (ROA) is calculated as: ROA=Net IncomeTotal Assets\text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}}ROA=Total AssetsNet Income​ Rearranging to find Net Income: $\text{Net Income}=\text{ROA}\times \text{Total Assets}$ $\text{Net Income}=0.10\times 500,000=50,000$

Explanation: Under LIFO, the latest inventory costs are used first, which matches the rising prices with higher cost of goods sold, reducing taxable income during inflationary periods.

Explanation: Contribution margin ratio is calculated as: Contribution Margin Ratio=Sales−Variable CostsSales×100\text{Contribution Margin Ratio} = \frac{\text{Sales} - \text{Variable Costs}}{\text{Sales}} \times 100Contribution Margin Ratio=SalesSales−Variable Costs​×100 Contribution Margin Ratio=600,000−360,000600,000×100=40%\text{Contribution Margin Ratio} = \frac{600,000 - 360,000}{600,000} \times 100 = 40\%Contribution Margin Ratio=600,000600,000−360,000​×100=40%

Explanation: The current ratio is calculated as: Current Ratio=Current AssetsCurrent Liabilities\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}Current Ratio=Current LiabilitiesCurrent Assets​ $\text{Current Assets}=\text{Current Ratio}\times \text{Current Liabilities}$ $\text{Current Assets}=3.0\times 200,000=600,000$

Explanation: The debt-to-equity ratio measures a company’s financial leverage by comparing its total debt to total equity: Debt-to-Equity Ratio=Total DebtTotal Equity\text{Debt-to-Equity Ratio} = \frac{\text{Total Debt}}{\text{Total Equity}}Debt-to-Equity Ratio=Total EquityTotal Debt​

Explanation: Cash flow from operating activities includes cash generated or used in the core business operations, such as receipts from customers and payments to suppliers and employee

Explanation: A flexible budget adjusts for changes in activity levels, allowing for more accurate performance evaluations by comparing actual results to budgeted figures adjusted for the actual level of activity.

Explanation: Budget variance analysis evaluates performance by comparing actual results to budgeted figures, helping to identify areas where performance deviated from expectations and understand the reasons for these deviations.

Explanation: Capital budgeting focuses on evaluating long-term investment opportunities to determine their feasibility and profitability before committing resources.

Explanation: Breakeven analysis determines the sales level required to cover both fixed and variable costs, indicating the point at which total revenues equal total costs, resulting in no profit or loss.

Explanation: The debt ratio indicates the proportion of assets financed by debt: Debt Ratio=Total DebtTotal Assets\text{Debt Ratio} = \frac{\text{Total Debt}}{\text{Total Assets}}Debt Ratio=Total AssetsTotal Debt​ A debt ratio of 0.4 means that 40% of the company’s assets are financed by debt.

Explanation: Capital budgeting is concerned with evaluating long-term investment opportunities and making decisions about which projects or investments to pursue based on their expected returns.

Explanation: Relevant costs for a make-or-buy decision are future costs that will change based on the decision, such as variable costs and potential savings or expenses from outsourcing.

Explanation: The Income Statement provides information about a company’s revenues, expenses, and profits or losses over a specific period.

Explanation: Budgetary control provides a framework for monitoring and managing financial performance by comparing actual results with budgeted figures and making necessary adjustments.

Explanation: First, calculate the total direct labor hours: $\text{Total Direct Labor Hours}=\text{Units Produced}\times \text{Direct Labor Hours per Unit}$ $\text{Total Direct Labor Hours}=4,000\times 2=8,000$

Then, calculate the overhead rate: Overhead Rate=Total Overhead CostsTotal Direct Labor Hours\text{Overhead Rate} = \frac{\text{Total Overhead Costs}}{\text{Total Direct Labor Hours}}Overhead Rate=Total Direct Labor HoursTotal Overhead Costs​ Overhead Rate=80,0008,000=10 per hour\text{Overhead Rate} = \frac{80,000}{8,000} = 10 \, per \, hourOverhead Rate=8,00080,000​=10perhour

Explanation: The quick ratio excludes inventory from current assets, as inventory may not be as readily convertible to cash as other liquid assets. The formula is: Quick Ratio=Current Assets−InventoryCurrent Liabilities\text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}}Quick Ratio=Current LiabilitiesCurrent Assets−Inventory​

Explanation: Sensitivity analysis evaluates how changes in key variables or assumptions affect financial outcomes, helping to understand the potential impact of uncertainties or risks.