US CMA Part 1 · Chapter 3
Performance Management MCQs with Answers
30 multiple-choice questions on Performance Management for US CMA Part 1 Financial Planning, Performance and Analytics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
The static budget variance for operating income can be split into which two components?
- A) A price variance and a mix variance
- B) A spending variance and a production volume variance
- C) A flexible budget variance and a sales volume variance
- D) A rate variance and an efficiency variance
Show answer & explanation
Answer: C) A flexible budget variance and a sales volume variance
The static budget variance compares actual results with the original budget. It splits into the sales volume variance (flexible budget minus static budget, caused by selling a different quantity) and the flexible budget variance (actual minus flexible budget, caused by prices, costs and efficiency).
Question 2
A company budgeted to sell 20,000 units with a standard contribution margin of $14 per unit. It actually sold 22,000 units. What is the sales volume variance in terms of contribution margin?
- A) $28,000 unfavorable
- B) $90,000 favorable
- C) $62,000 favorable
- D) $28,000 favorable
Show answer & explanation
Answer: D) $28,000 favorable
Sales volume variance = (actual units - budgeted units) x budgeted contribution margin per unit = (22,000 - 20,000) x $14 = $28,000 favorable, because more units were sold than planned.
Question 3
A company sold 22,000 units at an actual price of $47 per unit. The budgeted selling price was $45. What is the sales price variance?
- A) $44,000 favorable
- B) $40,000 favorable
- C) $44,000 unfavorable
- D) $4,000 favorable
Show answer & explanation
Answer: A) $44,000 favorable
Sales price variance = (actual price - budgeted price) x actual units sold = ($47 - $45) x 22,000 = $44,000 favorable.
Question 4
Budgeted sales were 6,000 units of Product X (contribution margin $20 per unit) and 4,000 units of Product Y (contribution margin $35 per unit). Actual sales were 7,700 units of X and 3,300 units of Y. What is the sales mix variance?
- A) $16,500 unfavorable
- B) $16,500 favorable
- C) $26,000 favorable
- D) $9,500 favorable
Show answer & explanation
Answer: A) $16,500 unfavorable
Budgeted mix is 60% X / 40% Y; actual total units = 11,000, with an actual mix of 70% X / 30% Y. Mix variance = sum of (actual mix % - budgeted mix %) x actual total units x budgeted CM per unit. X: (70% - 60%) x 11,000 x $20 = $22,000 F. Y: (30% - 40%) x 11,000 x $35 = $38,500 U. Net = $16,500 unfavorable, because the mix shifted toward the lower-margin product. (The sales quantity variance would be 1,000 x $26 = $26,000 favorable.)
Question 5
Brightline Co. purchased 50,000 pounds of material for $3.12 per pound. The standard price is $3.00 per pound, and the company isolates the price variance at the time of purchase. What is the direct materials price variance?
- A) $6,000 unfavorable
- B) $6,000 favorable
- C) $5,820 unfavorable
- D) $5,640 unfavorable
Show answer & explanation
Answer: A) $6,000 unfavorable
Price variance = (actual price - standard price) x actual quantity purchased = ($3.12 - $3.00) x 50,000 = $6,000 unfavorable. Because the variance is isolated at purchase, the quantity purchased (not the quantity used) is the base.
Question 6
To produce 23,500 units, a factory used 48,500 pounds of material. The standard is 2 pounds per unit at $3.00 per pound. What is the direct materials efficiency (usage) variance?
- A) $4,500 favorable
- B) $4,680 unfavorable
- C) $9,000 unfavorable
- D) $4,500 unfavorable
Show answer & explanation
Answer: D) $4,500 unfavorable
Standard quantity allowed = 23,500 x 2 = 47,000 pounds. Efficiency variance = (actual quantity - standard quantity) x standard price = (48,500 - 47,000) x $3.00 = $4,500 unfavorable.
Question 7
Direct labor for the month was 12,400 hours at a total cost of $327,360. The standard wage rate is $26 per hour, and standard hours allowed for the actual output were 12,500. What is the direct labor rate variance?
- A) $4,960 favorable
- B) $5,000 unfavorable
- C) $4,960 unfavorable
- D) $2,360 unfavorable
Show answer & explanation
Answer: C) $4,960 unfavorable
Actual rate = $327,360 / 12,400 = $26.40. Rate variance = (actual rate - standard rate) x actual hours = ($26.40 - $26.00) x 12,400 = $4,960 unfavorable. Equivalently, $327,360 - 12,400 x $26 = $4,960. Using standard hours instead of actual hours gives $0.40 x 12,500 = $5,000, and $2,360 unfavorable ($327,360 - 12,500 x $26 = $327,360 - $325,000) is the total labor flexible budget variance, which also includes the $2,600 favorable efficiency variance.
Question 8
A plant produced 25,000 units, each with a standard of 0.5 direct labor hours at $26 per hour. Actual hours worked were 12,400, at an actual rate of $26.40. What is the direct labor efficiency variance?
- A) $2,600 unfavorable
- B) $2,640 favorable
- C) $2,640 unfavorable
- D) $2,600 favorable
Show answer & explanation
Answer: D) $2,600 favorable
Standard hours allowed = 25,000 x 0.5 = 12,500. Efficiency variance = (actual hours - standard hours) x standard rate = (12,400 - 12,500) x $26 = $2,600 favorable, because fewer hours were used than allowed. The standard rate, not the actual rate, is used.
Question 9
A chemical is made by blending two inputs. The standard mix for a 100 kg input batch is 60 kg of Input A at $2.00 per kg and 40 kg of Input B at $5.00 per kg. In June the company used 6,000 kg of A and 4,500 kg of B. What is the direct materials mix variance?
- A) $900 unfavorable
- B) $900 favorable
- C) $1,500 unfavorable
- D) $600 favorable
Show answer & explanation
Answer: A) $900 unfavorable
Total input = 10,500 kg. At the standard mix it would have been 6,300 kg of A and 4,200 kg of B. Mix variance = (actual - standard mix quantity) x standard price: A (6,000 - 6,300) x $2 = $600 F; B (4,500 - 4,200) x $5 = $1,500 U. Net mix variance = $900 unfavorable, because more of the expensive input was used.
Question 10
Variable overhead is applied at $4.80 per direct labor hour. Actual variable overhead was $61,200, actual hours were 12,400 and standard hours allowed for actual output were 12,500. What is the variable overhead spending variance?
- A) $1,680 unfavorable
- B) $1,200 unfavorable
- C) $1,680 favorable
- D) $480 favorable
Show answer & explanation
Answer: A) $1,680 unfavorable
Spending variance = actual variable overhead - (actual hours x standard rate) = $61,200 - (12,400 x $4.80) = $61,200 - $59,520 = $1,680 unfavorable.
Question 11
Variable overhead is applied at $4.80 per direct labor hour. Actual direct labor hours were 12,400 and standard hours allowed for actual output were 12,500. What is the variable overhead efficiency variance?
- A) $480 favorable
- B) $480 unfavorable
- C) $1,680 unfavorable
- D) $1,200 unfavorable
Show answer & explanation
Answer: A) $480 favorable
Efficiency variance = (actual hours - standard hours allowed) x standard rate = (12,400 - 12,500) x $4.80 = $480 favorable. It arises from efficient use of the allocation base (labor hours), not from overhead spending itself.
Question 12
Budgeted fixed manufacturing overhead was $150,000 and actual fixed manufacturing overhead was $156,000. What is the fixed overhead spending (budget) variance?
- A) $6,000 unfavorable
- B) $6,000 favorable
- C) $250 favorable
- D) $6,250 favorable
Show answer & explanation
Answer: A) $6,000 unfavorable
Fixed overhead spending variance = actual fixed overhead - budgeted fixed overhead = $156,000 - $150,000 = $6,000 unfavorable. It is unaffected by the level of output.
Question 13
Budgeted fixed manufacturing overhead is $150,000, based on a denominator level of 12,000 direct labor hours. Standard hours allowed for actual output were 12,500, and actual hours worked were 12,400. What is the production volume variance?
- A) $6,250 favorable
- B) $6,250 unfavorable
- C) $5,000 favorable
- D) $250 unfavorable
Show answer & explanation
Answer: A) $6,250 favorable
Fixed overhead rate = $150,000 / 12,000 = $12.50 per hour. Applied fixed overhead = 12,500 standard hours x $12.50 = $156,250. Production volume variance = applied - budgeted = $156,250 - $150,000 = $6,250 favorable, because output exceeded the denominator level. Actual hours are not used.
Question 14
Which statement about the fixed overhead production volume variance is correct?
- A) It measures how efficiently direct labor hours were used during the period
- B) It is the difference between actual and budgeted fixed overhead
- C) It is controllable by the purchasing manager
- D) It reflects the difference between the denominator level and actual output, and does not indicate whether fixed costs were over- or under-spent
Show answer & explanation
Answer: D) It reflects the difference between the denominator level and actual output, and does not indicate whether fixed costs were over- or under-spent
The production volume variance arises because fixed overhead is applied per unit. It measures capacity utilization relative to the denominator level, not spending or efficiency, and is often considered beyond the control of an individual department manager.
Question 15
The manager of a division is responsible for its revenues and costs and also has authority over the investment in assets used by the division. This division is best described as:
- A) A cost center
- B) A revenue center
- C) An investment center
- D) A profit center
Show answer & explanation
Answer: C) An investment center
An investment center manager controls revenues, costs and invested capital, so performance is typically measured using ROI, residual income or EVA. A profit center manager controls revenues and costs but not the investment base.
Question 16
Applying the controllability principle, which item should be excluded when evaluating the performance of a production department supervisor?
- A) An allocation of corporate headquarters administration costs
- B) Overtime premiums paid to the department's workers
- C) Materials scrapped through operator error
- D) Supplies used in the department
Show answer & explanation
Answer: A) An allocation of corporate headquarters administration costs
The controllability principle says managers should be evaluated only on items they can significantly influence. Corporate headquarters costs allocated to the department are outside the supervisor's control, while overtime, scrap and supplies are directly influenced by the supervisor.
Question 17
The Eastern segment of a company reports sales of $900,000, variable costs of $540,000, traceable fixed costs of $210,000 and an allocation of common corporate costs of $80,000. What is the segment margin used to evaluate the segment's contribution to company profit?
- A) $360,000
- B) $70,000
- C) $150,000
- D) $280,000
Show answer & explanation
Answer: C) $150,000
Contribution margin = $900,000 - $540,000 = $360,000. Segment margin = contribution margin - traceable fixed costs = $360,000 - $210,000 = $150,000. Common costs are not deducted because they would continue even if the segment were eliminated.
Question 18
The Motor Division makes a component with variable cost of $32 per unit and allocated fixed cost of $9 per unit. It sells the component externally for $50. The division has substantial idle capacity. What is the minimum transfer price it should accept for internal sales to another division?
- A) $50
- B) $41
- C) $18
- D) $32
Show answer & explanation
Answer: D) $32
Minimum transfer price = incremental (variable) cost per unit + opportunity cost per unit. With idle capacity, no external sales are given up, so the opportunity cost is zero and the minimum is $32. Allocated fixed costs are not incremental.
Question 19
The Motor Division sells its component externally for $50, with variable cost of $32 per unit, including $3 of variable selling costs that are avoided on internal transfers. The division is operating at full capacity and could sell everything it produces externally. What is the minimum acceptable transfer price?
- A) $50
- B) $29
- C) $47
- D) $32
Show answer & explanation
Answer: C) $47
Minimum transfer price = variable cost of an internal sale + contribution given up on the lost external sale. Variable cost of an internal unit = $32 - $3 = $29. Opportunity cost = $50 - $32 = $18. Minimum = $29 + $18 = $47, i.e. the market price less the avoided selling costs.
Question 20
When a multinational company sets transfer prices between subsidiaries in different countries, tax authorities generally require that the prices:
- A) Equal the selling division's full absorption cost in every case
- B) Follow the arm's-length principle, approximating prices that unrelated parties would agree
- C) Be set to shift as much profit as possible into the lowest-tax jurisdiction
- D) Be negotiated freely by divisional managers without documentation
Show answer & explanation
Answer: B) Follow the arm's-length principle, approximating prices that unrelated parties would agree
Tax authorities in most jurisdictions apply the arm's-length principle to intercompany transactions to prevent profit shifting. Companies must document their transfer pricing methods, and deliberately moving profit to low-tax countries through non-arm's-length prices can lead to adjustments and penalties.
Question 21
A division reports operating income of $360,000, sales of $3,000,000 and average invested capital of $2,400,000. What is its return on investment, and how does it split into margin and turnover?
- A) ROI 12%: profit margin 15% x asset turnover 0.80
- B) ROI 15%: profit margin 1.25% x asset turnover 12
- C) ROI 18%: profit margin 12% x asset turnover 1.50
- D) ROI 15%: profit margin 12% x asset turnover 1.25
Show answer & explanation
Answer: D) ROI 15%: profit margin 12% x asset turnover 1.25
ROI = $360,000 / $2,400,000 = 15%. Profit margin = $360,000 / $3,000,000 = 12%. Asset turnover = $3,000,000 / $2,400,000 = 1.25 times. Check: 12% x 1.25 = 15% (the DuPont relationship).
Question 22
A division has operating income of $360,000 and average invested capital of $2,400,000. The company's required rate of return is 11%. What is the division's residual income?
- A) $264,000
- B) $30,000
- C) $96,000
- D) $320,400
Show answer & explanation
Answer: C) $96,000
Residual income = operating income - (required rate x invested capital) = $360,000 - (11% x $2,400,000) = $360,000 - $264,000 = $96,000.
Question 23
A division currently earns an ROI of 18%. Its manager is considering a project expected to earn 15% on its investment. The company's cost of capital is 12%. If the manager is evaluated on ROI, what is the likely outcome?
- A) The manager will accept the project because it increases the division's ROI
- B) The manager will reject the project, which is the correct decision for the company
- C) The manager will be indifferent because the project's return exceeds the cost of capital
- D) The manager will probably reject the project, although it would increase the division's residual income
Show answer & explanation
Answer: D) The manager will probably reject the project, although it would increase the division's residual income
Adding a 15% project to an 18% division lowers average ROI, so an ROI-evaluated manager is tempted to reject it. Because 15% exceeds the 12% cost of capital, the project has positive residual income and adds value, so rejecting it is not goal congruent. This is a key weakness of ROI compared with residual income.
Question 24
A division measures invested capital at net book value. If operating income and all other factors stay constant, what happens to the division's ROI as its assets age?
- A) ROI rises over time because the denominator falls as accumulated depreciation increases
- B) ROI falls over time because depreciation reduces operating income each year
- C) ROI is unaffected because book value does not change
- D) ROI rises only if the assets are revalued to replacement cost
Show answer & explanation
Answer: A) ROI rises over time because the denominator falls as accumulated depreciation increases
Using net book value, the investment base shrinks as assets are depreciated, so ROI increases even though performance has not improved. This can discourage managers from replacing old equipment, which is a known drawback of net book value as the investment base.
Question 25
A business unit has operating income (EBIT) of $1,200,000 and a tax rate of 25%. Its total assets are $8,000,000 and current liabilities are $1,500,000. The weighted average cost of capital is 10%. What is economic value added (EVA)?
- A) $250,000
- B) $550,000
- C) $100,000
- D) $900,000
Show answer & explanation
Answer: A) $250,000
NOPAT = $1,200,000 x (1 - 25%) = $900,000. Invested capital = total assets - current liabilities = $8,000,000 - $1,500,000 = $6,500,000. Capital charge = 10% x $6,500,000 = $650,000. EVA = $900,000 - $650,000 = $250,000.
Question 26
In a balanced scorecard, the measure 'average training hours per employee' would normally be placed in which perspective?
- A) Learning and growth
- B) Financial
- C) Customer
- D) Internal business process
Show answer & explanation
Answer: A) Learning and growth
The learning and growth perspective covers the people, systems and culture needed to support improvement, such as employee skills, training and information system capabilities. The other three perspectives are financial, customer and internal business process.
Question 27
What is the main purpose of a strategy map in a balanced scorecard system?
- A) To show the cause-and-effect links between objectives across the scorecard perspectives
- B) To list the financial ratios that are reported to shareholders
- C) To allocate overhead costs to strategic business units
- D) To rank divisions by their return on investment
Show answer & explanation
Answer: A) To show the cause-and-effect links between objectives across the scorecard perspectives
A strategy map visually links objectives, typically showing how learning and growth enables better internal processes, which improve customer outcomes and ultimately financial results. This helps managers see how non-financial measures drive financial performance.
Question 28
Which of the following is best described as a leading indicator of future financial performance?
- A) Last quarter's return on investment
- B) Annual earnings per share
- C) The percentage of customers rating the company's service as excellent
- D) Prior-year operating income
Show answer & explanation
Answer: C) The percentage of customers rating the company's service as excellent
Leading indicators are drivers that predict future outcomes; customer satisfaction often signals future repeat sales and revenue. ROI, EPS and operating income are lagging indicators that report the results of past actions.
Question 29
A distributor uses activity-based customer profitability analysis. For Customer K: revenue $180,000; cost of goods sold $108,000; 120 orders processed at $95 per order; 60 rush deliveries at $310 per delivery. What is the operating profit earned from Customer K?
- A) $42,000
- B) $72,000
- C) $60,600
- D) $53,400
Show answer & explanation
Answer: A) $42,000
Gross margin = $180,000 - $108,000 = $72,000. Order processing = 120 x $95 = $11,400. Rush deliveries = 60 x $310 = $18,600. Customer operating profit = $72,000 - $11,400 - $18,600 = $42,000.
Question 30
Under management by exception, which items in a performance report should receive the most management attention?
- A) Every line item, regardless of size
- B) Only unfavorable variances, however small
- C) Significant deviations from budget or standard, whether favorable or unfavorable
- D) Items that exactly match the budget
Show answer & explanation
Answer: C) Significant deviations from budget or standard, whether favorable or unfavorable
Management by exception focuses attention on significant variances, both favorable and unfavorable, because these indicate where plans and actual results diverge. Investigating every small variance is not cost-effective.