US CMA Part 1 · Chapter 4
Cost Management MCQs with Answers
22 multiple-choice questions on Cost 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
In its first year, a company produced 50,000 units and sold 46,000 units. Fixed manufacturing overhead was $600,000; there were no variances. How will operating income under absorption costing compare with operating income under variable costing?
- A) Absorption costing income will be $48,000 higher
- B) Absorption costing income will be $48,000 lower
- C) Absorption costing income will be $52,174 higher
- D) The two methods will report the same income
Show answer & explanation
Answer: A) Absorption costing income will be $48,000 higher
Fixed overhead per unit = $600,000 / 50,000 = $12. Inventory increased by 4,000 units, and absorption costing defers $12 of fixed overhead in each of them. Difference = 4,000 x $12 = $48,000; absorption income is higher when production exceeds sales.
Question 2
Per-unit costs for a product are: direct materials $14, direct labor $9, variable manufacturing overhead $5, fixed manufacturing overhead $7 and variable selling expense $3. What is the inventoriable cost per unit under variable costing?
- A) $28
- B) $35
- C) $31
- D) $23
Show answer & explanation
Answer: A) $28
Variable (direct) costing inventories only variable manufacturing costs: $14 + $9 + $5 = $28. Fixed manufacturing overhead is a period cost, and variable selling expenses are never inventoried.
Question 3
Which cost is treated as a product cost under absorption costing but as a period cost under variable costing?
- A) Variable manufacturing overhead
- B) Direct materials
- C) Fixed manufacturing overhead
- D) Fixed selling and administrative expenses
Show answer & explanation
Answer: C) Fixed manufacturing overhead
The only difference between the two methods is the treatment of fixed manufacturing overhead, which absorption costing assigns to units and variable costing expenses in the period incurred. Direct materials and variable overhead are product costs under both, and selling and administrative costs are period costs under both.
Question 4
Westbury Inc. sells a product for $80. Variable production cost is $36 per unit and variable selling cost is $4 per unit. Fixed manufacturing overhead is $360,000 per year, applied on normal output of 30,000 units, and fixed selling and administrative costs are $150,000. There was no beginning inventory; 30,000 units were produced and 27,000 were sold. What is operating income under absorption costing?
- A) $570,000
- B) $714,000
- C) $534,000
- D) $606,000
Show answer & explanation
Answer: D) $606,000
Fixed overhead rate = $360,000 / 30,000 = $12; absorption cost per unit = $36 + $12 = $48. Gross margin = 27,000 x ($80 - $48) = $864,000. Less variable selling $108,000 and fixed S&A $150,000 = $606,000. Variable costing income would be $570,000; the $36,000 difference is the fixed overhead in the 3,000 units of ending inventory.
Question 5
A joint process costing $240,000 yields 8,000 units of Product P, with a sales value at split-off of $30 per unit, and 12,000 units of Product Q, with a sales value at split-off of $10 per unit. Using the sales value at split-off method, how much joint cost is allocated to Product P?
- A) $96,000
- B) $120,000
- C) $160,000
- D) $80,000
Show answer & explanation
Answer: C) $160,000
Sales value at split-off: P = 8,000 x $30 = $240,000; Q = 12,000 x $10 = $120,000; total $360,000. P's share = $240,000 / $360,000 = 2/3, so P is allocated $240,000 x 2/3 = $160,000. The physical units method would give $96,000.
Question 6
Joint costs of $300,000 produce two products that must be processed further before sale: Product R: 10,000 units, final selling price $45, separable processing costs $90,000 Product S: 20,000 units, final selling price $18, separable processing costs $60,000 Using the net realizable value method, how much joint cost is allocated to Product R (to the nearest dollar)?
- A) $166,667
- B) $100,000
- C) $150,000
- D) $163,636
Show answer & explanation
Answer: D) $163,636
NRV of R = 10,000 x $45 - $90,000 = $360,000. NRV of S = 20,000 x $18 - $60,000 = $300,000. Total NRV = $660,000. Allocation to R = $300,000 x $360,000 / $660,000 = $163,636 (rounded). Using final sales values without deducting separable costs would give $166,667.
Question 7
A joint product can be sold at split-off for $12 per unit, or processed further at an additional cost of $5 per unit and sold for $16. Its allocated share of joint costs is $7 per unit. What should the company do?
- A) Process further, because the final price of $16 exceeds the split-off price of $12
- B) Sell at split-off, because further processing would reduce profit by $1 per unit
- C) Process further, because the final price of $16 exceeds the total cost of $7 + $5
- D) Stop producing the product, because allocated joint costs make it unprofitable
Show answer & explanation
Answer: B) Sell at split-off, because further processing would reduce profit by $1 per unit
Joint costs are sunk at the split-off point and irrelevant to the decision. Incremental revenue from processing = $16 - $12 = $4, while incremental cost = $5. Processing further reduces profit by $1 per unit, so the product should be sold at split-off.
Question 8
Under the commonly used net realizable value approach to by-products, how is the NRV of a by-product recognized at the time of production?
- A) It is allocated a share of joint costs in proportion to its sales value
- B) It is added to the cost of the main products
- C) It is recorded as a reduction of selling and administrative expenses
- D) It is deducted from the joint costs before those costs are allocated to the main products
Show answer & explanation
Answer: D) It is deducted from the joint costs before those costs are allocated to the main products
By-products have relatively low sales value. Under the production (NRV) method, the by-product's net realizable value is recorded as inventory and subtracted from joint production costs, so only the remaining joint cost is allocated to the main products.
Question 9
Which capacity level, when used as the denominator for setting a fixed overhead rate, best highlights the cost of unused capacity that management could otherwise deploy?
- A) Normal capacity utilization
- B) Practical capacity
- C) Master-budget capacity utilization
- D) Actual capacity utilization for the period
Show answer & explanation
Answer: B) Practical capacity
Practical capacity is the maximum output achievable allowing for unavoidable interruptions such as maintenance. Using it as the denominator keeps product costs from being inflated by idle capacity and makes the cost of unused capacity visible. Normal and budgeted utilization spread the cost of idle capacity over the units produced.
Question 10
A process had 4,000 units in beginning work in process, 60% complete for conversion costs. During the period 34,000 units were completed and transferred out, and ending work in process was 6,000 units, 40% complete for conversion. Using the FIFO method, what are the equivalent units for conversion costs?
- A) 36,400 units
- B) 34,000 units
- C) 31,600 units
- D) 40,000 units
Show answer & explanation
Answer: B) 34,000 units
FIFO counts only the work done this period: finish beginning WIP 4,000 x 40% = 1,600; units started and completed 34,000 - 4,000 = 30,000; ending WIP 6,000 x 40% = 2,400. Total = 34,000. The weighted-average method would give 34,000 + 2,400 = 36,400.
Question 11
Using the weighted-average method, equivalent units for conversion are 36,400. Conversion costs in beginning work in process were $21,600 and conversion costs incurred this period were $342,400. What is the conversion cost per equivalent unit?
- A) $9.41
- B) $10.00
- C) $10.07
- D) $10.71
Show answer & explanation
Answer: B) $10.00
The weighted-average method combines beginning WIP costs with current costs: ($21,600 + $342,400) / 36,400 = $364,000 / 36,400 = $10.00 per equivalent unit.
Question 12
A job-order shop applies overhead using a predetermined rate based on budgeted overhead of $1,440,000 and 48,000 budgeted machine hours. Actual machine hours were 50,500 and actual overhead was $1,492,000. What is the over- or under-applied overhead?
- A) $23,000 underapplied
- B) $52,000 underapplied
- C) $23,000 overapplied
- D) $75,000 overapplied
Show answer & explanation
Answer: C) $23,000 overapplied
Predetermined rate = $1,440,000 / 48,000 = $30 per machine hour. Applied overhead = 50,500 x $30 = $1,515,000. Applied exceeds actual ($1,492,000) by $23,000, so overhead is overapplied.
Question 13
A plant uses activity-based costing with two overhead pools: machine setups ($180,000, 300 setups) and quality inspections ($96,000, 1,200 inspections). Product Z required 40 setups and 150 inspections to produce 2,000 units. What overhead cost per unit is assigned to Product Z?
- A) $12.00
- B) $17.48
- C) $18.00
- D) $36.00
Show answer & explanation
Answer: C) $18.00
Activity rates: setups $180,000 / 300 = $600 per setup; inspections $96,000 / 1,200 = $80 per inspection. Overhead for Z = 40 x $600 + 150 x $80 = $24,000 + $12,000 = $36,000. Per unit = $36,000 / 2,000 = $18.00.
Question 14
In an activity-based costing cost hierarchy, machine setup costs that are incurred each time a group of units is produced are classified as:
- A) Unit-level costs
- B) Product-sustaining costs
- C) Facility-sustaining costs
- D) Batch-level costs
Show answer & explanation
Answer: D) Batch-level costs
Batch-level costs vary with the number of batches rather than the number of units; setups, purchase orders and material moves are typical examples. Unit-level costs vary with each unit, product-sustaining costs support a product line, and facility-sustaining costs support the operation as a whole.
Question 15
A company has two support departments, Maintenance (costs $120,000) and IT (costs $80,000), and two production departments, P1 and P2. Maintenance provides 20% of its services to IT, 50% to P1 and 30% to P2. IT provides 10% of its services to Maintenance, 36% to P1 and 54% to P2. Using the step-down method and allocating Maintenance first, what total support cost is allocated to P1?
- A) $101,600
- B) $107,000
- C) $97,440
- D) $92,000
Show answer & explanation
Answer: A) $101,600
Maintenance: $120,000 allocated 20% to IT ($24,000), 50% to P1 ($60,000) and 30% to P2. IT now has $80,000 + $24,000 = $104,000. Under step-down, no cost goes back to Maintenance, so IT is allocated to P1 and P2 in the ratio 36:54, giving P1 $104,000 x 36/90 = $41,600. Total to P1 = $60,000 + $41,600 = $101,600.
Question 16
Which support department cost allocation method fully recognizes services that support departments provide to each other in both directions?
- A) The reciprocal method
- B) The direct method
- C) The step-down (sequential) method
- D) The single-rate method
Show answer & explanation
Answer: A) The reciprocal method
The reciprocal method uses simultaneous equations so that every support department's services to every other support department are reflected. The direct method ignores all inter-support services, and the step-down method recognizes them only in one direction.
Question 17
Under a cost of quality framework, the cost of repairing products returned by customers under warranty is classified as:
- A) An internal failure cost
- B) An appraisal cost
- C) A prevention cost
- D) An external failure cost
Show answer & explanation
Answer: D) An external failure cost
External failure costs arise after defective products reach the customer, including warranty repairs, returns and lost goodwill. Internal failure costs (such as scrap and rework) are found before shipment, appraisal costs relate to inspection, and prevention costs are incurred to stop defects occurring.
Question 18
A manufacturer's quality-related costs for the year include: rework $42,000; scrap $18,000; final inspection $25,000; warranty claims $31,000; design reviews $12,000. What are total internal failure costs?
- A) $85,000
- B) $91,000
- C) $60,000
- D) $42,000
Show answer & explanation
Answer: C) $60,000
Internal failure costs are those incurred when defects are detected before shipment: rework $42,000 + scrap $18,000 = $60,000. Inspection is an appraisal cost, warranty claims are external failure costs and design reviews are prevention costs.
Question 19
A plant applies the theory of constraints. A single machine is the bottleneck. Data per unit: Alpha: price $120, direct materials $50, bottleneck time 5 minutes Beta: price $90, direct materials $30, bottleneck time 3 minutes Gamma: price $150, direct materials $60, bottleneck time 8 minutes All other costs are fixed in the short run. To maximize throughput, which product should receive priority on the bottleneck?
- A) Gamma, with the highest throughput contribution of $90 per unit
- B) Beta, with throughput contribution of $20.00 per bottleneck minute
- C) Alpha, with throughput contribution of $14.00 per bottleneck minute
- D) Gamma, with the highest selling price of $150 per unit
Show answer & explanation
Answer: B) Beta, with throughput contribution of $20.00 per bottleneck minute
Under the theory of constraints, throughput contribution = selling price - direct materials, and products are ranked by throughput per unit of the constrained resource. Alpha: ($120 - $50) / 5 = $14.00 per minute; Beta: ($90 - $30) / 3 = $20.00 per minute; Gamma: ($150 - $60) / 8 = $11.25 per minute. Beta earns the most per bottleneck minute, so it should be prioritized.
Question 20
Which statement best describes a just-in-time (JIT) production system?
- A) Large safety stocks are held at every stage to protect against supplier delays
- B) Production is pushed through the plant according to a long-range forecast
- C) Production is pulled by customer demand, with materials arriving as needed and inventories kept to a minimum
- D) Products are made in large batches to minimize the number of setups
Show answer & explanation
Answer: C) Production is pulled by customer demand, with materials arriving as needed and inventories kept to a minimum
JIT is a demand-pull system that aims to eliminate waste, including excess inventory, by producing and receiving materials only as they are needed. It relies on reliable suppliers, short setup times and high quality.
Question 21
In a Six Sigma improvement project, what do the letters of the DMAIC methodology stand for?
- A) Define, Measure, Analyze, Improve, Control
- B) Design, Monitor, Audit, Implement, Communicate
- C) Define, Model, Allocate, Inspect, Correct
- D) Detect, Measure, Assess, Integrate, Confirm
Show answer & explanation
Answer: A) Define, Measure, Analyze, Improve, Control
DMAIC is the structured problem-solving cycle used in Six Sigma for improving existing processes: define the problem, measure current performance, analyze root causes, improve the process and control it to sustain the gains.
Question 22
Which statement best describes life-cycle costing?
- A) It accumulates all costs of a product from research and design through production, marketing and after-sale support
- B) It includes only the manufacturing costs incurred while a product is in production
- C) It allocates fixed overhead to products based on direct labor hours
- D) It is used only for products with a life of less than one year
Show answer & explanation
Answer: A) It accumulates all costs of a product from research and design through production, marketing and after-sale support
Life-cycle costing tracks costs over the whole life of a product, including upstream costs (research, design) and downstream costs (marketing, distribution, customer service). Because many costs are committed at the design stage, it helps managers focus cost reduction early.