Certified Management Accountant (CMA) Past Questions and Answers

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Certified Management Accountant (CMA) Exam 1

Certified Management Accountant (CMA) Exam 1
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1 / 40
A company is evaluating two different projects. Project A requires an initial investment of $100,000 and is expected to generate annual cash flows of $30,000 for 5 years. Project B requires an initial investment of $150,000 and is expected to generate annual cash flows of $50,000 for 5 years. If the company's cost of capital is 8%, which project has the higher Net Present Value (NPV)?
Project B
It cannot be determined without additional information
Both projects have the same NPV
Project A

Explanation: To determine which project has the higher NPV, we need to calculate the present value of each project's cash flows using the cost of capital (8%) as the discount rate. Project B generates higher annual cash flows and, although it requires a larger initial investment, the higher cash flows often result in a higher NPV.
For precise comparison, use the NPV formula: $\sum \frac{CF_t}{(1 + r)^t} - Initial \, Investment$ Where $CF_t$ is the cash flow in year $t$ , $r$ is the discount rate, and $t$ is the year.
Project A NPV: $NPVA=30,000(1+0.08)1+30,000(1+0.08)2+30,000(1+0.08)3+30,000(1+0.08)4+30,000(1+0.08)5−100,000NPV_A = \frac{30,000}{(1 + 0.08)^1} + \frac{30,000}{(1 + 0.08)^2} + \frac{30,000}{(1 + 0.08)^3} + \frac{30,000}{(1 + 0.08)^4} + \frac{30,000}{(1 + 0.08)^5} - 100,000$ Project B NPV: $NPVB=50,000(1+0.08)1+50,000(1+0.08)2+50,000(1+0.08)3+50,000(1+0.08)4+50,000(1+0.08)5−150,000NPV_B = \frac{50,000}{(1 + 0.08)^1} + \frac{50,000}{(1 + 0.08)^2} + \frac{50,000}{(1 + 0.08)^3} + \frac{50,000}{(1 + 0.08)^4} + \frac{50,000}{(1 + 0.08)^5} - 150,000$
Calculations will show that Project B typically has a higher NPV.
2 / 40
A company has a total budget of $500,000 for fixed costs and $200,000 for variable costs. If the company expects to produce 10,000 units, what is the total cost per unit?
$50
$70
$60
$70

Explanation: Total cost per unit is calculated by dividing the sum of fixed and variable costs by the number of units produced: $\, Cost \, per \, Unit = \frac{Fixed \, Costs + Variable \, Costs}{Units \, Produced}$ $\, Cost \, per \, Unit = \frac{500,000 + 200,000}{10,000} = 70$
3 / 40
In the context of financial management, what does the term “liquidity” refer to?
The ability to generate profits from sales
The company’s ability to meet long-term obligations
The ease of converting assets into cash without significant loss
The proportion of debt to equity in the capital structure

Explanation: Liquidity refers to the ease with which assets can be converted into cash without significant loss of value, indicating the company’s ability to meet short-term obligations.
4 / 40
In a balanced scorecard, which perspective focuses on organizational learning and growth?
Learning and growth
Financial
Customer
Internal business processes

Explanation: The learning and growth perspective in a balanced scorecard focuses on the intangible assets of an organization, such as employee capabilities, information systems, and organizational climate.
5 / 40
In variance analysis, the materials quantity variance is computed as:
(Actual quantity used - Standard quantity allowed) × Standard price
(Standard price - Actual price) × Standard quantity allowed
(Standard quantity allowed - Actual quantity used) × Actual price
(Actual price - Standard price) × Actual quantity used

Explanation: The materials quantity variance measures the difference between the actual quantity of materials used and the standard quantity allowed, multiplied by the standard price.
6 / 40
Which of the following costing methods assigns only variable manufacturing costs to the product?
Activity-based costing
Absorption costing
Variable costing
ob order costing

Explanation: Variable costing only assigns variable manufacturing costs to the product, including direct materials, direct labor, and variable manufacturing overhead. Fixed manufacturing overhead is treated as a period expense.
7 / 40
In which of the following cases would a company most likely use absorption costing?
When preparing external financial reports
When making decisions about product discontinuation
When evaluating short-term pricing decisions
When analyzing variable cost behavior

Explanation: Absorption costing includes all manufacturing costs (both variable and fixed) in product costs and is used for external financial reporting in accordance with generally accepted accounting principles (GAAP).
8 / 40
In which of the following situations would a company most likely use a standard costing system?
When producing custom-made products
When manufacturing large quantities of similar products
When operations involve frequent changes
When costs are highly variable

Explanation: Standard costing is most beneficial in environments where products are manufactured in large quantities with similar production processes, as it allows for easier cost control and variance analysis.
9 / 40
What is the primary goal of activity-based costing (ABC)?
To focus solely on direct costs
To trace costs to individual products and activities
To allocate overhead costs based on traditional cost drivers
To simplify the costing process by using broad averages

Explanation: The primary goal of activity-based costing (ABC) is to allocate overhead costs more accurately by tracing them to individual products and activities based on their actual consumption of resources.
10 / 40
Which of the following measures the efficiency of a company’s operations in generating earnings?
Return on assets
Current ratio
Debt-to-equity ratio
Quick ratio

Explanation: Return on assets (ROA) measures how efficiently a company uses its assets to generate earnings. It is calculated as net income divided by total assets.
11 / 40
In capital budgeting, the internal rate of return (IRR) is:
The rate of return that maximizes profits
The actual return on an investment
The discount rate that makes the NPV of an investment zero
The rate of return required by investors

Explanation: The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of an investment zero. It represents the expected rate of return of the project.
12 / 40
A firm uses a flexible budget. If the actual level of activity is higher than the budgeted level of activity, what effect would this have on the budgeted fixed costs?
Fixed costs will decrease
Fixed costs will increase
Fixed costs will remain the same
Fixed costs will be allocated to different cost centers

Explanation: In a flexible budget, fixed costs remain unchanged regardless of the level of activity. The flexible budget adjusts only variable costs with changes in activity levels.
13 / 40
In the context of risk management, which of the following best describes “hedging”?
Protecting against risk by taking an offsetting position in a related security
Reducing risk by eliminating the source of risk
Ignoring potential risks in decision-making
Diversifying investments to spread risk

Explanation: Hedging involves taking an offsetting position in a related security to protect against potential losses from fluctuations in the value of the primary investment or exposure. It is a risk management strategy used to minimize financial risk.
14 / 40
A company’s management is considering whether to accept a special order at a price below the usual selling price. The relevant cost for decision-making is:
Variable manufacturing costs
Fixed manufacturing overhead
Allocated fixed costs
Depreciation of equipment

Explanation: Relevant costs for decision-making regarding a special order are those costs that will change as a result of accepting the order, which typically include variable manufacturing costs.
15 / 40
Which of the following is a limitation of the payback period method?
Considers all cash flows of the project
Requires a high discount rate
Is difficult to calculate
Ignores the time value of money

Explanation: The payback period method does not account for the time value of money, meaning it ignores the fact that future cash flows are worth less than immediate cash flows.
16 / 40
Which financial statement reports a company’s financial position at a specific point in time?
Statement of retained earnings
Income statement
Balance sheet
Statement of cash flows

Explanation: The balance sheet reports a company’s financial position at a specific point in time, showing assets, liabilities, and shareholders' equity.
17 / 40
When calculating the breakeven point, which of the following is subtracted from total sales?
Total variable costs
Variable cost per unit
Total fixed costs
Contribution margin per unit

Explanation: The breakeven point is reached when total sales equal total fixed costs plus total variable costs. Total variable costs are subtracted from total sales to determine the contribution margin.
18 / 40
The economic order quantity (EOQ) model is used primarily to:
Minimize the cost of stockouts
Minimize the total cost of inventory
Maximize production efficiency
Maximize sales revenue

Explanation: The economic order quantity (EOQ) model is used to determine the optimal order quantity that minimizes the total cost of inventory, including ordering and holding costs.
19 / 40
What is the primary purpose of cost-volume-profit (CVP) analysis?
To determine the optimal product mix
To analyze the behavior of total costs and sales
To allocate overhead costs
To forecast future sales

Explanation: Cost-volume-profit (CVP) analysis examines how changes in costs and sales volume affect a company's profit, helping management make decisions about production levels, pricing, and product mix.
20 / 40
A company is considering a new project with the following cash flows: Initial investment of $250,000, annual cash inflows of $70,000 for 6 years. Calculate the project’s payback period.
6 years
5 years
4 years
3.5 years

Explanation: The payback period is calculated by dividing the initial investment by the annual cash inflows: $\, Period = \frac{Initial \, Investment}{Annual \, Cash \, Inflows}$ $\, Period = \frac{250,000}{70,000} \approx 3.57 \, years$
Since the payback period falls between 3 and 4 years, the closest answer is 4 years.
21 / 40
Which of the following is a key performance indicator for the customer perspective in a balanced scorecard?
Customer satisfaction index
Return on investment
Employee turnover rate
Average production cycle time

Explanation: The customer satisfaction index measures the degree to which customers are satisfied with a company's products or services, making it a key performance indicator for the customer perspective.
22 / 40
A flexible budget is prepared:
Based on actual costs
Based on fixed costs only
For various levels of activity
For a single level of activity

Explanation: A flexible budget adjusts for various levels of activity, allowing for more accurate comparison between actual and budgeted performance at different levels of production or sales.
23 / 40
Which of the following is an example of a nonfinancial performance measure?
Earnings per share
Gross profit margin
Customer complaint rate
Return on investment

Explanation: Nonfinancial performance measures include metrics that are not expressed in monetary terms, such as customer complaint rate, which reflects customer satisfaction and service quality.
24 / 40
Which type of costing method uses cost drivers to allocate overhead?
Activity-based costing
Variable costing
Standard costing
Absorption costing

Explanation: Activity-based costing (ABC) allocates overhead costs to products based on the activities that drive those costs, using cost drivers to assign costs more accurately.
25 / 40
What is the primary objective of conducting a SWOT analysis in strategic planning?
To identify strengths, weaknesses, opportunities, and threats
To analyze market trends and customer behavior
To forecast future financial performance
To develop detailed financial projections

Explanation: SWOT analysis is used in strategic planning to identify and evaluate the internal strengths and weaknesses of an organization, as well as external opportunities and threats.
26 / 40
Which of the following is considered a financing activity in the statement of cash flows?
Sale of inventory
Purchase of equipment
Receipt of interest income
Payment of dividends

Explanation: Financing activities in the statement of cash flows include transactions related to obtaining or repaying capital, such as issuing stock, borrowing funds, and paying dividends.
27 / 40
If a company is using return on investment (ROI) to measure the performance of its investment centers, which of the following is the formula used?
Operating Income / Average Operating Assets
Net Income / Shareholders' Equity
Net Income / Total Assets
Total Revenue / Total Expenses

Explanation: Return on investment (ROI) measures the performance of investment centers by comparing operating income to the average operating assets used. It indicates how effectively assets are being utilized to generate profits.
28 / 40
Which of the following describes the principle of “economic order quantity” (EOQ)?
The point at which total ordering costs equal total carrying costs
The maximum quantity of inventory that can be ordered
The optimal order quantity that minimizes total inventory costs
The quantity of inventory that maximizes sales revenue

Explanation: The Economic Order Quantity (EOQ) is the order quantity that minimizes the total costs of ordering and carrying inventory. It is calculated to find the most cost-effective amount to order.
29 / 40
A company’s current ratio is 2.5, and its quick ratio is 1.5. If the company’s inventory is $40,000, what is its current liabilities?
$100,000
$80,000
$120,000
$60,000

Explanation: The current ratio is calculated as: $\, Ratio = \frac{Current \, Assets}{Current \, Liabilities}$
The quick ratio is: $\, Ratio = \frac{Current \, Assets - Inventory}{Current \, Liabilities}$
Given: $\, Ratio = 2.5$ $\, Ratio = 1.5$ $I n v e n t ory = 40, 000$
Let $\, Liabilities = CL$ and $\, Assets = 2.5 \times CL$ . From the quick ratio: $\frac{2.5 \times CL - 40,000}{CL}$
Solving for CL: $1.5 \times CL = 2.5 \times CL - 40,000$ $\times CL$ $C L = 100, 000$
30 / 40
A company’s sales revenue is $500,000, and its cost of goods sold is $300,000. If its operating expenses are $100,000, what is the company’s gross profit margin?
50%
40%
60%
20%

Explanation: Gross profit margin is calculated as: $\, Profit \, Margin = \frac{Sales \, Revenue - Cost \, of \, Goods \, Sold}{Sales \, Revenue} \times 100$ $\, Profit \, Margin = \frac{500,000 - 300,000}{500,000} \times 100 = 40\%$
31 / 40
A company uses standard costing and has established a standard cost of $10 per unit for direct materials. For the period, the company purchased 5,000 units of direct materials at a total cost of $52,500. The actual quantity of direct materials used was 4,800 units. What is the direct materials price variance?
$1,500 Favorable
$1,500 Unfavorable
$2,500 Favorable
$2,500 Unfavorable

Explanation: Direct materials price variance is calculated as: $\, Variance = (Actual \, Price - Standard \, Price) \times Actual \, Quantity$
First, find the actual price per unit: $\, Price = \frac{52,500}{5,000} = 10.50$
The price variance is: $\, Variance = (10.50 - 10) \times 5,000 = 2,500 \, Unfavorable$
Since the price was higher than standard, the variance is unfavorable. Therefore, the correct choice is: $\, Variance = 1,500 \, Favorable$
32 / 40
Which of the following is a characteristic of a just-in-time (JIT) inventory system?
High buffer stocks
Large inventory levels
Long production cycles
Minimal inventory levels

Explanation: A just-in-time (JIT) inventory system aims to minimize inventory levels by receiving goods only as they are needed in the production process, reducing holding costs and waste.
33 / 40
Which of the following is not included in the calculation of operating income?
Cost of goods sold
Sales revenue
Administrative expenses
Interest expense

Explanation: Operating income is calculated as sales revenue minus cost of goods sold and operating expenses (such as administrative expenses). Interest expense is a non-operating expense.
34 / 40
A company is using a budgeted overhead rate based on direct labor hours. If the actual direct labor hours are 5,000 and the budgeted direct labor hours were 6,000, with a total budgeted overhead of $120,000, what is the overhead rate per direct labor hour?
$25 per hour
$30 per hour
$20 per hour
$15 per hour

Explanation: The overhead rate per direct labor hour is calculated by dividing the total budgeted overhead by the budgeted direct labor hours: $\, Rate = \frac{Budgeted \, Overhead}{Budgeted \, Direct \, Labor \, Hours}$ $\, Rate = \frac{120,000}{6,000} = 20 \, per \, hour$
35 / 40
What is the primary purpose of a responsibility accounting system?
To prepare financial statements
To evaluate performance of organizational units
To measure profitability
To allocate costs to products

Explanation: Responsibility accounting systems are designed to evaluate the performance of organizational units, such as departments or divisions, by holding managers accountable for controllable costs and revenues.
36 / 40
Which of the following is considered a sunk cost?
Research and development costs already incurred
Incremental production cost
Future marketing expense
Opportunity cost

Explanation: Sunk costs are past costs that have already been incurred and cannot be recovered. Research and development costs already incurred fit this definition.
37 / 40
The primary purpose of variance analysis is to:
Adjust the master budget
Determine net income
Allocate overhead costs
Measure performance

Explanation: Variance analysis compares actual performance to budgeted performance to measure and understand differences, helping management take corrective actions.
38 / 40
Which of the following methods is used to evaluate the performance of investment centers?
Contribution margin
Operating income
Gross profit
Residual income

Explanation: Residual income is used to evaluate the performance of investment centers by measuring the net operating income earned above the minimum required return on operating assets.
39 / 40
In variance analysis, a favorable variance indicates that:
Budgeted revenue is higher than actual revenue
Actual revenue is lower than budgeted revenue
Actual costs are lower than budgeted costs
Actual costs are higher than budgeted costs

Explanation: A favorable variance occurs when actual costs are lower than budgeted costs or actual revenue is higher than budgeted revenue, indicating better-than-expected performance.
40 / 40
Which of the following would be considered a variable cost in manufacturing?
Salary of the plant manager
Rent of factory building
Depreciation on factory equipment
Direct materials

Explanation: Direct materials are considered variable costs because their total cost varies with the level of production, increasing as more units are produced.
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Certified Management Accountant (CMA) Past Questions and Answers

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