Part 1 : 07/28/10 08:38:51

Question 1 - IMA 08-P2-20 - Introduction to Variance Analysis and Standard Costs

When compared with ideal standards, practical standards:

A. Serve as a better motivating target for manufacturing personnel.

B. Result in a less desirable basis for the development of budgets.
C. Produce lower per-unit product costs.
D. Incorporate very generous allowances for spoilage and worker inefficiencies.

A. Practical standards are excellent measures for employees to keep themselves in check. Knowing how
much to use or how much to pay gives employees realistic guidelines that can be applied to everyday
working conditions. They are reasonable, not impossible.

B. Practical standards are a more desirable basis as rarely does any company work under ideal situations. To
budget at those levels would be to set the company up for multiple budget variances and unmotivated employees.

C. A practical standard includes allowances for downtime and idle time. Therefore it would actually increase the
per-unit costs somewhat.

D. Practical standards do allow for downtime or idle time, but those allowances do not include incompetence or
irresponsible use of resources.

Question 2 - CMA 1279 4-11 - Introduction to Variance Analysis and Standard Costs

The best basis upon which cost standards should be set to measure controllable production inefficiencies is

A. Recent average historical performance.

B. Engineering standards based on attainable performance.
C. Engineering standards based on ideal performance.
D. Normal capacity.

A. Standards set on the basis of recent average historical performance don't reflect possible changes in technology
and other changes that might take place. This is not the best basis for measuring controllable production
inefficiencies.

B. The key in this question is in the words "to measure controllable production inefficiencies." Engineering
standards based on attainable performance should be used in standard setting, because attainable
performance takes into consideration a normal amount of time lost, normal amounts of waste, and a normal
learning curve. Comparing actual output to this level will bring out variances from these normal amounts of
losses. Production inefficiencies above and beyond the normal will be recognized. It is these production
inefficiencies that are controllable. The other, normal losses are not controllable. Once the controllable
inefficiencies are recognized, they can be dealt with.

C. The ideal, perfect or theoretical level of output assumes that there are no breakdowns, no waste and no time lost
to illness, and that the workers are already working at maximum efficiency. If standards are set using this capacity
they will be unattainable. This is not the best basis for measuring controllable production inefficiencies. Furthermore,
if ideal performance standards are used, overhead costs will be underapplied.

D. Normal level of capacity is an average expected level of production within the time frame of several years given
the reasonable expectations of effective and efficient production as well as customer demand. This is not the best
basis for measuring controllable production inefficiencies.

Question 3 - CIA 595 III-24 - Introduction to Variance Analysis and Standard Costs

Which of the following management practices involves concentrating on areas that deserve attention and placing
less attention on areas operating as expected?

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A. Benchmarking.
B. Responsibility accounting.
C. Management by objectives.
D. Management by exception.

A. Benchmarking is the process of a company using the standards set by other companies as a target or model for
its own operations. This is also called best practices. It is the process of continuously trying to emulate (imitate) the
best companies in the world.

B. Responsibility accounting is an accounting system that measures accounting results of each responsibility center
separately; it also measures consolidated results.

C. The primary area of concentration in MBO is goal congruence; it is behavioral, communication-oriented, and a
responsibility approach system.

D. Management by exception means that management focuses on areas where there are problems, as
identified by the fact that there is a variance from the standard. In order for a company to use management
by exception, standards must be set and there must be a system whereby variances are identified and
reported to the appropriate level of the company.

Question 4 - CIA 579 IV-2 - Introduction to Variance Analysis and Standard Costs

Which of the following factors should not be considered when deciding whether to investigate a variance?

A. Magnitude of the variance.

B. Whether the variance is favorable or unfavorable.
C. Trend of the variances over time.
D. Likelihood that an investigation will eliminate future occurrences of the variance.

A. The magnitude (amount) of the variance should be considered in determining whether or not to investigate a
variance. Management should give more attention to significant variances, measuring how material the variance is. It
is critical that benefits from variance investigation exceed its costs.

B. The behavior of the variance (negative or positive) should not influence the decision of whether to
investigate or not to investigate the variance. The variance is the measure of how much the actual results
vary from the budgeted (expected) results. All significant variances should be investigated. It is also critical
that benefits from variance investigation exceed its costs.

C. The trend of the variances over time should be considered in determining whether or not to investigate a variance.
It is important to investigate variances when there is a strong tendency of unfavorable variances to increase.

D. The investigation of any variance. especially an unfavorable one, should take place in order to eliminate future
occurrences of the variance. Part of the process should be to plan and take corrective actions. If an investigation
would not result in any changes that could eliminate future occurrences of the variance, then the benefit to be gained
from the investigation would not be worth the cost of the investigation.

Question 5 - CMA 695 3-10 - Introduction to Variance Analysis and Standard Costs

A standard costing system is most often used by a firm in conjunction with

A. Participative management programs.

B. Management by objectives.
C. Target (hurdle) rates of return.
D. Flexible budgets.

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A. Participative management lies in the area of communications and does not relate to standard costs.

B. MBO can be used in conjunction with a standard costing system, but they are not necessarily related. The primary
focus of MBO is goal congruence; it is a behavioral, communication-oriented, responsibility approach system.

C. The target (hurdle) rate of return is a capital budgeting function. It is not concerned with standard costs.

D. A standard cost is an estimate of the cost the company expects to incur in the production process.
Without a standard cost, the analysis of actual activities and results is very difficult because there is no
standard to measure the performance against. Standard costs are best used with a flexible budgeting
system in order to provide the most useful variance analysis.

Question 6 - IMA 08-P2-25 - Introduction to Variance Analysis and Standard Costs

All of the following are examples of benchmarking standards except:

A. A comparison with a similar unit within the same company.

B. The best performance of the unit in comparable past periods.
C. The best performance of a competitor with a similar operation.
D. The performance of the unit during the previous year.

A. Benchmarks should be based on best practices. In benchmarking, the best performance anywhere can be used
as a standard to be attained. Comparing similar units under similar economic conditions is acceptable as a
benchmarking standard.

B. Benchmarks should be based on best practices. In benchmarking, the best performance anywhere can be used
as a standard to be attained. The best performance of a unit in comparable past periods is a good "best practice" to
emulate.

C. Benchmarks should be based on best practices. In benchmarking, the best performance anywhere can be used
as a standard to be attained. The best performance of a competitor with a similar operation is a good "best practice"
to emulate.

D. Benchmarks should be based on best practices. In benchmarking, the best performance anywhere can be
used as a standard to be attained. The units previous year's performance may have been outstanding, or it
may have been average, or it may have been a disaster. Unless the previous year's performance was
outstanding, it cannot be used as a benchmark, so the previous years performance is not an example of a
benchmarking standard.

Question 7 - IMA 08-P2-23 - Introduction to Variance Analysis and Standard Costs

Which one of the following will allow a better use of standard costs and variance analysis to help improve
managerial decision-making?

A. Company D constantly revises standards to reflect learning curves.

B. Company A does not differentiate between variable and fixed overhead in calculating its overhead variances.
C. Company B uses the prior years average actual cost as the current years standard.
D. Company C investigates only negative variances.

A. Economic conditions and production requirements are continually changing within the company and the
world. Through continued revisions, analysis and scrutiny Company D is in the best position to create
meaningful guidelines and information from the standards and variance analysis process.

B. Without distinguishing between fixed and variable costs Company A will be unable to pinpoint areas for
improvement or favorable areas that should be capitalized upon.

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C. Prior year's average cost is a fine place to start but other factors need to be considered, such as forecasted
prices, required quantities, and alternative sources or materials.

D. Unfavorable variances certainly need to be investigated, but favorable variances can be revealing as well. A
favorable labor quantity variance can indicate that your employees don't need as long as standards allow to
complete a process. The standard may be too high. Favorable material price variances could indicate a less
expensive source of materials and the standard could be adjusted accordingly. Failure to investigate could lead to
wasteful spending, as standards provide employees with guidelines. Too much extra room and they may be less cost
conscious.

Question 8 - CMA 694 3-19 - Introduction to Variance Analysis and Standard Costs

Which one of the following is least likely to be involved in establishing standard costs for evaluation purposes?

A. Industrial engineers.
B. Quality control personnel.
C. Budgetary accountants.
D. Top management.

A. Industrial engineers are involved in establishing standard costs for evaluation purposes.

B. Quality control personnel are involved in establishing standard costs for evaluation purposes.

C. Budgetary accountants are involved in establishing standard costs for evaluation purposes.

D. Top management is primarily involved in formulating strategy plans and budgets. Establishing standard
costs for evaluation purposes is a task of management of a lower level. These standards are used to
estimate what costs should be under normal conditions of operations. Industrial engineers, budgetary
accountants, quality control personnel and employees who will be evaluated using these criteria are
involved in the process.

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