Our only savior is our will power. Will is the switch that controls everything in this universe. If you don't exercise your will power, you will be a weakling, easily influenced by your environment. Development of the will is the secret of magnetism. Men of success are men of great will power. When you develop will, no matter how you are pounded down by life, you rise again and say, "I am successful. I can win." Regards from Prof Mahaley Head Gmsisuccess Your Career Mentor Gmsisuccess...

Sunday, December 28, 2025

Investment:Short term &Long term,Debt &equity,HTM, TRADING, Available for sale investment, Investment in Associate SUBSIDIARY

Notes on Investments strictly aligned with the US CMA Part 1 (Financial Reporting, Planning, Performance & Analytics) syllabus.

These points are framed the way MCQs and tricky scenarios are tested in the CMA exam.

1. Short-Term Investments (Current Investments)

Meaning

Investments intended to be held for ≤ 1 year or within the operating cycle (whichever is longer).
Also called Marketable Securities.

Examples

Accounting Treatment (US GAAP)

Reported as Current Assets
Measured at Fair Value
Unrealized gains/losses → Income Statement (if trading) or OCI (if AFS)

CMA Exam Traps

Classification depends on management intent, not maturity alone.
Fair value changes affect ratios (current ratio, ROA).

2. Long-Term Investments (Non-Current Investments)

Meaning

Investments intended to be held for more than one year.
Used for strategic, control, or income purposes.

Examples

Accounting Treatment

Reported as Non-current Assets
Measurement depends on type of investment.

3. Investment in Debt Securities

Types under US GAAP

Debt investments are classified into three categories:

(A) Held to Maturity (HTM)

Intent + Ability to hold till maturity
Examples: Bonds, debentures

Accounting

Recorded at Amortized Cost
Interest income → Income Statement
No fair value adjustment

CMA Focus

If sold before maturity → taints HTM classification
Only impairment losses recognized

(B) Trading Debt Securities

Bought for short-term profit
Actively traded

Accounting

Fair Value
Unrealized gains/losses → Income Statement

Exam Trick

Increases earnings volatility
Always classified as current assets

(C) Available for Sale (AFS) Debt Securities

Not trading, not HTM

Accounting

Fair Value
Unrealized gains/losses → OCI
Realized gains/losses → Income Statement on sale

4. Investment in Equity Shares

(A) Less than 20% Ownership → Fair Value Method

No significant influence

Accounting

Fair Value
Unrealized gains/losses → Net Income
Dividends → Income

(B) 20%–50% Ownership → Equity Method

Significant influence presumed

Accounting

Initially at cost
Investor recognizes share of investee’s profit
Dividends reduce investment balance

CMA Exam Point

Profit recognized even if dividends not received

(C) More than 50% Ownership → Consolidation

Parent-subsidiary relationship

5. Trading Investments

Key Features

Bought with intent to sell in short term
Can be equity or debt

Accounting

Fair Value
Unrealized gains/losses → Income Statement

CMA Exam Emphasis

Affects net income immediately
Increases earnings volatility
Always current asset

6. Held-to-Maturity Investments (HTM)

Key Points

Applies only to debt securities
Requires positive intent and ability
Not allowed for equity shares

Accounting Summary

Item	Treatment
Measurement	Amortized Cost
Interest	Income Statement
Fair Value Changes	Ignored
Impairment	Recognized

7. Investment in Subsidiary Companies

Definition

Ownership > 50%
Parent controls financial & operating policies

Accounting

Consolidated Financial Statements
Intercompany balances eliminated
Minority interest shown as Non-controlling Interest

CMA Exam Traps

Parent does not record dividend income from subsidiary
Instead, consolidates 100% revenue & expenses

8. Investment in Associate Companies

Ownership

20%–50%
Significant influence

Accounting

Equity Method
Share of profit → Income Statement
Dividends → Reduce investment account

9. Impairment of Investments

Debt Securities

Credit loss recognized in Net Income

Equity Securities

Decline in value → Recognized immediately in Net Income

10. Key CMA Exam Comparisons (Very Important)

Investment Type	Measurement	Unrealized G/L
Trading	Fair Value	Income Statement
AFS Debt	Fair Value	OCI
HTM	Amortized Cost	Not recognized
Equity (<20%)	Fair Value	Income Statement
Equity (20–50%)	Equity Method	Share of Profit
Subsidiary	Consolidation	Full consolidation

11. High-Probability CMA MCQ Areas

✔ Classification vs intention
✔ Impact on Net Income vs OCI
✔ Effect on ratios & EPS
✔ Difference between equity method & fair value
✔ Debt vs equity accounting differences

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Below are US CMA Part 1–level NUMERICAL questions with full working and exam logic on the exact areas you asked for.
These are framed to match actual CMA exam difficulty & traps.

1️⃣ Fair Value Measurement – Trading & AFS Securities

Question 1 (Trading Security – Unrealized Gain)

ABC Co. purchased equity shares for $100,000.
Fair value at year-end = $112,000.
Classified as Trading Security.

Required:
a) Carrying value at year-end
b) Impact on Income Statement

Solution

Carrying value = $112,000
Unrealized gain = $12,000
Recognized in Income Statement

📌 CMA Trap: Trading → Always P&L

Question 2 (AFS Debt Security – OCI Treatment)

Bond purchased at $200,000
Fair value at year-end = $185,000
Classification: Available for Sale

Answer

Carrying value = $185,000
Unrealized loss = $15,000
Recognized in OCI (Equity)

📌 CMA Focus: Does not affect Net Income

2️⃣ Amortized Cost – Held to Maturity (HTM)

Question 3 (Bond at Premium – Effective Interest Method)

Bond face value = $100,000
Coupon rate = 10%
Market rate = 8%
Price paid = $108,530
Interest annually.

Required:
Interest income for Year 1

Solution

Interest income = 108,530 × 8% = $8,682
Coupon received = 100,000 × 10% = $10,000
Premium amortized = $1,318

📌 CMA Trick: Use market rate, not coupon rate

3️⃣ Equity Method – Investment in Associate (20–50%)

Question 4

Parent purchased 30% of Associate for $300,000
Associate profit for year = $120,000
Dividends declared = $40,000

Solution

Step 1: Share of profit

120,000 × 30% = $36,000 (Income)

Step 2: Dividends received

40,000 × 30% = $12,000 (Reduce investment)

Closing Investment Value = 300,000 + 36,000 − 12,000
= $324,000

📌 CMA Trap: Dividends ≠ Income under equity method

4️⃣ Consolidated Financial Statements – Line by Line

Question 5

Parent acquired 80% of Subsidiary.
At acquisition:

Item	Parent	Subsidiary
Assets	800,000	400,000
Liabilities	300,000	150,000

Solution

Step 1: Net Assets of Subsidiary = 400,000 − 150,000 = 250,000

Step 2: Group Share (80%) = 200,000

Step 3: Non-Controlling Interest (20%) = 50,000

Consolidated Assets = 800,000 + 400,000 = 1,200,000

Consolidated Liabilities = 300,000 + 150,000 = 450,000

📌 CMA Focus: 100% line-by-line consolidation

5️⃣ Elimination of Intercompany Owing

Question 6

Parent sold goods to Subsidiary for $50,000.
Balance outstanding at year-end.

Solution (Elimination Entry)

Dr Intercompany Payable 50,000
Cr Intercompany Receivable 50,000

📌 CMA Exam Rule:
Intercompany balances must be eliminated fully

6️⃣ Goodwill on Acquisition

Question 7

Parent purchased 75% of Subsidiary for $360,000
Fair value of net identifiable assets = $420,000

Solution

Step 1: Implied Total Value = 360,000 ÷ 75% = 480,000

Step 2: Goodwill = 480,000 − 420,000
= $60,000

📌 CMA Favorite: Partial vs full goodwill logic

7️⃣ Impairment of Investment

Question 8 (Equity Investment Impairment)

Investment cost = $150,000
Fair value dropped to $120,000 (permanent)

Solution

Impairment loss = $30,000
Recognized in Income Statement
New carrying value = $120,000

📌 CMA Rule: Equity impairment → P&L immediately

Question 9 (HTM Debt – Credit Loss)

HTM bond carrying amount = $200,000
Expected credit loss = $18,000

Solution

Loss recognized = $18,000
Carrying value = $182,000
Recognized in Net Income

🔑 Ultra-Important CMA Exam Reminders

✔ Trading → P&L
✔ AFS → OCI
✔ HTM → Amortized cost
✔ Equity method → Share of profit, not dividends
✔ Subsidiary → 100% consolidation
✔ Goodwill → Not amortized, tested for impairment
✔ Intercompany → Always eliminated

🔥 Feel free to discuss with me if you have any questions ‼️

🎯

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How to gain command over topic Variance Analysis or Standard Costing?

To gain strong command over Variance Analysis & Standard Costing (US CMA Part 1 & ACCA. foundation. Management Accounting), you must follow a fixed thinking sequence. Examiner does NOT test calculations alone — it tests logic, linkage, cause–effect, and responsibility.

Below is a step-by-step mastery framework + must-remember bullet points exactly aligned with CMA exam thinking.

STEP 1️⃣ Fix the BIG PICTURE (Most Important)

Always remember this flow:

Standard Cost → Actual Cost → Variance → Cause → Responsibility → Control

If you miss cause or responsibility, you lose CMA marks even if calculation is right.

STEP 2️⃣ Memorize the VARIANCE TREE (Visual Logic)

A. Material Variances

Material Cost Variance
├── Price Variance
└── Quantity (Efficiency) Variance
     ├── Mix Variance
     └── Yield Variance

B. Labor Variances

Labor Cost Variance
├── Rate Variance
└── Efficiency Variance

C. Overhead Variances

Variable OH
├── Spending Variance
└── Efficiency Variance

Fixed OH
├── Spending (Budget) Variance
└── Volume Variance

STEP 3️⃣ Standard CMA FORMULAS (Don’t Overthink)

Material

Price Variance = AQ × (AP − SP)
Quantity Variance = SP × (AQ − SQ)

Labor

Rate Variance = AH × (AR − SR)
Efficiency Variance = SR × (AH − SH)

Variable Overhead

Spending = AH × (AR − SR)
Efficiency = SR × (AH − SH)

Fixed Overhead

Spending = Actual FOH − Budgeted FOH
Volume = Budgeted FOH − Applied FOH

🔑 Exam Tip: CMA often gives partial data → derive missing figures.

STEP 4️⃣ RESPONSIBILITY MATRIX (CMA Favorite)

Variance	Responsible
Material Price	Purchasing
Material Quantity	Production
Labor Rate	HR / Labor market
Labor Efficiency	Production
Variable OH Spending	Department manager
Fixed OH Volume	Capacity utilization

⚠️ Exam trap: Uncontrollable ≠ Not reported

STEP 5️⃣ UNDERSTAND FAVOURABLE vs UNFAVOURABLE LOGIC

Cost Variance

Actual < Standard → Favorable
Actual > Standard → Unfavorable

But…

Favorable ≠ Good (quality may suffer)
Unfavorable ≠ Bad (volume increase)

🔑 CMA tests interpretation, not emotion.

STEP 6️⃣ MASTER MIX & YIELD (High-Scoring Area)

When used?

Multiple materials
Standard mix exists

Logic

Mix variance → Input proportions
Yield variance → Output efficiency

🔑 Yield variance uses total input & output relationship

STEP 7️⃣ FLEXIBLE BUDGET THINKING (Critical)

Always ask:

Is variance due to price or efficiency?
Should cost change with activity?

Variable cost → Flexible budget

Fixed cost → Static budget

STEP 8️⃣ LINK VARIANCES TO EACH OTHER (CMA Logic)

Labor efficiency ↓ → Variable OH efficiency ↓
Poor material quality → Labor efficiency variance
High sales volume → Fixed OH volume variance (Favorable)

Examiner loves cause–effect chains.

STEP 9️⃣ PRACTICE “THINK FIRST – CALCULATE LATER”

Before calculation, ask:

What variance?
What changed? (Rate, quantity, time, volume?)
Who controls it?
Is it controllable?
Short-run or long-run issue?

STEP 🔟 LAST-DAY REVISION CHECKLIST

✔️ Variance tree
✔️ Responsibility mapping
✔️ Favorable vs unfavorable logic
✔️ Flexible vs static budget
✔️ Mix vs yield clarity
✔️ Cause–effect linkages

FINAL CMA EXAM STRATEGY

Eliminate irrelevant numbers
Focus on standard allowed vs actual used
Watch capacity level in fixed OH
Never assume favorable = good

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1️⃣ SALES VARIANCES (VERY HIGH EXAM WEIGHT)

A. Sales Value Variance

Sales Value Variance
= Actual Sales – Budgeted Sales

B. Sales Price Variance

= AQ × (AP – SP)

➡️ Controlled by Marketing / Market conditions

C. Sales Volume Variance

= SP × (AQ – SQ)

SALES MIX & SALES YIELD (Multi-product)

Sales Mix Variance

Caused by change in sales proportions

= (Actual Mix – Standard Mix) × Standard Contribution / Price

Sales Yield Variance

Caused by total quantity change

= (Actual Total Qty – Standard Total Qty) × Weighted Avg Contribution

🔑 CMA logic

Mix → WHAT was sold
Yield → HOW MUCH was sold

2️⃣ MIX VARIANCE vs YIELD VARIANCE (INPUT SIDE)

MATERIAL MIX VARIANCE

Wrong proportions of materials

MATERIAL YIELD VARIANCE

Difference between actual output vs expected output

🔑 Key CMA Link

Poor material mix → Poor yield → Labor efficiency variance

3️⃣ COST VARIANCES: ABSORPTION vs VARIABLE COSTING ⭐⭐⭐

A. Under VARIABLE COSTING

Only variable production costs are inventoried

Variances calculated for:

Direct material
Direct labor
Variable overhead

✔️ NO fixed overhead volume variance

B. Under ABSORPTION COSTING

Fixed Overhead Variances exist:

Spending (Budget) variance
Volume variance

Income difference caused by:

Change in inventory × Fixed OH rate

🔑 CMA Exam Rule

Inventory ↑ → Absorption profit ↑
Inventory ↓ → Variable profit ↑

4️⃣ TWO-WAY VARIANCE ANALYSIS

Used when:

Single cause focus
Simpler control

Example: Direct Material

Material Cost Variance
= Price Variance + Quantity Variance

✔️ Common in intro questions

5️⃣ THREE-WAY VARIANCE ANALYSIS (CMA FAVORITE)

A. Variable Cost (DM / DL / VOH)

Total Variance
= Rate (Spending) Variance
+ Efficiency Variance

B. Sales Variance (Contribution Approach)

Sales Value Variance
= Sales Price Variance
+ Sales Volume Variance

🔑 CMA prefers contribution-based sales variance

6️⃣ FOUR-WAY VARIANCE ANALYSIS ⭐⭐⭐⭐

A. Variable Cost – 4 Way

Total Variance =
Rate Variance
+ Mix Variance
+ Yield Variance
+ Efficiency Variance

B. Sales – 4 Way (Advanced CMA)

Sales Value Variance =
Sales Price Variance
+ Sales Mix Variance
+ Sales Quantity Variance
+ Sales Yield Variance

🔑 Used in multi-product + limiting factor questions

7️⃣ ABSORPTION COSTING – FULL VARIANCE STRUCTURE

Total Absorption Cost Variance
├── Variable Cost Variance
│   ├── Rate
│   └── Efficiency
└── Fixed OH Variance
    ├── Spending
    └── Volume

8️⃣ EXAM TRAPS YOU MUST AVOID 🚫

❌ Mixing contribution & absorption sales variance
❌ Ignoring mix when multiple products exist
❌ Assuming favorable = good
❌ Missing fixed OH volume variance in absorption costing
❌ Using budgeted instead of standard data

9️⃣ LAST-DAY REVISION BULLETS (MEMORIZE)

✔️ Mix → Proportion
✔️ Yield → Quantity
✔️ Absorption → Inventory effect
✔️ Variable → Sales driven profit
✔️ 2-way = Cost focus
✔️ 3-way = Rate + Efficiency
✔️ 4-way = Deep CMA analysis

🔟 CMA EXAM STRATEGY

Identify single vs multi-product
Identify absorption or variable
Identify input side or output side
Choose 2 / 3 / 4-way analysis
THEN calculate

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CAUSES & REMEDIES FOR UNFAVORABLE, FAVOURABLE VARIANCES....

This is a classic US CMA Part 1 theory-plus-logic area.
CMA MCQs often ask “Which of the following is MOST likely cause?” or
“What corrective action should management take?”

Below is a complete cause → effect → remedy matrix, written exactly in CMA exam language.

1️⃣ MATERIAL VARIANCES

A. UNFAVOURABLE Material PRICE Variance (MPV)

(Actual price > Standard price)

Causes

Purchase in small quantities (loss of bulk discount)
Supplier price increase
Poor vendor negotiation
Rush / emergency purchase
Higher freight or handling cost
Change in supplier

Remedies (Management Accountant)

Long-term supplier contracts
Better vendor evaluation
Centralized purchasing
Economic order quantity (EOQ)
Standard price revision (if permanent)

B. FAVOURABLE Material PRICE Variance

Causes

Bulk purchase discounts
Lower-quality material purchased
Favorable market conditions
Strong negotiation

⚠️ CMA trap: Favorable MPV may cause unfavorable efficiency variance

Remedies

Quality inspection controls
Link purchasing with production feedback
Life-cycle costing review

C. UNFAVOURABLE Material EFFICIENCY (Quantity) Variance (MQV)

(Actual quantity > Standard quantity)

Causes

Inferior quality material
Excess scrap or spoilage
Poor supervision
Inaccurate standards
Machine inefficiency
Untrained labor

Remedies

Improve material quality
Strengthen production controls
Revise standards
Employee training
Better maintenance

D. FAVOURABLE Material EFFICIENCY Variance

Causes

Higher quality material
Skilled labor
Better production methods
Improved technology

⚠️ May increase material price variance

Remedies

Cost–benefit analysis
Continuous improvement benchmarking

2️⃣ LABOUR VARIANCES

A. UNFAVOURABLE Labour RATE Variance (LRV)

(Actual rate > Standard rate)

Causes

Overtime premium
Use of skilled labor instead of standard
Wage rate increase
Labor union pressure
Poor labor scheduling

Remedies

Better workforce planning
Control overtime
Use standard skill mix
Wage renegotiation (long run)

B. FAVOURABLE Labour RATE Variance

Causes

Use of lower-skilled workers
Lower wage rates
Reduced overtime

⚠️ May cause unfavourable efficiency variance

Remedies

Balance skill level vs productivity
Monitor quality output

C. UNFAVOURABLE Labour EFFICIENCY Variance (LEV)

(Actual hours > Standard hours)

Causes

Poor training
Low morale
Inferior material
Machine breakdown
Poor supervision

Remedies

Training programs
Motivation & incentives
Maintenance planning
Quality input control

D. FAVOURABLE Labour EFFICIENCY Variance

Causes

Skilled workforce
Automation
Good supervision
Better work methods

Remedies

Standard revision
Best-practice sharing

3️⃣ VARIABLE OVERHEAD VARIANCES

A. UNFAVOURABLE Variable OH SPENDING Variance

Causes

Higher indirect material cost
Higher utility rates
Inflation
Inefficient purchasing

Remedies

Cost control systems
Budget revision
Energy efficiency initiatives

B. FAVOURABLE Variable OH SPENDING Variance

Causes

Cost-saving measures
Lower indirect material prices
Efficient resource usage

⚠️ Check for quality compromise

Remedies

Sustainability analysis
Standard reset if permanent

C. UNFAVOURABLE Variable OH EFFICIENCY Variance

Causes

Poor labor efficiency
Idle time
Machine downtime
Poor scheduling

🔑 Linked to labor efficiency variance

Remedies

Improve production scheduling
Preventive maintenance
Workflow redesign

D. FAVOURABLE Variable OH EFFICIENCY Variance

Causes

Improved labor productivity
Automation
Better capacity utilization

Remedies

Process standardization
Capacity planning

4️⃣ FIXED OVERHEAD VARIANCES

A. UNFAVOURABLE Fixed OH SPENDING Variance

Causes

Higher fixed costs (rent, salaries)
Poor budget estimation
Unexpected repairs
Inflation

Remedies

Budgetary control
Long-term cost contracts
Review fixed cost structure

B. FAVOURABLE Fixed OH SPENDING Variance

Causes

Cost-cutting
Deferred maintenance
Lower fixed expenses

⚠️ Deferred costs may hurt future periods

Remedies

Life-cycle costing
Prevent cost deferral distortion

C. UNFAVOURABLE Fixed OH VOLUME Variance

Causes

Low production volume
Underutilized capacity
Reduced demand

🔑 Capacity issue, not cost control

Remedies

Increase demand
Capacity rationalization
Outsourcing excess capacity

D. FAVOURABLE Fixed OH VOLUME Variance

Causes

High production volume
Better capacity utilization

⚠️ May increase inventory (absorption costing)

Remedies

Inventory management review
Avoid overproduction

5️⃣ SALES VARIANCES

A. UNFAVOURABLE Sales PRICE Variance

Causes

Price discounts
Intense competition
Poor pricing strategy

Remedies

Market analysis
Value-based pricing
Cost leadership review

B. FAVOURABLE Sales PRICE Variance

Causes

Strong brand
Market demand
Effective sales strategy

Remedies

Demand sustainability analysis

C. UNFAVOURABLE Sales VOLUME Variance

Causes

Lower demand
Poor marketing
Supply constraints

Remedies

Improve marketing mix
Expand distribution
Product redesign

D. FAVOURABLE Sales VOLUME Variance

Causes

Strong demand
Successful promotions
Market expansion

⚠️ Check capacity & margin impact

Remedies

Capacity expansion planning
Margin protection strategies

🔑 CMA EXAM GOLDEN RULES

✔️ Favorable ≠ Good
✔️ Unfavorable ≠ Bad
✔️ Variances are signals, not judgments
✔️ Always link cause → responsibility → corrective action

🎯 LAST-DAY MEMORY HACK

Price/Rate → Purchasing / HR
Efficiency → Production
Spending → Department manager
Volume → Capacity utilization
Sales → Marketing

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CASE-BASED QUESTIONS (mini caselets) on standard costing, variances, absorption vs variable costing, and sales variances.
Each case tests cause–effect–responsibility–decision, exactly like the real exam.

📌 CASE 1: Material Price & Efficiency (Linked Variances)

Case:
ABC Ltd. experienced a favourable material price variance after switching to a new supplier. However, production reported an unfavourable material efficiency variance in the same month.

Question:
Which is the MOST likely explanation?

Options:
A. Purchasing negotiated better prices without affecting quality
B. Production inefficiency due to poor supervision
C. Lower-quality material increased usage
D. Standard quantity was set too high

✅ Answer: C

CMA Logic:
Favourable price often comes from lower-quality inputs, which increase usage → unfavourable efficiency. CMA loves this linkage.

📌 CASE 2: Labour Rate vs Labour Efficiency

Case:
XYZ Manufacturing used lower-paid temporary workers to reduce costs. The company reported a favourable labour rate variance but an unfavourable labour efficiency variance.

Question:
What is the best interpretation?

A. Labour standards were inaccurate
B. Temporary workers lacked skills
C. Overtime premium increased
D. Production volume increased

✅ Answer: B

CMA Logic:
Lower wages → favourable rate
Lower skill → unfavourable efficiency
Favourable ≠ good (key exam theme).

📌 CASE 3: Variable Overhead Efficiency Variance

Case:
During a period of machine breakdowns, a company reported an unfavourable variable overhead efficiency variance.

Question:
Which variance is MOST likely also unfavourable?

A. Fixed overhead spending variance
B. Sales price variance
C. Labour efficiency variance
D. Fixed overhead volume variance

✅ Answer: C

CMA Logic:
Variable OH efficiency is driven by labour hours → linked directly to labour efficiency variance.

📌 CASE 4: Fixed Overhead Volume Variance

Case:
A firm operated at 70% of practical capacity due to weak demand. Fixed costs were exactly as budgeted.

Question:
Which variance will occur?

A. Favourable spending variance
B. Unfavourable spending variance
C. Favourable volume variance
D. Unfavourable volume variance

✅ Answer: D

CMA Logic:
Low capacity utilization → unfavourable FOH volume variance
This is a capacity issue, not cost control.

📌 CASE 5: Absorption vs Variable Costing (Profit Difference)

Case:
Inventory increased during the year. Fixed manufacturing overhead was ₹10 per unit.

Question:
Compared to variable costing, absorption costing profit will be:

A. Lower by ₹10 per unit
B. Higher by ₹10 per unit
C. Equal
D. Lower due to higher fixed costs

✅ Answer: B

CMA Logic:
Inventory ↑ → fixed OH deferred in inventory → absorption profit higher.

📌 CASE 6: Sales Mix Variance

Case:
A company sells Products A and B. Product A has a higher contribution margin. Actual sales shifted toward Product B.

Question:
Impact on sales variances?

A. Favourable sales mix variance
B. Unfavourable sales mix variance
C. Favourable sales yield variance
D. No impact

✅ Answer: B

CMA Logic:
Selling more of lower-margin product → unfavourable mix.

📌 CASE 7: Sales Price vs Sales Volume

Case:
To increase market share, management reduced selling prices. Sales units increased significantly.

Question:
Which combination is MOST likely?

A. Favourable price, unfavourable volume
B. Unfavourable price, favourable volume
C. Both favourable
D. Both unfavourable

✅ Answer: B

CMA Logic:
Price cut → unfavourable price variance
Higher units → favourable volume variance

📌 CASE 8: Management Action (Remedy Question)

Case:
The firm reports recurring unfavourable material efficiency variances due to excessive scrap.

Question:
What is the BEST corrective action?

A. Renegotiate material prices
B. Increase selling price
C. Improve production supervision and training
D. Ignore variance as uncontrollable

✅ Answer: C

CMA Logic:
Efficiency issues → production control, not purchasing or pricing.

📌 CASE 9: Fixed OH Spending Variance

Case:
Actual fixed overhead exceeded budget due to unplanned equipment repairs.

Question:
Which variance occurred and who is responsible?

A. Volume variance – Production
B. Spending variance – Management
C. Efficiency variance – HR
D. Spending variance – Marketing

✅ Answer: B

CMA Logic:
Unexpected fixed cost → spending variance, responsibility = management.

📌 CASE 10: Big CMA Integrative Case (Elimination Type)

Case:
A company reports:

Favourable labour rate variance
Unfavourable labour efficiency variance
Unfavourable variable OH efficiency variance

Question:
Which is the MOST reasonable conclusion?

A. Labour standards are too strict
B. Use of unskilled labour reduced wages but productivity
C. Sales demand declined
D. Fixed overhead was overabsorbed

✅ Answer: B

CMA Logic:
Low wage → favourable rate
Low productivity → unfavourable efficiency
VOH efficiency follows labour hours.

🎯 HOW CMA EXPECTS YOU TO ANSWER CASE QUESTIONS

Identify variance type
Identify cause (price / rate / efficiency / volume)
Link related variances
Identify responsibility center
Choose most logical, not emotional answer

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ILLUSTRATION on Reverse Ratio (Back-calculation) in Variance Analysis.

These questions are very common and very tricky because CMA gives variances first and asks you to reconstruct standards or actuals.

🔁 WHAT IS “REVERSE RATIO” IN CMA?

👉 Instead of calculating variance from data,
you calculate data from variance.

CMA tests:

Logical rearrangement
Understanding of formulas
Not blind memorization

🔹 ILLUSTRATION 1: MATERIAL PRICE VARIANCE (Reverse)

Case:

A company reports a Material Price Variance of ₹4,000 Unfavourable.
Actual quantity of material purchased = 8,000 kg.
Standard price = ₹20 per kg.

Question:

What was the Actual Price per kg?

Step-by-step CMA Logic:

Formula:

Material Price Variance = AQ × (AP − SP)

Substitute:

4,000 (U) = 8,000 × (AP − 20)

Solve:

AP − 20 = 0.50
AP = ₹20.50 per kg

✅ Answer: ₹20.50 per kg

🔑 CMA tip:
Unfavourable → Actual price higher than standard.

🔹 ILLUSTRATION 2: MATERIAL EFFICIENCY VARIANCE (Reverse)

Case:

Material Efficiency Variance = ₹3,600 Favourable
Standard price = ₹30 per kg
Actual quantity used = 1,100 kg

Question:

What was the Standard Quantity allowed?

Solution:

Formula:

Material Efficiency Variance = SP × (AQ − SQ)

Since variance is Favourable, AQ < SQ

3,600 = 30 × (SQ − 1,100)

SQ − 1,100 = 120
SQ = 1,220 kg

✅ Answer: Standard Quantity = 1,220 kg

🔹 ILLUSTRATION 3: LABOUR RATE VARIANCE (Reverse)

Case:

Labour Rate Variance = ₹1,500 Unfavourable
Actual hours worked = 750 hours
Standard rate = ₹18 per hour

Question:

Find the Actual Labour Rate.

Solution:

Formula:

LRV = AH × (AR − SR)

1,500 = 750 × (AR − 18)

AR − 18 = 2
AR = ₹20 per hour

✅ Answer: ₹20 per hour

🔹 ILLUSTRATION 4: LABOUR EFFICIENCY VARIANCE (Reverse)

Case:

Labour Efficiency Variance = ₹2,400 Unfavourable
Standard rate = ₹16 per hour
Standard hours allowed = 1,500 hours

Question:

What were the Actual Hours Worked?

Solution:

Formula:

LEV = SR × (AH − SH)

2,400 = 16 × (AH − 1,500)

AH − 1,500 = 150
AH = 1,650 hours

✅ Answer: Actual hours = 1,650

🔹 ILLUSTRATION 5: VARIABLE OVERHEAD SPENDING VARIANCE (Reverse)

Case:

Variable OH Spending Variance = ₹900 Favourable
Actual hours = 300 hours
Standard VOH rate = ₹6 per hour

Question:

What was the Actual VOH Rate per hour?

Solution:

Formula:

VOH Spending Variance = AH × (AR − SR)

Favourable → Actual < Standard

900 = 300 × (6 − AR)

6 − AR = 3
AR = ₹3 per hour

✅ Answer: ₹3 per hour

🔹 ILLUSTRATION 6: FIXED OVERHEAD VOLUME VARIANCE (Reverse)

Case:

Fixed OH Volume Variance = ₹10,000 Unfavourable
Budgeted Fixed OH = ₹50,000
Standard production = 10,000 units

Question:

What was the Actual Production (units)?

Solution:

FOH rate per unit:

50,000 ÷ 10,000 = ₹5 per unit

Formula:

FOH Volume Variance = FOH Rate × (Actual − Standard units)

Unfavourable → Actual < Standard

10,000 = 5 × (10,000 − Actual)

10,000 − Actual = 2,000
Actual = 8,000 units

✅ Answer: Actual production = 8,000 units

🔑 CMA EXAM SHORTCUT FOR REVERSE QUESTIONS

1️⃣ Identify variance type
2️⃣ Write standard formula
3️⃣ Replace variance with ₹ value + F/U logic
4️⃣ Solve algebraically
5️⃣ Sanity-check direction (F or U)

🚨 COMMON CMA TRAPS

❌ Forgetting sign (F vs U)
❌ Using SH instead of AH
❌ Mixing absorption & variable concepts
❌ Using budgeted instead of standard figures

🎯 FINAL EXAM TIP

If CMA gives variance first → STOP → Write formula → Think direction → THEN calculate

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Friday, December 26, 2025

MCQ questions on Financial Reporting Compreh examinable

–style MCQ questions strictly aligned with . Questions are conceptual + tricky, similar to Part 1 exam patterns.

Section A..

1. Cash Flow After Tax

Q1. Cash flow after tax is best described as:

A. Net income + depreciation

B. Cash inflows minus cash outflows after income taxes

C. EBIT × (1 − tax rate)

D. Operating cash flow before tax

Answer:

2. Cash Flow from Operating Activities (CFO)

Q2. Under the indirect method, which item is added back to net income?

A. Gain on sale of equipment

B. Increase in accounts receivable

C. Depreciation expense

D. Decrease in accounts payable

Answer:

3. Cash Flow from Investing Activities

Q3. Which of the following is reported as an investing activity?

A. Payment of dividends

B. Issuance of bonds

C. Purchase of machinery

D. Interest paid

Answer:

4. Cash Flow from Financing Activities

Q4. Cash received from issuing common stock is classified as:

A. Operating

B. Investing

C. Financing

D. Non-cash activity

Answer:

5. Closing Cash & Cash Equivalents

Q5. Which item is considered a cash equivalent under US GAAP?

A. 6-month treasury bill

B. 120-day commercial paper

C. Equity securities

D. Restricted cash

Answer:

(≤ 3 months maturity)

6. Trading Securities

Q6. Trading securities are reported at:

A. Cost

B. Lower of cost or market

C. Fair value with unrealized gains in OCI

D. Fair value with unrealized gains in net income

Answer:

7. Held-to-Maturity (HTM) Securities

Q7. HTM debt securities are reported at:

A. Fair value

B. Amortized cost

C. Market value

D. Lower of cost or market

Answer:

8. Available-for-Sale (AFS) Securities

Q8. Unrealized gains on AFS securities are reported in:

A. Net income

B. Retained earnings

C. Other comprehensive income

D. Notes only

Answer:

9. Mortgaged Loan

Q9. A mortgaged loan means:

A. Loan without collateral

B. Loan secured by property

C. Loan payable on demand

D. Loan guaranteed by government

Answer:

10. Earnings Per Share (EPS)

Q10. Basic EPS is calculated as:

A. Net income / outstanding shares

B. Net income − preferred dividends ÷ weighted avg common shares

C. Operating income ÷ shares

D. Net income ÷ diluted shares

Answer:

11. Diluted EPS

Q11. Which instrument causes dilution?

A. Treasury stock

B. Stock options

C. Cash dividends

D. Stock dividends

Answer:

12. Operating Cycle vs Fiscal Period

Q12. Classification of current assets is based on the longer of:

A. 6 months or 1 year

B. Operating cycle or fiscal year

C. Cash cycle or accounting period

D. Budget year or operating cycle

Answer:

13. Inventory Valuation

Q13. Ending inventory is valued at:

A. Cost only

B. Market only

C. Lower of cost or market

D. Higher of cost or NRV

Answer:

14. Allowance for Uncollectible Accounts

Q14. The allowance method recognizes bad debts:

A. When cash is not received

B. When account becomes uncollectible

C. At time of sale

D. Based on estimates

Answer:

15. Credit Loss Recovery

Q15. Recovery of bad debts previously written off is recorded as:

A. Other income

B. Reduction of bad debt expense

C. Increase in allowance

D. Revenue

Answer:

16. Impairment Loss

Q16. Asset impairment loss occurs when:

A. Carrying value > fair value

B. Undiscounted cash flows < carrying value

C. Discounted cash flows < carrying value

D. Market price declines

Answer:

17. Accumulated Depreciation

Q17. Accumulated depreciation is classified as:

A. Asset

B. Liability

C. Contra-asset

D. Expense

Answer:

18. Temporary Difference

Q18. Which creates a temporary difference?

A. Fines & penalties

B. Tax-exempt interest

C. Depreciation method difference

D. Meals expense disallowed

Answer:

19. Permanent Difference

Q19. Which creates a permanent difference?

A. Warranty provision

B. Accelerated depreciation

C. Tax-exempt municipal bond interest

D. Unearned revenue

Answer:

20. Deferred Tax Expense

Q20. Deferred tax expense appears in:

A. Balance sheet

B. Statement of cash flows

C. Income statement

D. OCI

Answer:

21. Indirect Method – CFO

Q21. Increase in prepaid expenses under indirect method:

A. Added

B. Deducted

C. Ignored

D. Financing

Answer:

22. Age-wise Analysis of Trade Receivables

Q22. Aging analysis is primarily used to estimate:

A. Revenue

B. Cash flow

C. Bad debt allowance

D. Sales growth

Answer:

23. Factoring Without Recourse

Q23. Factoring without recourse means:

A. Seller retains risk

B. Buyer retains risk

C. Factor assumes credit risk

D. It is a loan

Answer:

24. Operating Lease

Q24. Operating lease payments are recorded as:

A. Asset & liability

B. Expense only

C. Financing activity

D. OCI

Answer:

25. Finance (Capital) Lease Criteria

Q25. Which indicates a finance lease?

A. Lease term < 75% of asset life

B. No bargain purchase option

C. Transfer of ownership at end

D. Cancelable lease

Answer:

26. Off-Balance Sheet Financing

Q26. Operating leases are considered:

A. On-balance sheet financing

B. Off-balance sheet financing

C. Equity financing

D. Cash financing

Answer:

27. FIFO vs LIFO

Q27. During rising prices, FIFO results in:

A. Higher COGS

B. Lower inventory

C. Higher net income

D. Lower tax

Answer:

28. FOB Destination

Q28. Under FOB destination, ownership transfers:

A. At shipment

B. At factory

C. At delivery

D. At billing

Answer:

29. Annual Cash Dividend

Q29. Cash dividend declaration creates:

A. Expense

B. Liability

C. Equity increase

D. Revenue

Answer:

30. Stock Dividend

Q30. Stock dividends result in:

A. Increase in total equity

B. Decrease in equity

C. Reclassification within equity

D. Cash outflow

Answer:

31. Internal Stakeholders

Q31. Which is an internal stakeholder?

A. Supplier

B. Customer

C. Employee

D. Government

Answer:

32. Other Comprehensive Income (OCI)

Q32. Which item is reported in OCI?

A. Net profit

B. Unrealized gain on AFS securities

C. Dividend income

D. Interest income

Answer:

33. Deferred Tax Asset (DTA)

Q33. Deferred tax assets arise when:

A. Accounting income > taxable income

B. Taxable income > accounting income

C. Permanent differences exist

D. Taxes are unpaid

Answer:

34. Deferred Tax Liability (DTL)

Q34. Accelerated tax depreciation creates:

A. DTA

B. DTL

C. OCI

D. Equity reserve

Answer:

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Section B…

NUMERICAL MCQs exactly in US CMA Part 1 exam style, focused on conceptual traps, mixed adjustments, and examiner favorites.

1. CFO – Indirect Method (Multiple Traps)

Net income (after tax) = $120,000

Additional data:

• Depreciation expense = $25,000

• Gain on sale of equipment = $8,000

• Accounts receivable ↑ $12,000

• Inventory ↓ $6,000

• Prepaid expenses ↑ $4,000

• Accounts payable ↓ $5,000

Cash flow from operations = ?

A. $122,000

B. $132,000

C. $118,000

D. $150,000

✅ Answer:

2. Cash Flow After Tax (Exam Favorite)

Operating income = $200,000

Tax rate = 30%

Depreciation = $40,000

Cash flow after tax = ?

A. $140,000

B. $154,000

C. $180,000

D. $200,000

✅ Answer:

3. Investing vs Operating Trap

Company sold land for $90,000.

Book value = $65,000.

Effect on CFO (indirect method)?

A. +$90,000

B. −$65,000

C. −$25,000

D. +$25,000

✅ Answer:

4. Depreciation vs Accumulated Depreciation

Asset cost = $300,000

Accumulated depreciation at beginning = $90,000

Depreciation for year = $30,000

Ending book value = ?

A. $210,000

B. $180,000

C. $150,000

D. $120,000

✅ Answer:

5. Deferred Tax Liability – Numerical Trap

Accounting depreciation = $40,000

Tax depreciation = $70,000

Tax rate = 25%

Deferred tax effect = ?

A. DTA $7,500

B. DTL $7,500

C. DTA $10,000

D. DTL $10,000

✅ Answer:

6. Inventory LIFO vs FIFO – Rising Prices

FIFO COGS = $380,000

LIFO COGS = $420,000

Tax rate = 30%

Difference in net income (FIFO − LIFO)?

A. $40,000

B. $28,000

C. $12,000

D. $20,000

✅ Answer:

7. EPS vs Diluted EPS (Options)

Net income = $500,000

Preferred dividends = $50,000

Weighted avg shares = 100,000

Options outstanding = 20,000 (treasury stock method adds 8,000 shares)

Diluted EPS = ?

A. $4.50

B. $4.25

C. $4.09

D. $4.00

✅ Answer:

8. Factoring Without Recourse

Receivables factored = $200,000

Cash received = $190,000

Loss on factoring = ?

A. $0

B. $10,000

C. $190,000

D. $200,000

✅ Answer:

9. Operating Cycle Trap

Inventory period = 260 days

Receivable period = 140 days

Classification period for current assets = ?

A. 365 days

B. 400 days

C. 260 days

D. Fiscal year only

✅ Answer:

10. Lease Classification Numerical

Asset life = 10 years

Lease term = 8 years

PV of lease payments = 92% of fair value

Lease classification?

A. Operating lease

B. Short-term lease

C. Finance lease

D. Sale-leaseback

✅ Answer:

11. OCI vs Net Income Trap

AFS security cost = $100,000

Fair value end = $120,000

Unrealized gain reported where?

A. Net income $20,000

B. OCI $20,000

C. Retained earnings $20,000

D. Cash flow statement

✅ Answer:

12. Allowance Method – Aging

Total receivables = $500,000

Estimated uncollectible = 4%

Existing allowance = $12,000

Bad debt expense = ?

A. $8,000

B. $20,000

C. $32,000

D. $12,000

✅ Answer:

🔑 CMA EXAM STRATEGY

• Indirect CFO = Net income ± non-cash ± WC

• Temporary difference → Deferred tax

• Gains always reversed in CFO

• AFS → OCI, Trading → Net Income

• FIFO boosts profit in inflation

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MCQ questions on Internal Control, Accounting information systems,control application

Below are exam-oriented, scenario-based MCQs with answers on Control Applications, Accounting Information System (AIS) documents in manufacturing, and Internal Control weaknesses, framed exactly at the difficulty level tested in the US CMA & CIA Part 1 exams.
(Conceptual traps + practical judgment included.)

🔹 A. CONTROL APPLICATIONS – SCENARIO BASED MCQs

Q1.

A manufacturing company allows the same clerk to create vendors, approve purchase orders, and process payments in the ERP system.

This represents a weakness in which control application?

A. Input validation control
B. Processing control
C. Segregation of duties
D. Output control

✅ Answer: C

📌 Key exam point: Vendor master + PO + payment = classic fraud risk

Q2.

A system automatically rejects sales invoices with duplicate invoice numbers.

This is an example of:

A. Authorization control
B. Completeness control
C. Validity control
D. Edit check

✅ Answer: D

Q3.

During month-end, the system generates a report of unmatched receiving reports and vendor invoices for review.

This control primarily ensures:

A. Accuracy
B. Authorization
C. Completeness
D. Reconciliation

✅ Answer: D

Q4.

Management reviews exception reports for unusually high inventory write-offs.

This is best classified as:

A. Preventive control
B. Detective control
C. Corrective control
D. Input control

✅ Answer: B

Q5.

A system does not allow posting of journal entries unless a valid account code is entered.

This is a:

A. Processing control
B. Output control
C. Input control
D. Access control

✅ Answer: C

🔹 B. AIS DOCUMENTS DURING MANUFACTURING OPERATIONS

Q6.

A production manager authorizes the release of materials from the storeroom to the factory floor.

Which document initiates this process?

A. Purchase requisition
B. Receiving report
C. Materials requisition
D. Job cost sheet

✅ Answer: C

Q7.

Which document provides the primary source for recording direct labor cost to specific jobs?

A. Payroll register
B. Labor efficiency report
C. Employee time ticket
D. Job order

✅ Answer: C

Q8.

A document summarizing direct materials, direct labor, and applied overhead for a specific job is called:

A. Production order
B. Bill of materials
C. Job cost sheet
D. Cost ledger

✅ Answer: C

Q9.

Which document is most useful for verifying quantities actually received from suppliers?

A. Vendor invoice
B. Purchase order
C. Receiving report
D. Materials requisition

✅ Answer: C

Q10.

In a process costing environment, costs are accumulated using:

A. Job cost sheets
B. Materials requisitions
C. Production cost report
D. Time tickets

✅ Answer: C

🔹 C. INTERNAL CONTROL WEAKNESSES – EXAM SCENARIOS

Q11.

Inventory records are maintained by the same employee who performs the physical inventory count.

This weakness increases the risk of:

A. Clerical error only
B. Inefficient operations
C. Asset misappropriation
D. Unauthorized purchases

✅ Answer: C

Q12.

Which situation represents the greatest internal control weakness?

A. Use of prenumbered documents
B. Independent bank reconciliation
C. Lack of segregation between custody and record-keeping
D. Periodic management review

✅ Answer: C

Q13.

A company does not perform regular system access reviews.

Which risk is most directly increased?

A. Data redundancy
B. Processing delays
C. Unauthorized transactions
D. Inaccurate financial reporting

✅ Answer: C

Q14.

Which control would best prevent creation of fictitious vendors?

A. Three-way matching
B. Prenumbered purchase orders
C. Independent approval of vendor master changes
D. Inventory cycle counts

✅ Answer: C

Q15.

Which situation most likely indicates a control deficiency?

A. Management override approved in writing
B. Automated matching of PO, invoice, and receiving report
C. Unexplained reconciling items recurring each month
D. Use of ERP-based authorization controls

✅ Answer: C

🔹 D. HIGH-TRAP INTEGRATED MCQs (CMA + CIA FAVORITES)

Q16.

Which control best ensures accuracy and completeness of production costs?

A. Physical safeguards over inventory
B. Reconciliation of job cost sheets to general ledger
C. Access controls over payroll system
D. Budget variance analysis

✅ Answer: B

Q17.

In an automated environment, which control most effectively replaces manual authorization?

A. Batch totals
B. Role-based access controls
C. Output distribution logs
D. Supervisory review

✅ Answer: B

Q18.

Which is the most effective preventive control in a manufacturing AIS?

A. Exception reports
B. Internal audit review
C. System-enforced segregation of duties
D. Trend analysis

✅ Answer: C

Q19.

Which document helps prevent over-production?

A. Job cost sheet
B. Production order
C. Time ticket
D. Receiving report

✅ Answer: B

Q20.

A company experiences frequent inventory shrinkage despite accurate accounting records.

Which control is MOST likely missing?

A. Authorization of purchase orders
B. Accurate costing methods
C. Physical access controls over inventory
D. Proper depreciation policies

✅ Answer: C

🔹 LAST-DAY EXAM MEMORY KEYS

✔ Segregation of duties = Authorization + Custody + Record-keeping
✔ Receiving report verifies quantity, not price
✔ Job cost sheet = accumulation document
✔ Exception reports = Detective controls
✔ Vendor master controls = high-risk CMA/CIA area

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Thursday, December 25, 2025

Variable overhead variances & Fixed Overhead Variance,Solve mocktest & Submit your answers

Below are exam-oriented, high-yield revision points for US CMA (Part 1) on Variable Overhead Variances, Fixed Overhead Variances, Spending & Volume Variances, Flexible Budget Variances, with causes and shortcuts. These are frequently tested and help eliminate options fast in MCQs.

🔹 VARIABLE OVERHEAD VARIANCES (VOH)

1️⃣ Variable Overhead Spending (Rate) Variance

Formula:

(Actual VOH Rate − Standard VOH Rate) × Actual Activity Base (AH / MH)

Meaning:

• Did we pay more or less per hour than expected?

Favorable when:

• Actual VOH rate < Standard rate

Causes (CMA favorite):

• Increase/decrease in indirect material prices

• Change in utility rates

• Use of cheaper or expensive supplies

• Poor supplier negotiation

• Inflation effects

📌 Key exam tip:

👉 Spending variance = price effect (NOT efficiency)

2️⃣ Variable Overhead Efficiency Variance

Formula:

(Actual Hours − Standard Hours) × Standard VOH Rate

Meaning:

• Were hours used efficiently?

Favorable when:

• Actual hours < Standard hours allowed

Causes:

• Labor efficiency or inefficiency

• Machine breakdowns

• Poor supervision

• Substandard materials

• Learning curve effect

📌 CMA linkage rule:

👉 VOH efficiency variance is caused by same factors as Labor Efficiency Variance

3️⃣ Total Variable Overhead Variance

Formula:

Spending Variance ± Efficiency Variance

🔹 FLEXIBLE BUDGET VARIANCES (VERY IMPORTANT)

Flexible Budget Concept

• Budget adjusted for actual output

• Eliminates volume difference

• CMA exam uses flexible budget heavily

Variable Cost Flexible Budget Variance

Formula:

Actual Variable Cost − Flexible Budget Variable Cost

📌 Shortcut:

Flexible budget variance = Spending + Efficiency (for variable OH)

🔹 FIXED OVERHEAD VARIANCES (FOH)

4️⃣ Fixed Overhead Spending (Budget) Variance

Formula:

Actual Fixed Overhead − Budgeted Fixed Overhead

Meaning:

• Did we spend more or less than planned?

Causes:

• Unexpected rent increase

• Higher salaries of supervisors

• Insurance premium changes

• Property tax revision

📌 Exam rule:

👉 NOT affected by production volume

5️⃣ Fixed Overhead Volume Variance ⭐ (VERY TESTED)

Formula:

Budgeted Fixed Overhead − Applied Fixed Overhead

(Standard Hours − Budgeted Hours) × FOH Rate

Meaning:

• Capacity utilization issue

• Over/Under absorption of fixed costs

Favorable when:

• Actual production > Budgeted production

Causes:

• Demand fluctuations

• Underutilization of plant capacity

• Poor production planning

• Seasonal demand

📌 Golden CMA rule:

👉 Volume variance exists ONLY because fixed cost rate is based on normal capacity

6️⃣ Fixed Overhead Applied

Formula:

Standard Hours × FOH Rate

🔹 RELATIONSHIP & SHORTCUTS (MCQ KILLERS)

✔ Variable OH Efficiency variance ↔ Labor efficiency variance

✔ Variable OH Spending variance ↔ Price/Rate changes

✔ Fixed OH Spending variance ↔ Cost control

✔ Fixed OH Volume variance ↔ Capacity utilization

📌 Important CMA Trick:

• No efficiency variance for fixed overhead

• Fixed cost per unit changes when volume changes

🔹 COMMON CMA TRAPS ⚠️

❌ Fixed overhead does NOT vary with activity

❌ Volume variance ≠ Spending variance

❌ Variable overhead efficiency variance ≠ cost control issue

✔ Flexible budget always uses actual output

🔹 ONE-LINE REMEMBER POINTS (EXAM GOLD)

• Variable OH rate variance = price effect

• Variable OH efficiency variance = usage effect

• Fixed OH spending variance = budget discipline

• Fixed OH volume variance = capacity utilization

• Favorable variance ≠ good performance always

• Under-absorption of FOH → unfavorable volume variance

🔹 WHEN CMA ASKS “MOST LIKELY CAUSE”

Variance Best Answer

VOH Efficiency Labor inefficiency

VOH Spending Utility rate increase

FOH Spending Rent / salary change

FOH Volume Lower production

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🔥 Solve MCQs , Submit your answers– Overhead Variances

MCQ 1: VOH Efficiency vs Labor Efficiency

A company applies variable overhead based on direct labor hours.

Labor efficiency variance is favorable. Variable overhead spending variance is unfavorable.

Which is most likely true?

A. Variable overhead efficiency variance is favorable

B. Variable overhead efficiency variance is unfavorable

C. Variable overhead efficiency variance is zero

D. Variable overhead efficiency variance cannot be determined

✅ Answer:

📌 Logic:

MCQ 2: Fixed Overhead Volume Trap

Budgeted production = 10,000 units

Actual production = 8,000 units

Fixed overhead spending variance = Zero

Which statement is correct?

A. Fixed overhead volume variance is favorable

B. Fixed overhead volume variance is unfavorable

C. Total fixed overhead variance is zero

D. No variance exists

✅ Answer:

📌 Logic:

MCQ 3: Flexible Budget Confusion

Actual variable overhead cost exceeds flexible budget variable overhead by ₹12,000.

Which variance is this?

A. Volume variance

B. Fixed overhead spending variance

C. Variable overhead flexible budget variance

D. Variable overhead volume variance

✅ Answer:

📌 Trap

MCQ 4: Rate vs Efficiency

Actual hours = 9,000

Standard hours allowed = 10,000

Standard VOH rate = ₹6 per hour

Variable overhead efficiency variance is:

A. ₹6,000 F

B. ₹6,000 U

C. ₹54,000 F

D. ₹54,000 U

✅ Answer:

📌

MCQ 5: Fixed Cost Misconception

Which variance reflects capacity utilization?

A. Fixed overhead spending variance

B. Variable overhead efficiency variance

C. Fixed overhead volume variance

D. Variable overhead spending variance

✅ Answer:

📌

MCQ 6: Zero Spending Variance Trick

Actual fixed overhead = Budgeted fixed overhead

Actual production ≠ Budgeted production

Which variance must exist?

A. Spending variance

B. Volume variance

C. Flexible budget variance

D. No variance

✅ Answer:

📌

MCQ 7: VOH Spending Cause

Which situation causes unfavorable variable overhead spending variance?

A. Higher labor hours

B. Poor labor efficiency

C. Increase in electricity rates

D. Lower production volume

✅ Answer:

📌

MCQ 8: FOH Rate Confusion

Fixed overhead rate is based on normal capacity. Actual output is less than normal capacity.

What happens?

A. Favorable spending variance

B. Unfavorable volume variance

C. Favorable volume variance

D. No variance

✅ Answer:

MCQ 9: Over-absorption Logic

Which condition leads to over-absorption of fixed overhead?

A. Actual hours < standard hours

B. Actual production < budgeted production

C. Actual production > budgeted production

D. Actual fixed cost > budgeted fixed cost

✅ Answer:

MCQ 10: CMA Elimination Killer

Which variance is NOT controllable by department managers in the short run?

A. Variable overhead spending variance

B. Variable overhead efficiency variance

C. Fixed overhead spending variance

D. Fixed overhead volume variance

✅ Answer:

📌 Reason:

🔑 FINAL EXAM STRATEGY (CMA GOLD)

✔ Variable OH → Rate & Efficiency

✔ Fixed OH → Spending & Volume

✔ Volume variance = capacity issue

✔ Flexible budget removes volume effect

✔ Fixed costs → no efficiency variance

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Below is a high-yield logical correlation map of ALL major variances tested in US CMA Part 1.

If you understand these cause–effect links, you can answer 70–80% variance MCQs without calculation.

🔗 LOGICAL CORRELATION BETWEEN VARIANCES (US CMA PART 1)

1️⃣ CORE PRINCIPLE (MOST IMPORTANT)

👉 One operational issue creates MULTIPLE related variances

CMA tests logic linkage, not isolated formulas.

2️⃣ EFFICIENCY CHAIN (THE GOLDEN TRIANGLE) ⭐⭐⭐

🔹 SAME ROOT CAUSE → SAME DIRECTION

Variance Correlates With

Material Efficiency Variance ↓

Labor Efficiency Variance ↓

Variable Overhead Efficiency Variance ↓

📌 Golden Rule (CMA Favorite):

If labor efficiency variance is unfavorable, variable OH efficiency variance is also unfavorable.

Common Causes:

• Poor supervision

• Machine breakdowns

• Substandard materials

• Inexperienced labor

❌ Trap:

Fixed overhead has NO efficiency variance

3️⃣ PRICE / RATE CHAIN (COST CONTROL LINK)

Variance Driven By

Material Price Variance Material purchase price

Labor Rate Variance Wage rate

Variable OH Spending Variance Utility, indirect material prices

Fixed OH Spending Variance Budgeted vs actual fixed cost

📌 Key Insight:

Spending ≠ Efficiency

4️⃣ MATERIAL MIX & YIELD → EFFICIENCY IMPACT

🔹 MATERIAL MIX VARIANCE

• Caused by change in input proportion

• Often intentional (cost saving)

🔹 MATERIAL YIELD VARIANCE

• Caused by output loss or gain

🔹 LOGICAL CORRELATION:

Scenario Impact

Cheaper material mix Favorable mix but unfavorable yield

Poor yield Unfavorable material efficiency

Bad materials Unfavorable labor efficiency + VOH efficiency

📌 Exam Gold:

Yield variance affects ALL efficiency-related variances

5️⃣ LABOR EFFICIENCY → CASCADING EFFECTS

If Labor Efficiency Variance is Unfavorable, expect:

✔ Variable OH Efficiency Variance → Unfavorable

✔ Possibly Material Efficiency Variance → Unfavorable

✔ Higher variable cost per unit

📌 CMA logic:

Labor is the driver activity base

6️⃣ VARIABLE OVERHEAD: DOUBLE LINK

VOH Variance Correlates With

Spending (Rate) Indirect cost prices

Efficiency Labor efficiency

📌 Shortcut:

VOH Efficiency ≠ Cost Control

VOH Spending ≠ Usage

7️⃣ FIXED OVERHEAD VARIANCE LOGIC (VERY TESTED)

🔹 Fixed OH Spending Variance

• Budget discipline issue

• NOT linked to volume

🔹 Fixed OH Volume Variance ⭐

• Capacity utilization issue

• Linked to production level

Production Volume Variance

> Budgeted Favorable

< Budgeted Unfavorable

📌 CMA Trap:

Volume variance exists ONLY due to fixed cost allocation

8️⃣ FLEXIBLE BUDGET VARIANCES – THE BRIDGE

Flexible Budget Variance =

Actual Cost − Flexible Budget Cost

LOGIC:

Cost Type Variance Type

Variable cost Spending + Efficiency

Fixed cost Spending only

📌 Key Rule:

Flexible budget eliminates volume effect

9️⃣ SALES VARIANCE LOGIC (REVENUE SIDE)

🔹 SALES PRICE VARIANCE

• Market conditions

• Discounts

• Competition

🔹 SALES VOLUME VARIANCE

• Demand & capacity

• Correlates with Fixed OH Volume Variance

📌 CMA Favorite Correlation:

Unfavorable sales volume variance → Unfavorable FOH volume variance

🔟 SALES QUANTITY vs MIX (MULTI-PRODUCT)

Variance Meaning

Sales Quantity Total units sold

Sales Mix Proportion of products

Sales Volume Combination of both

📌 Logic Trap:

Favorable sales mix ≠ Favorable profit

1️⃣1️⃣ BIG CORRELATION SUMMARY TABLE (EXAM CHEAT)

If This Happens… Expect This

Poor labor efficiency Unfavorable VOH efficiency

Cheap materials Favorable price, unfavorable efficiency

Low production Unfavorable FOH volume

High demand Favorable sales volume & FOH volume

Utility rate ↑ Unfavorable VOH spending

Better yield Favorable material efficiency

1️⃣2️⃣ CMA EXAM “MOST LIKELY” ANSWER LOGIC

Question Asks Best Variance

Capacity utilization FOH Volume

Cost control Spending variance

Operational efficiency Efficiency variance

Market conditions Sales price

Demand fluctuation Sales volume

🔥 ONE-LINE CMA MEMORY TRIGGERS

• Efficiency variances move together

• Spending variances are price-driven

• Volume variances are capacity-driven

• Flexible budget removes volume

• Fixed cost ≠ efficiency variance

• Revenue variances mirror production variances

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