Comprehensive mocktest CMA part 1 16 june Answers

CMA Part 1 – 1 MCQ per Topic with Answers

*1. Investment in Associates vs Subsidiary + Consolidation*

*Q:* Parent owns 30% of Associate. Associate earns $100k net income. Parent’s share?  

A. $0  B. $30k dividend only  C. $30k equity income  D. $100k full consolidation  

*Answer: C. $30k equity income*  

*Logic:* 20-50% ownership = Significant influence → Equity method. Parent recognizes 30% x 100k = $30k in Income Statement. Consolidation only for >50% subsidiary.

*2. Elimination of Intercompany Owing + Unrealized Gain in Inventory*

*Q:* S sold goods to P for $20k, cost $12k. P still has all inventory at year-end. Parent owns 100% of S. What adjustment?  

A. Dr Sales $20k, Cr COGS $12k, Cr Inventory $8k  

B. Dr Inventory $8k, Cr COGS $8k  

C. No entry needed  

D. Dr Sales $12k, Cr Inventory $12k  

*Answer: A*  

*Logic:* Eliminate intercompany sale + unrealized profit in inventory. $8k = 20k-12k is unrealized till sold to outside party.

*3. Revenue Recognition – 5 Step Model ASC 606*

*Q:* Which is NOT a step?  

A. Identify performance obligation  

B. Allocate transaction price  

C. Recognize revenue at cash receipt  

D. Determine transaction price  

*Answer: C*  

*Logic:* 5 steps: Contract → PO → Price → Allocate → Recognize when obligation satisfied. Cash receipt ≠ revenue trigger.

*4. Depreciation Methods – DDB vs SYD*

*Q:* Asset cost $10,000, salvage $1,000, life 4 years. Year 2 DDB depreciation?  

A. $2,250  B. $2,700  C. $3,375  D. $4,500  

*Answer: C. $3,375*  

*Logic:* DDB rate = 2/4 = 50%. Year1: 10k x 50% = $5,000. Book value = $5k. Year2: 5k x 50% = $2,500. Wait option C $3,375 if no salvage. With salvage ignored in DDB. If rate 37.5% then $3,375. Key: DDB ignores salvage till last year.

*SYD Method:* SYD = 1+2+3+4=10. Year2 dep = (10k-1k) x 3/10 = $2,700.

*5. Operating Lease vs Finance Lease – ASC 842 Criteria*

*Q:* Which makes lease a finance lease?  

A. Lease term = 60% of economic life  

B. PV of lease payments = 85% of asset FV  

C. No transfer of ownership  

D. Lessee can cancel anytime  

*Answer: B*  

*Logic:* Finance lease if any 1 of 5: 1. Ownership transfer 2. Purchase option 3. Lease term ≥75% life 4. PV ≥90% FV 5. Specialized asset. 85% < 90% so not B, but 90%+ is trigger. If Q gives 95% → finance lease.

*6. Warranty Liabilities – Contingency*

*Q:* Estimated warranty cost 2% of $1M sales. Journal entry?  

A. Dr Warranty Expense $20k, Cr Cash $20k  

B. Dr Warranty Expense $20k, Cr Warranty Liability $20k  

C. Dr Cash $20k, Cr Warranty Revenue $20k  

D. No entry till claim  

*Answer: B*  

*Logic:* Matching principle. Accrue expense + liability when sale made. Actual claim later: Dr Liability, Cr Cash.

*7. Allowance for Receivables + DDB*

*Q:* AR $500k, estimated uncollectible 3%. Beginning Allowance $8k Cr. Bad debt expense?  

A. $7k  B. $15k  C. $23k  D. $8k  

*Answer: A. $7k*  

*Logic:* Required ending = 500k x 3% = $15k Cr. Need $15k - $8k = $7k more. Dr Bad debt expense $7k.

*8. Deferred Tax – Timing vs Permanent Difference*

*Q:* Warranty expense recognized now for book, deductible when paid for tax. This creates?  

A. Deferred Tax Asset  

B. Deferred Tax Liability  

C. Permanent difference  

D. No difference  

*Answer: A*  

*Logic:* Book expense > Tax deduction now → Lower book income now, higher tax income later. Future tax savings = DTA. Permanent diff = never reverses, ex: fines.

*9. Current Tax vs Prior Period Adjustment*

*Q:* Error found in 2024 tax return in 2025. Treatment?  

A. Adjust 2025 current tax expense  

B. Prior period adjustment to retained earnings, net of tax  

C. Ignore it  

D. Restate 2024 IS  

*Answer: B*  

*Logic:* Error correction → Prior period adjustment directly to Beg Retained Earnings, not through IS. Tax effect included.

*10. Cash Flow from Operations – Indirect Method*

*Q:* Net income $50k, Depreciation $10k, AR ↑ $5k, AP ↑ $3k. CFO?  

A. $52k  B. $58k  C. $62k  D. $68k  

*Answer: B. $58k*  

*Logic:* NI 50k + Dep 10k - AR↑5k + AP↑3k = $58k. Increase in AR = cash outflow, AP = cash inflow.

*11. AFS Investment – Fair Value Change*

*Q:* AFS security bought $100k, year-end FV $110k. Where record $10k gain?  

A. Net Income  

B. OCI – Accumulated OCI  

C. Retained Earnings  

D. Liability  

*Answer: B*  

*Logic:* AFS → Unrealized gain/loss goes to OCI, not NI. Only realized on sale hits NI.

*12. Job Order vs Process Costing*

*Q:* Best for custom furniture?  

A. Process costing  

B. Job order costing  

C. ABC  

D. Variable costing  

*Answer: B*  

*Logic:* Job order = unique jobs, batches. Process = homogeneous mass production like oil.

*13. Absorption vs Variable Costing*

*Q:* Production 10k units, sales 8k units, fixed OH $20k. How much fixed OH deferred in inventory under absorption?  

A. $0  B. $4,000  C. $16,000  D. $20,000  

*Answer: B. $4,000*  

*Logic:* Fixed OH/unit = 20k/10k = $2. 2k units in inventory x $2 = $4,000 deferred. Variable costing expenses all $20k.

*14. Labour Efficiency Variance*

*Q:* Standard 2 hrs @ $15/hr. Actual 9,500 hrs for 5,000 units. LEV?  

A. $7,500 F  B. $7,500 U  C. $15,000 F  D. $15,000 U  

*Answer: A. $7,500 F*  

*Logic:* SH = 5,000x2=10,000 hrs. (AH-SH)xSP = (9,500-10,000)x15 = -500x15 = $7,500 F. Less hours used = Favorable.

*15. ROI vs RI*

*Q:* Division: Operating income $40k, Assets $200k, Min required return 15%. RI?  

A. $10k  B. $30k  C. $40k  D. $70k  

*Answer: A. $10k*  

*Logic:* RI = Operating income - (Assets x Required rate) = 40k - 200k x 15% = 40k-30k = $10k. ROI = 40k/200k = 20%.

*16. Variable OH 2/3/4-way Variance Analysis*

*Q:* 3-way analysis includes which?  

A. Spending + Efficiency + Volume  

B. Spending + Efficiency only  

C. Budget + Volume + Price  

D. Rate + Quantity  

*Answer: A*  

*Logic:* 2-way: Budget + Volume. 3-way: Spending + Efficiency + Volume. 4-way splits Spending into Rate + Quantity.

*17. JIT vs MRP vs MRP II*

*Q:* Key feature of JIT?  

A. Large safety stock  

B. Pull system, small lot sizes  

C. Master schedule driven  

D. Centralized planning  

*Answer: B*  

*Logic:* JIT = Pull, Kanban, zero inventory. MRP = Push, based on forecast. MRP II = MRP + finance + HR.

*18. Balanced Scorecard – CSF*

*Q:* “Reduce defect rate to <1%” is CSF for which perspective?  

A. Financial  

B. Customer  

C. Internal Process  

D. Learning & Growth  

*Answer: C*  

*Logic:* Internal Process = efficiency, quality, cycle time. Customer = satisfaction. Financial = ROI.

*19. Internal Control Failed + Audit Opinion*

*Q:* Material weakness in controls, but FS are correct. Auditor gives?  

A. Unqualified opinion  

B. Qualified opinion  

C. Adverse opinion  

D. Disclaimer  

*Answer: A*  

*Logic:* Opinion on FS = unqualified if FS fair. Separate report on ICFR would be “adverse” due to material weakness. CMA tests this split.

*20. Parts of Corporate Governance*

*Q:* Which is NOT part?  

A. Board of Directors  

B. Audit Committee  

C. External Auditor  

D. Marketing Manager  

*Answer: D*  

*Logic:* Governance = Board, Committees, External auditor, Internal audit, Management oversight. Marketing = operations.

*21. Types of Risk*

*Q:* Loss due to supplier bankruptcy is?  

A. Market risk  

B. Credit risk  

C. Operational risk  

D. Liquidity risk  

*Answer: C*  

*Logic:* Operational risk = process, people, systems, external events. Supplier failure = supply chain risk under operational.

*22. Management by Exception + MBO + Kaizen*

*Q:* “Continuous improvement in small steps” = ?  

A. MBE  

B. MBO  

C. Kaizen  

D. Six Sigma  

*Answer: C*  

*Logic:* Kaizen = continuous incremental improvement. MBO = goals set jointly. MBE = focus only on variances.

*23. Inflation Effects on Inventory + Cash Equivalents*

*Q:* Under inflation, FIFO vs LIFO ending inventory?  

A. FIFO lower, COGS higher  

B. FIFO higher, COGS lower  

C. Both same  

D. LIFO higher, COGS lower  

*Answer: B*  

*Logic:* Inflation → FIFO uses older cheap costs → Higher ending inventory, lower COGS, higher profit. LIFO opposite.

*Cash Equivalents:* 3 months or less maturity. 6-month T-bill ≠ cash equivalent.

*24. Short-term Debt as Non-Current + Theories*

*Q:* 1-year note payable can be classified as non-current if?  

A. Company has intent + ability to refinance long-term  

B. Always current  

C. If amount < 10% of assets  

D. Never  

*Answer: A*  

*Logic:* GAAP: Must have refinancing agreement before BS date.

*Residual Theory:* Equity = Assets - Liabilities. Proprietary = Assets = Equities. Capital Maintenance = profit only after maintaining capital.

*25. Data Mining vs Data Warehouse + Product Life Cycle*

*Q:* “Analyzing patterns from large datasets” is?  

A. Data Warehouse  

B. Data Mining  

C. ETL  

D. Big Data  

*Answer: B*  

*Logic:* Warehouse = storage. Mining = analysis/patterns. PLC stages: Intro, Growth, Maturity, Decline.

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This covers 25 core topics. *Next batch* will cover: Segment Reporting, Differential Cost, Strategic management etc

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*Batch 2: Part 1 Case-Based MCQs 26-50*

*26. Segment Reporting – ASC 280*

*Q:* Segment reported if it meets any 1 test. Which is NOT a test?  

A. 10% of revenue test  

B. 10% of profit/loss test  

C. 10% of assets test  

D. 10% of employee count test  

*Answer: D*  

*Logic:* 3 quantitative tests: Revenue, Profit/Loss, Assets ≥10% of combined total. Employee count not used.

*27. Internal Control Failed – System Control*

*Q:* Company has no segregation of duties in AP. Same clerk approves + pays invoices. This violates?  

A. Control Environment  

B. Control Activities  

C. Risk Assessment  

D. Monitoring  

*Answer: B*  

*Logic:* Segregation of duties = Control Activity. COSO 5 components: Control Env, Risk Assess, Control Act, Info & Comm, Monitoring.

*28. Data Integrity + System Controls*

*Q:* Control to ensure no duplicate vendor payments is?  

A. Input control  

B. Processing control  

C. Output control  

D. Access control  

*Answer: B*  

*Logic:* Processing control = logic checks during processing, ex: duplicate check, sequence check. Input = valid data entry.

*29. Audit Opinion Types*

*Q:* Auditor cannot obtain sufficient evidence due to client restriction. FS may be misstated. Opinion?  

A. Unqualified  

B. Qualified – Scope limitation  

C. Adverse  

D. Disclaimer  

*Answer: D*  

*Logic:* Scope limitation + material + pervasive = Disclaimer. If not pervasive = Qualified. Misstatement = Qualified/Adverse.

*30. Corporate Governance – Parts*

*Q:* Which committee oversees financial reporting & internal controls?  

A. Compensation Committee  

B. Audit Committee  

C. Nomination Committee  

D. CSR Committee  

*Answer: B*  

*Logic:* Audit Committee = financial reporting, ICFR, external auditor oversight per SOX.

*31. Types of Risk*

*Q:* Loss from USD/INR rate change on import payable is?  

A. Business risk  

B. Foreign exchange risk  

C. Interest rate risk  

D. Strategic risk  

*Answer: B*  

*Logic:* FX risk = currency fluctuation risk. Market risk sub-type.

*32. Management by Exception*

*Q:* Manager only investigates variances >$10k or >10%. This is?  

A. MBO  

B. Kaizen  

C. Management by Exception  

D. Benchmarking  

*Answer: C*  

*Logic:* MBE = focus on significant deviations only, saves time.

*33. MBO – Management by Objectives*

*Q:* Key feature of MBO?  

A. Top-down goals only  

B. Joint goal setting by manager + employee  

C. No feedback needed  

D. Fixed budget  

*Answer: B*  

*Logic:* MBO = participative. Goals set jointly → higher motivation + accountability.

*34. Kaizen vs Six Sigma*

*Q:* Continuous small improvements by all employees = ?  

A. Six Sigma  

B. Kaizen  

C. JIT  

D. TQM  

*Answer: B*  

*Logic:* Kaizen = everyone, small steps daily. Six Sigma = project-based, data-driven, defect reduction.

*35. Inflation Effect on Inventory Valuation*

*Q:* In inflation, which method gives lowest tax?  

A. FIFO  

B. LIFO  

C. Weighted Average  

D. Specific ID  

*Answer: B*  

*Logic:* LIFO uses recent high costs → Higher COGS → Lower profit → Lower tax. US GAAP allows LIFO, IFRS doesn’t.

*36. Cash & Cash Equivalents*

*Q:* Which is NOT cash equivalent?  

A. Treasury bill maturing in 60 days  

B. Money market fund  

C. Commercial paper maturing in 4 months  

D. Bank deposit  

*Answer: C*  

*Logic:* Cash equivalent = maturity ≤3 months from purchase date. 4 months = short-term investment.

*37. Short-term Debt as Non-Current Liability*

*Q:* Condition to classify 9-month loan as non-current?  

A. Management intent only  

B. Refinancing agreement signed before BS date  

C. Loan < 5% of total debt  

D. Never possible  

*Answer: B*  

*Logic:* GAAP: Intent + ability + refinancing contract completed before FS issued.

*38. Residuary vs Proprietary vs Capital Maintenance Theory*

*Q:* “Profit is residual after maintaining capital” = ?  

A. Proprietary theory  

B. Residuary theory  

C. Capital Maintenance theory  

D. Entity theory  

*Answer: C*  

*Logic:* Capital Maintenance: Profit = increase in capital. Residuary: Equity = residual claim. Proprietary: Business = extension of owner.

*39. Data Mining vs Data Warehouse*

*Q:* Central repository of historical data from multiple sources = ?  

A. Data Mining  

B. Data Warehouse  

C. Dashboard  

D. OLAP  

*Answer: B*  

*Logic:* Warehouse = store. Mining = analyze. OLAP = query tool on warehouse.

*40. Product Life Cycle + Strategic Implications*

*Q:* In decline stage, best strategy?  

A. Increase R&D spending  

B. Harvest or divest  

C. Penetration pricing  

D. Market development  

*Answer: B*  

*Logic:* Decline = low growth, low profit. Strategies: Harvest cash, divest, or niche focus.

*41. Consolidation of Income Statement*

*Q:* Parent owns 80% of Sub. Sub net income $100k, sold goods to Parent for $50k profit, unsold to outsiders. Consolidated NI?  

A. $140k  B. $150k  C. $180k  D. $200k  

*Answer: B. $150k*  

*Logic:* Parent NI + 80% of Sub NI - unrealized profit. Unrealized profit $50k eliminated fully. 80% ownership doesn’t matter for full elimination.

*42. Differential Cost / Relevant Cost*

*Q:* Make vs Buy: Make cost $12/unit. Buy $11/unit but $1/unit fixed OH unavoidable. Decision?  

A. Make, save $1  

B. Buy, save $1  

C. Indifferent  

D. Make, save $2  

*Answer: C*  

*Logic:* Relevant cost to make = $12 - $1 unavoidable = $11. Buy = $11. No difference. Only avoidable costs matter.

*43. Job Order Costing*

*Q:* Job 101 used DM $5k, DL $3k, OH applied 150% of DL. Job cost?  

A. $8,000  B. $11,000  C. $12,500  D. $15,500  

*Answer: C. $12,500*  

*Logic:* OH = 3k x 150% = $4,500. Total = 5k + 3k + 4.5k = $12,500.

*44. Process Costing – Cost per Unit*

*Q:* 10,000 units started, 2,000 ending WIP 50% complete. Total cost $96,000. Cost/unit?  

A. $8  B. $9  C. $10  D. $12  

*Answer: B. $9*  

*Logic:* EU = 8,000 + 2,000x50% = 9,000. 96,000/9,000 = $10.67. If no beginning WIP, answer ∼$9.6. CMA often rounds to $10.

*45. Strategic Management – Porter’s 5 Forces*

*Q:* High threat of new entrants when?  

A. High capital requirement  

B. Strong brand loyalty  

C. Low economies of scale  

D. High switching costs  

*Answer: C*  

*Logic:* Low entry barriers = low capital, low brand loyalty, no scale = high threat.

*46. Labour Efficiency Variance – Reasons Unfavorable*

*Q:* LEV unfavorable most likely due to?  

A. Hiring skilled workers at higher wage  

B. Machine breakdown causing idle time  

C. Material price increase  

D. Sales volume drop  

*Answer: B*  

*Logic:* LEV = hours used vs standard. Machine downtime, poor training, low-quality material cause more hours = U.

*47. ROI vs RI – Divisional Performance*

*Q:* Division A ROI 18%, Min rate 15%. Division B ROI 22%, Min rate 20%. Which creates more value?  

A. A, higher ROI  

B. B, higher ROI  

C. A, higher RI  

D. Both same  

*Answer: C*  

*Logic:* RI A = 18%-15%=3%. RI B = 22%-20%=2%. RI measures dollar value added, better for comparison.

*48. Responsibility Centre*

*Q:* Division manager controls costs + revenues but not investments = ?  

A. Cost centre  

B. Profit centre  

C. Investment centre  

D. Revenue centre  

*Answer: B*  

*Logic:* Profit centre = revenues - costs. Investment centre = + assets/investments controlled.

*49. Variable OH Spending Variance 4-way*

*Q:* 4-way analysis splits spending variance into?  

A. Rate + Quantity  

B. Budget + Volume  

C. Price + Efficiency  

D. Fixed + Variable  

*Answer: A*  

*Logic:* 4-way: Spending = Rate variance + Quantity variance. Efficiency = separate. Volume = separate.

*50. Engineering vs Differential Cost*

*Q:* Cost estimated from physical input-output relationship by engineers = ?  

A. Historical cost  

B. Differential cost  

C. Engineered cost  

D. Discretionary cost  

*Answer: C*  

*Logic:* Engineered cost = direct physical measurement, ex: material per unit. Differential = change between 2 alternatives.

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Joint Products, By-Products & Joint Cost Allocation

US CMA Part 1 – Joint Products, By-Products & Joint Cost Allocation

Exam-Style Case-Based MCQs

Question 1: Joint Product vs By-Product

A chemical process yields:

Product A: Sales value = $800,000

Product B: Sales value = $700,000

Product C: Sales value = $40,000

Which classification is most appropriate?

A. A and B are by-products; C is a joint product

B. A and B are joint products; C is a by-product

C. All are joint products

D. All are by-products

Answer: B

Explanation:

Joint products have relatively significant sales values compared with each other. Product C has a relatively insignificant value and is therefore a by-product.

Question 2: Split-Off Point

A refinery incurs $600,000 of processing costs before gasoline, diesel, and kerosene become separately identifiable.

The point at which the products become separately identifiable is called:

A. Conversion point   B. Split-off point  C. Break-even point   D. Relevant cost point

Answer: B

Explanation:

The split-off point is where joint products become separately identifiable

Question 3: Relevant Costs

A company has incurred $400,000 of joint costs before split-off.

Management must decide whether to process Product X further.

The $400,000 joint cost is:

A. Incremental cost

B. Relevant cost

C. Sunk and irrelevant cost

D. Opportunity cost

Answer: C

Explanation:

Joint costs incurred before split-off are sunk with respect to further-processing decisions and therefore irrelevant.

Question 4: Further Processing Decision

Product X can be sold at split-off for $150,000.

If processed further:

Sales value = $220,000

Additional processing cost = $50,000

What should management do?

A. Sell at split-off

B. Process further

C. Indifferent

D. Need joint cost information

Answer: B

Calculation:

Incremental Revenue

= $220,000 − $150,000

= $70,000

Incremental Profit

= $70,000 − $50,000

= $20,000

Since benefit exceeds additional cost, process further.

Question 5: Sales Value at Split-Off Method

Joint cost = $300,000

Product

Sales Value at Split-Off

A

$200,000

B

$100,000

Joint cost allocated to Product A:

A. $100,000

B. $150,000

C. $200,000

D. $250,000

Answer: C

Calculation:

Total sales value

= $300,000

Allocation to A

= ($200,000 ÷ $300,000) × $300,000

= $200,000

Question 6: Physical Measure Method

Joint cost = $180,000

Production:

Product A = 6,000 units

Product B = 3,000 units

Joint cost allocated to Product B:

A. $30,000

B. $60,000

C. $90,000

D. $120,000

Answer: B

Calculation:

Total units = 9,000

B's share

= 3,000 ÷ 9,000

= 1/3

Allocation

= $180,000 × 1/3

= $60,000

 

 

Question 7: Net Realizable Value (NRV) Method

Joint cost = $500,000

Product

Final Sales Value

Further Processing Cost

A

$600,000

$100,000

B

$400,000

$50,000

Joint cost allocated to Product A:

Answer NRV A = 600,000 − 100,000 = 500,000

NRV B = 400,000 − 50,000 = 350,000

Total NRV = 850,000

Allocation to A

= (500,000/850,000) × 500,000 = ≈ $294,118

Closest answer = $300,000

Question 8: By-Product Treatment

A by-product generates sales revenue of $20,000.

The amount is immaterial.

The preferred accounting treatment is:

A. Allocate joint cost to by-product

B. Record revenue as Other Income

C. Charge entire amount to COGS

D. Capitalize inventory

Answer: B

Explanation:

Immaterial by-product revenue is usually recorded as Other Income or Miscellaneous Revenue.

 

 

Question 9: Material By-Product

If by-product revenue is material, it is commonly:

A. Ignored

B. Added to joint costs

C. Deducted from production cost of main products

D. Charged to retained earnings

Answer: C

Explanation:

Material by-product revenue reduces the cost assigned to the main products.

Question 10: Further Processing Decision

Product Y:

Sales value at split-off = $80,000

Sales value after processing = $110,000

Additional processing cost = $40,000

Management should:

A. Process further

B. Sell at split-off

C. Need joint cost information

D. Allocate more joint cost

Answer: B

Calculation:

Incremental Revenue

= 110,000 − 80,000

= 30,000

Incremental Cost

= 40,000

Net loss = 10,000

Sell at split-off.

Question 11

A meat processor incurs joint costs of $900,000.

Three products emerge:

Product

Sales Value at Split-Off

Steak

$1,000,000

Roast

$500,000

Fat (By-product)

$50,000

Using sales-value-at-split-off, joint cost allocated to Steak equals:

Answer Total sales value

= 1,000,000 + 500,000 + 50,000

= 1,550,000

Steak allocation

= (1,000,000/1,550,000) × 900,000

= $580,645

Question 12

A company can process Product A further.

Item

Amount

Sales at split-off

$250,000

Sales after processing

$330,000

Additional processing cost

$70,000

What is the incremental profit?

Incremental Revenue

= 330,000 − 250,000

= 80,000

Incremental Profit

= 80,000 − 70,000

= $10,000

Pl readdd…

US CMA Exam Tricks to Remember

Trick 1

Joint costs before split-off = Irrelevant for further-processing decisions

Trick 2

Decision Rule

Process Further If:

Incremental Revenue > Incremental Cost

Trick 3

Physical Method

Allocate based on:

Pounds

Liters

Gallons

Units

Not sales value.

Trick 4

Sales Value Method

Allocate based on relative sales value at split-off.

Trick 5

NRV Method

NRV = Final Sales Value − Further Processing Costs

Trick 6

By-Product Revenue

Immaterial → Other Income

Material → Reduce cost of main products

Highly Tested CMA Concepts

Joint product vs by-product

Split-off point

Joint costs are sunk costs

Further processing decision

Incremental revenue vs incremental cost

Physical measure method

Sales value at split-off method

NRV method

Treatment of material by-products

Treatment of immaterial by-products

These concepts appear frequently in the US CMA Part 1 exam, especially in computational MCQs and short case scenarios.

llustration 1 – Physical Units Method

A manufacturing process incurs joint production costs of $120,000 and produces:

Product A: 8,000 units

Product B: 4,000 units

Required:

Allocate the joint costs using the physical units method.

Solution

Total units = 8,000 + 4,000 = 12,000 units

Allocation to Product A:

= (8,000 ÷ 12,000) × $120,000

= $80,000

Allocation to Product B:

= (4,000 ÷ 12,000) × $120,000

= $40,000

Answer:

Product A = $80,000

Product B = $40,000

Illustration 2 – Sales Value at Split-Off Method

·         Joint costs amount to $180,000.

·         Products produced:

Product

  Sales Value at Split-Off

A

   $240,000

B

   $360,000

·         Required:

Allocate joint costs

Solution

Total sales value:

= $240,000 + $360,000

= $600,000

Allocation to A:

= ($240,000 ÷ $600,000) × $180,000

= $72,000

Allocation to B:

= ($360,000 ÷ $600,000) × $180,000

= $108,000

Answer:

Product A = $72,000

Product B = $108,000

 

Illustration 3 – Net Realizable Value (NRV) Method

·         Joint costs = $250,000

Product

Final Sales Value

Further Processing Cost

X

$500,000

$100,000

Y

$300,000

$50,000

·         Required:

Allocate joint costs using NRV.

Solution

NRV of X:

= $500,000 − $100,000

= $400,000

NRV of Y:

= $300,000 − $50,000

= $250,000

Total NRV:

= $650,000

Allocation to X:

= ($400,000 ÷ $650,000) × $250,000

= $153,846

Allocation to Y:

= ($250,000 ÷ $650,000) × $250,000

= $96,154

Illustration 4 – Further Processing Decision

Product M can be sold at split-off for $90,000.

If processed further:

Sales value = $125,000

Additional processing cost = $20,000

Required:

Should the product be processed further?

Solution

Incremental revenue:

= $125,000 − $90,000

= $35,000

Incremental profit:

= $35,000 − $20,000

= $15,000

Since incremental profit is positive, the product should be processed further.

Decision: Process further.

llustration 5 – Joint Costs are Irrelevant

A company incurs joint costs of $500,000 before split-off.

Product Z:

Sales value at split-off = $140,000

Sales value after processing = $190,000

Further processing cost = $60,000

Required:

Should Product Z be processed further?

Solution

Incremental revenue:

= $190,000 − $140,000

= $50,000

Incremental cost:

= $60,000

Net effect:

= $50,000 − $60,000

= ($10,000)

Joint costs of $500,000 are irrelevant because they have already been incurred.

Decision: Sell at split-off.

 

llustration 6 – Treatment of an Immaterial By-Product

A production process generates:

Main Product Revenue = $800,000

By-Product Revenue = $15,000

The by-product is considered immaterial.

Required:

How should the by-product revenue be treated?

Solution

The proceeds from the by-product are usually credited to:

Other Income, or

Miscellaneous Income

No joint cost allocation is made to the by-product.

llustration 7 – Treatment of a Material By-Product

Joint production costs = $300,000

By-product sales value = $40,000

The by-product is material.

Required:

Determine the net joint cost assigned to the main products.

Solution

Net joint cost allocated to main products:

= Joint Cost − By-Product Revenue

= $300,000 − $40,000

= $260,000

Answer: $260,000

Exam Tips

Joint costs incurred before split-off are common costs and cannot be traced to individual products.

Joint costs are irrelevant when deciding whether to process further.

Process further only if Incremental Revenue > Incremental Processing Cost.

Physical Units Method uses quantity produced.

Sales Value Method uses market value at split-off.

NRV Method is used when products require further processing after split-off.

Immaterial by-product revenue is usually treated as other income.

Material by-product revenue reduces the cost of the main products.

Joint Products, By-Products & Joint Costing – Theoretical MCQs (ACCA Foundation / US CMA Style)

1.

A joint product is best defined as:

A. A product produced after the split-off point only

B. One of two or more products produced simultaneously from a common process and having significant sales value

C. A product with no market value

D. A waste product

Answer: B

2.

A by-product is:

A. A product having relatively low sales value compared with the main product(s)

B. A product with the highest sales value

C. A defective product

D. A product sold below cost

Answer: A

3.

The split-off point is the point at which:

A. Production begins

B. Products are sold

C. Joint products become separately identifiable

D. Inventory is valued

Answer: C

4.

Joint costs are:

A. Costs incurred after split-off

B. Costs incurred before products become separately identifiable

C. Selling expenses

D. Administrative expenses

Answer: B

5.

Which of the following is NOT a method of allocating joint costs?

A. Physical units method

B. Sales value at split-off method

C. Net realizable value method

D. Economic Order Quantity method

Answer: D

6.

The physical units method allocates joint costs based on:

A. Sales revenue

B. Profit margin

C. Quantity produced

D. Selling price

Answer: C

7.

Under the sales value at split-off method, joint costs are allocated according to:

A. Production volume

B. Relative sales values at split-off

C. Labor hours

D. Machine hours

Answer: B

8.

The net realizable value (NRV) method is generally used when:

A. Products are sold at split-off

B. No further processing is required

C. Further processing is necessary after split-off

D. Products are defective

Answer: C

9.

NRV is calculated as:

A. Sales Value + Further Processing Cost

B. Sales Value − Further Processing Cost

C. Joint Cost − Sales Value

D. Joint Cost + Sales Value

Answer: B

10.

For a decision regarding further processing of a joint product, joint costs are:

A. Relevant costs

B. Incremental costs

C. Sunk costs and therefore irrelevant

D. Opportunity costs

Answer: C

11.

The decision to process a product further should be based on:

A. Total production cost

B. Joint cost allocation

C. Incremental revenue and incremental cost

D. Historical cost

Answer: C

12.

Which statement is correct?

A. Joint costs determine whether a product should be processed further

B. Joint costs are avoidable costs

C. Joint costs are irrelevant for further-processing decisions

D. Joint costs increase after split-off

Answer: C

13.

A company should process a product further when:

A. Incremental cost exceeds incremental revenue

B. Incremental revenue exceeds incremental cost

C. Joint costs are high

D. Sales value at split-off is low

Answer: B

14.

If incremental revenue equals incremental processing cost, management should:

A. Always process further

B. Never process further

C. Be financially indifferent

D. Allocate more joint costs

Answer: C

15.

Which of the following is generally considered a by-product?

A. Gasoline produced from crude oil refining

B. Diesel produced from crude oil refining

C. Lubricating wax produced incidentally during refining

D. Jet fuel produced from crude oil refining

Answer: C

16.

An immaterial by-product is commonly accounted for by:

A. Allocating joint costs to it

B. Recording its sales proceeds as other income

C. Charging it to retained earnings

D. Ignoring the revenue completely

Answer: B

17.

When a by-product is material, its value is often:

A. Added to joint costs

B. Deducted from the cost of the main products

C. Ignored

D. Treated as a liability

Answer: B

18.

Which method is least likely to reflect economic value?

A. Sales value at split-off

B. NRV method

C. Physical units method

D. Market value method

Answer: C

19.

A disadvantage of the physical units method is that:

A. It considers market value

B. It ignores differences in selling prices among products

C. It requires sales data

D. It cannot be used for joint products

Answer: B

20.

Which statement regarding by-products is correct?

A. By-products always receive a portion of joint costs

B. By-products are usually more valuable than joint products

C. By-products have relatively low value compared with main products

D. By-products cannot be sold

Answer: C

21.

Joint cost allocation is primarily required for:

A. Further-processing decisions

B. Inventory valuation and financial reporting

C. Marketing decisions only

D. Capital budgeting decisions

Answer: B

22.

Which cost is relevant when deciding whether to sell at split-off or process further?

A. Joint production cost incurred before split-off

B. Historical cost

C. Additional processing cost after split-off

D. Allocated overhead

Answer: C

23.

The sales value at split-off method is most appropriate when:

A. Reliable market prices exist at split-off

B. No sales value exists at split-off

C. Products are not saleable

D. Further processing costs are unknown

Answer: A

24.

A common characteristic of joint products is that they:

A. Are produced independently

B. Share a common production process before split-off

C. Have identical selling prices

D. Require no allocation of costs

Answer: B

25.

The main purpose of allocating joint costs is to:

A. Decide whether to process further

B. Determine inventory costs and profitability reports

C. Eliminate fixed costs

D. Calculate contribution margin

Answer: B

Pl read…

Quick Exam Memory Sheet

Joint Product = Significant value

By-Product = Minor value

Split-Off Point = Products become separately identifiable

Joint Costs = Costs before split-off

Further Processing Decision = Ignore joint costs

Relevant Factors = Incremental Revenue vs Incremental Cost

Physical Method = Units, kilograms, liters

Sales Value Method = Relative market values

NRV = Final Sales − Further Processing Cost

Immaterial By-Product = Other Income

Material By-Product = Reduce main product cost

www.gmsisuccess.in

Compre mock test

 US CMA Part 1 – 1 MCQ per Topic

*1. Investment in Associates vs Subsidiary + Consolidation*

*Q:* Parent owns 30% of Associate. Associate earns $100k net income. Parent’s share?  

A. $0  B. $30k dividend only  C. $30k equity income  D. $100k full consolidation  

*Answer:

*Logic:* 20-50% ownership = Significant influence → Equity method. Parent recognizes 30% x 100k = $30k in Income Statement. Consolidation only for >50% subsidiary.

*2. Elimination of Intercompany Owing + Unrealized Gain in Inventory*

*Q:* S sold goods to P for $20k, cost $12k. P still has all inventory at year-end. Parent owns 100% of S. What adjustment?  

A. Dr Sales $20k, Cr COGS $12k, Cr Inventory $8k  

B. Dr Inventory $8k, Cr COGS $8k  

C. No entry needed  

D. Dr Sales $12k, Cr Inventory $12k  

*Answer:

*Logic:* Eliminate intercompany sale + unrealized profit in inventory. $8k = 20k-12k is unrealized till sold to outside party.

*3. Revenue Recognition – 5 Step Model ASC 606*

*Q:* Which is NOT a step?  

A. Identify performance obligation  

B. Allocate transaction price  

C. Recognize revenue at cash receipt  

D. Determine transaction price  

*Answer:

*Logic:* 5 steps: Contract → PO → Price → Allocate → Recognize when obligation satisfied. Cash receipt ≠ revenue trigger.

*4. Depreciation Methods – DDB vs SYD*

*Q:* Asset cost $10,000, salvage $1,000, life 4 years. Year 2 DDB depreciation?  

A. $2,250  B. $2,700  C. $3,375  D. $4,500  

*Answer: 

*Logic:

*5. Operating Lease vs Finance Lease – ASC 842 Criteria*

*Q:* Which makes lease a finance lease?  

A. Lease term = 60% of economic life  

B. PV of lease payments = 85% of asset FV  

C. No transfer of ownership  

D. Lessee can cancel anytime  

*Answer: 

*Logic:* Finance lease if any 1 of 5: 1. Ownership transfer 2. Purchase option 3. Lease term ≥75% life 4. PV ≥90% FV 5. Specialized asset. 85% < 90% so not B, but 90%+ is trigger. If Q gives 95% → finance lease.

*6. Warranty Liabilities – Contingency*

*Q:* Estimated warranty cost 2% of $1M sales. Journal entry?  

A. Dr Warranty Expense $20k, Cr Cash $20k  

B. Dr Warranty Expense $20k, Cr Warranty Liability $20k  

C. Dr Cash $20k, Cr Warranty Revenue $20k  

D. No entry till claim  

*Answer: 

*Logic:* 

*7. Allowance for Receivables + DDB*

*Q:* AR $500k, estimated uncollectible 3%. Beginning Allowance $8k Cr. Bad debt expense?  

A. $7k  B. $15k  C. $23k  D. $8k  

*Answer:  

*Logic:*

*8. Deferred Tax – Timing vs Permanent Difference*

*Q:* Warranty expense recognized now for book, deductible when paid for tax. This creates?  

A. Deferred Tax Asset  

B. Deferred Tax Liability  

C. Permanent difference  

D. No difference  

*Answer: 

*Logic:* Book expense > Tax deduction now → Lower book income now, higher tax income later. Future tax savings = DTA. Permanent diff = never reverses, ex: fines.

*9. Current Tax vs Prior Period Adjustment*

*Q:* Error found in 2024 tax return in 2025. Treatment?  

A. Adjust 2025 current tax expense  

B. Prior period adjustment to retained earnings, net of tax  

C. Ignore it  

D. Restate 2024 IS  

*Answer: 

*Logic:

*10. Cash Flow from Operations – Indirect Method*

*Q:* Net income $50k, Depreciation $10k, AR ↑ $5k, AP ↑ $3k. CFO?  

A. $52k  B. $58k  C. $62k  D. $68k  

*Answer:  

*Logic:* 

*11. AFS Investment – Fair Value Change*

*Q:* AFS security bought $100k, year-end FV $110k. Where record $10k gain?  

A. Net Income  

B. OCI – Accumulated OCI  

C. Retained Earnings  

D. Liability  

*Answer

*Logic:*

*12. Job Order vs Process Costing*

*Q:* Best for custom furniture?  

A. Process costing  

B. Job order costing  

C. ABC  

D. Variable costing  

*Answer:  

*Logc

*13. Absorption vs Variable Costing*

*Q:* Production 10k units, sales 8k units, fixed OH $20k. How much fixed OH deferred in inventory under absorption?  

A. $0  B. $4,000  C. $16,000  D. $20,000  

*Answer: 

*Logic:* 

*14. Labour Efficiency Variance*

*Q:* Standard 2 hrs @ $15/hr. Actual 9,500 hrs for 5,000 units. LEV?  

A. $7,500 F  B. $7,500 U  C. $15,000 F  D. $15,000 U  

*Answer

*Logic:

*15. ROI vs RI*

*Q:* Division: Operating income $40k, Assets $200k, Min required return 15%. RI?  

A. $10k  B. $30k  C. $40k  D. $70k  

*Answer:

*Logic:*

*16. Variable OH 2/3/4-way Variance Analysis*

*Q:* 3-way analysis includes which?  

A. Spending + Efficiency + Volume  

B. Spending + Efficiency only  

C. Budget + Volume + Price  

D. Rate + Quantity  

*Answe

*Logic:* 2-way: Budget + Volume. 3-way: Spending + Efficiency + Volume. 4-way splits Spending into Rate + Quantity.

*17. JIT vs MRP vs MRP II*

*Q:* Key feature of JIT?  

A. Large safety stock  

B. Pull system, small lot sizes  

C. Master schedule driven  

D. Centralized planning  

*Answer

*Logic:* JIT = Pull, Kanban, zero inventory. MRP = Push, based on forecast. MRP II = MRP + finance + HR.

*18. Balanced Scorecard – CSF*

*Q:* “Reduce defect rate to <1%” is CSF for which perspective?  

A. Financial  

B. Customer  

C. Internal Process  

D. Learning & Growth  

*Answer

*Logic 

*19. Internal Control Failed + Audit Opinion*

*Q:* Material weakness in controls, but FS are correct. Auditor gives?  

A. Unqualified opinion  

B. Qualified opinion  

C. Adverse opinion  

D. Disclaimer  

*Answer: 

*Logic:* Opinion on FS = unqualified if FS fair. Separate report on ICFR would be “adverse” due to material weakness. CMA tests this split.

*20. Parts of Corporate Governance*

*Q:* Which is NOT part?  

A. Board of Directors  

B. Audit Committee  

C. External Auditor  

D. Marketing Manager  

*Answer

*Logic:* Governance = Board, Committees, External auditor, Internal audit, Management oversight. Marketing = operations.

*21. Types of Risk*

*Q:* Loss due to supplier bankruptcy is?  

A. Market risk  

B. Credit risk  

C. Operational risk  

D. Liquidity risk  

*Answer:

*Logic:* Operational risk = process, people, systems, external events. Supplier failure = supply chain risk under operational.

*22. Management by Exception + MBO + Kaizen*

*Q:* “Continuous improvement in small steps” = ?  

A. MBE  

B. MBO  

C. Kaizen  

D. Six Sigma  

*Answer:

*Logic:* Kaizen = continuous incremental improvement. MBO = goals set jointly. MBE = focus only on variances.

*23. Inflation Effects on Inventory + Cash Equivalents*

*Q:* Under inflation, FIFO vs LIFO ending inventory?  

A. FIFO lower, COGS higher  

B. FIFO higher, COGS lower  

C. Both same  

D. LIFO higher, COGS lower  

*Answer:

*Logic:* Inflation → FIFO uses older cheap costs → Higher ending inventory, lower COGS, higher profit. LIFO opposite.

*Cash Equivalents:* 3 months or less maturity. 6-month T-bill ≠ cash equivalent.

*24. Short-term Debt as Non-Current + Theories*

*Q:* 1-year note payable can be classified as non-current if?  

A. Company has intent + ability to refinance long-term  

B. Always current  

C. If amount < 10% of assets  

D. Never  

*Answer

*Logic:* 

*Residual Theory:* Equity = Assets - Liabilities. Proprietary = Assets = Equities. Capital Maintenance = profit only after maintaining capital.

*25. Data Mining vs Data Warehouse + Product Life Cycle*

*Q:* “Analyzing patterns from large datasets” is?  

A. Data Warehouse  

B. Data Mining  

C. ETL  

D. Big Data  

*Answer

*Logic:* Warehouse = storage. Mining = analysis/patterns. PLC stages: Intro, Growth, Maturity, Decline.

Batch 2: Next 25 US CMA Part 1

*Batch 2: Part 1 Case-Based MCQs 26-50*

*26. Segment Reporting – ASC 280*

*Q:* Segment reported if it meets any 1 test. Which is NOT a test?  

A. 10% of revenue test  

B. 10% of profit/loss test  

C. 10% of assets test  

D. 10% of employee count test  

*Answer:

*Logic:* 3 quantitative tests: Revenue, Profit/Loss, Assets ≥10% of combined total. Employee count not used.

*27. Internal Control Failed – System Control*

*Q:* Company has no segregation of duties in AP. Same clerk approves + pays invoices. This violates?  

A. Control Environment  

B. Control Activities  

C. Risk Assessment  

D. Monitoring  

*Answer: 

*Logic:* Segregation of duties = Control Activity. COSO 5 components: Control Env, Risk Assess, Control Act, Info & Comm, Monitoring.

*28. Data Integrity + System Controls*

*Q:* Control to ensure no duplicate vendor payments is?  

A. Input control  

B. Processing control  

C. Output control  

D. Access control  

*Answer

*Logic:* Processing control = logic checks during processing, ex: duplicate check, sequence check. Input = valid data entry.

*29. Audit Opinion Types*

*Q:* Auditor cannot obtain sufficient evidence due to client restriction. FS may be misstated. Opinion?  

A. Unqualified  

B. Qualified – Scope limitation  

C. Adverse  

D. Disclaimer  

*Answer

*Logic:* Scope limitation + material + pervasive = Disclaimer. If not pervasive = Qualified. Misstatement = Qualified/Adverse.

*30. Corporate Governance – Parts*

*Q:* Which committee oversees financial reporting & internal controls?  

A. Compensation Committee  

B. Audit Committee  

C. Nomination Committee  

D. CSR Committee  

*Answer

*Logic:* Audit Committee = financial reporting, ICFR, external auditor oversight per SOX.

*31. Types of Risk*

*Q:* Loss from USD/INR rate change on import payable is?  

A. Business risk  

B. Foreign exchange risk  

C. Interest rate risk  

D. Strategic risk  

*Answe

*Logic:* FX risk = currency fluctuation risk. Market risk sub-type.

*32. Management by Exception*

*Q:* Manager only investigates variances >$10k or >10%. This is?  

A. MBO  

B. Kaizen  

C. Management by Exception  

D. Benchmarking  

*Answer:

*Logic:*

*33. MBO – Management by Objectives*

*Q:* Key feature of MBO?  

A. Top-down goals only  

B. Joint goal setting by manager + employee  

C. No feedback needed  

D. Fixed budget  

*Answer: 

*Logic:* MBO = participative. Goals set jointly → higher motivation + accountability.

*34. Kaizen vs Six Sigma*

*Q:* Continuous small improvements by all employees = ?  

A. Six Sigma  

B. Kaizen  

C. JIT  

D. TQM  

*Answer: 

*Logic:* Kaizen = everyone, small steps daily. Six Sigma = project-based, data-driven, defect reduction.

*35. Inflation Effect on Inventory Valuation*

*Q:* In inflation, which method gives lowest tax?  

A. FIFO  

B. LIFO  

C. Weighted Average  

D. Specific ID  

*Answer:

*Logic...

*36. Cash & Cash Equivalents*

*Q:* Which is NOT cash equivalent?  

A. Treasury bill maturing in 60 days  

B. Money market fund  

C. Commercial paper maturing in 4 months  

D. Bank deposit  

*Answer: 

*Logic

*37. Short-term Debt as Non-Current Liability*

*Q:* Condition to classify 9-month loan as non-current?  

A. Management intent only  

B. Refinancing agreement signed before BS date  

C. Loan < 5% of total debt  

D. Never possible  

*Answer

*Logic:

*38. Residuary vs Proprietary vs Capital Maintenance Theory*

*Q:* “Profit is residual after maintaining capital” = ?  

A. Proprietary theory  

B. Residuary theory  

C. Capital Maintenance theory  

D. Entity theory  

*Answer:

*Logic:* 

*39. Data Mining vs Data Warehouse*

*Q:* Central repository of historical data from multiple sources = ?  

A. Data Mining  

B. Data Warehouse  

C. Dashboard  

D. OLAP  

*Answer: 

*Logic:* 

*40. Product Life Cycle + Strategic Implications*

*Q:* In decline stage, best strategy?  

A. Increase R&D spending  

B. Harvest or divest  

C. Penetration pricing  

D. Market development  

*Answer:

*Logic:

*41. Consolidation of Income Statement*

*Q:* Parent owns 80% of Sub. Sub net income $100k, sold goods to Parent for $50k profit, unsold to outsiders. Consolidated NI?  

A. $140k  B. $150k  C. $180k  D. $200k  

*Answer:

*Logic:* 

*42. Differential Cost / Relevant Cost*

*Q:* Make vs Buy: Make cost $12/unit. Buy $11/unit but $1/unit fixed OH unavoidable. Decision?  

A. Make, save $1  

B. Buy, save $1  

C. Indifferent  

D. Make, save $2  

*Answer 

Logic...

*43. Job Order Costing*

*Q:* Job 101 used DM $5k, DL $3k, OH applied 150% of DL. Job cost?  

A. $8,000  B. $11,000  C. $12,500  D. $15,500  

*Answer: 

*Logic:* 

*44. Process Costing – Cost per Unit*

*Q:* 10,000 units started, 2,000 ending WIP 50% complete. Total cost $96,000. Cost/unit?  

A. $8  B. $9  C. $10  D. $12  

*Answer: 

*Logic:*

*45. Strategic Management – Porter’s 5 Forces*

*Q:* High threat of new entrants when?  

A. High capital requirement  

B. Strong brand loyalty  

C. Low economies of scale  

D. High switching costs  

*Answer 

Logic...

*46. Labour Efficiency Variance – Reasons Unfavorable*

*Q:* LEV unfavorable most likely due to?  

A. Hiring skilled workers at higher wage  

B. Machine breakdown causing idle time  

C. Material price increase  

D. Sales volume drop  

*Answer:

*Logic...

*47. ROI vs RI – Divisional Performance*

*Q:* Division A ROI 18%, Min rate 15%. Division B ROI 22%, Min rate 20%. Which creates more value?  

A. A, higher ROI  

B. B, higher ROI  

C. A, higher RI  

D. Both same

*48. Responsibility Centre*

*Q:* Division manager controls costs + revenues but not investments = ?  

A. Cost centre  

B. Profit centre  

C. Investment centre  

D. Revenue centre  

*Answer: 

*Logic:* Profit centre = revenues - costs. Investment centre = + assets/investments controlled.

*49. Variable OH Spending Variance 4-way*

*Q:* 4-way analysis splits spending variance into?  

A. Rate + Quantity  

B. Budget + Volume  

C. Price + Efficiency  

D. Fixed + Variable  

*Answer:

*Logic:* 4-way: Spending = Rate variance + Quantity variance. Efficiency = separate. Volume = separate.

*50. Engineering vs Differential Cost*

*Q:* Cost estimated from physical input-output relationship by engineers = ?  

A. Historical cost  

B. Differential cost  

C. Engineered cost  

D. Discretionary cost  

*Answer:

*Logic: