Below is a high-quality, exam-oriented set of Essay-based & Case-based questions with structured answers from major US CMA Part 1 & Part 2 topics, exactly in the style IMA expects.
📘 US CMA PART 1
Essay-Based & Case-Based Questions with Answers
(Major Exam Topics)
1️⃣ External Financial Reporting (US GAAP)
✍️ Essay Question 1
Explain the objectives of external financial reporting under US GAAP.
✅ Answer
The primary objective of external financial reporting under US GAAP is to provide useful financial information to existing and potential investors, lenders, and other creditors for decision-making.
Key objectives include:
- Relevance – Information should influence economic decisions.
- Faithful Representation – Information must be complete, neutral, and free from error.
- Comparability – Enables comparison across firms and periods.
- Consistency – Same accounting methods applied over time.
- Understandability – Clear and concise presentation.
US GAAP focuses on decision usefulness, particularly for capital allocation decisions.
📊 Case-Based Question 1
Case:
ABC Inc. changed its inventory valuation method from FIFO to LIFO to reduce taxable income during inflation.
Required:
(a) Identify the accounting principle involved
(b) Explain the impact on financial statements
✅ Answer
(a) Accounting Principle:
- Consistency principle
- Disclosure requirement
(b) Impact:
- Cost of Goods Sold (COGS): Increases
- Net Income: Decreases
- Inventory Value: Lower on balance sheet
- Tax Liability: Reduced
- Disclosure: Change must be disclosed with justification
2️⃣ Cost Concepts & Cost Behavior
✍️ Essay Question 2
Differentiate between fixed, variable, and mixed costs with examples.
✅ Answer
| Cost Type | Behavior | Example |
|---|---|---|
| Fixed Cost | Remains constant in total | Factory rent |
| Variable Cost | Changes proportionally | Direct material |
| Mixed Cost | Contains both fixed & variable | Electricity bill |
Understanding cost behavior is critical for budgeting, CVP analysis, and decision-making.
📊 Case-Based Question 2
Case:
A company pays ₹50,000 monthly rent plus ₹5 per unit produced. Production is 10,000 units.
Required:
Calculate total cost and identify cost type.
✅ Answer
- Fixed Cost = ₹50,000
- Variable Cost = 10,000 × ₹5 = ₹50,000
- Total Cost = ₹1,00,000
👉 This is a Mixed (Semi-variable) Cost
3️⃣ Cost-Volume-Profit (CVP) Analysis
✍️ Essay Question 3
Explain the importance of Contribution Margin in managerial decision-making.
✅ Answer
Contribution Margin represents the amount available to cover fixed costs and generate profit.
Formula:
Contribution Margin = Sales – Variable Costs
Importance:
- Break-even analysis
- Pricing decisions
- Product mix decisions
- Profit planning
- Make-or-buy decisions
Higher contribution margin indicates better profitability potential.
📊 Case-Based Question 3
Case:
Selling price = ₹200/unit
Variable cost = ₹120/unit
Fixed cost = ₹4,00,000
Required:
(a) Contribution per unit
(b) Break-even units
✅ Answer
(a) Contribution = 200 – 120 = ₹80/unit
(b) Break-even units = 4,00,000 ÷ 80 = 5,000 units
4️⃣ Activity-Based Costing (ABC)
✍️ Essay Question 4
Explain Activity-Based Costing and its advantages over traditional costing.
✅ Answer
Activity-Based Costing allocates overheads based on activities that drive costs, rather than volume.
Advantages:
- More accurate product costing
- Better cost control
- Identifies non-value-added activities
- Improves pricing and profitability decisions
ABC is most useful when overheads are high and diverse.
📊 Case-Based Question 4
Case:
Machine setups cost ₹3,00,000 and are driven by number of setups. Product A uses 30 setups out of total 100.
Required:
Allocate setup cost to Product A.
✅ Answer
Cost per setup = 3,00,000 ÷ 100 = ₹3,000
Product A cost = 30 × 3,000 = ₹90,000
5️⃣ Budgeting & Forecasting
✍️ Essay Question 5
Discuss Zero-Based Budgeting (ZBB).
✅ Answer
Zero-Based Budgeting requires every expense to be justified from zero, rather than using previous budgets.
Advantages:
- Eliminates wasteful spending
- Improves cost control
- Encourages efficiency
Disadvantages:
- Time-consuming
- Requires skilled managers
ZBB is effective in cost reduction and restructuring environments.
📊 Case-Based Question 5
Case:
A department requests ₹5 lakh budget. Under ZBB, management asks justification for all expenses.
Required:
Explain why this approach is beneficial.
✅ Answer
- Prevents automatic budget increases
- Identifies unnecessary activities
- Aligns spending with organizational goals
6️⃣ Performance Management & Responsibility Accounting
✍️ Essay Question 6
Explain Responsibility Accounting and types of responsibility centers.
✅ Answer
Responsibility Accounting assigns accountability to managers based on areas they control.
| Center Type | Responsible For |
|---|---|
| Cost Center | Costs |
| Revenue Center | Revenues |
| Profit Center | Revenues & Costs |
| Investment Center | Profit & Assets |
It enhances managerial control and performance evaluation.
📊 Case-Based Question 6
Case:
A division manager controls revenues, costs, and invested assets.
Required:
Identify the responsibility center and performance measure.
✅ Answer
- Center: Investment Center
- Performance Measure: ROI or Residual Income
🔑 Exam Tips (IMA Focus)
✔ Concept clarity > theory length
✔ Use formulas + short explanations
✔ Case questions test application, not memory
✔ Always link answer to decision-making
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case based & Essay based questions From US CMA exam
You need 50% on MCQs to access essays, which are untimed beyond the remaining section time (about 1 hour).
Essays assess higher-order skills like problem-solving and communication via calculations, memos, or discussions.
## Part 1 Sample Case
**Brown Printing Scenario:** A family-owned book manufacturer provides March data (e.g., sales $90/book, 15,000 produced, 10,000 sold, costs like $15 materials/book, $240,000 fixed overhead).
**Essay Tasks:**
- Define absorption vs. variable costing.
- Compute unit COGS and prepare income statements under both methods (variable: $220,000 net income; absorption: $300,000).
- List 2 advantages of variable costing (e.g., no overproduction incentive) and 2 limitations of absorption (e.g., distorts decisions).
- Explain net income difference ($80,000 due to fixed overhead in 5,000 unsold units).
- Define throughput costing (only direct materials inventoriable).
Below is your essay content converted into a complete US CMA–style CASE-BASED question, followed by a model answer exactly in the format IMA expects.
📘 US CMA Part 1 – Case-Based Question
Topic: Absorption Costing vs Variable Costing
📊 Case Scenario: Brown Printing Company
Brown Printing Company is a family-owned book manufacturer. Management is reviewing the operating results for the month of March and is concerned about the impact of inventory levels on reported income.
The following information is available:
- Selling price per book: $90
- Units produced: 15,000
- Units sold: 10,000
- Direct material cost per book: $15
- Direct labor cost per book: $25
- Variable manufacturing overhead per book: $10
- Fixed manufacturing overhead (total): $240,000
- Variable selling & administrative expenses: $8 per book sold
- Fixed selling & administrative expenses: $180,000
There was no beginning inventory.
🔹 Required
(a)
Briefly distinguish between absorption costing and variable costing.
(b)
Compute the unit product cost under:
(i) Absorption costing
(ii) Variable costing
(c)
Prepare an income statement for March using:
(i) Variable costing
(ii) Absorption costing
(d)
Explain why net income differs under the two costing methods and quantify the difference.
(e)
State two advantages of variable costing and two limitations of absorption costing.
(f)
Define throughput costing.
✅ Model Answer (US CMA Exam Style)
(a) Absorption vs Variable Costing
- Absorption costing: All manufacturing costs (variable + fixed) are included in product cost.
- Variable costing: Only variable manufacturing costs are treated as product costs; fixed manufacturing overhead is expensed in the period incurred.
(b) Unit Product Cost
Variable Cost per Unit:
- Direct materials = $15
- Direct labor = $25
- Variable MOH = $10
Variable unit cost = $50
Fixed MOH per unit:
240,000 ÷ 15,000 = $16
Absorption unit cost:
50 + 16 = $66
(c) Income Statements
(i) Variable Costing Income Statement
| Particulars | Amount ($) |
|---|---|
| Sales (10,000 × $90) | 900,000 |
| Variable COGS (10,000 × $50) | (500,000) |
| Variable S&A (10,000 × $8) | (80,000) |
| Contribution Margin | 320,000 |
| Fixed Manufacturing OH | (240,000) |
| Fixed S&A | (180,000) |
| Net Income | $220,000 |
(ii) Absorption Costing Income Statement
| Particulars | Amount ($) |
|---|---|
| Sales | 900,000 |
| COGS (10,000 × $66) | (660,000) |
| Gross Profit | 240,000 |
| Selling & Admin (180,000 + 80,000) | (260,000) |
| Net Income | $300,000 |
(d) Reason for Income Difference
Difference in income = $80,000
Units in ending inventory:
15,000 – 10,000 = 5,000 \text{ units}
Fixed OH deferred in inventory:
5,000 × $16 = $80,000
📌 Absorption costing defers fixed manufacturing overhead in inventory, increasing income when production exceeds sales.
(e) Advantages & Limitations
Advantages of Variable Costing (Any Two):
- Prevents artificial profit increases from overproduction
- Useful for CVP analysis and internal decision-making
Limitations of Absorption Costing (Any Two):
- Encourages overproduction to inflate income
- Can distort short-term managerial decisions
(f) Throughput Costing
Throughput costing treats only direct materials as inventoriable costs. All other costs are expensed as period costs and it is used primarily in Theory of Constraints (TOC) environments.
🔑 US CMA Examiner Focus
✔ Inventory vs income relationship
✔ Fixed overhead treatment
✔ Clear reconciliation logic
✔ Short, precise explanations
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## Part 2 Sample Case
**Grandeur Industries Scenario:** Reviews division projects using CAPM (company beta 1.2, risk-free 4%, market return 14%). Projects: A (IRR 16%, beta 1.4), B (18%, 1.6), C (12%, 0.7), D (17%, 1.1).
**Essay Tasks:**
- Calculate required returns (A:18%, B:20%, C:11%, D:15%).
- Recommend accepting C and D (IRRs exceed required returns).
- Define beta (stock volatility vs. market).
- Describe 4 beta factors (e.g., industry risk, management strength, competition).
- List risk approaches (e.g., risk-adjusted discount rates, sensitivity analysis).
Perfect example 👍
Below is your essay content converted into a proper US CMA–style CASE-BASED question, exactly how IMA frames it, followed by a model answer.
📘 US CMA Part 1 – Case-Based Question (CAPM & Risk Analysis)
📊 Case Scenario: Grandeur Industries
Grandeur Industries uses the Capital Asset Pricing Model (CAPM) to evaluate capital investment projects.
The company’s overall beta is 1.2. Current market information is as follows:
- Risk-free rate (Rf) = 4%
- Expected market return (Rm) = 14%
The management is evaluating four independent projects with the following details:
| Project | IRR | Beta |
|---|---|---|
| A | 16% | 1.4 |
| B | 18% | 1.6 |
| C | 12% | 0.7 |
| D | 17% | 1.1 |
🔹 Required
(a)
Using CAPM, calculate the required rate of return for each project.
(b)
Based on CAPM, recommend which projects should be accepted and justify your answer.
(c)
Explain the meaning of beta in the context of investment risk.
(d)
Identify and briefly explain any four factors that influence beta.
(e)
List alternative approaches used to incorporate risk in capital budgeting decisions.
✅ Model Answer (US CMA Exam Style)
(a) Required Rate of Return using CAPM
CAPM Formula:
\text{Required Return} = R_f + \beta (R_m - R_f)
Market Risk Premium = 14% – 4% = 10%
| Project | Calculation | Required Return |
|---|---|---|
| A | 4% + 1.4 × 10% | 18% |
| B | 4% + 1.6 × 10% | 20% |
| C | 4% + 0.7 × 10% | 11% |
| D | 4% + 1.1 × 10% | 15% |
(b) Project Acceptance Decision
| Project | IRR | Required Return | Decision |
|---|---|---|---|
| A | 16% | 18% | Reject |
| B | 18% | 20% | Reject |
| C | 12% | 11% | Accept |
| D | 17% | 15% | Accept |
📌 Recommendation:
Projects C and D should be accepted because their IRRs exceed their risk-adjusted required returns, indicating positive risk-adjusted value creation.
(c) Meaning of Beta
Beta measures a project’s or security’s systematic risk, indicating how sensitive its returns are relative to overall market movements.
- Beta = 1 → Same risk as market
- Beta > 1 → More volatile than market
- Beta < 1 → Less volatile than market
(d) Factors Influencing Beta (Any Four)
- Industry Risk – Cyclical industries have higher betas
- Operating Leverage – Higher fixed costs increase earnings volatility
- Financial Leverage – More debt increases equity risk
- Competitive Environment – Intense competition raises uncertainty
- Management Quality – Strong management reduces operational risk
(Any four earn full credit)
(e) Risk Adjustment Approaches in Capital Budgeting
- Risk-adjusted discount rate
- Sensitivity analysis
- Scenario analysis
- Probability-weighted expected values
- Decision tree analysis
🔑 Why this is a Perfect US CMA Case Question
✔ Numerical + theory integration
✔ Clear “Required” structure
✔ Tests application, not memorization
✔ CAPM + Risk concepts combined (IMA favorite)
Great topic choice 👍
Below are US CMA Part 2–level CASE-BASED questions with full model answers covering Risk Assessment in Marginal Analysis, Pricing Strategy, Break-Even Point (BEP), and Margin of Safety (MOS) — exactly the way IMA tests application and judgment.
📘 US CMA PART 2
Case-Based Questions with Answers
Topic: Risk Assessment in Marginal Analysis, Pricing, BEP & MOS
🔹 CASE 1: Risk & Break-Even Analysis (BEP)
📊 Scenario
Omega Electronics sells a single product.
- Selling price per unit = $120
- Variable cost per unit = $75
- Annual fixed costs = $9,00,000
- Expected annual sales = 30,000 units
Required
(a) Calculate the contribution margin per unit and P/V ratio.
(b) Compute the break-even point (units and sales value).
(c) Calculate the margin of safety (units and percentage).
(d) Assess the risk level based on MOS.
✅ Answer
(a) Contribution & P/V Ratio
- Contribution/unit = 120 − 75 = $45
- P/V ratio = 45 ÷ 120 = 37.5%
(b) Break-Even Point
- BEP (units) = 9,00,000 ÷ 45 = 20,000 units
- BEP (sales) = 20,000 × 120 = $24,00,000
(c) Margin of Safety
- MOS (units) = 30,000 − 20,000 = 10,000 units
- MOS (%) = 10,000 ÷ 30,000 = 33.33%
(d) Risk Assessment
A MOS of 33.33% indicates moderate operating risk. The firm can tolerate a reasonable decline in sales before incurring losses.
🔹 CASE 2: Marginal Cost Pricing under Risk
📊 Scenario
Delta Chemicals has idle capacity of 5,000 units. A foreign buyer offers to purchase 4,000 units at $60/unit.
- Normal selling price = $85/unit
- Variable cost = $55/unit
- Fixed costs are fully covered by existing sales.
Required
(a) Evaluate the offer using marginal analysis.
(b) Identify risk factors management should consider before accepting the order.
✅ Answer
(a) Marginal Analysis
- Contribution per unit = 60 − 55 = $5
- Total contribution = 4,000 × 5 = $20,000
📌 Since fixed costs are already covered, the order increases profit by $20,000 and should be accepted.
(b) Risk Factors
- Possibility of price erosion in regular market
- Impact on existing customers
- Exchange rate risk
- Quality and delivery risk
- Long-term dependence on low-margin customers
🔹 CASE 3: Pricing Strategy & Risk Sensitivity
📊 Scenario
Nova Furniture plans to reduce selling price by 10% to boost demand.
Current data:
- Selling price = $500/unit
- Variable cost = $350/unit
- Fixed costs = $15,00,000
- Current sales volume = 6,000 units
Required
(a) Calculate current profit.
(b) Determine the required sales volume after price reduction to maintain current profit.
(c) Comment on pricing risk.
✅ Answer
(a) Current Profit
- Contribution/unit = 500 − 350 = $150
- Total contribution = 6,000 × 150 = $9,00,000
- Profit = 9,00,000 − 15,00,000 = –$6,00,000 (loss)
(b) After Price Reduction
- New selling price = 500 − 10% = $450
- New contribution = 450 − 350 = $100/unit
To earn same contribution of $9,00,000:
- Required units = 9,00,000 ÷ 100 = 9,000 units
(c) Risk Comment
A 50% increase in sales volume is required, indicating high pricing risk. Management should assess market elasticity before price reduction.
🔹 CASE 4: Margin of Safety & Operating Risk
📊 Scenario
Sigma Textiles reports:
- Actual sales = $50,00,000
- Break-even sales = $42,00,000
Required
(a) Calculate the margin of safety.
(b) Interpret the operating risk.
✅ Answer
(a) Margin of Safety
- MOS = 50,00,000 − 42,00,000 = $8,00,000
- MOS (%) = 8,00,000 ÷ 50,00,000 = 16%
(b) Risk Interpretation
A MOS of 16% indicates high operating risk, as even a small drop in sales could lead to losses.
🔹 CASE 5: Risk Assessment Using Contribution Ratio
📊 Scenario
Alpha Motors has two products:
| Product | Contribution Ratio | Sales Mix |
|---|---|---|
| X | 50% | 40% |
| Y | 30% | 60% |
Required
(a) Calculate weighted average contribution ratio.
(b) Assess the risk impact if sales shift toward Product Y.
✅ Answer
(a) Weighted Contribution Ratio
(0.5 × 0.4) + (0.3 × 0.6) = 0.20 + 0.18 = **38%**
(b) Risk Impact
Increasing sales of Product Y lowers overall contribution, raises BEP, and increases operating risk.
🔑 US CMA Part 2 Examiner Tips
✔ Risk interpretation > calculation
✔ BEP & MOS used to judge business stability
✔ Pricing decisions always linked to capacity & contribution
✔ Marginal analysis focuses on relevant costs only
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Practice official IMA samples and review guides for more; focus on clear structure, calculations, and professional explanations.
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