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CPA Bar Quiz

CPA Bar Quiz: Apply Responsibility Accounting

Practice Apply Responsibility Accounting in CPA Bar with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

Question 1 / 20

0 of 20 answered

Thornwood Division is a cost center. Budgeted controllable costs total 450,000(directmaterials450,000 (direct materials 450,000(directmaterials180,000, direct labor 120,000,variableoverhead120,000, variable overhead 120,000,variableoverhead60,000, fixed overhead 90,000).Actualcontrollablecostswere:directmaterials90,000). Actual controllable costs were: direct materials 90,000).Actualcontrollablecostswere:directmaterials188,000, direct labor 116,000,variableoverhead116,000, variable overhead 116,000,variableoverhead65,000, fixed overhead 88,000.Allocatedcorporateoverheadof88,000. Allocated corporate overhead of 88,000.Allocatedcorporateoverheadof45,000 is identical in budget and actual. What is the controllable cost variance for performance evaluation?

Select an answer to continue

What this quiz covers

This quiz focuses on Apply Responsibility Accounting, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Bar.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

Thornwood Division is a cost center. Budgeted controllable costs total 450,000(directmaterials450,000 (direct materials 450,000(directmaterials180,000, direct labor 120,000,variableoverhead120,000, variable overhead 120,000,variableoverhead60,000, fixed overhead 90,000).Actualcontrollablecostswere:directmaterials90,000). Actual controllable costs were: direct materials 90,000).Actualcontrollablecostswere:directmaterials188,000, direct labor 116,000,variableoverhead116,000, variable overhead 116,000,variableoverhead65,000, fixed overhead 88,000.Allocatedcorporateoverheadof88,000. Allocated corporate overhead of 88,000.Allocatedcorporateoverheadof45,000 is identical in budget and actual. What is the controllable cost variance for performance evaluation?

  1. $7,000 favorable
  2. $7,000 unfavorable (correct answer)
  3. $52,000 unfavorable
  4. $2,000 favorable

Explanation: Controllable cost variance excludes allocated corporate overhead, which is outside the manager's control. Actual controllable = 188,000+188,000 + 188,000+116,000 + 65,000+65,000 + 65,000+88,000 = 457,000.Budgetedcontrollable=457,000. Budgeted controllable = 457,000.Budgetedcontrollable=450,000. Variance = 457,000−457,000 - 457,000−450,000 = $7,000 unfavorable. Option A applies the correct amount but labels the direction incorrectly. Option C includes the allocated overhead in the variance calculation. Option D results from an arithmetic error.

Question 2

Thornwood Division reports actual controllable costs of 457,000versusabudgetof457,000 versus a budget of 457,000versusabudgetof450,000, plus allocated corporate overhead of $45,000 (equal in both actual and budget). What is the total cost budget variance including all line items?

  1. $52,000 unfavorable
  2. $0
  3. $7,000 unfavorable (correct answer)
  4. $12,000 unfavorable

Explanation: Total actual = 457,000+457,000 + 457,000+45,000 = 502,000.Totalbudget=502,000. Total budget = 502,000.Totalbudget=450,000 + 45,000=45,000 = 45,000=495,000. Total variance = 502,000−502,000 - 502,000−495,000 = $7,000 unfavorable. Because allocated overhead is identical in actual and budget, it does not change the variance amount - only the controllable costs drive the difference. Option A incorrectly includes allocated overhead in the variance. Option B treats allocated overhead as eliminating all variance. Option D applies an incorrect budget amount.

Question 3

Westbrook Division is an investment center reporting net operating income of 480,000andaverageoperatingassetsof480,000 and average operating assets of 480,000andaverageoperatingassetsof3,200,000. What is the division's return on investment (ROI)?

  1. 6.67%
  2. 20.0%
  3. 12.5%
  4. 15.0% (correct answer)

Explanation: ROI = Net operating income / Average operating assets = 480,000/480,000 / 480,000/3,200,000 = 15.0%. Option A inverts the formula. Option B divides by 2,400,000insteadof2,400,000 instead of 2,400,000insteadof3,200,000. Option C divides by $3,840,000.

Question 4

Westbrook Division reports net operating income of 480,000,averageoperatingassetsof480,000, average operating assets of 480,000,averageoperatingassetsof3,200,000, and a required rate of return of 10%. What is the division's residual income?

  1. $160,000 (correct answer)
  2. $800,000
  3. $320,000
  4. $640,000

Explanation: Residual income = NOI - (Required rate x Operating assets) = 480,000−(10480,000 - (10% x 480,000−(103,200,000) = 480,000−480,000 - 480,000−320,000 = 160,000.OptionBaddsNOIandthecapitalchargeinsteadofsubtracting.OptionCreportsonlythecapitalcharge(160,000. Option B adds NOI and the capital charge instead of subtracting. Option C reports only the capital charge (160,000.OptionBaddsNOIandthecapitalchargeinsteadofsubtracting.OptionCreportsonlythecapitalcharge(320,000). Option D doubles the residual income through an arithmetic error.

Question 5

Division B purchases a component and processes it further. Division B's selling price for the finished product is 80perunitanditsadditionalvariableprocessingcostsafterreceivingthecomponentare80 per unit and its additional variable processing costs after receiving the component are 80perunitanditsadditionalvariableprocessingcostsafterreceivingthecomponentare15 per unit. What is the maximum transfer price Division B would be willing to pay for the component?

  1. $65 per unit (correct answer)
  2. $80 per unit
  3. $50 per unit
  4. $55 per unit

Explanation: Maximum transfer price = Final selling price - Division B's additional variable processing costs = 80−80 - 80−15 = 65.DivisionBwillnotpaymorethan65. Division B will not pay more than 65.DivisionBwillnotpaymorethan65 because at any higher price it would be unprofitable for Division B to accept the transfer. Option B is Division B's selling price, which ignores its own processing costs. Option C subtracts both the additional variable costs and an assumed fixed amount, overstating deductions. Option D represents the external market price for the component, not Division B's maximum willingness to pay.

Question 6

Clearview Corp. has two investment centers: Division X (NOI 240,000,operatingassets240,000, operating assets 240,000,operatingassets1,500,000) and Division Y (NOI 180,000,operatingassets180,000, operating assets 180,000,operatingassets900,000). What is the ROI for Division Y?

  1. 16.0%
  2. 20.0% (correct answer)
  3. 25.0%
  4. 15.0%

Explanation: Division Y ROI = 180,000/180,000 / 180,000/900,000 = 20.0%. Option A is Division X's ROI (240,000/240,000 / 240,000/1,500,000 = 16.0%). Option C applies an incorrect divisor of 720,000.OptionDappliesanincorrectdivisorof720,000. Option D applies an incorrect divisor of 720,000.OptionDappliesanincorrectdivisorof1,200,000.

Question 7

Clearview Division Y reports NOI of 180,000,operatingassetsof180,000, operating assets of 180,000,operatingassetsof900,000, and a required rate of return of 12%. What is Division Y's residual income?

  1. $108,000
  2. $180,000
  3. $72,000 (correct answer)
  4. $36,000

Explanation: Residual income = NOI - (Required rate x Operating assets) = 180,000−(12180,000 - (12% x 180,000−(12900,000) = 180,000−180,000 - 180,000−108,000 = 72,000.OptionAisthecapitalchargeonly(72,000. Option A is the capital charge only (72,000.OptionAisthecapitalchargeonly(108,000), not residual income. Option B is NOI before deducting the capital charge. Option D applies an incorrect required rate or operating asset base.

Question 8

Clearview Division X reports NOI of 240,000,operatingassetsof240,000, operating assets of 240,000,operatingassetsof1,500,000, and a required rate of return of 12%. What is Division X's residual income?

  1. $240,000
  2. $180,000
  3. $72,000
  4. $60,000 (correct answer)

Explanation: Residual income = NOI - (Required rate x Operating assets) = 240,000−(12240,000 - (12% x 240,000−(121,500,000) = 240,000−240,000 - 240,000−180,000 = 60,000.Notably,DivisionXgeneratesmoreabsoluteNOIthanDivisionY(60,000. Notably, Division X generates more absolute NOI than Division Y (60,000.Notably,DivisionXgeneratesmoreabsoluteNOIthanDivisionY(240,000 vs. 180,000)yethaslowerROI(16180,000) yet has lower ROI (16% vs. 20%) and lower residual income (180,000)yethaslowerROI(1660,000 vs. $72,000) because its larger asset base raises the capital charge and dilutes the return rate. Option A is NOI before the capital charge. Option B is the capital charge only. Option C is Division Y's residual income, not Division X's.

Question 9

Ridgecrest Division has a current ROI of 18%. A new investment opportunity costs 500,000andisexpectedtogenerateannualNOIof500,000 and is expected to generate annual NOI of 500,000andisexpectedtogenerateannualNOIof75,000 (ROI of 15%). The company's required rate of return is 12%. Based on ROI analysis and residual income analysis respectively, what is the correct recommendation?

  1. ROI says accept; residual income says accept
  2. ROI says reject; residual income says accept (correct answer)
  3. ROI says accept; residual income says reject
  4. ROI says reject; residual income says reject

Explanation: ROI analysis: the project's ROI (15%) is below the division's current ROI (18%), so accepting it would lower the division's average ROI - creating incentive to reject. Residual income analysis: RI = 75,000−(1275,000 - (12% x 75,000−(12500,000) = 75,000−75,000 - 75,000−60,000 = $15,000 positive. The project earns above the cost of capital and increases total residual income - RI says accept. This conflict illustrates a key limitation of ROI: it can motivate managers to reject value-creating investments that would dilute an already-high ROI. Options A and D misstate at least one measure. Option C reverses the conclusions.

Question 10

A profit center manager is evaluated on profit before allocated corporate overhead. The manager's reported profit has improved each year for three years, while the company's total profitability has declined over the same period. Which concern does this raise?

  1. The profit center manager is underperforming because total company profit declined
  2. The evaluation metric is flawed because excluding overhead allocation distorts all performance measures
  3. The profit center may be optimizing its local performance in ways that impose costs on shared services or other divisions, creating improvement in the unit's reported results without improving total company value (correct answer)
  4. The company should replace profit center evaluation with cost center evaluation to better align incentives

Explanation: When a profit center improves locally while total company performance declines, a common explanation is suboptimization - the division is making decisions that benefit its own reported profit at the expense of other units or shared resources. For example, the division may delay payments to shared service groups, negotiate aggressively on internal prices, or underprice sales to related divisions in ways that shift costs or reduce revenues elsewhere. Option A incorrectly attributes the company-level decline to this manager. Option B overstates the flaw; pre-allocation evaluation is a valid and common approach for assessing controllable performance. Option D recommends a structural change that is not supported by the analysis.

Question 11

Residual income is often considered a superior measure to ROI for investment center performance evaluation for which of the following reasons?

  1. Residual income is always a larger absolute number than ROI, making performance differences easier to observe
  2. Residual income eliminates the need for a required rate of return in evaluating division performance
  3. ROI cannot be computed for divisions reporting negative net operating income
  4. Residual income aligns manager incentives with value creation - any investment earning above the cost of capital increases residual income regardless of its effect on the existing ROI ratio (correct answer)

Explanation: Residual income (NOI minus a capital charge) increases whenever a new investment earns above the cost of capital, regardless of how that investment compares to the division's current ROI. This eliminates the incentive to reject value-creating investments simply because they would dilute an already-high ROI. Option A is incorrect; residual income is a dollar amount that cannot be directly compared to ROI, which is a percentage. Option B is incorrect; residual income specifically requires a required rate of return to calculate the capital charge. Option C is incorrect; ROI can be calculated for negative NOI divisions, though interpretation requires care.

Question 12

A cost center manager produced 25% more output than planned due to stronger-than-expected customer demand. The center reports a large unfavorable variance compared to the static budget. Which evaluation approach is most appropriate?

  1. Hold the manager accountable for the full static budget variance to enforce cost discipline
  2. Evaluate the manager against a flexible budget adjusted to the actual output level, since the volume increase drove a portion of the cost increase that was outside the manager's control (correct answer)
  3. Suspend variance reporting for the cost center for this period since output exceeded expectations
  4. Reduce the manager's performance rating based on the unfavorable static budget variance as reported

Explanation: When a cost center produces significantly more output than planned, a portion of the higher total cost is expected and appropriate - variable costs should increase proportionally with volume. Evaluating the manager against the static budget penalizes them for producing more output at the request of the sales or operations function, which is not a controllable decision for the cost center manager. A flexible budget adjusted to actual output isolates the true cost control performance. Option A and D apply the static budget standard unfairly. Option C removes a valuable control tool rather than correcting how it is applied.

Question 13

A division manager with a current ROI of 22% is considering a new investment with an expected ROI of 17%. The company's cost of capital is 10%. The manager declines the project. Which statement best describes the concern with this decision?

  1. The manager is correct because any investment below the division's current ROI reduces shareholder value
  2. The manager's decision is suboptimal for the company; the project earns above the cost of capital and creates value, but lowers the division's average ROI, creating a misalignment between the manager's incentive and the company's interest (correct answer)
  3. Divisional ROI is the best measure of value creation and the rejection is fully aligned with company objectives
  4. The manager should accept only investments that exceed the industry average ROI

Explanation: The project earns 17%, which exceeds the 10% cost of capital and therefore creates economic value for the company. However, because it is below the division's current 22% ROI, accepting it would dilute the division's average ROI - creating a personal incentive to reject a value-creating investment. This conflict between divisional ROI optimization and company-wide value creation is a known weakness of ROI as a performance metric, and is one reason residual income is often preferred. Option A incorrectly equates the division's ROI with the hurdle rate for value creation. Options C and D are analytically unsound.

Question 14

Transfer pricing refers to which of the following?

  1. The process of allocating corporate overhead to operating divisions based on usage measures
  2. The price charged when one segment of an organization sells goods or services to another segment of the same organization (correct answer)
  3. The method used to establish selling prices for products sold to external customers
  4. The allocation of joint production costs between products produced from a common input

Explanation: Transfer pricing governs the internal pricing of goods and services exchanged between divisions or segments of the same company. The transfer price affects reported revenues and costs for both the selling and buying division, influencing each unit's performance metrics. Option A describes cost allocation, not transfer pricing. Option C describes external pricing strategy. Option D describes joint cost allocation, a separate costing topic.

Question 15

A profit center manager is evaluating a special order that would add 40,000torevenueand40,000 to revenue and 40,000torevenueand32,000 to variable costs, with no incremental fixed costs. Allocated fixed corporate costs to the center are $85,000 per month. What is the incremental profit impact of accepting the order?

  1. $8,000 (correct answer)
  2. -$77,000
  3. $45,000
  4. -$45,000

Explanation: Incremental profit = Incremental revenue - Incremental variable costs = 40,000−40,000 - 40,000−32,000 = $8,000. Allocated corporate fixed costs are not incremental to the order decision and are irrelevant. Option B subtracts allocated fixed costs from the contribution margin. Option C adds the contribution to something incorrectly. Option D nets the contribution margin against the allocated costs in the wrong direction.

Question 16

Lakewood Co. has a revenue center manager responsible for a sales territory. Budgeted revenue for the period was 2,400,000andactualrevenueachievedwas2,400,000 and actual revenue achieved was 2,400,000andactualrevenueachievedwas2,280,000. What is the revenue variance?

  1. $120,000 favorable
  2. $2,280,000 unfavorable
  3. $4,680,000 unfavorable
  4. $120,000 unfavorable (correct answer)

Explanation: Revenue variance = Actual revenue - Budgeted revenue = 2,280,000−2,280,000 - 2,280,000−2,400,000 = $120,000 unfavorable. Actual revenue fell short of the budget, which is unfavorable for a revenue center. Option A applies the correct amount but labels the direction incorrectly. Option B reports actual revenue as the variance rather than computing the difference. Option C sums the two figures instead of computing the difference.

Question 17

Division A transfers products to Division B at full cost (60perunit:60 per unit: 60perunit:40 variable, $20 fixed). Division B sells the final product externally. Division A earns no markup on transfers. Which concern does this full-cost transfer pricing policy create for Division A?

  1. Division A is motivated to over-produce because full-cost transfers increase its revenue
  2. Division B is over-charged because fixed costs should never be included in transfer prices
  3. Division A earns zero contribution margin on internal transfers, reducing its motivation to serve internal customers and obscuring the profitability of Division A as a standalone unit (correct answer)
  4. The $60 transfer price is too high and will cause the company to lose external customers for the final product

Explanation: At a full-cost transfer price, Division A recovers its costs but earns no profit on internal sales. Internal transfers generate zero contribution margin for Division A, while external sales generate a positive margin equal to market price minus variable cost. If Division A has limited capacity, it has a financial incentive to prioritize external demand over internal transfers, since only external sales improve its reported profit. Additionally, Division A's reported profit will be zero on these transfers, making it difficult to assess whether the division is adding value as a standalone unit. Option A is incorrect; revenue from internal transfers at full cost does not increase Division A's profit. Option B is an overstatement; full cost transfer pricing is a valid and widely used approach. Option D conflates Division A's transfer price with Division B's external selling price.

Question 18

Harborview Division has average operating assets of 2,000,000andcurrentROIof152,000,000 and current ROI of 15%. Management is evaluating whether to drop an underperforming product line that uses 2,000,000andcurrentROIof15300,000 of operating assets and generates NOI of $36,000. What would be the division's ROI after eliminating this product line?

  1. 15.53% (correct answer)
  2. 12.00%
  3. 18.00%
  4. 16.00%

Explanation: Current NOI = 15% x 2,000,000=2,000,000 = 2,000,000=300,000. After elimination: NOI = 300,000−300,000 - 300,000−36,000 = 264,000;Operatingassets=264,000; Operating assets = 264,000;Operatingassets=2,000,000 - 300,000=300,000 = 300,000=1,700,000. New ROI = 264,000/264,000 / 264,000/1,700,000 = 15.53%. The product line's ROI is 36,000/36,000 / 36,000/300,000 = 12%, which is below the division's average 15%, so eliminating it increases the division's ROI slightly. Options B, C, and D apply incorrect calculations to the revised NOI or asset base.

Question 19

Division A produces a component at a variable cost of 30perunitandafullcostof30 per unit and a full cost of 30perunitandafullcostof45 per unit. Division A has no excess capacity and can sell all output on the external market at $55 per unit. Division B wants to purchase 1,000 units from Division A. What is the minimum transfer price Division A should accept?

  1. $30 per unit
  2. $45 per unit
  3. $55 per unit (correct answer)
  4. $40 per unit

Explanation: Minimum transfer price = Variable cost + Opportunity cost per unit. With no excess capacity, each internal sale displaces an external sale. Opportunity cost = External market price - Variable cost = 55−55 - 55−30 = 25.MinimumTP=25. Minimum TP = 25.MinimumTP=30 + 25=25 = 25=55. Division A must receive at least the market price to be indifferent between internal and external sales. Option A ignores opportunity cost entirely. Option B uses full cost but still understates the opportunity cost of foregone external sales. Option D uses an intermediate figure without analytical basis.

Question 20

A cost center manager's controllable cost report shows budgeted controllable costs of 320,000andactualcontrollablecostsof320,000 and actual controllable costs of 320,000andactualcontrollablecostsof308,000. What is the controllable cost variance?

  1. $12,000 unfavorable
  2. $0
  3. $12,000 favorable (correct answer)
  4. $628,000 unfavorable

Explanation: Controllable cost variance = Actual - Budget = 308,000−308,000 - 308,000−320,000 = $12,000 favorable. Actual costs were below budget, which is favorable from a cost control perspective. Option A applies the correct amount but labels the direction incorrectly. Option B would imply no variance, which is incorrect. Option D adds rather than subtracts the two values.