CPA Bar Quiz: Apply Responsibility Accounting

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.

Question 1

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 + $116,000 + $65,000 + $88,000 = $457,000. Budgeted controllable = $450,000. Variance = $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

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

Explanation: Total actual = $457,000 + $45,000 = $502,000. Total budget = $450,000 + $45,000 = $495,000. Total variance = $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

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

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

Question 4

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 - $15 = $65. Division B will not pay more than $65 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 5

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

Explanation: Division Y ROI = $180,000 / $900,000 = 20.0$240,000 / $1,500,000 = 16.0%). Option C applies an incorrect divisor of $720,000. Option D applies an incorrect divisor of $1,200,000.

Question 6

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 - (12% x $900,000) = $180,000 - $108,000 = $72,000. Option A is the capital charge only ($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 7

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 - (12% x $500,000) = $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 8

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 9

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 10

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 11

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

Explanation: Incremental profit = Incremental revenue - Incremental variable costs = $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 12

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 13

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

Explanation: Current NOI = 15% x $2,000,000 = $300,000. After elimination: NOI = $300,000 - $36,000 = $264,000; Operating assets = $2,000,000 - $300,000 = $1,700,000. New ROI = $264,000 / $1,700,000 = 15.53%. The product line's ROI is $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 14

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 - $30 = $25. Minimum TP = $30 + $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 15

1. The company should mandate a midpoint transfer price of $60 to resolve the dispute
2. Any transfer price between $50 and $70 would benefit the entire company; failure to agree means the company is forfeiting available internal profit that both divisions could share (correct answer)
3. Division A should always accept Division B's maximum offer to maximize total company profit
4. Negotiated transfer pricing should be replaced with market-based pricing in all situations

Explanation: When the minimum transfer price (seller's floor) is below the maximum transfer price (buyer's ceiling), a mutually beneficial internal transaction exists. Any price within the $50-$70 range would make both divisions better off than not transacting, and the consolidated company benefits from the $20 spread ($70 - $50) that represents value not captured when the internal transfer fails to occur. The inability to agree wastes this opportunity. Option A imposes a solution without acknowledging why negotiation is failing. Option C cedes all the value to Division B with no benefit to Division A beyond variable cost recovery. Option D draws too broad a conclusion from one negotiation failure.

Question 16

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

Explanation: Minimum transfer price = Variable cost + Opportunity cost. With excess capacity, there is no foregone external sale, so the opportunity cost is zero. Minimum TP = $30 + $0 = $30. Any price above $30 contributes to covering fixed costs and improving Division A's profit. Option A uses full cost, which includes fixed costs already being incurred regardless of the internal sale. Option B uses the external market price, which overstates the minimum when there is idle capacity. Option C uses an intermediate figure without basis.

Question 17

1. Manager A is the superior performer because consistently high ROI always indicates better stewardship
2. Manager B should be penalized because large capital investments require board approval in most companies
3. ROI is irrelevant for evaluating investment centers and should be replaced with revenue growth targets
4. ROI evaluation may incentivize managers to underinvest or defer needed capital replacement because older, more depreciated assets produce a higher ROI than newer assets with higher book values (correct answer)

Explanation: As assets depreciate, their book value decreases while NOI may remain stable or grow, mechanically increasing ROI over time. A manager can maximize ROI by avoiding new investments that would add to the asset base. This creates a dysfunctional incentive: the company may need new capacity or technology while the manager resists investment to protect the ROI metric. Manager B's approach - investing for future competitiveness - may be correct strategically even if it temporarily compresses ROI. Option A treats a static metric as evidence of good management. Options B and C make unsupported assertions.

Question 18

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 - $2,400,000 = $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 19

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 - (10% x $3,200,000) = $480,000 - $320,000 = $160,000. Option B adds NOI and the capital charge instead of subtracting. Option C reports only the capital charge ($320,000). Option D doubles the residual income through an arithmetic error.

Question 20

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 - (12% x $1,500,000) = $240,000 - $180,000 = $60,000. Notably, Division X generates more absolute NOI than Division Y ($240,000 vs. $180,000) yet has lower ROI (16$60,000 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.