CMA Examination

Sample Essay Questions

CMA Part 1 Sample Essay Questions

Question 1.1 Coe Company

Coe Company is a manufacturer of semi-custom motorcycles. The company used 500 labor hours to produce a prototype of a
new motorcycle for one of its key customers. The customer then ordered three additional motorcycles to be produced over the
next six months. Coe estimates that the manufacturing process for these additional motorcycles is subject to a 90% learning
curve. Although the production manager was aware of the learning curve projections, he decided to ignore the learning curve
when compiling his budget in order to provide a cushion to prevent exceeding the budgeted amount for labor.

Required:

1. By using the cumulative average-time learning curve, estimate the total number of labor hours that are required to
manufacture the first four units of product. Show your calculations.

2. Assume the 90% learning curve is realized. Calculate Coe’s cost savings in producing the three additional units if the
cost of direct labor is $25 per hour. Show your calculations.

3. a. Define budgetary slack.

b. Identify and explain two negative effects that budgetary slack can have on the budgeting process.

4. Assume that Coe actually used 1,740 labor hours to produce the four units at a total cost of $44,805.
a. If the company ignored the learning curve when creating the budget, for the four units produced,
compute Coe’s
1. direct labor rate (price) variance.
2. direct labor efficiency variance.
b. How would the above two variances differ if the learning curve had been considered when creating the
budget? Show your calculations.

5. Assume that the price variance is unfavorable and the efficiency variance is favorable. Identify and discuss one reason
that explains both of these variances.

6. Explain the effect on the direct labor efficiency variance if the manufacturing process were subject to an 80% learning
curve.

7. Identify and explain one limitation of learning curve analysis.

Question 1.2 Law Services Inc.

Law Services Inc. provides a variety of legal services to its clients. The firm’s attorneys each have the authority to negotiate
billing rates with their clients. Law Services wants to manage its operations more effectively, and established a budget at the
beginning of last year. The budget included total hours billed, amount billed per hour, and variable expense per hour.
Unfortunately, the firm failed to meet its budgeted goals for last year. The results are shown below.

Actual Budget
Total hours billed 5,700 6,000
Amount billed/hour $275 $325
The budgeted variable expense per hour is $50, and the actual total variable expense was $285,000. There is disagreement
among the attorneys over the reasons that the firm failed to meet its budgeted goals.

CMA Part 1 Sample Essay Questions | © Copyright 2016 Institute of Certified Management Accountants 1
 Required:

1. What is the advantage of using a flexible budget to evaluate Law Services’ results for last year as opposed to a static
budget? Explain your answer.

2. Explain the process of creating a flexible budget for Law Services.

3. Calculate the total static budget revenue variance, the flexible budget revenue variance, and the sales-volume revenue
variance. Show your calculations.

4. a. Calculate the variable expense variance. Show your calculations.

b. Was the variable expense variance a flexible budget variance or a sales volume variance? Explain your answer.

Question 1.3 Inman Inc.

Inman Inc. is a manufacturer of a single product and is starting to develop a budget for the coming year. Because cost of goods
manufactured is the biggest item, Inman’s senior management is reviewing how costs are calculated. In addition, senior
management wants to develop a budgeting system that motivates managers and other workers to work toward the corporate
goals. Inman has incurred the following costs to make 100,000 units during the month of September.

Materials $400,000

Direct labor 100,000

Variable manufacturing overhead 20,000

Variable selling and administrative costs 80,000

Fixed manufacturing overhead 200,000

Fixed selling and administrative costs 300,000

Inman Inc.’s September 1 inventory consisted of 10,000 units valued at $72,000 using absorption costing. Total fixed costs and
variable costs per unit have not changed during the past few months. In September, Inman sold 106,000 units at $12 per unit.

Required:

1. Using absorption costing, calculate the following.

a. Inman’s September manufacturing cost per unit
b. Inman’s September 30 inventory value
c. Inman’s September net income
2. Using variable costing, calculate the following.
a. Inman’s September manufacturing cost per unit
b. Inman’s September 30 inventory value
c. Inman’s September net income
3. Identify and explain one reason why the income calculated in the previous two questions might differ.
4. Identify and discuss one advantage of using each of the following:
a. absorption costing
b. variable costing

5. a. Identify one strength and one weakness each of authoritative budgeting and participative
budgeting.
b. Which of these budgeting methods will work best for Inman Inc.? Explain your answer.
c. Identify and explain one method the top managers can take to restrict the Production Manager from taking
advantage of budgetary slack.

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CMA Part 2 Sample Essay Questions

Question 2.1 Foyle Inc.

Foyle Inc. has prepared the comparative income statements for the three most recent fiscal years that are shown below. While
profitable, Foyle has been losing market share and is concerned about future performance. Also presented are data about Foyle’s
largest competitor and the industry average.

Year 1 Year 2 Year 3 Competitor Ind. Avg.

Revenue $20,000 $24,000 $30,000 $45,000 $28,000
Cost of goods sold 12,000 12,000 18,000 21,600 14,000
Gross profit 8,000 12,000 12,000 23,400 14,000
Sales and marketing 2,000 2,000 2,000 5,000 3,000
General and administrative 1,500 2,000 3,000 3,150 2,500
Research and development 1,500 2,000 1,000 4,000 1,500
Operating income $ 3,000 $ 6,000 $ 6,000 $11,250 $ 7,000

Required:

1. Using the three Foyle Inc. statements,

a. Prepare a comparative common-size statement using revenue as the base measure.
b. Prepare a common base-year income statement using Year 1 as the base year.
Show your calculations

2. Calculate Foyle’s growth rate of both revenue and operating income for Year 2 and Year 3. Show your calculations.
3. By evaluating Foyle’s performance against the performance of Foyle’s largest competitor and the industry average,
identify and discuss three areas that Foyle should target for further investigation and performance improvement.
Support your discussion with data.

Question 2.2 Bockman Industries.

Income statements for Bockman Industries, a retailer, are shown below for the past two years.

Year 2 Year 1
Revenues $6,400,000 $6,000,000
Cost of goods sold 3,100,000 2,850,000
Gross margin 3,300,000 3,150,000
Selling expenses 950,000 880,000
Administrative expenses 1,120,000 1,050,000
Loss due to strike 20,000 0
Interest expense 30,000 30,000
Income before taxes 1,180,000 1,190,000
Income tax expense 472,000 476,000
Income from continuing operations 708,000 714,000
Discontinued operations, net 72,000 0
Net income $ 780,000 $ 714,000
Earnings per share $2.50 $2.30

CMA Part 2 Sample Essay Questions | © Copyright 2016 Institute of Certified Management Accountants 3
 Required:

1. Prepare common-size income statements (vertical analysis) for Bockman Industries for the two years presented.

2. Prepare a memo to the controller of Bockman identifying and describing a possible explanation for each of the
following.
a. An increase in sales along with the change in the gross margin percentage.
b. An increase in sales along with the increase in selling expenses.
c. An increase in sales along with the increase in administrative expenses.
3. Assume that Bockman has no preferred stock outstanding and any change in the number of shares of common stock
occurred at the beginning of Year 2. If the shareholders’ equity at the end of Year 2 totaled $7,363,200, calculate
Bockman’s book value per share.

Question 2.3 Han Electronics Inc.

Han Electronics Inc. is an electronics retailer with a fitness equipment retailer subsidiary. Han is a mature company with
declining sales while the subsidiary is growing and profitable. The management of Han is considering several strategic options
for the company as a whole. They considered purchasing additional companies to continue to diversify their product mix, or
split out some or all of the subsidiary into a separate company so that each company could go in a different direction.
Ultimately, the concern is that Han is failing. Management wants to maximize shareholder value, turn the company around,
and continue as a going concern.

Required:

1. a. Define mergers and acquisitions.

b. Does this scenario describe a merger or an acquisition?
c. Identify three possible synergies or benefits of mergers and acquisitions.

2. a. Identify and describe the following two types of divestitures: spin-offs and equity carve-outs.
b. Identify whether either of these divestiture types is described in the scenario above.

3. Define bankruptcy and identify the different types of bankruptcy.

CMA Part 2 Sample Essay Questions | © Copyright 2016 Institute of Certified Management Accountants 4
Answers: CMA Part 1 Sample Essay Questions

Answer: 1.1 Coe Company

1. Cumulative Number Cumulative Cumulative

of Units Average Time/Unit Total Time
1 500 500
2 500 x .9 = 450 450 x 2 = 900
4 450 x .9 = 405 405 x 4 = 1620

2. $25 x 500 hours x 4 units = $50,000 with no learning curve

$25 x 405 x 4 units = $40,500 with 90% learning curve
$50,000 - $40,500 = $9,500 savings

3. a. Budgetary slack is the practice of underestimating budgeted revenues, or overestimating budgeted costs, to
make budgeted targets more easily achievable.
b. Budgetary slack misleads top management about the true profit potential of the company, which leads to
inefficient resource planning and allocation as well as poor coordination of activities across different parts of
the company.

4. a. 1. 1,740 x (25.00 – [44,805/1,740]) = 1,305U

2. 25.00 x (1,740 – [4 x 500]) = 6,500F
b. Direct labor rate variance remains the same, but direct labor efficiency variance will
become $3000 negative, because actual hours 1740 is more than expected from 90%
learning curve 1620.

5. A factor that could cause an unfavorable price variance and a favorable efficiency variance is using a higher-skilled
labor force that would be paid more per hour but would work more quickly.

6. Direct labor efficiency variance would be even more unfavorable if an 80% learning curve was used. The lower number
implies more benefit from learning.

7. For a new product, the company may have no way of forecasting the amount of improvement (if any) from savings. The
company may set up a production method that is more efficient than prototype, but will not gain further efficiencies.

Answer: 1.2 Law Services Inc.

1. A flexible budget allows the attorneys to tell how much of their unfavorable variance is due to lower than planned
billing hours and how much is due to performance issues such as the negotiated billed amount or variable expenses. A
master budget is static and any variance must be analyzed further to determine its cause.

2. The flexible budget revenues are calculated by multiplying the actual billed hours by the budgeted amount per billed
hour. Then the budgeted variable expense per billed hour is multiplied by the actual billed hours. The flexible budget
variable expense is subtracted from the flexible budget revenue. The results are compared to the actual results from
last year.

Answers: CMA Part 1 Sample Essay Questions | © Copyright 2016 Institute of Certified Management Accountants 5
 3. 6,000 * 325 = 1,950,000 static budget revenue
5,700 * 275 = 1,567,500 actual revenue
1,950,000 - 1,567,500 = $382,500 unfavorable static budget revenue variance
5,700 * 325 = 1,852,500 flexible budget revenue
1,852,500 - 1,567,500 = $285,000 flexible budget variance
6,000 - 5,700 = 300 hours unfavorable sales volume
300 * 325 = $97,500 unfavorable sales volume variance

4. 6,000 * 50 = 300,000 static budget variable expense

300,000 - 285,000 = $15,000 favorable variable expense variance
5,700 * 50 = 285,000 flexible budget variable expense
285,000 - 285,000 = $0, so the variance is a sales volume variance

Answer: 1.3 Inman Inc.

1. a. Materials $400,000
Direct labor 100,000
Variable manufacturing overhead 20,000
Fixed manufacturing overhead 200,000
$720,000/100,000 = $7.20

b. 10,000 beginning inventory + 100,000 manufactured – 106,000 sold = 4,000 units in ending inventory;
4,000 x $7.20 = $28,800.

c. Sales (106,000 x $12) $1,272,000

Cost of Goods Sold:
Beginning inventory $ 72,000
Cost of goods manufactured (100,000 x $7.20) 720,000
- Ending inventory (28,800) 763,200
Gross profit 508,800
Less selling & administrative
Variable costs 80,000
Fixed costs 300,000 380,000
Income $ 128,800

2. a. Materials $400,000
Direct labor 100,000
Variable manufacturing overhead 20,000
$520,000/100,000 = $5.20
b. 4,000 units x $5.20 = $20,800

c. Sales $1,272,000
Less variable costs:
Manufacturing = $5.20 x 106,000 $551,200
Selling and administrative 80,000 631,200
Contribution margin 640,800
Less fixed costs:
Manufacturing 200,000
Selling and administrative 300,000 500,000
Income $ 140,800

Answers: CMA Part 1 Sample Essay Questions | © Copyright 2016 Institute of Certified Management Accountants 6
3. The difference in incomes is caused by the treatment of fixed manufacturing overhead. Absorption costing treats this
cost as a product cost that is held in inventory until the goods are sold; variable costing treats fixed manufacturing
overhead as a period cost, showing it as an expense immediately. Because inventory decreased, absorption costing
would expense all of the current month’s fixed manufacturing overhead as well as some of the costs that were previous-
ly deferred in the prior period’s inventory; variable costing would only expense the current month’s amount, resulting in
a higher income.

4. a. The advantages of using absorption costing are:

It is required for external reporting.
It matches all manufacturing costs with revenues.

b. The advantages of using variable costing are:

Data required for cost-volume-profit analysis can be taken directly from the statement.
The profit for a period is not affected by changes in inventories.
Unit product costs do not contain fixed costs that are often unitized, a practice that could result in poor decision-making.
The impact of fixed costs on profits is emphasized.
It is easier to estimate a product’s profitability.
It ties in with cost control measures such as flexible budgets.

5. a. Top-down advantage: speed, control top-down disadvantage: little buy-in, top has less info
Bottom-up advantage: more likely to commit, disadvantage: may set easier targets

b. Best: top-down, cost of products most important, want to focus on control

c. Benchmark with outside examples, mutual learning about problems, balance

scorecard methods of evaluation.

Answers: CMA Part 1 Sample Essay Questions | © Copyright 2016 Institute of Certified Management Accountants 7
Answers: CMA Part 2 Sample Essay Questions

Answer: 2.1 Foyle Inc.

1. a.
Year 1 Year 2 Year 3
Revenue 100% 100% 100%
Cost of goods sold 60% 50% 60%
Gross profit 40% 50% 40%
Sales & marketing 10% 8.3% 6.7%
General & admin 7.5% 8.3% 10%
Research & development 7.5% 8.3% 3.3%
Operating income 15% 25% 20%

b.
Year 1 Year 2 Year 3
Revenue 100% 120% 150%
Cost of goods sold 100% 100% 150%
Gross profit 100% 150% 150%
Sales & marketing 100% 100% 100%
General & admin 100% 133% 200%
Research & development 100% 133% 66.7%
Operating income 100% 200% 200%

2. Revenue
Year 2: ($24,000 - $20,000)/$20,000 = 20%
Year 3: ($30,000 – $24,000)/$24,000 = 25%

Operating income
Year 2: ($6,000 - $3,000)/$3,000 = 100%
Year 3: ($6,000 – $6,000)/$6,000 = 0%

3. Foyle’s gross profit margin 50% was comparable in Year 2 to competitor 52% and industry average 50%, but Foyle has
fallen to 40% in Year 3. Foyle’s operating income percentage 25% was the same in Year 2 to competitor and industry
average at 25%, but Foyle has fallen to 20% in Year 3.
Foyle in Year 3 has lower Sales and marketing than Competitor and Industry Average (6.7% vs. 11.1% and 10.7%), but
higher in General and admin (10% vs. 7% and 8.9%). Foyle’s Research and development is substantially below both
Competitor and Industry Average (3.3% vs. 8.9% and 5.4%)

Answers: CMA Part 2 Sample Essay Questions | © Copyright 2016 Institute of Certified Management Accountants 8
Answer: 2.2 Bockman Industries

1. Year 2 Year 1
Revenues 100.0% 100.0%
Cost of Goods Sold 48.4 47.5
Gross Margin 51.6 52.5
Selling Expenses 14.8 14.7
Administrative Expenses 17.5 17.5
Loss Due to Strike .3
Interest Expense .5 .5
Income before Taxes 18.4 19.8
Income Tax Expense 7.4 7.9
Income from Continuing Operations 11.1 11.9
Discontinued Operations 1.1 _____
Net Income 12.2 11.9

2. a. Sales increased but the gross margin percentage decreased. This could be caused by:
• a change in the product mix
• a decrease in the selling price which resulted in selling more units but if the cost per unit did not
change or increased, the gross margin percentage would increase
• an increase in the cost of goods that was not passed along to customers; sales could have increased
because competition did raise their prices

b. Selling expenses remained fairly constant as a percentage of sales. This could be caused by:
• nearly all of the selling expenses being variable costs
• increased advertising to boost sales

c. Administrative expenses remained at a constant percentage of sales. Since most of these costs are fixed, when sales
rise, the costs as a percentage of sales should decrease. The constant percentage could be caused by:
• moving outside of the relevant range of Year 1’s activity, causing step-fixed costs to increase
• poor budgeting procedures or poor cost controls that allow administrative spending in proportion
to sales

3. Number of shares outstanding = $780,000/$2.50 = 312,000

Book value = $7,363,200/312,000 = $23.60

Answer: 2.3 Han Electronic Inc.

1. a. A merger is the combination of two or more companies in which only one firm survives as the legal entity. An
acquisition is when one company acquires another as part of its overall business strategy.

b. The scenario describes a potential strategic acquisition as management was hoping to work on product mix.

c. Some of the synergies of a business combination are the economies realized where the performance of the
combined firm exceeds that of its previously separate parts. There are economies of scale where the benefits of size
cause the average unit cost to falls as volume increases. Acquisitions can increase sales, market share, or help the
company gain market dominance. There may be other marketing and strategic benefits, or the acquisition might
bring technological advance to the product table, or it may fill a gap in the product line which would enhance sales

Answers: CMA Part 2 Sample Essay Questions | © Copyright 2016 Institute of Certified Management Accountants 9
 made throughout the firm. It may be possible for duplicate facilities to be eliminated after a merger or departments
like marketing, accounting, purchasing, and other operations can be consolidated. The sales force may be reduced
to avoid duplication of effort in a particular territory. The companies may be able to concentrate a greater volume
of activity into a given facility and into a given number of people to have a more efficient utilization of resources.

2. a. A spinoff is a form of divestiture resulting in a subsidiary or division becoming an independent company. Ordinarily,
shares in the new company are distributed to the parent company’s shareholders on a pro-rata bases. An equity
carve-out is a public sale of stock in a subsidiary in which the parent usually retains majority control. Only the spin off
is described in the scenario above.

b. The spinoff would be if Electronics Inc were to decide to split the subsidiary off into its own separate company.

3. The main types of bankruptcy are chapter 7 – which is liquidation, or the sale of assets of a firm, and chapter 11 which is
rehabilitation of an enterprise through its reorganization.

Answers: CMA Part 2 Sample Essay Questions | © Copyright 2016 Institute of Certified Management Accountants 10