CMA P1 Planning, Budgeting and Forecasting: practice questions with answers

Question 1

As part of its strategic planning, Granite Ridge Outdoor Gear is preparing a SWOT analysis. Which of the following should be classified as a threat?

1. A The company's aging production equipment, which causes frequent downtime
2. B Strong customer loyalty to the company's flagship brand
3. C Falling interest rates that make expansion financing cheaper
4. D Proposed legislation that would sharply raise compliance costs for every firm in the industry

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Answer: D. SWOT separates internal factors (strengths and weaknesses, which the organization controls) from external factors (opportunities and threats, arising in the environment).

Industry-wide regulation that raises costs is external and unfavorable, so it is a threat. Aging equipment is an internal weakness, brand loyalty an internal strength, and cheaper financing an external opportunity.

Question 2

Northbay Plastics regressed monthly factory overhead on machine hours and obtained: overhead = $18,500 + $4.20 x machine hours, with a coefficient of determination (R squared) of 0.81. Which statement about a month with 6,000 machine hours is correct?

1. A Forecast overhead is $43,700, and 90% of the variation in overhead is explained by machine hours.
2. B Forecast overhead is $25,200, and 81% of the variation in overhead is explained by machine hours.
3. C Forecast overhead is $43,700, and there is an 81% probability that the forecast will be accurate.
4. D Forecast overhead is $43,700, and 81% of the variation in overhead is explained by machine hours.

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Answer: D. Forecast = 18,500 + 4.20 x 6,000 = 18,500 + 25,200 = $43,700.

R squared of 0.81 means 81% of the variation in overhead is explained by the variation in machine hours. The correlation coefficient r = square root of 0.81 = 0.90 (positive, as the slope is positive). R squared is not a probability of forecast accuracy.

Question 3

Drayford Garden Centers budgets sales of $600,000 for April and $750,000 for May. Its gross margin is 40% of sales. Merchandise inventory at the end of each month is to equal 30% of the next month's cost of goods sold, and this policy was met at the end of March. What are Drayford's budgeted merchandise purchases for April?

1. A $258,000
2. B $333,000
3. C $387,000
4. D $405,000

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Answer: C. Cost of goods sold = 60% of sales: April $360,000, May $450,000.

| April | Amount |
|---|---|
| Cost of goods sold | $360,000 |
| Add desired ending inventory (30% x $450,000) | $135,000 |
| Less beginning inventory (30% x $360,000) | ($108,000) |
| Budgeted purchases | $387,000 |

Question 4

Westerly Castings budgets 25,000 direct labor hours for the next quarter. Variable manufacturing overhead is $6 per direct labor hour, and fixed manufacturing overhead is $180,000 per quarter, including $40,000 of depreciation. All other overhead is paid in the quarter incurred. What are budgeted cash disbursements for manufacturing overhead for the quarter?

1. A $140,000
2. B $150,000
3. C $290,000
4. D $330,000

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Answer: C. Variable overhead = 25,000 x $6 = 150,000.
Fixed overhead requiring cash = 180,000 - 40,000 depreciation = 140,000.

Cash disbursements for overhead = 150,000 + 140,000 = $290,000.

Question 5

Kelso Labs runs a chain of private clinical testing laboratories. In its strategic plan it is assessing several changes in its industry. Under Porter's five forces model, which change most directly increases the threat of new entrants?

1. A Regulators drop the five-year operating history they required before a new laboratory could bill public insurers.
2. B Hospitals in the region form a single purchasing group that negotiates all of their outsourced testing contracts.
3. C Low-cost home test kits allow patients to carry out several common tests without visiting a laboratory.
4. D Two of Kelso's largest competitors merge and then cut their prices sharply to win market share from Kelso.

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Answer: A. The threat of new entrants depends on barriers to entry, such as capital requirements, economies of scale, access to distribution, brand loyalty and government regulation. When a barrier falls, entry becomes easier and the threat rises.

- Removing the operating-history requirement for billing public insurers lowers a regulatory barrier: threat of new entrants.
- A single hospital purchasing group: bargaining power of buyers.
- Home test kits: threat of substitutes.
- A merger and price war: rivalry among existing competitors.

Question 6

Ardent Robotics expects the first unit of a new assembly to take 200 direct labor hours. Labor time is expected to follow an 85% learning curve under the incremental unit-time learning model. What total number of labor hours should Ardent budget for the first 4 units (to one decimal place)?

1. A 578.0 hours
2. B 669.1 hours
3. C 671.8 hours
4. D 800.0 hours

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Answer: B. Under the incremental unit-time model, the time for the last individual unit falls to 85% each time cumulative output doubles. Time for unit n = 200 x n^b, where b = log 0.85 / log 2 = -0.2345.

| Unit | Time (hours) |
|---|---|
| 1 | 200.0 |
| 2 | 200 x 0.85 = 170.0 |
| 3 | 200 x 3^-0.2345 = 154.6 |
| 4 | 200 x 0.85 x 0.85 = 144.5 |
| Total | 669.1 |

(Under the cumulative average-time model the total would be 4 x 144.5 = 578.0 hours.)