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IIA CIA Exam
Certified Internal Auditor Exam (Page 25 )

Updated On: 12-Jan-2026
Page 25 of 342
PDF with 1702 Questions

An assembly plant accumulates its variable and fixed manufacturing overhead costs in a single cost pool, which is then applied to work in process using a single application base. The assembly plant management wants to estimate the magnitude of the total manufacturing overhead costs for different volume levels of the application activity base using a flexible budget formula. If there is an increase in the application activity base that is within the relevant range of activity for the assembly plant, which one of the following relationships regarding variable and is true?

  1. The variable cost per unit is constant, and the total fixed costs decrease.
  2. The variable cost per unit is constant, and the total fixed costs increase.
  3. The variable cost per unit and the total fixed costs remain constant.
  4. The variable cost per unit increases, and the total fixed costs remain constant.

Answer(s): C

Explanation:

Total variable cost changes when changes in the activity occur within the relevant range. The cost per unit for a variable cost is constant for all activity levels within the relevant range. Thus, if the activity volume increases within the relevant range, total variable costs will increase. A fixed cost does not change when volume changes occur in the activity level within the relevant range. If the activity volume increases within the relevant range, total fixed costs will remain unchanged.



In a traditional manufacturing operation, direct costs would normally include

  1. Machine repairs in an automobile factory.
  2. Electricity in an electronics plant.
  3. Wood in a furniture factory.
  4. Commissions paid to sales personnel.

Answer(s): C

Explanation:

Direct costs are readily identifiable with and attributable to specific units of production. Wood is a raw material a direct cost) of furniture.



When comparing absorption costing with variable costing, which of the following statements is not true?

  1. Absorption costing enables managers to increase operating profits in the short run by increasing inventories.
  2. When sales volume is more than production volume. variable costing will result in higher operating profit
  3. A manager who is evaluated based on variable costing operating profit would be tempted to increase production at the end of a period in order to get a more favorable review.
  4. Under absorption costing. operating profit is a function of both sales volume and production volume.

Answer(s): C

Explanation:

Absorption full) costing is the accounting method that considers all manufacturing costs as product costs. These costs include variable and fixed manufacturing costs whether direct or indirect Variable direct) costing considers only variable manufacturing costs to be product costs. i.e.. inventoriable. Fixed manufacturing costs are considered period costs and are expensed as incurred. If production is increased without increasing sales, inventories will rise. However, all fixed costs associated with production will be an expense of the period under variable costing. Thus, this action will not artificially increase profits and improve the manager's review.



Which of the following is a product cost for a manufacturing company?

  1. Insurance on the corpor
  2. Property taxes on a fact
  3. Depreciation on a salesperson's vehicle.
  4. The salary of a sales manager.

Answer(s): B

Explanation:

Product costs such as material, labor, and overhead attach to the product and are carried
in future periods if the revenue from the product is recognized in subsequent periods. Period costs are , ~xpensed immediately because no direct relationship between cost and revenue exists.



The allocation of general overhead costs to operating departments can be least justified in determining

  1. In come of a product or functional unit.
  2. Costs for making management's decisions.
  3. Costs for the federal government's cost-plus contracts
  4. Income tax payable.

Answer(s): B

Explanation:

In the short run. management decisions are made in reference to incremental costs without regard to fixed overhead costs because fixed overhead cannot be changed in the short run. Thus, the emphasis in the short run should be on controllable costs. For example, service department costs allocated as a part of overhead may not be controllable in the short run.



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