Gleim / Flesher CMA Review 15th Edition, 1st Printing Part 1 Updates

of 8 Gleim / Flesher CMA Review 15th Edition, 1st Printing Part 1 Updates NOTE: Text that should be deleted from the outline is displayed as struck through with a red background. New text is shown in courier font with a green background. Introduction Middle of page 5: This is a correction clarifying test question difficulty. Level of Performance Required The ICMA has specified three levels of coverage as reproduced below and indicated in its content specification outlines. All topics on the CMA exam are tested at up to Skill Level C. The relative proportions of multiple-choice questions are: Skill Level A 25%, Skill Level B 50%; Skill Level C 25%. Study Unit 1 -- Budgeting Concepts and Forecasting Techniques Middle of page 34: This corrects a typo; percentages should be minutes. a) With the completion of the final batch (units 9 16), the average had come down to 40.96% minutes. b) For it to reach this level from the 51.2% minutes it had reached at the end of the fourth batch (units 5 8), the average of the units in the fifth batch alone must have been 30.72% minutes [(40.96% minutes 2) 51.2% minutes].

of 8 Bottom of page 38: This adds an example showing that, even though the best answer is to stock two yachts, which will yield a profit of $225,000 in the long run, there will be some risk averse dealers who would not want to expose themselves to a $100,000 loss when demand is zero and two yachts are stocked. Thus, there are behavioral implications that might take precedence over what seemingly is the best decision. e. The expected value criterion is likely to be adopted by a decision maker who is risk neutral. However, other circumstances may cause the decision maker to be risk averse or even risk seeking. 1) EXAMPLE: A dealer in luxury yachts may order 0, 1, or 2 yachts for this season s inventory. a) The dealer projects demand for the season as follows: Demand Probability 0 yachts 10% 1 yacht 50% 2 yachts 40% b) The cost of carrying each excess yacht is $50,000, and the gain for each yacht sold is $200,000. The profit or loss resulting from each combination of decision and outcome is thus as follows: Expected Value Without States of Nature Perfect Info. Decision Demand = 0 Demand = 1 Demand = 2 Totals Stock 0 yachts $ 0 $ 0 $ 0 $ 0 Stock 1 yacht (50,000) 200,000 200,000 175,000 Stock 2 yachts (100,000) 150,000 400,000 225,000 2) Thus, in the example on the previous page In this example, a risk averse decision maker may not wish to accept the risk of losing $100,000 by ordering two yachts.

of 8 Top of page 61: This expands the explanation of the correct answer. 53. In order to ensure that the company would not Answer (B) is correct. (CMA, adapted) lose money on the project, LCB s minimum bid for the REQUIRED: The minimum bid to ensure that the company will not 40 units would be lose money on the contract. DISCUSSION: The full cost of the incremental production is A. $760,800 $708,640 ($184,320 DL + 184,320 VOH + $240,000 DM + $100,000 FOH). The company is permitted to bid 25% above B. $608,640 full cost (including fixed overhead). Given a learning curve of 80% and a cumulative average unit labor cost C. $885,800 for 40 units of $7,680 ($307,200 40), the additional labor costs for the next 40 units can be determined. D. $708,640 Cumulative average unit labor cost for 80 units is estimated to be $6,144 ($7,680 80%). Estimated total labor cost for 80 units is $491,520 (80 units $6,144). Thus, the incremental labor cost of the last 40 units is expected to be $184,320 ($491,520 - $307,200). Variable overhead is $1 per direct labor dollar, or $184,320. Adding $240,000 for materials and $100,000 for fixed overhead results in a full cost of $708,640 ($184,320 DL + $184,320 VOH + $240,000 DM + $100,000 FOH). However, that amount includes $100,000 of fixed overhead that would presumably not increase as a result of the production. Thus, if the company obtains the contract at a price of $608,640 ($708,640 $100,000), it will break even. The minimum bid is therefore $608,640: the incremental cost of labor, variable overhead, and raw materials. Bottom of page 67: This corrects a typo in the book. 72. Butler and Burnside's expected profits with perfect Answer (D) is correct. (CMA, adapted) information is REQUIRED: The expected profit with perfect information DISCUSSION: With perfect information, the seller could A. $28 order the inventory each day to meet the exact demand. For example, if demand were zero, supply would be zero and the B. $20 seller would not lose any money. If demand were 2 units, the seller would acquire an equal supply and make a profit of $40. C. $(36) The total profit can be calculated by weighting the payoff from each best option. D. $68 Demand Payoff Probability Weighted Payoffs 0 $ 0.1 = $ 0 2 40.3 = 12 4 80.4 = 32 6 120.2 = 16 24 Expected Profit $68

of 8 Study Unit 2 -- Budget Methodologies and Budget Preparation Middle of page 82: This corrects a typo in the book. Sample Company CASH BUDGET For Quarter Ending March 31, Year 10 January February March Total Beginning cash balance $ 80 $ 20 $ 1,957 $ 80 Receipts: Collection from sales* 6,800 9,350 11,825 27,975 TOTAL CASH AVAILABLE $6,880 $9,370 $13,782 $28,055 Payments: Purchases** $3,150 $2,760 $ 3,960 $ 9,870 Sales salaries 1,350 1,455 2,093 4,898 Supplies 360 388 588 558 1,306 Utilities 120 110 100 330 Administrative salaries 1,800 1,800 1,800 5,400 Advertising 80 80 80 240 Equipment purchases 0 820 3,000 3,820 TOTAL PAYMENTS $6,860 $7,413 $11,591 $25,864 ENDING BALANCE $ 20 $1,957 $ 2,191 $ 2,191 Top of page 85: This corrects a typo in the book. b. The full per-hour cost of labor can now be determined. This will be used in determining the costs embedded in units remaining in ending finished goods inventory. 1) Since a first-in, first-out (FIFO) assumption is used for all inventories and only units produced in June are expected to remain at the end of June, the calculation is only necessary for June s data. Total projected Total projected Full direct direct labor direct labor = labor cost cost hours per hour Ref. $87,360 3,640 = $24 DLB5

of 8 Study Unit 3 -- Cost Management Terminology Top of page 149: This corrects a minor typo in the book. QUESTIONS 3.1 Cost Management Terminology 1. The terms direct cost and indirect cost are Answer (C) is correct. (CMA, adapted) commonly used in accounting. A particular cost might REQUIRED: The factor that influences whether a cost is be considered a direct cost of a manufacturing classified as direct or indirect. department but an indirect cost of the product DISCUSSION: A direct cost can be specifically associated produced in the manufacturing department. with a single cost object in an economically feasible way. An Classifying a cost as either direct or indirect depends indirect cost cannot be specifically associated with a single cost upon object. Thus, the specific cost object influences whether a cost is direct or indirect. For example, a cost might be directly A. The behavior of the cost in response to volume associated with a single plant. The same cost, however, might changes. not be directly associated with a particular department in the plant. B. Whether the cost is expensed in the period in Answer (A) is incorrect. Behavior in response to volume which it is incurred. changes is a factor only if the cost object is a product. Answer (B) is incorrect. The timing of an expense is not a means C. The cost objective to which the cost is being of classifying a cost as direct or indirect. Answer (D) is incorrect. related. Both direct and indirect costs can be either avoidable or unavoidable, depending upon the cost object. D. Whether an expenditure is unavoidable because it cannot be changed regardless of any action taken

of 8 Study Unit 5 -- Cost Allocation Techniques Top of page 234: This rewording more clearly elucidates the meaning of the example. c. If the by-products are material, they are recognized at the time of production and recorded capitalized in a separate inventory account, as in this example: Finished goods inventory Asphalt (net manufacturing allocated costs) $XX,XXX Finished goods inventory Fuel oil (net manufacturing allocated costs) XX,XXX Finished goods inventory Diesel fuel (net manufacturin allocated costs) XX,XXX Finished goods inventory Kerosene (net manufacturing allocated costs) XX,XXX Finished goods inventory Gasoline (net manufacturing allocated costs) XX,XXX By-product inventory Sludge (estimated net realizable value) X,XXX Work-in-process (total manufacturing costs for period) $XXX,XXX 1) The amount of miscellaneous revenue (or reduction to cost of goods sold) reported capitalized is the entire estimated net realizable value of the byproducts generated during the period. a) This treatment is justifiable when a ready market for the by-products is available. 2) Because revenue (or cost of goods sold) was affected at the time of production, these accounts are unaffected when the by-products are sold. Cash By-product inventory Sludge $X,XXX $X,XXX d. If the by-products are immaterial, they are not recognized until the time of sale and are thus not recorded on the balance sheet. 1) The amount of miscellaneous revenue or reduction to cost of goods sold reported is the actual proceeds from the sale of the by-products. Middle of page 235: This change more clearly elucidates the point being made. a. The crucial quality of an allocation base is that it be a cost driver of the costs in the pool to be allocated. 1) Recall that a cost driver must capture a cause-and-effect relationship between the level of the driver and the level of the cost being allocated and the cost object to which the costs are being attached.

of 8 Bottom of page 235: The application rate is per hour, not per unit. The company s best projection is that 1,110,000 units will be produced and 57,000 machine hours will be expended during the upcoming year. The overhead allocation rates can thus be calculated as follows: Variable overhead application rate: $281,000 1,110,000 units of output = $0.253 per unit Fixed overhead application rate: $375,000 57,000 machine hours = $6.579 per unit hour Middle of page 266: This is a correction of the correct answer. 55. Assuming two overhead accounts are used, Answer (D) is correct. (Publisher, adapted) what is the entry to close them and to charge REQUIRED: The journal entry to close the overhead underapplied overhead to cost of goods sold? accounts and to charge underapplied overhead to CGS. DISCUSSION: Although not theoretically sound, total under- A. Cost of goods sold XX or overapplied overhead is often debited (credited) to CGS. The Finished goods XX correct entry to close the overhead accounts and to charge underapplied overhead to CGS is to debit the factory overhead B. Factory O/H applied XX applied account for the amount of overhead applied for the period Finished goods XX and to credit factory overhead control for the amount of overhead Cost of goods sold XX actually incurred for the period. The amount actually incurred exceeds the amount of overhead applied because overhead is C. Cost of goods sold XX underapplied. The difference is the amount charged to CGS. Factory O/H applied XX Answer (A) is incorrect. A debit to cost of goods sold and a credit to finished goods expenses inventoried costs related to D. Cost of goods sold XX items sold. Answer (B) is incorrect. The entry to close the Factory O/H applied XX overhead accounts credits CGS when overhead has been Factory O/H control XX overapplied. Answer (C) is incorrect. Debiting CGS and crediting overhead applied does not close the overhead accounts. Factory O/H applied XX Cost of goods sold XX Factory O/H control XX Study Unit 6 -- Operational Efficiency and Business Process Performance Middle of page 281: The inventory items were listed in the wrong order in the book, so it made the beginning inventories incorrect. This gives the correct quantities for each item. Current inventory quantities are as follows: Subunit On Hand CM12 25 PR75 35 LQ992 30 50 TT413 40 30 XH511 50 40

of 8 Study Unit 8 -- Responsibility Accounting and Performance Measures Extensive changes have been made to Subunit 8.5. The replacement pages can be viewed at the following link: http:///public/support/updates/19_cma1_08_pp390-391.pdf http:///public/support/updates/23_cma1_08_pp415-421.pdf Bottom of page 398: Question 6 has been removed because the topic is not covered by the CMA exam. Appendix A Middle of page 517: The note at the bottom of the page has been deleted. Pages 520-521: The old/unchanged 4-part exam Registration Form has been replaced by a new Registration Form for the new, 2-part exam. You can fill out a registration form online at http://www.imanet.org/certification_taking_registration_twopart.asp