CMA Part 2 Slides PDF

CMA Learning System, Version 3.
0, 2nd Edition
Part 2 Participant’s Guide
Session 1
Updated Slides
These updated slides are being provided to update the CMA Learning System with suggestions received by
instructors of the CMA Learning System, and to provide further discussions and clarifications relevant to the
content of the CMA Exam. These slides are to provide replacements of those slides that have been requested
be updated. In the updates and errata process, it is important to include those suggestions that are deemed
necessary and in alignment with the CMA Exam.
Session 1
CMA Learning System, Part 2: Financial Decision Making, Version 3.0, 2nd Edition, January 2012
Copyright © 2009, 2012 Institute of Management Accountants. All rights reserved.
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CMA Learning System, Version 3.0, 2nd Edition
Session 2
Updated Exercise and Slides
Session 2
Session 2 Exercise: Financial Statement Analysis Ratios
All-Things, Inc.
Comparative Statement of Financial Position
As of May 31
(in thousands)
Year 3 Year 2
Cash $ 400 $ 500
Marketable securities (at cost) 500 500
Accounts receivable (net) 3,200 2,600
Inventory 5,800 5,400
Total current assets 9,900 9,000
Property, plant, and equipment (net) 7,100 7,000
Total assets $17,000 $16,000
Accounts payable $3,700 $3,400

Income taxes payable 900 800
Accrued expenses 1,700 1,400
Total current liabilities 6,300 5,600
Long-term debt 2,000 1,800
Total liabilities 8,300 7,400
Common stock ($1 par value) 2,700 2,700

Paid-in-capital in excess of par 1,000 1,000
Retained earnings 5,000 4,900
Total shareholders’ equity 8,700 8,600
Total liabilities and shareholders’ equity $17,000 $16,000
Session 2
Session 2 Exercise Solution: Financial Statement Analysis Ratios

Net Profit Margin Percentage
• Measures the net income generated by each dollar of sales. The net profit margin ratio provides
some indication of the ability of the firm to absorb cost increases or sales declines.
• All-Things’ net profit margin has been improving and is currently above the industry average.
The improvement in net profit margin further indicates the ability of the firm to weather soft
economic periods, pay down debt, or take on additional debt for expansion.
C. At least two limitations of ratio analysis include the following:
• It is often difficult to make comparisons among firms within an industry due to accounting
differences. Different numbers can be shown in the financial statements for the same economic
event because of different accounting methods, such as straight-line versus accelerated
depreciation, LIFO versus FIFO inventory, and so forth.
• Ratios represent past conditions that may not indicate future trends.
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Session 4 Exercise Solution: Current Variance (Page 106)
3. Material quantity variance =

standard price x [(standard usage per unit x actual units produced) – actual quantity used]
Standard Price Ounces Used*

Cookie mix 0.02 x [(10 x 450,000 units) – 4,650,000] = $ 3,000 U
Milk chocolate 0.15 x [(5 x 450,000 units) – 2,660,000] = 61,500 U
Almonds 0.50 x [(1 x 450,000 units) – 480,000] = 15,000 U
$79,500 U
* (Standard ounces x actual units produced) – actual units used = variance
4. Labor efficiency variance = standard hourly rate x (standard hours – actual hours)
Standard Cost Minutes Used*
Mixing ($14.40/hr. x [(1 min. x 450,000 units) – 450,000 min.] = $ 0

60 minutes)
Baking ($18.00/hr. x [(2 min. x 450,000 units) – 800,000 min.] = 30,000
60 minutes)
$30,000 F
* [(Standard minutes x actual units produced) – actual minutes used) = variance
5. Variable overhead efficiency variance = standard hourly rate x (standard hours – actual hours)
$32.40/hr
60 min. x [( 3 min. x 450,000 units ) ( - 450,000 min. + 800,000 min. )]
= $54,000 F
6. Variable overhead spending variance =

(actual min. x standard overhead rate) – actual variable overhead
[( 450,000 min. + 800,000 min. )x( $32.40/hr.

60 min. )] - $750,000 = $75,000 U
7. Contribution margin volume variance =

budgeted unit contribution* x (actual units – budgeted units)
* $1,636,000 contribution margin = $4.09

400,000 budgeted units
$4.09 x (450,000 units – 400,000 units) = $204,500 F
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Session 8 Exercise 1 Solution: Break-Even and Special Order

A. The break-even point in units is:
Fixed costs: $320,000 (cost of goods sold) + $20,000 (selling and administrative expenses) =
$340,000
Variable costs: $800,000 (cost of goods sold) + $100,000 (selling and administrative expenses) =
$900,000 total variable costs
$900,000
Variable cost per unit: = $22.50 per unit
40,000 units
Contribution margin per unit: $40.00 (selling price per unit) – $22.50 (variable cost per unit) =
$17.50 per unit
Break-Even in Units:
Total Fixed Costs $340,000
= = 19,429 units
Contribution Margin Per Unit $17.50
B. Special order cost analysis:

A special order is a one-time order that is not considered part of the company’s normal ongoing
business. To analyze the special order, it is necessary to focus on the relevant costs associated
with the decision. Only the incremental revenue and costs are relevant to this decision.
Relevant revenue:
Revenue related to special order (6,000 units x $25.00) $150,000
Relevant cost:
Cost associated with the special order
(Variable costs directly related to producing this order)* 131,760
Increase in revenue from special order: $ 18,240
Yes, the special order should be accepted, since the increase in revenue is greater than the
increase in costs associated with the order.
*Variable cost per unit for special order:

Original variable cost adjusted for changes to variable cost structure = $22.50 – $0.54 = $21.96
6000 units x $21.96 = $131,760
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Session 10 Exercise 4: Profitability Index

Section D, Topic 4: Ranking Investment Projects
The Raines Company is evaluating the following three capital investment projects:
Project Cash Inflow Cash Inflow Cash Inflow Present Value of

Year 0 Year 1 Year 2 Cash Flows at 10%
A –$100,000 $100,000 $50,000 $132,200
B –50,000 50,000 200,000 210,650
C –50,000 50,000 150,000 169,350
The company has a $100,000 capital rationing limit. Calculate the profitability index for each
project and determine which project will generate the most money from the limited capital
available.
Note: Round all calculations to two decimal places (e.g., 1.54).
Session 10
Session 10 Exercise 4 Solution: Profitability Index

Correct answer: 4.21
The formula to determine profitability index (PI) is:
PV of Future Cash Flows

Profitability Index =
Total Initial Investment
Given the following information for the three projects, calculate the profitability index for each
one.
Project Investment Present Value of Profitability

Cash Flows at 10% Index
A $100,000 $132,200
B 50,000 210,650
C 50,000 169,350
The profitability index for each project is shown below.
Project Investment Present Value of Profitability

Cash Flows at 10% Index
A $100,000 $132,200 1.32
B 50,000 210,650 4.21
C 50,000 169,350 3.39
Project B has the highest profitability index, with 4.21. But given the capital rationing limit of
$100,000, projects B and C can both be recommended over project A because together they have
greater net present value and can provide the highest level of return without exceeding the
constraint.
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necessary and in alignment with the CMA Exam
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CMA Learning System, Version 3.

Session 2 Exercise: Financial Statement Analysis Ratios

Accounts payable $3,700 $3,400

Common stock ($1 par value) 2,700 2,700

Total liabilities and shareholders’ equity $17,000 $16,000

Session 2 Exercise Solution: Financial Statement Analysis Ratios

Session 4 Exercise Solution: Current Variance (Page 106)

3. Material quantity variance =

Standard Price Ounces Used*

Standard Cost Minutes Used*

Mixing ($14.40/hr. x [(1 min. x 450,000 units) – 450,000 min.] = $ 0

6. Variable overhead spending variance =

[( 450,000 min. + 800,000 min. )x( $32.40/hr.

7. Contribution margin volume variance =

* $1,636,000 contribution margin = $4.09

$4.09 x (450,000 units – 400,000 units) = $204,500 F

Session 8 Exercise 1 Solution: Break-Even and Special Order

B. Special order cost analysis:

*Variable cost per unit for special order:

Session 10 Exercise 4: Profitability Index

Project Cash Inflow Cash Inflow Cash Inflow Present Value of

Note: Round all calculations to two decimal places (e.g., 1.54).

Session 10 Exercise 4 Solution: Profitability Index

PV of Future Cash Flows

Project Investment Present Value of Profitability

The profitability index for each project is shown below.

Project Investment Present Value of Profitability

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