Get This Knowledge 1.0 Flashcards
WHAT is considered a method for evaluating capital projects that is LEAST useful from an investment analysis point of view?
Accounting Rate of Return
WHY? - Because it is an unsatisfactory means of evaluating capital projects due to its use of:
(1) Accrual-basis numbers, the calculation is subject to such accounting judgments; and
(2) An average of all of a firm’s capital projects
Bottom Line: IT reveals nothing about the performance of individual investment choices
Fill in the Blank.
A natural monopoly is _________.
Identified with a one-firm industry with significant economies of scale and
- in which unit costs are minimized
i. e. A natural monopoly occurs when economies of scale are very great
WHAT does the master budget process usually begins with?
THE sales budget
i.e. IT is the first budget prepared
WHY? - Because it is the basis for all subsequent budgets
The next step is to decide how much to produce or purchase
WHAT is the difference between a Master Budget and a flexible budget?
THE master budget is prepared before the period begins, while a flexible budget is prepared after it ends
WHY? - Because it is management’s best estimate of sales, production levels, and costs
WHAT should the planned cost column be based on when preparing a performance report for a cost center?
MAJOR KEY: Using flexible budgeting technique
ON a Budget adjusted to actual levels of activity for the period being reported
WHAT is a primary advantage of Flexible Budgeting?
The ability to adjust amounts for varying activity levels
i.e. THIS is the primary advantage of flexible budgeting
WHAT basis for cost standards should they be set to measure controllable production inefficiencies?
Engineering standards based on attainable performance
WHY? - Because Subordinates should believe that standards are both fair and achievable. Otherwise, they may tend to sabotage, ignore, or circumvent them
WHAT is the difference between the flexible budget and the static budget?
A flexible budget provides cost allowances for different levels of activity, whereas a static budget provides costs for one level of activity
FOR what reason are ideal standards replaced by attainable standards for budgeting purposes in a manufacturing environment?
Budgeting and forecasting require accuracy
i.e. Standards must be realistic and achievable if they are to be used in budgeting and forecasting
WHAT is the chronological order of preparation for the components of the operating budget?
(A) Sales budget
(B) Production budget
(C) Purchases budget
(D) Cost of goods sold budget
(E) Administrative budget
In a comprehensive budgeting system, WHAT would be the proper order to prepare certain budget schedules of Financial Statements?
(1) Cost of goods Sold
(2) Income Statement (I/S)
(3) Balance Sheet (B/S); and
(4) Statement of Cash Flows
WHY would management select a high hurdle rate of return for certain projects for capital budgeting?
Because management wants to factor risk into its consideration of projects
WHAT would be considered the appropriate order for the preparation of certain budget schedules (e.g. income statement, balance sheet, Cost of goods sold and statement of cash flows)?
Cost of goods sold
Income statement
Balance sheet; and
Statement of cash flows
WHAT is the best basis for a firm to measure controllable production inefficiencies?
Using estimates based on attainable performance
WHY? - Because a standard cost system compares expected costs to actual costs.
Thus, deviations from expected results are identified this way
WHAT budget schedule would provide the necessary input data for a direct labor budget?
THE Production Budget
WHY? - Because the direct labor budget requires the implementation of the production budget
