ACCT2 Capital Budgeting

Manufacturing overhead costs are applied to work in process on the basis of
standard hours allowed
A favorable variance
implies a positive result if quality control standards are met.
Most companies that use standards set them at
the normal level.
The labor time requirements for standards may be determined by the
industrial engineers
The formula for the materials price variance is
(AQ × AP) – (AQ × SP).
The total materials variance is equal to the
sum of the materials price variance and the materials quantity variance.
The materials price variance is recorded
when materials are purchased
The direct labor quantity standard is sometimes called the direct labor
efficiency standard.
Capital budgeting is the process
of making capital expenditure decisions.
Disadvantages of the annual rate of return method include all of the following except that
management is unfamiliar with the information used in the computation.
Most of the capital budgeting methods use
cash flow numbers
Intangible benefits in capital budgeting
include increased quality or employee loyalty
The internal rate of return is the interest rate that results in a
zero NPV
The direct material price standard should include an amount for all of the following except
Normal spoilage cost
If the labor quantity variance is unfavorable and the cause is inefficient use if direct labor, the responsibility rests with the
Production department
The two levels that standards may be set at are
Normal and ideal
The balanced scored card approach
Normally sets the financial objectives first, and then sets the objectives in the other perspectives to accomplish the financial objectives
Which of the following statement is false?
a) The overhead volume variance indicates whether plant facilities were used efficiently during the period
b) false The costs that cause the overhead volume variance are usually controllable costs.
c) The overhead volume variance relates solely to fixed costs
d) The overhead volume variance is favorable if standard hours allowed for output are greater than the standard hours at normal capacity
The overhead volume variance is
The fixed overhead rate times the difference between normal capacity hours and standard hours allowed
a) False A standard cost is ,more accurate than a budgeted cost
b) A standard is a unit amount
c) In concept, standards and budgets are essentially the same
d) The standard cost of a product is equivalent to the budgeted cost per unit of product
Using standard costs
Provides a basis for evaluating cost control
Which of the following is a disadvantage of the cash payback technique
It ignores the expected profitability of a project
All of the following statement about intangible benefits in capital budgeting are correct except that they
Cannot be incorporated into the NPV calculation
The capital budgeting technique that indicates the profitability of a capital expenditure is the
Annual rate of return method
Performing a post-audit is important because
a) Managers will be more likely to submit reasonable data when they make investment proposals if they know their estimates will be compared to actual results
b) It provides a formal mechanism by which the company can determine whether existing projects should be terminated
c) It improves the development of future investment proposals because managers improve their estimation technique by evaluating their past successes and failures
d) All of these
The capital budgeting method that takes into account both the size of the original investment and the discounted cash flows is the
Profitability index
If a project has a zero net present value, its profitability index will be
a) One
The discount rate that will result in the lowest net present value for a project is
The highest rate used to evaluated the project
Which of the following will cause the internal rate of return to increase
An increase in the annual cash inflows
Standard costs
are predetermined unit costs which companies use as measures of performance.
The advantages of standard costs include all of the following except:
management by exception may be used.

management planning is facilitated.

they may simplify the costing of inventories.
D except

management must use a static budget.

Normal standards:
allow for rest periods, machine breakdowns, and setup time.
The setting of standards is:
a management decision.
Which of the following is correct about the total overhead variance
Standard hours allowed for the work done is the measure used in computing the variance.
In using variance reports to evaluate cost control, management normally looks into:
both favorable and unfavorable variances that exceed a predetermined quantitative measure such as a percentage or dollar amount.
Generally accepted accounting principles allow a company to:
report inventory and cost of goods sold at standard cost as long as there are no significant differences between actual and standard cost.
Which of the following would not be an objective used in the customer perspective of the balanced scorecard approach?

Percentage of customers who would recommend product to a friend.

Customer retention.

Brand recognition.

Earnings per share.

What is the order of involvement of the following parties in the capital budgeting authorization process?
Plant managers, capital budget committee, officers, board of directors.
What is a weakness of the cash payback approach
It ignores the time value of money.It ignores the useful life of alternative projects
Which is a true statement regarding using a higher discount rate to calculate the net present value of a project?
It will make it less likely that the project will be accepted.

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