Management Accounting Flashcards

A company is considering dropping a product line that shows a net loss. Which cost is most relevant to this decision?

Answer: Avoidable fixed costs of the product line

Avoidable fixed costs that would be eliminated if the product line is dropped are the most relevant costs in the decision.

What is the margin of safety?

Answer: The excess of actual or budgeted sales over break-even sales

The margin of safety measures how much sales can decline before the company reaches break-even, expressed as a dollar amount or percentage.

Which transfer pricing method uses the market price of the transferred good or service?

Answer: Market-based transfer pricing

Market-based transfer pricing uses the external market price as the internal transfer price, which is generally considered the most objective method.

What does Economic Value Added (EVA) measure?

Answer: Net operating profit after tax minus the cost of capital employed

EVA = NOPAT − (Invested Capital × WACC), measuring whether the company earns more than its cost of capital.

In capital budgeting, what does the profitability index measure?

Answer: The ratio of the present value of future cash flows to the initial investment

The profitability index (PI) = PV of future cash inflows ÷ Initial investment; a PI greater than 1.0 indicates an acceptable project.

Which variance measures the efficiency of labor usage?

Answer: Direct labor efficiency variance

The direct labor efficiency variance = (Standard hours for actual output − Actual hours) × Standard rate, measuring hours saved or wasted.

A manufacturing company uses process costing. What are equivalent units used for?

Answer: Expressing partially completed units in terms of fully completed units

Equivalent units convert work-in-process inventory into units that are effectively complete, enabling cost per unit calculations.