Management Accounting: Budgeting & Evaluation Flashcards
6 cards from real AAT L4 practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Management Accounting: Budgeting & Evaluation flashcards as text
Which capital investment appraisal method explicitly accounts for the time value of money?
Answer: Net present value (NPV)
NPV discounts all future cash flows back to their present value using the cost of capital, explicitly recognising that money received in the future is worth less than money received today.
If the NPV of a project is positive, it means:
Answer: The project generates a return in excess of the cost of capital and should increase shareholder value
A positive NPV means the present value of cash inflows exceeds the present value of cash outflows (including the initial investment) — the project earns more than the required rate of return and adds value.
The accounting rate of return (ARR) is calculated as:
Answer: Average annual profit / Average (or initial) investment × 100%
ARR = (Average annual accounting profit / Average investment) × 100%. It uses profit (after depreciation) rather than cash flows and does not consider the time value of money.
In the context of budgeting, 'management by exception' means:
Answer: Managers focus attention and investigation on significant or material variances, not minor differences
Management by exception focuses managerial time on significant variances (both favourable and adverse) that exceed a predetermined significance threshold, allowing routine variances to be monitored without detailed investigation.
Throughput accounting focuses on maximising throughput (sales minus direct material cost) per unit of:
Answer: Bottleneck resource time
Throughput accounting ranks products by throughput per unit of the binding constraint (bottleneck resource); the bottleneck limits total output, so maximising throughput per bottleneck hour maximises total profit.
A budget manual typically contains:
Answer: Instructions for preparing budgets, including the timetable, formats, key assumptions, and responsibilities
The budget manual is a guide distributed to budget holders; it sets out the budget preparation timetable, standard formats, key assumptions (e.g., pay awards, inflation), submission deadlines, and each manager's responsibilities.