APP Financial Analysis & Reporting 3 — Questions and Answers
Question 1: Which costing method assigns manufacturing overhead to products based on the activities that drive costs, rather than volume measures like direct labor hours?
- Standard costing
- Absorption costing
- Activity-based costing (ABC) (Correct answer)
- Marginal costing
Correct answer: Activity-based costing (ABC)
ABC traces overhead to specific activities (e.g., machine setups, inspections), giving a more accurate picture of true product cost.
Question 2: When a supplier's balance sheet shows a high proportion of intangible assets relative to total assets, a purchasing practitioner should be concerned about:
- Excessive inventory levels
- Asset valuation reliability and liquidation value in case of insolvency (Correct answer)
- Low gross margins
- High accounts payable turnover
Correct answer: Asset valuation reliability and liquidation value in case of insolvency
Intangibles like goodwill can lose value rapidly and have little liquidation value, making the supplier's net worth less reliable.
Question 3: A make-or-buy financial analysis should include all of the following EXCEPT:
- Incremental fixed costs
- Opportunity costs of capital
- Sunk costs already incurred (Correct answer)
- Variable production costs
Correct answer: Sunk costs already incurred
Sunk costs are irrelevant to future decisions because they cannot be recovered regardless of the choice made.
Question 4: In financial ratio analysis, a debt-to-equity ratio greater than 2.0 for a supplier generally signals:
- Conservative financial management
- Strong equity growth
- High financial leverage and potential solvency risk (Correct answer)
- Excellent liquidity
Correct answer: High financial leverage and potential solvency risk
A D/E ratio above 2.0 means the supplier relies heavily on debt financing, increasing vulnerability to interest rate changes and economic downturns.
Question 5: Which type of cost remains constant per unit but changes in total as production volume changes?
- Fixed cost
- Variable cost (Correct answer)
- Semi-variable cost
- Sunk cost
Correct answer: Variable cost
Variable costs are constant per unit but their total rises or falls proportionally with output volume.
Question 6: A purchasing manager reviewing a supplier's working capital trend over three years notices a steady decline. The most likely implication for the buyer is:
- The supplier is becoming more efficient
- The supplier may struggle to fund operations and fulfill orders on time (Correct answer)
- The supplier's profitability is improving
- The supplier is reducing unnecessary assets
Correct answer: The supplier may struggle to fund operations and fulfill orders on time
Declining working capital reduces operational buffer, increasing the risk that the supplier cannot pay suppliers or maintain inventory to fulfill buyer orders.
Question 7: Price variance in standard costing is calculated as:
- (Actual price – Standard price) × Actual quantity purchased (Correct answer)
- (Standard price – Actual price) × Standard quantity
- (Actual quantity – Standard quantity) × Standard price
- (Actual cost – Budgeted cost) ÷ Budgeted cost
Correct answer: (Actual price – Standard price) × Actual quantity purchased
Purchase price variance measures the cost difference between what was actually paid and the standard price, multiplied by the actual quantity bought.
APP Financial Analysis & Reporting 3
Which costing method assigns manufacturing overhead to products based on the activities that drive costs, rather than volume measures like direct labor hours?