Financial Planning & Analysis Flashcards

A favorable material price variance combined with an unfavorable material usage variance most likely indicates that:

Answer: Cheaper materials were bought but required more quantity to meet standards

Lower-cost materials may have inferior quality, causing production to use more units than the standard allows, creating an unfavorable usage variance.

Which of the following best describes the concept of 'management by exception' in budget analysis?

Answer: Managers focus attention on variances that exceed predetermined thresholds

Management by exception directs managerial attention to significant variances from budget, improving efficiency by focusing on items that need corrective action.

If net present value (NPV) of a project is positive, it means the project:

Answer: Generates returns exceeding the required rate of return

A positive NPV indicates the project's discounted cash inflows exceed its cost, meaning it adds value by earning more than the required rate of return.

A budget committee is reviewing a department's request. The department head uses the 'padding' technique by inflating expense estimates. This practice is known as:

Answer: Budgetary slack

Budgetary slack is the deliberate overestimation of expenses (or underestimation of revenues) to create a cushion that makes budget targets easier to meet.

Which metric measures the number of days it takes a company to convert inventory into cash from sales?

Answer: Cash conversion cycle

The cash conversion cycle (days inventory outstanding + days sales outstanding − days payable outstanding) measures total time from inventory purchase to cash collection.

In sensitivity analysis for a budget, what does varying one assumption while holding all others constant test?

Answer: The impact of a single variable on the budgeted result

One-way sensitivity analysis isolates the impact of changing a single input variable (e.g., sales price or volume) to understand its individual effect on budget outcomes.

A company has total assets of $1,000,000, total liabilities of $600,000, and net income of $80,000. What is the return on equity (ROE)?

Answer: 20%

ROE = Net income ÷ Shareholders' equity = $80,000 ÷ ($1,000,000 − $600,000) = $80,000 ÷ $400,000 = 20%.