Management Accounting Flashcards

A company has a margin of safety of 25%. This means:

Answer: Actual sales can fall 25% before the company makes a loss

A margin of safety of 25% indicates actual sales exceed breakeven by 25%, so sales could drop by that amount before a loss occurs.

Process costing is most appropriate for which type of production?

Answer: Oil refining producing homogeneous outputs

Process costing suits continuous, mass production of identical or near-identical units such as oil refining, chemicals, or food processing.

Normal loss in a process account is valued at:

Answer: Net realizable value (scrap value)

Normal loss is valued at its scrap/net realizable value; its cost is absorbed into the remaining good output.

Which of the following best describes a 'relevant cost' in decision-making?

Answer: A future incremental cash cost that differs between alternatives

Relevant costs are future, incremental cash flows that differ between the decision alternatives being evaluated.

A company is considering dropping a product line. Which of the following would NOT be relevant to the decision?

Answer: Historical development costs already spent

Historical development costs are sunk costs — they have already been incurred and cannot be recovered, making them irrelevant to the decision.

If a company operates at full capacity and receives a special order, the minimum price it should charge per unit is:

Answer: Variable cost plus opportunity cost per unit

At full capacity, accepting a special order means sacrificing existing contribution (opportunity cost), so the minimum price must cover variable cost plus that lost contribution.

The internal rate of return (IRR) of a project is best described as:

Answer: The discount rate at which the NPV of the project equals zero

The IRR is the discount rate that makes the NPV of all cash flows from a project equal to zero.