FAC Finance and Accounting Budgeting & Cost Management 5

Question 1

A company uses absorption costing for external reporting and variable costing for internal management decisions. When production exceeds sales, net income under absorption costing will be:

Accepted Answer

Higher than net income under variable costing

Answer

When production exceeds sales, absorption costing defers fixed overhead in ending inventory, resulting in higher reported income than variable costing, which expenses all fixed overhead immediately.

Question 2

Which variance should a purchasing manager MOST likely be held accountable for?

Accepted Answer

Material price variance

Answer

The purchasing manager controls the prices paid for materials, making the material price variance the most appropriate measure of their performance.

Question 3

A company's contribution margin ratio is 40%. If fixed costs increase by $80,000, by how much must sales revenue increase to maintain the same net income?

Accepted Answer

$200,000

Answer

To cover $80,000 of additional fixed costs with a 40% contribution margin ratio, required additional sales = $80,000 ÷ 0.40 = $200,000.

Question 4

In the context of capital budgeting within a master budget, which document feeds directly into the cash budget?

Accepted Answer

The capital expenditure budget, for planned asset purchases paid in cash

Answer

Planned capital expenditures represent cash outflows and flow directly into the cash budget, whereas depreciation from the overhead budget is a non-cash item.

Question 5

When evaluating a make-or-buy decision, which of the following costs is MOST relevant?

Accepted Answer

Avoidable variable costs of internal production compared to the external purchase price

Answer

Relevant costs for a make-or-buy decision are those that differ between alternatives, primarily avoidable variable costs and any incremental fixed costs.

(FAC) Finance and Accounting Certification Practice Test

(FAC) Finance and Accounting Certification Practice Test

FAC Finance and Accounting Budgeting & Cost Management 5