QUESTION: 121

Explain why sensitivity analysis is useful when dealing with uncertainty in project

appraisal.

Select all the true statements.

Sensitivity analysis enables a company to determine the effect of changes to fixed costs on the planned outcome
Sensitivity analysis enables a company to determine the effect of changes to variables on the planned outcome
In project appraisal, an analysis can be made if all the key variables to ascertain by how much variable would need to change before the net present value (NPV) reaches zero i.e.
the indifference point.
In project appraisal, in analysis can be made of all the key variables to ascertain by how much each variable would need to change before the net present value (NPV) reaches 100% i.e. the maximum point.

Answer(s): B,C

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CORRECT TEXT
A company's budgeted data for the period are shown in the table below.

There is a stepped increase in fixed overheads of $10,000 when production exceeds 52,000 units.

Actual production for the period was 60,000 units.

What is the flexed budgeted cost for the period?

Give your answer as a whole number (in '000s).

$3070000
$3000000

Answer(s): A

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QUESTION: 123

A company produces trays of pre-prepared meals that are sold to restaurants and food retailers. Three varieties of meals are sold: economy, premium and deluxe.

Discuss the benefits of flexible budgeting for planning and control purposes.

Select all the true statements.

A fixed budget will provide meaningful control information when actual activity differs from budget and variable costs are significant.
If actual sales revenue is compared to a fixed budget it is possible to tell whether a favourable sales variance is due to an increase in units sold or an increase in sales price.
If sales volumes were well above budget, adverse variable cost variances will probably be reported, against the fixed budget, since more variable costs have to be incurred to support the higher level of activity.
Reporting against a fixed budget tells management nothing about the efficiency of operations.
If a flexible budget is prepared then the budget variances calculated will provide a better indication of performance since actual results will be compared against an appropriate benchmark.
The fixed budget however provides more insight into actual performance.

Answer(s): C,D,E

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QUESTION: 124

TP makes wedding cakes that are sold to specialist retail outlets which decorate the cakes according to the customers' specific requirements. The standard cost per unit of its most popular cake is as follows:

The general market prices at the time of purchase for Ingredient A and Ingredient B were $23 per kg and $20 per kg respectively. TP operates a JIT purchasing system for ingredients and a JIT production system; therefore, there was no inventory during the period.

Discuss the usefulness of the planning and operational variances calculated for TP's management.

Select ALL the TRUE statements.

The use of planning and operational variances will enable TP's management to draw a distinction between variances caused by factors extraneous to the business and planning errors (planning variances) and variances caused by factors that are within the control of management (operational variances).
The purchasing manager's performance can't be compared with the adjusted standards that reflect the conditions the manager actually operated under during the reporting period.
If planning and operational variances are not distinguished, there is potential for dysfunctional behavior especially where the manager has been operating efficiently and performance is being judged by factors outside the manager's control. In the case of TP it became evident during the period that the prevailing market prices for materials were significantly less than those set during the budget process.
Where a revision of standards is required due to environmental changes that were not foreseeable at the time the budget was prepared, the planning variances are controllable.
Standards that failed to anticipate known market trends when they were set will reflect faulty standard setting.

Answer(s): A,C,E

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QUESTION: 124