6. Managerial Accounting, Budgeting and Control

Introduction and context

Financial accounting reports an organisation’s past performance to external users, whereas managerial accounting supplies information for internal planning, decision-making and control. Managers must decide what products to offer, how much to produce, whether to outsource a component, how to price services, where to invest scarce resources and how to evaluate the performance of departments. These decisions cannot be made effectively from financial statements alone. They require information about costs, revenues, capacity, cash flows, operational constraints and strategic priorities.

Managerial accounting is therefore both an information system and a managerial discipline. It converts operational data into analyses that support action. Budgeting translates plans into quantified targets, while control compares actual results with those targets and investigates significant deviations. The purpose is not merely to identify who is responsible for an unfavourable variance. Effective control asks why the variance occurred, whether the original plan remains valid and what corrective or strategic response is appropriate.

This chapter develops a connected set of tools: cost-volume-profit analysis, relevant costing, marginal analysis, short-term decision models, pricing decisions, operating and cash budgets, capital budgets, flexible budgets, responsibility accounting and variance analysis. Although the numerical illustrations are simplified, the underlying reasoning applies to manufacturing, software services, financial institutions, hospitals, public organisations and digital businesses.

Learning objectives

After studying this chapter, the learner should be able to:

1. Explain the role of managerial accounting in planning, decision-making and control.

2. Classify costs according to their behaviour and decision relevance.

3. Apply cost-volume-profit analysis and interpret its assumptions and limitations.

4. Use relevant costing and marginal analysis in make-or-buy, special-order, product-mix and discontinuation decisions.

5. Explain alternative approaches to pricing and identify their strategic implications.

6. Prepare operating, cash, capital and flexible budgets.

7. Distinguish financial budgets from operating budgets and explain their interdependence.

8. Design responsibility centres and interpret performance reports.

9. Calculate and investigate major sales, cost and profit variances.

10. Evaluate behavioural, ethical, technological and governance issues in budgeting and control.

Managerial accounting as a decision architecture

Managerial accounting information is useful when it is relevant, timely, understandable and sufficiently reliable for the decision at hand. Unlike financial reporting, it is not restricted to one prescribed format. A manager may need unit economics, customer profitability, process cost, capacity utilisation, scenario analysis or a rolling forecast. The appropriate report depends on the decision and the time horizon.

A central distinction is between costs that change with a decision and costs that do not. A cost may be variable in general but irrelevant to a particular choice if it is incurred under every alternative. Conversely, a fixed cost may be relevant if it can be avoided by selecting one option. Costs already incurred are sunk costs; they should not influence a rational choice unless they create future consequences. Opportunity cost is the benefit sacrificed when a scarce resource is used for one purpose rather than its next-best alternative.

Important classifications include:

• Variable cost: changes in total, approximately in proportion to activity within a relevant range.
• Fixed cost: remains constant in total within a relevant range, although fixed cost per unit changes as output changes.
• Mixed cost: contains both fixed and variable elements.
• Direct cost: can be traced economically to a cost object.
• Indirect cost: cannot be traced economically and is allocated using a suitable basis.
• Product cost: attached to inventory until the product is sold.
• Period cost: charged against the period in which it is incurred.
• Relevant cost: a future cost that differs between alternatives.
• Avoidable cost: a cost that can be eliminated by taking a particular action.
• Sunk cost: a past cost that cannot be changed by current decisions.

Cost behaviour is often estimated using the high-low method, account analysis, regression analysis or activity-based methods. A simple cost equation is:

Y = a + bX

where Y is total cost, a is fixed cost, b is variable cost per activity unit and X is the activity level. The equation is useful for planning but depends on the relevant range and the stability of the underlying cost relationship.

Cost-volume-profit analysis

Cost-volume-profit (CVP) analysis examines the relationship among selling price, volume, variable cost, fixed cost and operating profit. It is especially useful for break-even planning, target-profit analysis and sensitivity analysis.

The contribution margin is the amount remaining after variable cost:

Contribution margin per unit = Selling price per unit − Variable cost per unit

Total contribution margin = Sales − Total variable cost

Contribution first covers fixed costs; any remainder is operating profit. Thus:

Operating profit = Total contribution margin − Fixed costs

The contribution margin ratio is:

CM ratio = Contribution margin per unit ÷ Selling price per unit

or, equivalently, total contribution margin divided by sales.

The break-even point is the activity level at which profit is zero:

Break-even units = Fixed costs ÷ Contribution margin per unit

Break-even sales = Fixed costs ÷ CM ratio

For a target operating profit:

Required units = (Fixed costs + Target profit) ÷ Contribution margin per unit

If income tax is considered, a target after-tax profit must first be converted into a pre-tax target by dividing it by one minus the tax rate.

The margin of safety measures the amount by which expected or actual sales exceed break-even sales:

Margin of safety = Actual or expected sales − Break-even sales

A high margin of safety indicates greater protection against a fall in volume, although it does not guarantee financial strength. Operating leverage describes the sensitivity of profit to changes in sales. Organisations with a high proportion of fixed costs generally experience larger changes in operating profit for a given percentage change in sales. This can be advantageous during growth but risky during contraction.

Illustration: single-product CVP analysis

Suppose a technology firm sells a subscription package for ₹2,000 per customer per year. Variable service and support cost is ₹800 per customer, and annual fixed operating cost is ₹24,00,000. Contribution per customer is ₹1,200. The break-even volume is therefore:

₹24,00,000 ÷ ₹1,200 = 2,000 customers.

If management wants an operating profit of ₹12,00,000, required customers are:

(₹24,00,000 + ₹12,00,000) ÷ ₹1,200 = 3,000 customers.

At 3,000 customers, sales are ₹60,00,000 and the contribution margin is ₹36,00,000, leaving the target profit after fixed cost. If expected volume is 3,600 customers, the margin of safety is 1,600 customers, or ₹32,00,000 of sales.

CVP becomes more complex when an organisation sells several products. A weighted-average contribution margin must be calculated using an assumed sales mix. The analysis is reliable only if the mix remains reasonably stable. Other assumptions include constant selling price, linear variable cost, fixed cost within the relevant range and a clear separation between fixed and variable costs. Real organisations may face step-fixed costs, capacity constraints, changing prices, learning effects and demand uncertainty. CVP should therefore be used with scenarios and sensitivity analysis rather than treated as a prediction with certainty.

Relevant costing and short-term decisions

Relevant costing focuses attention on future differential cash flows. The standard procedure is to identify the alternatives, list revenues and costs that differ, include opportunity costs, exclude sunk costs and consider qualitative consequences. A decision based only on accounting cost may be misleading when allocated fixed overhead does not change with the decision.

Make-or-buy decisions

A company should compare the avoidable cost of making a component with the purchase price. Any capacity released by buying must also be valued. If the released capacity can generate contribution elsewhere, its opportunity cost makes internal production more expensive than its recorded cost.

For example, a component costs ₹140 to manufacture, comprising ₹90 variable cost and ₹50 allocated fixed overhead. A supplier offers it for ₹115. If all fixed overhead continues, the relevant make cost is only ₹90, so making is preferable by ₹25 per unit. If buying eliminates ₹30 of fixed cost, relevant make cost becomes ₹120, and buying is preferable by ₹5. If the freed capacity can produce another item yielding ₹20 contribution per component-equivalent, the opportunity cost makes internal production cost ₹140, strongly favouring purchase.

Non-financial factors include quality, delivery reliability, data security, supplier dependence, intellectual property protection, employee effects and long-term strategic capability.

Special orders

A special order at a lower price may be accepted if its incremental revenue exceeds incremental cost and spare capacity exists. If capacity is full, the opportunity cost of displacing regular sales must be included. Managers should also consider whether the order will damage the normal market price or establish an undesirable customer expectation.

Product mix under a constrained resource

When a resource such as machine hours, skilled labour or server capacity is scarce, products should generally be ranked by contribution per unit of the constrained resource, not contribution per unit of product. The analysis must also consider minimum demand, contractual obligations, bottlenecks and quality requirements. The best short-term mix may not be the best long-term strategy if it weakens customer relationships or prevents investment in a more valuable capability.

Dropping a product or service

A product should not be discontinued merely because its reported profit is negative. Allocated fixed costs may remain after discontinuation. The relevant question is whether the contribution margin lost exceeds the avoidable costs saved, after considering alternative uses of capacity and strategic effects. Customer cross-selling, reputation and platform effects may make a seemingly unprofitable service valuable to the wider business.

Pricing decisions and marginal analysis

Pricing combines cost information with demand, competition, perceived value, capacity and strategic positioning. Cost-plus pricing begins with estimated cost and adds a markup. It is simple and useful where costs are stable and market conditions permit price recovery, but it may ignore customer willingness to pay and competitor behaviour.

Target costing reverses the process. The market-based price is estimated first, the desired profit is deducted, and the allowable cost is determined:

Target cost = Target selling price − Target profit

Engineers, designers, procurement specialists and accountants then work together to achieve the target through value engineering, process redesign and supplier collaboration. Life-cycle costing extends attention beyond production to development, distribution, service, upgrades, disposal and environmental obligations.

Value-based pricing sets price according to the economic and functional value perceived by the customer. It is particularly relevant for software, consulting, analytics and platform services, where marginal delivery cost may be low but customer benefits are substantial. Dynamic pricing can respond to demand, capacity and customer segment, but it requires sound data, transparent policies and safeguards against discriminatory or manipulative outcomes.

Marginal analysis compares the change in total revenue with the change in total cost. In a simplified competitive setting, output is expanded while marginal revenue exceeds marginal cost and is reduced when marginal cost exceeds marginal revenue. In practice, managers must also consider strategic investment, capacity, uncertainty and non-financial outcomes.

From plans to budgets

A budget is a quantified plan for a specified period. It coordinates activities, communicates priorities, authorises resource use and provides a benchmark for control. A budget is not automatically a forecast: a budget expresses an intended plan, while a forecast estimates the most likely outcome given current information. Confusing the two can cause managers either to conceal adverse information or to treat targets as predictions.

The master budget integrates operating and financial budgets. The operating budget normally begins with sales because expected demand drives production, staffing, purchasing and service capacity. Typical components include:

1. Sales budget.

2. Production or service-delivery budget.

3. Direct materials and purchases budget.

4. Direct labour or staffing budget.

5. Manufacturing or operating overhead budget.

6. Selling and administrative expense budget.

7. Budgeted income statement.

The financial budget includes the capital expenditure budget, cash budget and budgeted balance sheet. These schedules are interdependent. For example, a new data centre may increase depreciation and operating capacity, require financing, alter cash payments and affect future revenue.

Operating budgets

The sales budget estimates units or service engagements and their prices by product, region, channel or customer segment. A production budget is:

Budgeted production = Budgeted sales + Desired ending inventory − Beginning inventory

Materials and labour budgets are derived from production requirements and usage standards. Service organisations may replace inventory schedules with consultant hours, server capacity, project milestones or customer support volumes.

Cash budget

Profit does not equal cash. A cash budget forecasts receipts, payments, financing needs and closing cash. It usually contains opening cash, cash receipts, cash disbursements, surplus or deficit before financing, borrowings or repayments and closing cash. Credit sales are included according to expected collection timing, while depreciation is excluded because it is non-cash. The budget helps identify periods requiring overdraft, short-term borrowing or investment of temporary surpluses.

Capital budgeting

Capital budgeting evaluates long-term investments such as equipment, information systems, data centres, product platforms and acquisitions. Relevant cash flows include initial investment, incremental operating cash flows, working capital changes, tax effects, disposal proceeds and opportunity costs. Common methods are:

• Payback period: time required to recover the initial investment; simple but ignores cash flows after payback and, unless discounted, the time value of money.
• Accounting rate of return: based on accounting profit; easy to communicate but not a cash-flow measure.
• Net present value (NPV): present value of future cash inflows less present value of investment and other cash outflows. A positive NPV indicates value creation relative to the chosen discount rate.
• Internal rate of return (IRR): discount rate that makes NPV zero. It can be difficult to interpret for non-conventional cash flows or mutually exclusive projects.
• Profitability index: present value of future inflows divided by investment; useful when capital is rationed, though it should not replace NPV for mutually exclusive choices.

Post-completion review compares actual benefits and costs with the investment case. It improves accountability and future estimates, but it should not become a mechanism for punishing managers for unforeseeable events.

Flexible budgets and variance analysis

A static budget is prepared for one planned activity level. It is unsuitable for evaluating cost control when actual activity differs materially from planned activity. A flexible budget recalculates expected revenues and variable costs for the actual activity level while retaining appropriate fixed costs.

Suppose the budgeted variable cost is ₹60 per service unit and fixed cost is ₹4,00,000. At a planned activity of 10,000 units, the static budgeted cost is ₹10,00,000. If actual activity is 12,000 units, the flexible budget is:

(12,000 × ₹60) + ₹4,00,000 = ₹11,20,000.

Comparing actual cost with the static budget would mix volume effects with spending control. Comparing actual cost with the flexible budget provides a more meaningful spending variance.

A useful performance report separates:

1. Sales-volume variance: effect of selling a different quantity from the plan.

2. Flexible-budget or activity variance: effect of actual activity differing from budgeted activity.

3. Price or rate variance: effect of paying or charging a different price or rate.

4. Efficiency or usage variance: effect of using more or fewer inputs than the standard quantity for actual output.

5. Mix and yield variances: relevant when several inputs or products are combined.

For materials, a common formulation is:

Material price variance = Actual quantity × (Standard price − Actual price)

Material usage variance = Standard price × (Standard quantity for actual output − Actual quantity)

For labour:

Labour rate variance = Actual hours × (Standard rate − Actual rate)

Labour efficiency variance = Standard rate × (Standard hours for actual output − Actual hours)

The sign convention may vary by organisation, so reports must clearly label favourable and unfavourable outcomes. A favourable price variance may result from cheaper, lower-quality materials and create an unfavourable usage or defect variance later. Variances should therefore be investigated together and interpreted through operational knowledge.

Responsibility accounting and organisational control

Responsibility accounting assigns financial responsibility to managers whose authority corresponds to the outcomes being evaluated. A cost centre manager controls costs but not revenue; a revenue centre manager controls revenue; a profit centre manager controls both revenue and costs; and an investment centre manager also influences assets employed and investment decisions.

Performance measures should reflect controllability. A manager should not be held responsible for centrally imposed costs or market changes outside managerial authority. Investment-centre measures include return on investment and residual income:

ROI = Operating income ÷ Average operating assets

Residual income = Operating income − Imputed capital charge

ROI can motivate managers to reject projects that earn more than the organisation’s cost of capital but less than the division’s existing ROI. Residual income can reduce this problem because any project generating income above the capital charge increases divisional residual income. Neither measure is complete; managers may manipulate timing, defer maintenance or reject strategically essential investments. Non-financial measures such as defect rates, customer retention, cycle time, employee development, cybersecurity incidents and innovation milestones should complement financial measures.

The balanced scorecard links performance to several perspectives: financial outcomes, customer value, internal processes, and learning and growth. In a digital enterprise, a broader control dashboard may include system availability, model accuracy, data quality, privacy incidents and cloud cost per transaction.

Case study: an illustrative cloud-service expansion decision

Background

Nimbus Analytics, an illustrative mid-sized software company, provides a data-processing platform to business customers. It is considering a one-year contract requiring 1,000 additional processing units per month. The customer offers ₹1,150 per unit. Variable hosting and support cost is ₹700 per unit. The contract would require additional annual fixed monitoring cost of ₹2,40,000. Nimbus has spare capacity, but management is also considering a marketing campaign expected to generate ₹6,00,000 contribution if the spare capacity remains available.

Situation and problem

The sales team argues that the contract will generate attractive revenue. The operations team points out that accepting it would prevent the marketing campaign. Management must decide whether to accept the contract, considering relevant costs and opportunity cost.

Analysis

Annual contract units are 12,000. Incremental revenue is:

12,000 × ₹1,150 = ₹1,38,00,000.

Variable cost is:

12,000 × ₹700 = ₹84,00,000.

Incremental contribution before fixed monitoring cost is ₹54,00,000. After the additional fixed cost, contract contribution is ₹51,60,000. The opportunity cost of losing the marketing campaign is ₹6,00,000. The net relevant benefit is therefore ₹45,60,000. Since it is positive, the contract appears financially attractive.

However, management must verify whether the marketing estimate is credible, whether service-level penalties could increase costs, whether the customer may demand a lower renewal price and whether the contract creates cybersecurity or data-residency obligations. If the contract requires peak-period capacity that causes service failures for existing customers, the apparent contribution would not represent the full economic effect.

Approach and outcome

Nimbus accepts the contract subject to a capacity reservation clause, a service-level pricing adjustment, cybersecurity review and a renewal price based on updated cost data. It also establishes a separate responsibility report showing revenue, hosting cost, support hours, incidents and customer retention. A quarterly review compares actual contract contribution with the original assumptions.

Learning points

The case demonstrates that relevant costing includes incremental fixed costs and opportunity costs, not merely variable cost. It also shows why quantitative analysis must be supplemented by contractual, operational, technological and ethical evaluation. A positive short-term contribution is not sufficient if the decision undermines reliability, privacy or long-term customer value.

Budgeting and control in digital organisations

Enterprise resource planning systems, cloud platforms and business intelligence tools can integrate sales, procurement, production, payroll and cash data. Rolling forecasts update expectations regularly rather than waiting for an annual budget cycle. Driver-based budgeting links financial outcomes to operational drivers such as active users, transactions, compute hours, ticket volumes or employee utilisation.

Advanced analytics can identify unusual spending, predict demand, model scenarios and detect variance patterns. Machine-learning forecasts, however, inherit weaknesses in historical data and may obscure assumptions. Automated controls should therefore maintain data lineage, access restrictions, approval workflows, audit trails and human review. AI-generated forecasts should be treated as decision support rather than unquestionable authority.

Limitations, risks and ethical considerations

Budgetary control can produce dysfunctional behaviour. Managers may create budgetary slack by understating revenue or overstating costs, maximise departmental results at the expense of organisational performance, or defer essential expenditure to meet short-term targets. Excessively rigid targets can discourage innovation and encourage manipulation of performance data.

Other risks include inaccurate cost drivers, arbitrary overhead allocations, outdated standards, double counting of opportunity costs, ignoring capacity constraints and treating forecasts as commitments. Variance investigation also has a cost; not every small deviation merits management attention. A materiality threshold, trend analysis and risk-based investigation are preferable to mechanical review of every variance.

Ethical practice requires truthful forecasts, transparent assumptions, responsible use of personal and operational data, confidentiality of commercially sensitive information and fair performance evaluation. Managers should distinguish controllable from uncontrollable outcomes and document significant changes in assumptions. Governance committees should review major capital proposals, conflicts of interest, cybersecurity exposure and environmental or social consequences where relevant.

Best-practice principles

Effective managerial accounting and control generally follow these principles:

• Begin with the decision, then identify the information needed.
• Separate relevant future cash flows from sunk and allocated costs.
• Make assumptions explicit and test them through sensitivity analysis.
• Use flexible budgets when activity differs from the original plan.
• Combine financial indicators with operational and non-financial measures.
• Align authority, responsibility and performance evaluation.
• Investigate causes rather than merely assigning blame for variances.
• Update forecasts when conditions change while preserving accountability for the original plan.
• Use technology with controls over data quality, access, explainability and auditability.
• Evaluate short-term decisions against long-term strategic, ethical and customer consequences.

Chapter Summary

Managerial accounting supports internal planning, decision-making and control by linking financial information with operational realities. Cost behaviour, contribution margin and CVP analysis help managers understand break-even points, target profits, risk and operating leverage. Relevant costing improves short-term decisions by focusing on future differential costs, avoidable costs and opportunity costs; it is central to make-or-buy, special-order, product-mix and discontinuation decisions. Pricing may be cost-based, market-based or value-based, with target costing and life-cycle costing providing broader strategic perspectives.

Budgets convert organisational plans into sales, operating, cash and capital schedules. The master budget reveals how decisions affect profit, liquidity and financial position. Flexible budgets allow fairer evaluation when actual activity differs from the plan. Variance analysis separates volume, price, rate, usage, efficiency, mix and yield effects, but variances must be investigated in context. Responsibility accounting aligns performance reports with managerial authority, while ROI, residual income, balanced scorecards and operational indicators provide alternative views of performance. Digital systems and analytics strengthen these processes when supported by sound data governance, ethical judgment and human oversight.

Key Terms

Managerial accounting: Internal accounting process that provides information for planning, decision-making and control.

Relevant cost: Future cost that differs between decision alternatives.

Sunk cost: Past cost that cannot be changed by a current decision.

Opportunity cost: Benefit sacrificed by choosing one alternative over the next-best alternative.

Contribution margin: Sales revenue less variable costs.

Contribution margin ratio: Contribution margin expressed as a proportion of sales.

Break-even point: Activity level at which total revenue equals total costs.

Margin of safety: Excess of expected or actual sales over break-even sales.

Operating leverage: Degree to which fixed costs cause operating profit to respond to changes in sales.

Target costing: Method that derives allowable cost from market price less desired profit.

Master budget: Integrated set of operating and financial budgets.

Cash budget: Forecast of cash receipts, payments, financing and closing cash.

Capital budgeting: Evaluation of long-term investment proposals.

Net present value: Present value of future cash flows less the present value of investment and other cash outflows.

Flexible budget: Budget adjusted to the actual level of activity.

Variance analysis: Comparison of actual results with budgeted or standard results to explain deviations.

Responsibility accounting: System that evaluates managers according to outcomes within their authority.

Residual income: Operating income less a capital charge on operating assets.

Controllability: Extent to which a manager can influence an outcome.

Rolling forecast: Forecast updated continuously as new information becomes available.

Review Questions

Short Answer Questions

1. Distinguish between a relevant cost and a sunk cost.

2. Define contribution margin and explain its role in CVP analysis.

3. Why is a flexible budget more useful than a static budget when actual activity changes?

4. What is the purpose of responsibility accounting?

5. Distinguish between a budget and a forecast.

Long Answer Questions

1. Explain CVP analysis, including break-even volume, target profit, margin of safety and operating leverage. Discuss its assumptions.

2. Describe the process of analysing a make-or-buy decision and explain the role of avoidable costs and opportunity costs.

3. Explain the major components of a master budget and their interdependence.

4. Discuss capital budgeting methods and compare the strengths and weaknesses of NPV, IRR and payback.

5. Explain responsibility centres, ROI, residual income and the balanced scorecard as mechanisms of managerial control.

Analytical / Application Questions

1. A service has a selling price of ₹5,000, variable cost of ₹3,000 and annual fixed cost of ₹18,00,000. Calculate the break-even volume and the volume required for an operating profit of ₹6,00,000. Interpret the results.

2. A component can be manufactured for ₹95 variable cost plus ₹25 allocated fixed cost. It can be purchased for ₹110, and buying would eliminate ₹15 of fixed cost per unit. Analyse the decision if spare capacity exists and identify the additional information needed if capacity is constrained.

3. A division reports a favourable material price variance but an unfavourable usage variance and rising customer complaints. Explain how management should investigate the combined pattern rather than evaluating the price variance alone.

22. Multiple Choice Questions with Answers

Question 1

A firm sells a product for ₹500, has variable cost of ₹300 per unit and fixed costs of ₹8,00,000. What is the break-even volume?

A. 2,000 units

B. 4,000 units

C. 8,000 units

D. 16,000 units

Correct Answer: B. 4,000 units

Question 2

Which cost should normally be excluded from a current make-or-buy decision?

A. Avoidable supervision cost

B. Purchase price offered by the supplier

C. Opportunity cost of using released capacity

D. Historical research expenditure that cannot be recovered

Correct Answer: D. Historical research expenditure that cannot be recovered

Question 3

When a scarce machine hour is the constraint, products should generally be ranked by:

A. Selling price per unit

B. Total fixed cost per unit

C. Contribution margin per machine hour

D. Allocated overhead per unit

Correct Answer: C. Contribution margin per machine hour

Question 4

The primary purpose of a flexible budget is to:

A. Eliminate all fixed costs

B. Adjust budget expectations to the actual activity level

C. Replace the cash budget

D. Set the selling price automatically

Correct Answer: B. Adjust budget expectations to the actual activity level

Question 5

A target selling price is ₹1,000 and desired profit is ₹250. Under target costing, allowable cost is:

A. ₹250

B. ₹750

C. ₹1,250

D. ₹2,500

Correct Answer: B. ₹750

Question 6

Which item belongs primarily in a cash budget rather than a budgeted income statement?

A. Depreciation expense

B. Credit sales revenue

C. Cash repayment of a loan principal

D. Accrued salary expense

Correct Answer: C. Cash repayment of a loan principal

Question 7

Residual income is calculated as:

A. Sales less variable cost

B. Operating income less an imputed capital charge

C. Cash flow less depreciation

D. Net income divided by assets

Correct Answer: B. Operating income less an imputed capital charge

Question 8

A favourable material price variance accompanied by an unfavourable usage variance may indicate that:

A. Cheaper materials may have caused greater waste or defects

B. The standard price was necessarily too high

C. No investigation is required

D. Production volume was automatically above budget

Correct Answer: A. Cheaper materials may have caused greater waste or defects

Question 9

If a special order uses spare capacity, the relevant minimum price normally includes:

A. All allocated historical overhead

B. Incremental costs and any incremental fixed costs

C. Sunk development costs only

D. The product’s existing full cost regardless of the order

Correct Answer: B. Incremental costs and any incremental fixed costs

Question 10

Which measure is most directly associated with an investment centre?

A. Return on investment

B. Material usage variance only

C. Number of purchase orders

D. Direct labour hours only

Correct Answer: A. Return on investment