Explain the Use of the Acid-Test Ratio as a Measure

question 321

Essay

Explain the use of the acid-test ratio as a measure of a company's liquidity.

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Definitions:

Variable Overhead Spending Variance

The difference between the actual variable overhead costs incurred and the expected costs based on standard costs.

Direct Labour Hour

The amount of time spent by workers directly manufacturing a product, which is used as a basis for allocating production costs in cost accounting.

Static Budget

A budget based on a set level of activity or volume that does not adjust over the period for actual activity levels.

Standard Cost

A pre-determined estimate of the cost to produce a single unit or a number of units during a specific period.