A Favorable Cost Variance of Significant Magnitude

question 122

Multiple Choice

A favorable cost variance of significant magnitude:

• A) Is likely the result of exceptional planning.
• B) May lead to future improvements in production.
• C) Is strong evidence of excellent operating performance.
• D) Indicates tight financial control.
• E) Does not need to be investigated as to its underlying cause (because it is "favorable").

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Definitions:

Expected Inflation

The anticipated rate at which the general level of prices for goods and services will rise over a period.

Internal Rate

Often referred to as the internal rate of return (IRR), it is the discount rate that makes the net present value (NPV) of all cash flows from a particular project zero.

Net Present Value

A financial metric used to evaluate the profitability of an investment or project, calculated by subtracting the present value of cash outflows from the present value of cash inflows over a period of time.

Payback Period

The amount of time it takes for an investment to generate cash flows sufficient to recover its initial cost.