Capital Investment Appraisal and Costing Methods

Practice flashcards covering investment appraisal techniques, costing methods, budgeting, and ethical considerations in business decision-making.

A business may prefer a project with a short payback period because the initial investment is recovered more quickly, improving __________ and cash flow.

liquidity

The payback method focuses heavily on speed of recovery and ignores the total __________ of the investment.

profitability

Payback may be useful in industries with rapid technological change because a shorter recovery period reduces exposure to __________.

uncertainty

NPV incorporates the __________ __________ __________ __________ by discounting future cash flows to recognize that cash today is more valuable than cash in the future.

time value of money

A positive NPV indicates that __________ __________ should increase.

shareholder wealth

Decisions should not rely entirely on financial calculations because __________-__________ __________ such as employee morale or environmental sustainability may significantly influence success.

non-financial factors

Marginal costing excludes __________ __________ from the unit cost calculation, providing greater pricing flexibility.

fixed costs

Marginal costing is particularly useful when evaluating __________-__________ __________ or special orders where spare capacity exists.

one-off contracts

A key weakness of marginal costing is that it may lead to __________ because fixed costs are ignored when setting prices.

underpricing

Absorption costing includes both __________ and __________ costs within product cost calculations to ensure full cost recovery.

fixed and variable

A weakness of absorption costing is that __________ __________ __________ may be based on arbitrary allocation methods such as labour or machine hours.

overhead absorption rates

ABC costing improves decision-making by allocating overheads using multiple __________ __________ rather than a single absorption basis.

cost drivers

A major limitation of ABC costing is the __________ and __________ involved in identifying activities and collecting detailed operational data.

time and expense

__________ __________ may be attractive because it is quick and simple, but it risks carrying forward inefficiencies and wasteful spending.

Incremental budgeting

In __________-__________ __________, every expenditure item must be justified from zero rather than automatically carried forward.

zero-based budgeting

__________ __________ support fairer performance evaluation because figures are adjusted to reflect actual activity levels.

Flexible budgets

Standard costing uses __________ to identify differences between expected and actual performance for management investigation.

variances

When purchasing cheaper materials creates a favorable price variance but leads to higher wastage, these are referred to as __________ __________.

linked variances

Strong __________ __________ may indicate a lower short-term insolvency risk when evaluating a supplier's financial stability.

liquidity ratios

Ethical threats that may compromise professional objectivity include self-interest, familiarity, intimidation, and __________-__________.

self-review