Accounting 202 Exam 3

Following are selected accounts from a manufacturing company. For each account, indicate whether it will appear on a budgeted income statement or a budgeted balance sheet. If it will not appear on either label neither. 1. Sales 2. Office salaries expense 3. Accumulated depreciation 4. Sales commissions expense 5. Interest expense on loan 6. Cash dividends paid 7. Accounts payable 8. Cost of goods sold

1. Income statement 2. Income statement 3. Balance sheet 4. Income statement 5. Income statement 6. Neither 7. Balance sheet 8. Income statement

For each of the following indicate yes if the item is an important budgeting guideline or no if it is not. 1. Employees should have the opportunity to explain differences from budgeted amounts. 2. Budgets should include budgetary slack. 3. Employees impacted by a budget should be consulted when it is prepared. 4. Goals in a budget should be set low so targets can always be reached. 5. Budgetary goals should be attainable.

1. Yes 2. No 3. Yes 4. No 5. Yes

For each of the following indicate yes if it describes a potential benefit of budgeting or no if it describes a potential negative outcome of budgeting. 1. Budgets help coordinate activities across departments. 2. A budget forces managers to spend time planning for the future. 3. Some employees might overstate expenses in budgets. 4. Budgets can lead to excessive pressure to meet budgeted results. 5. Budgets can provide incentives for good performance.

1. Yes 2. Yes 3. No 4. No 5. Yes

Companies must use ______ for external & tax reporting

Absorption costing

Costing required by GAAP for external reporting purposes

Absorption costing

Costing that can result in misleading product cost info & poor managerial decisions

Absorption costing

Fixed overhead is included in product costs

Absorption costing

For setting the target price, _________ is useful because it reflects the full costs that a selling price must exceed for the company to be profitable.

Absorption costing

Type of costing that adds direct materials, direct labor, & both variable & fixed overhead in product costs

Absorption costing

Income statement that does not separate expenses into variable & fixed components

Absorption costing income statement

The actual amount paid to acquire the actual direct material/labor used during the period

Actual price (AP)

The actual amount of direct material/labor used to manufacture the actual quantity of output

Actual quantity (AQ)

Preliminary cash balance

Beg cash balance + budgeted cash receipts - budgeted cash payments

Formal statement of a company's plans in dollars

Budget

Compare budgeted results with actual results

Budget reports

Management's use of budgets to see that planned objectives are met

Budgetary control process

A budgetary cushion used to meet performance targets

Budgetary slack

Shows budgeted amounts for assets, liabilities, & equity as of the end of the budget period

Budgeted balance sheet

A report that shows predicted revenues & expenses for a budgeting period

Budgeted income statement

Shows budgeted sales & expenses for the budget period

Budgeted income statement

Total required units

Budgeted sales in units + Desired ending inventory in units

Process of planning future business actions & expressing them as formal plans

Budgeting

Budget that reports expected cash receipts & cash payments related to the sale & purchase of plant assets

Capital expenditures budget

Budget that shows budgeted cash receipts & cash payments during the budget period

Cash budget

Helps determine financing needs

Cash budget

Preparing budgets for a selected number of future periods & revising those budgets as each period is completed

Continuous budgeting

Income statement that separates variable & fixed costs & highlights contribution margin

Contribution margin income statement

Budget that shows total manufacturing costs for goods expected to be sold in the period

Cost of goods sold budget

Difference btwn actual & standard cost

Cost variance

If units produced is greater than units sold, will cost of goods sold under absorption costing increase or decrease?

Decrease due to a lower production cost per unit.

Budget that shows budgeted costs for direct materials necessary to satisfy estimated production for the period

Direct Materials Budget

Budget that shows budgeted costs for the direct labor that will be needed to satisfy the estimated production for the period

Direct labor budget

T or F: Fixed overhead from depreciation in the FOH budget does require a cash payment.

F

Budget that shows the budgeted costs for factory overhead that are needed to complete the estimated production for the period

Factory overhead budget

Actual cost < standard cost

Favorable variance

When actual income is higher than budgeted income

Favorable variance (F)

2 options for preparing a master budget

Fixed Flexible

Budget based on 1 predicted amount of sales or other activity measure

Fixed budget

Formula to compute difference in income between absorption costing income & variable costing income

Fixed overhead in ending FG inv - Fixed overhead in beg FG inv

Budget based on more than 1 amount of sales or other activity measure

Flexible budget

Budget that reports those expenses expected during the budget period

General & Administrative expense budget

Income levels differ between the costing methods when ___________ change

Inventory levels

Managers focus attention on the most significant differences between actual costs & standard costs

Management by exception

A comprehensive plan that consists of several budgets that are linked

Master budget

Formal, comprehensive plan that contains several interconnected budgets

Master budget

Is fixed overhead from depreciation in the cash budget?

No

Employees affected by a budget help in preparing it

Participatory budgeting

Shows budgeted amounts, actual amounts, & variances

Performance report

The master budget ends with this

Preparation of budgeted financial statements

Difference btwn actual price per unit of input & standard price per unit of input results in a price (or rate) variance

Price variance

2 main factors that cause direct materials & direct labor variances

Price variance & Quantity variance

Budget that shows units to produce each period

Production budget

Difference btwn actual quantity of input used & standard quantity of input that should have been used results in a quantity (or efficiency) variance

Quantity variance

When the company revises entire set of budgets by adding new quarterly budget to replace the quarter just elapsed

Rolling budget

Continuous budgets are applied by preparing _________

Rolling budgets

Contribution margin

Sales - variable costs

Budget that shows the units of goods to be sold or services to be provided

Sales budget

The master budget begins with this

Sales budget

The usual starting point in the master budget process

Sales budget

Budget that shows types & amounts of selling expenses expected during the budget period

Selling expense budget

Only accept special orders if _______ exceeds _______

Special order price; variable costs

Preset costs for delivering a product or service under normal conditions

Standard costs

The expected level of performance

Standard costs

The standard amount of input for the actual quantity of output

Standard quantity (SQ)

Standards for direct labor are set by _____________ studies that show the direct labor hours required under normal operations

Time & motion

Total budgeted costs

Total fixed costs + (Total variable cost per unit x Units of activity)

Units to produce

Total required units - Beginning inventory units

Actual cost > standard cost

Unfavorable variance

When actual income is lower than budgeted income

Unfavorable variance (U)

Materials to be purchased

Units to produce x Materials required per unit + Desired ending materials inventory - Beginning materials inventory

Includes direct materials, direct labor, & variable overhead costs for units sold

Variable cost of goods sold

Type of costing that adds direct materials, direct labor, & variable overhead

Variable costing

Type of costing that can't be used for external financial reporting

Variable costing

Type of costing that is useful for managerial decisions

Variable costing

Difference between budgeted & actual amounts

Variance

When should a company accept a special order?

When sales exceed variable costs

Standards for direct materials are set by studying the _________, ____________, & ___________ for each material used

quantity, grade, & cost

Overhead standards are set by studying the _________________ needed to support ______________-

resources; production activities

Income under absorption costing & income under variable costing differ whenever the _____ differ from _____-

units produced; units sold

Inventory levels change when ______ do not equal _____

units produced; units sold