Chapter 9 Review for Final

What is Management by Exemption?

A management system that compares actual results to a budget so that significant deviations can be flagged as exceptions and investigated further. This approach enables managers to focus on the most important variances, while bypassing trivial discrepancies between the budget and actual results.

The Variance Analysis Cycle is the ___________ part of Budgets in Managerial Accounting.

Controlling.

With Revenue Variance, if Actual Revenue exceeds what the revenue should have been, the variance is labeled as ______________.

Favorable.

What do Flexible Budgets take into account?

How changes in activity affects costs.

On a Performance Report, where does the Revenue and Spending Variance stand in relation to the Activity Variance?

The Revenue and Spending Variance is between the Actual Results and the Flexible Budget. The Activity Variance is between the Flexible Budget and the Planning Budget.

With Revenue Variance if Actual Revenue is less than what the revenue should have been, the variance is labeled as ______________.

Unfavorable.

What is the result if adjustments for the level of activity are not made?

It is very difficult to interpret discrepancies between Budgeted and Actual Costs.

What is the Variance Analysis Cycle?

Variance analysis, in budgeting (or management accounting in general), is a tool of budgetary control by evaluation of performance by means of variances between budgeted amount, planned amount or standard amount and the actual amount incurred/sold. Variance analysis can be carried out for both costs and revenues.

Can the Actual Amount of a Fixed Cost differ from the amount estimated on the Flexible Budget? Why or Why not?

YES!!! Because........... (???????)

What should the Variance Cycle Analysis NOT be used for?

To assign blame for poor performance.

What is the overall function of the Variance Analysis Cycle?

To evaluate and improve performance.

In the Variance Cycle Analysis, the cycle begins with the preparation of _____________ ____________________ in the accounting department.

Performance Reports.

From Chapter 8, what are Planning Budgets?

Planning Budgets are prepared before the period begins and is valid for only the planned level activity.

What does a Flexible Budget recognize?

Recognizes that a budget can be adjusted to show what costs should be for the actual level of activity.

In Variance Cycle Analysis, the significant variances are investigated so that their root causes can be either _____________ or _______________.

Replicated; Eliminated.

In Variance Cycle Analysis, what should the emphasis be on?

The emphasis should be on highlighting superior and unsatisfactory results, finding the root causes of these outcomes, and then replicating the sources of superior achievement and eliminating the sources of unsatisfactory performance.

What are some of the Characteristics of Flexible Budgets?

-May be prepared for any activity level in the relevant range. -Show costs that should have been incurred at the actual level of activity, enabling "apples to apples" cost comparisons. -Help managers control costs. -Improve performance evaluation.

What is the "Life Cycle" of The Variance Cycle Analysis?

1.) Prepare Performance Report. 2.) Analyze Variances 3.) Raise Questions 4.) Identify Root Causes 5.) Take Actions 6.) Conduct Next Period's Operations

What happens when Flexible Budgets are used in Performance Reports?

Actual Costs are compared to what the costs should have been for the Actual level of activity during the period rather than to the Static Planning Budget.

What are Flexible Budgets?

An estimate of what revenues and costs should have been, given the actual level of activity for the period.

Do Unfavorable or Favorable Variances always logically indicate the "good" vs the "bad"?

No.

What is the main discrepancy between Flexible Budgets and Planning Budgets?

The Flexible Budget shows what should have happened at the budgeted level of activity. Therefore, the differences between the Flexible Budget and the Planning Budget show what should have happened solely because the actual level of activity differed from what had been expected.

In Budgeting, what are Activity Variances?

The difference between a revenue or cost item in the static planning budget and the same item in the flexible budget. An Activity Variance is due solely to the difference between the level of activity assumed in the planning budget and the actual level of activity used in the flexible budget.

What is a Spending Variance?

The difference between the actual amount of the cost and how much a cost should have been, given the actual level of activity.

What is a Revenue Variance?

The difference between the actual total revenue and what the total revenue should have been, given the actual level of activity for the period.

What are Variances?

The differences between the actual results and what should have occurred according to the budget. The Variances raise questions.

In Flexible Budgeting, the Revenue Variance is Favorable, if the average selling price is _________ than expected. It is Unfavorable if the average selling price is _______ than expected.

Greater, Less.

In Flexible Budgeting, the Spending Variance is Favorable, if the Actual Cost is _________ than what the cost should have been. It is Favorable, if the Actual Cost is ________ than what the cost should have been.

Greater, Less.

When Actual Results are present, are they computed by plugging the Actual Quantities into the revenue and cost formulas? Why or why not?

No because the formulas are simply estimates of what the revenues and costs should be for a given level of activity. What actually happens usually differs from what is supposed to happen.

In Budgeting, when does an Unfavorable Variance happen?

Occurs when Actual Revenues/Costs are greater than Budgeted Revenues/Costs.

In Budgeting, when does an Favorable Variance happen?

Occurs when Actual Revenues/Costs is greater than Budgeted Revenue/Cost.