MGA 202 Final Exam Review

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

To flex a budget, we need to know that:

-total variable costs change in direct proportion to changes in activity -total fixed costs remain unchanged within the relevant range

flexible budget definition

A report showing estimates of what revenues and costs should have been, given the actual level of activity for the period.

Variance Analysis

A technique for determining the cause and degree of difference between the baseline and actual performance

formula for actual quantity of input at actual price

AQ x AP

formula for actual quantity of input at standard price

AQ x SP

absorption costing is

Required by GAAP and IFRS Used by most companies for both internal and external reports

formula for standard quantity allowed for actual output at standard price

SQ x SP

Because nonmanufacturing costs are not included as costs of a product, the use of _____ costing can lead to the omission of segment costs.

absorption

in order to comply with GAAP and IFRS, the __ costing method must be used for external reporting in the US

absorption

fixed manufacturing overhead costs are included as part of work in process inventory under

absorption costing

Costs are categorized by function when using ______ costing and by behavior when using ______ costing.

absorption, variable (contribution)

unfavorable variance

actual costs are greater than budgeted costs

favorable variance

actual revenue (or costs) is greater than budgeted revenue (or costs)

incremental cost

an increase in cost between two alternatives

3 responsibility centers

cost center, profit center, investment center

contribution margin is used FIRST to...

cover the fixed expenses, and then whatever remains goes towards profits

screening decisions

decisions about whether an investment meets a predetermined company standard

product costs under absorption costs include

direct materials, direct labor, and both fixed and variable manufacturing overhead

organizations use budgets to

encourage managers to think and plan for the future, communicate financial goals, allocate resources within the organization, coordinate the plans and activities for department managers and uncover potential bottlenecks before they occur

target profit analysis

estimating what sales volume is needed to achieve a specific target profit

(true or false) the margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars

false

the difference between reported net income on variable costing and absorption costing income statements is based on how

fixed overhead is accounted for

Cost-volume-profit (CVP) analysis

helps managers make many important decisions such as what products and services to offer, what prices to charge, what marketing strategy to use, and what cost structure to maintain

When units produced exceed units sold, net income will generally be:

higher under absorption costing than variable costing

Many managers believe that being empowered to create their own self-_______ budgets is the most effective method of budget preparation.

imposed

throughput time formula

process time + inspection time + move time + queue time

preference decisions

relate to selecting from among several acceptable alternatives

U.S. GAAP and IFRS ______ publicly traded companies include segmented financial data prepared for external users that use the same methods used in internal segment reports.

require

The first step in the budgeting process is the preparation of the

sales budget

quantity standards

specify how much of an input should be used to make a product or provide a service

price standards

specify how much should be paid for each unit of the input

what can be used to compute spending variance

standard costs per unit for direct materials, direct labor and variance manufacturing overhead

limitations of self-imposed budgeting include

suboptimal budget recommendations budgetary slack

actual price

the amount actually paid for the input used

actual quantity

the amount of direct materials, direct labor, and variable manufacturing overhead actually used

standard price

the amount that should have been paid for the input used

differential revenue

the difference in revenue between two alternatives

break-even point

the level of sales at which profit is zero

residual income definition

the net operating income that an investment center earns above the minimum required return on its operating assets

standard quantity

the standard quantity allowed for the actual output of the period

what is CVP primary purpose?

to estimate how profits are affected by selling prices, sales volume, unit variable costs, total fixed costs and mixed of products sold

avoidable cost

a cost that can be eliminated by choosing one alternative over another

sunk cost

a cost that has already been committed and cannot be recovered (irrelevant)

differential cost

a difference in cost between two alternatives

what is a responsibility center

a part of an organization whose manager has control over and is accountable for cost, profits or investments

decentralization advantages

Frees top management's time Encourages use of expert knowledge Improves customer relations Provides training Improves motivation and retention

master budget

a presentation of an organization's operational and financial budgets that represents the firm's overall plan of action for a specified time period

contribution margin

The amount remaining from sales revenues after all variable expenses have been deducted

budgeted income statement

a projection showing how a firm's budgeted sales and costs will affect expected net income

profit center

a business segment whose manager has control over cost and revenue but has no control over investments in operating assets

cost center

a business segment whose manager has control over cost but has no control over revenue or investments in operating assets (accounting, general administration and legal)

investment center

a business segment whose manager has control over cost, revenue, and investments in operating assets

Balanced Scorecard

a combination of performance measures directed toward the company's long and short term goals and used as the basis for awarding incentive pay

what is included in a balanced scorecard

learning and growth, business processes, customers and finance

An integrated business plan that formally lays out the company's goals is called the ______ budget.

master

Segment break-even calculations include:

only traceable fixed expenses

variable costing treats .... manufacturing costs as product costs

only variable

what costs are relevant to decision making

opportunity, avoidable, incremental and future cash flows

decentralization disadvantages

potential duplication of costs, potential problems achieving goal congruence

planing budget

prepared before the period begins and is valid for only the planned level of activity

Standard costs are:

preset costs for delivering a product or service under normal conditions

when preparing a CVP graph, the horizontal axis represents

unit volume

manufacturing cycle efficiency formula

value added time/manufacturing cycle time

for external reports, income statements are generally prepared using ___ costing, while ___ costing is used for internal decision making purposes

variable, absorption

Delivery Cycle Time Formula

wait time + throughput time