Module 6 - Controlling Costs

Two of the three factors to be considered in preparing a production budget include the desired amount of ending inventory and the amount of inventory already on hand in the beginning inventory. What is the third factor required to prepare a production budget?

Factors to be considered in preparing a production budget are the projected sales volume for the period, the desired amount of ending inventory, and the amount of inventory already on hand in the beginning inventory.

Pro forma financial statements

Financial statements that show a forecast of a company future performance based on certain assumptions rather than historical data.

Operating Capital

Funds available for use in financing the day-to-day activities of a business.

Dennis Rodman is the manager of Segment C in Chicago Company. Jeannie Train, company CFO, is developing a measure to evaluate Dennis's quarterly performance. What should Jeannie keep in mind as she develops a measure to evaluate his performance?

It is important that managers be held responsible only for controllable costs and not for uncontrollable costs.

Segments

Parts of an organization requiring separate reports for evaluation by management.

What is the first thing an accountant should do to develop a master budget?

Prepare a sales budget

Budget

a quantitative expression of a plan that shows how a firm or organization will acquire and use resources over some specified period of time.

Controllable Costs

costs over which a manager has direct authority and can change.

What is the segment margin?

The difference between segment revenue and direct segment costs

Segment Margins

The difference between segment revenue and direct segment costs; a measure of the segments contribution to cover indirect fixed costs and provide costs; in effect, the operating profit created by the segment.

The manufacturing overhead cost budget includes which manufacturing costs?

The manufacturing overhead budget includes all production costs other than direct materials and direct labor

Segment-margin ratios

The segment margin divided by the segment's net sales revenue, a measure of the efficiency of the segment's operating performance and, therefore, its profitability.

Selling and Administrative expense budget

A schedule of all non production spending expected to occur during the budget period.

Direct Labor Budget

A schedule of direct labor requirements for the budget period.

Direct Materials Budget

A schedule of direct materials to be used during the budget period and direct materials to be purchased during that period.

Manufacturing overhead budget

A schedule of production costs other than those for direct labor and direct materials.

Production Budget

A schedule of production requirements for the budget period.

Sales Budget

A schedule of projected sales over the budget period, which often includes a measure of revenue earned and cash collected from customers.

Responsibility accounting

A system of evaluating performance in which managers are held accountable for the cost, revenues, assets, or other elements over which they have control.

Decentralized company

An organization in which managers at all levels have the authority to make decisions concerning the operations for which they are responsible.

Profit Center

An organization unit in which a manager has control over and is held accountable for both cost revenue performance.

Cost Center

An organization unit in which a manager has control over and is held accountable for cost performance.

Investment Center

An organization unit in which a manager has control over and is held accountable for cost, revenue and asset performance.

Responsibility Center

An organizational unit in which a manager has control over and is held accountable for its performance.

Which items does a manager have control over in a profit center?

Costs and revenues

Indirect costs

Costs normally incurred for the benefit of several segments or activities; sometimes called common costs or joint costs.

Which items does a manager have control over in a cost center?

Costs only

Noncontrollable Costs

Costs over which a manager does not have direct authority and cannot change.

Direct Costs

Costs that are specifically traceable to a business unit or segment being analyzed.

How is a cost variance computed for a corporate budget?

A cost variance is the difference between actual costs and budgeted costs.

Cost Variance

A difference between the actual cost and the budgeted cost.

The master budgeting process begins with which forecast?

A forecast of sales

Master Budget

A network of many separate schedules and budgets that together constitute the overall operating and financing plan for the coming operating period.

Segment Margin Statement

A profit and loss statement that identifies costs directly chargeable to a segment and further divides them into variable and fixed cost behavior patterns.

Segment managers should be evaluated on which items included in a budget?

Only the items they can control or influence

The production budget supplies the information required for which other budget in the master budgeting process?

direct materials budget, direct labor budget, and manufacturing overhead budget

The sales and administrative expense budget includes which expenses?

includes all expenses except those that are production-related.