ACC 221 Exam 3

using the differential approach is desirable for two reasons:

1. Only rarely will enough information be available to prepare detailed income statements for both alternatives. 2.Mingling irrelevant costs with relevant costs may cause confusion and distract attention away from the information that is really critical.

business decision making involves 6 key concepts

1. define the alternatives 2. distinguish between relevant and irrelevant costs & benefits 3. perform differential analysis 4. identify sunk costs 5. identify future costs & benefits that do not differ between alternatives 6. identify opportunity costs

the budget is designed to answer

10 key questions

leverage effect

A 25% increase in sales resulting in a 30% increase in net operating income. due to the existence of fixed costs

master budget

A summary of a company's plans in which specific targets are set for sales, production, distribution, administrative, and financing activities; it generally culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet.

Which of the following is a major factor that should be taken into consideration while planning the desired level of inventories?

Costs of carrying inventory.

Which of the following is deducted from the total selling and administrative expense budget to determine the cash disbursements for selling and administrative expense budget?

Depreciation expense

relevant vs irrelevant costs

Mixing irrelevant costs with relevant costs may cause confusion and distract attention from the information that is critical. Costs and revenues that do not differ between alternatives are irrelevant to decision making.

Which of the following is NOT a column on a flexible budget performance report?

Net operating income

Be aware that allocated fixed costs can distort the keep/drop decision.

The answer lies in the way we allocate common fixed costs to our products. Including unavoidable common fixed costs makes the product line appear to be unprofitable, when in fact dropping the product line would decrease the company's overall net operating income.

activity variance

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

Responsibility accounting

The system of accountability in which managers are held responsible for those items of revenue and costs—and only those items—over which they can exert significant control essential for profit planning and control

avoidable costs

a cost that can be eliminated by choosing one alternative over another are relevant to decisions

cash budget

a detailed plan showing how cash resources will be acquired and used over a specific time period

special orders

a one-time order that is not considered part of the company's normal ongoing business When analyzing a special order, only the incremental costs and benefits are relevant. Since the existing fixed manufacturing overhead costs would not be affected by the order, they are not relevant. incremental revenues vs costs consider whether it affects normal sales or if we have idle capacity

The difference between a revenue or cost item in the planning budget and the same item in the flexible budget at the actual level of activity is a(n) ______ variance.

activity

The spending variance is labeled as favorable when the

actual cost is less than what the cost should have been at the actual level of activity

flexible budget @

actual level of activity

incremental cost

an increase in costs between two alternatives

Master budget schedules

answer several key questions for a company are based on estimates and assumptions. 1.What are the budgeted unit sales? 2.What is the budgeted selling price per unit? 3.What percentage of accounts receivable will be collected in the current and subsequent periods.

Companies prepare direct labor budgets to

avoid labor shortages

The annual master budget file includes the ______ from last year because it is needed for the schedule of expected cash collections. Multiple choice question.

balance sheet

every decision involves choosing

between at least 2 alternatives

A detailed plan for the future that is usually expressed in formal quantitative terms is a(n)

budget

The final schedule of the master budget is the

budgeted balance sheet

planning budget @

budgeted level of activity

sales revenue = (for budget period)

budgeted unit sales x unit selling price

a flexible budget is used to account for

changes in costs due to changes in activity used to measure performance and identify discrepancies between budgeted and actual costs tells what revenues and costs should have been for actual level of activity

reasons for spending variances

changes in: input prices usage technology

reasons for revenue variances

changes in: selling price product mix discount structure poor accounting controls

cash excess or deficiency section of the cash budget

computes excess of cash based on beginning balance

Anything that prevents you from getting more of what you want is a(n)

constraint -->When a limited resource of some type restricts the company's ability to satisfy demand, the company is said to have a

When a constraint exists, companies need to focus on maximizing

contribution margin per unit of constraint

In a budgeted income statement, _________ is subtracted from sales to arrive at gross margin.

cost of goods sold

the ending finished goods inventory budget computes the ______ units

cost of unsold

Budgets

define goals and objectives that can serve as benchmarks for evaluating subsequent performance and the budgeting process can uncover potential bottlenecks before they occur force managers to think about and plan for the future coordinate the activities of the entire organization by integrating the plans of its various parts

In a direct materials budget, the desired ending raw materials inventory for the year is equal to the

desired ending raw materials inventory for the last period

the manufacturing overhead budget is prepared to

determine the expected cash disbursements and the predetermined overhead rate for the period

financial benefit exists if

differential benefits > differential costs

The calculation of unit product cost requires information about

direct materials, direct labor and manufacturing overhead.

Performance reports for cost centers

do not include revenues or net income

The purpose of preparing a direct materials budget is to

estimate the quantity of raw materials to be purchased

financing section of cash budget

explains how excess or deficiency of cash is dealt with excess funds can be invested or used to pay earlier funds

A business segment should only be dropped if a company can save more in ______ costs than it loses in contribution margin.

fixed

One of the great dangers in allocating common ----- costs is that such allocations can make a product line look less profitable than it really is.

fixed

differential analysis

focusing on the costs and benefits that differ between the alternatives Differential analysis focuses on the future costs and benefits that differ between any two alternatives.

you create a planning budget

for a defined level of activity before a start of the period a static planning budget is is suitable for planning but not for evaluating performance. solution: flexible

the budgeted income statement is preapred

from data in previous budgets shows the companies planned profit serves as performance benchmark

Self-imposed budgets (parcipitative)

give managers at all levels of an organization an opportunity to provide input into the budgeting process.

the direct labor budget

helps determine the number of labor hours required to meet the production needs

The direct materials budget

helps determine the quantity of raw materials to be purchased in a period and the cost of those materials.

ending finished goods inventory budget

helps determine the value of ending inventory = unit product cost x # of units in ending finished goods inventory

When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative

income statements

Using multiple cost drivers on a flexible budget report will generally

increase accuracy

Options to generate a favorable revenue and spending variance include

increase operating efficiency protecting the selling price reduce the prices of inputs

Control

involves the steps taken by management to increase the likelihood that all parts of the organization are working to achieve the goals set down in the planning stage.

the selling and administrative expense budget

is prepared for non-manufacturing expenses summary of smaller departmental budgets (marketing, accounting, tax, facilities) can be variable or fixed

The budget period

is the period of time that a budget needs to follow.

Responsibility accounting

is when a manager should be held responsible for only the activities that the manager has direct control over.

receipts section of cash budget

lists all cash inflows except for ones from financing activities

disbursement section of cash budget

lists all cash outflows except for ones from financing activities

manufacturing overhead budget

lists all costs of production other than direct materials and direct labor both variable and fixed costs

The production budget

lists the number of units that must be produced to satisfy sales needs and to provide for the desired ending inventory.

benefits of buy decisions

lower costs and higher quality due to economies of scale

benefits of make decisions

lower dependency on outside suppliers and higher quality control of the production process

A number of separate, but interdependent, budgets that formally lay out the company's sales, production, and financial goals are contained in the

master, static, or planning budget

purpose of budget

motivate people to coordinate efforts to achieve organizational goals Planning - involves developing objectives and preparing various budgets to various budgets to achieve those objectives. Control- involves the steps taken by management to increase the likelihood that the objectives set down while planning are are attained and that all parts of the organization are working together toward that goal

Facing labor shortages or having to hire or lay off workers at awkward times are consequences of

neglecting to budget the amount of labor time that will be needed

When comparing the static planning budget to actual activity, a problem that arises when actual activity is higher than budgeted activity is that

net income is higher than expected but all or most expense variances are unfavorable

depreciation /amortization expense

non-cash expense

The potential benefit that is given up when one alternative is selected over another is called

opportunity cost

A budget that is prepared with the full cooperation of managers at all levels is a self-imposed

participative budget

Developing goals and preparing various budgets to achieve those goals is part of

planning

The direct materials budget directly relies on the ______ budget.

production

sales budget

pulls together the number of units to be produced and the projected selling and admin expenses from the budgeted expenses all other budgets in master budget depend on sales budget

the cash budget can be divided into 4 sections

receipts section disbursements section cash excess or deficiency section financing section

differential costs and revenues

relevant for decision making the only inputs that are relevant to decision making

Opportunity costs

represent the next best use of the resource and should always be considered. Opportunity costs are not actual cash outlays and are not recorded in the formal accounts of an organization. An opportunity cost is the benefit that is foregone as a result of pursuing some course of action.

The difference between the actual total revenue and budgeted total revenue at the actual level of activity is called a(n)

revenue variance

companies who neglect the budget process

run the risk of facing labor shortages or having to hire and lay off employees at awkward times

The budgeting process begins with the preparation of the

sales budget

Budgeted expenses for areas other than manufacturing are shown on the ______ budget.

selling and administrative

A constraint is a limited resource of some type that restricts the company's ability to satisfy demand,

so managing the constraint is the only way to increase profits.

The difference between the actual cost and budgeted cost at the actual level of activity is called a(n

spending variance

Costs that have been incurred and cannot be eliminated regardless of the alternative chosen are

sunk costs

For a production budget

the beginning inventory for the first quarter is the beginning inventory for the year. budgeted sales for year = sum ending inventory for year = ending for 4th quarter production needs for year = sum

variances

the differences between planned amounts and actual amounts

Budgetary slack occurs when a manager submits a budget that is

too easy to attain

In companies that do not use a self-imposed budgeting process, profit targets are generally set by

top managers

A company determines that the number of units sold is the cost driver for its variable selling and administrative expense budget. The product of its variable selling and administrative rate and budgeted unit sales will be

total budgeted variable selling and administrative expenses

When considering decision alternatives, both relevant and irrelevant costs are included when using the

total cost approach

Predetermined Overhead Rate =

total manufacturing overhead / total activity level

production budget

used to determine the budgets for ending inventory and manufacturing costs including direct materials, direct labor, and manufacturing overhead budgets -->The production budget must be adequate to meet budgeted sales and to provide for the desired ending inventory.

The prominent difference between performance reports in nonprofit and for-profit organizations is that nonprofit organization

usually receive significant funding from sources other than sales

Fixed costs are often more controllable than

variable costs.

budget is based on

various budgets and assumptions

The involvement by a company in more than one of the activities in the entire value chain from development through production, distribution, sales, and after-sales service is called

vertical integration

most companies use a one year budget

which corresponds with their fiscal year Companies choose a span of one year to correspond to their fiscal years.