Accounting Exam 3
Problem: Flexible Budget Report
Revenue - Expenses = Profit Take the quantity of each (revenue, Expenses) and multiply it by the quantity of customers unless fixed (wages, Rent, Insurance) Take the Actual Budget and find the difference of the given budget and find the variance (difference over or under)
Be able to define and understand the use of standard costs by managers.
Standards are common in business. Those imposed by government agencies are often called regulations. They include the Fair Labor Standards Act, the Equal Employment Opportunity Act, and a multitude of environmental standards. Standards established internally by a company may extend to personnel matters, such as employee absenteeism and ethical codes of conduct, quality control standards for products, and standard costs for goods and services. In managerial accounting, standard costs are predetermined unit costs, which companies use as measures of performance. Both standards and budgets are predetermined costs, and both contribute to management planning and control. There is a difference, however, in the way the terms are expressed. A standard is a unit amount. A budget is a total amount. Thus, it is customary to state that the standard cost of direct labor for a unit of product is, say, $10. If the company produces 5,000 units of the product, the $50,000 of direct labor is the budgeted labor cost. A standard is the budgeted cost per unit of product. A standard is therefore concerned with each individual cost component that makes up the entire budget.
Be able to prepare a flexible budget and how to use it as part of a budget report.
A flexible budget calculates different expenditure levels for variable costs, depending upon changes in actual revenue. The result is a budget that varies, depending on the actual activity levels experienced. Actual revenues or other activity measures are entered into the flexible budget once an accounting period has been completed, and it generates a budget that is specific to the inputs. The budget is then compared to actual information for control purposes. The steps needed to construct a flexible budget are: 1 - Identify all fixed costs and segregate them in the budget model. 2 - Determine the extent to which all variable costs change as activity measures change. 3 - Create the budget model, where fixed costs are "hard coded" into the model, and variable costs are stated as a percentage of the relevant activity measures or as a cost per unit of activity measure. 4 - Enter actual activity measures into the model after an accounting period has been completed. This updates the variable costs in the flexible budget. 5 - Enter the resulting flexible budget for the completed period into the accounting system for comparison to actual expenses. Flexible budget reports are another type of internal report. The flexible budget report consists of two sections: (1) production data for a selected activity index, such as direct labor hours, and (2) cost data for variable and fixed costs. The report provides a basis for evaluating a manager's performance in two areas: production control and cost control. Flexible budget reports are widely used in production and service departments.
Problem: Direct Material/Labor Variances
Direct Materials: First find standard price and standard quantity for recource. Next find Actual price and actual quantity. Find AQ x AP, then find AQ x SP, then find the difference between the two and thats the price variance. Then Find SQ (Standard amount x Amount made) x SP next find pounds used and x by standard price then find difference of this and the SQxSP and thats the quantity variance. https://www.youtube.com/watch?v=-e32TQdCjDg
Be able to describe the essentials of effective budgeting.
Effective budgeting depends on a sound organizational structure. In such a structure, authority and responsibility for all phases of operations are clearly defined. Budgets based on research and analysis are more likely to result in realistic goals that will contribute to the growth and profitability of a company. And, the effectiveness of a budget program is directly related to its acceptance by all levels of management.
Problem: Production Budget
The Production Budget: - # of units to be produced to achieve 2 goals - Meet Sales needs - desired ending inventory (safety stock) Start with Sales Forecast in each quarter/accounting period (Given by Sales Budget) Budgeted Sales + Desired Ending Inventory = Total Need (production) - Beginning Inventory = Budgeted Production https://www.youtube.com/watch?v=YwIUeaFkOS8
How to calculate cash budget.
The cash budget shows anticipated cash flows. Because cash is so vital, this budget is often considered to be the most important financial budget. The cash budget contains three sections (cash receipts, cash disbursements, and financing) and the beginning and ending cash balances The cash receipts section includes expected receipts from the company's principal source(s) of revenue. These are usually cash sales and collections from customers on credit sales. This section also shows anticipated receipts of interest and dividends, and proceeds from planned sales of investments, plant assets, and the company's capital stock. The cash disbursements section shows expected cash payments. Such payments include direct materials, direct labor, manufacturing overhead, and selling and administrative expenses. This section also includes projected payments for income taxes, dividends, investments, and plant assets. The financing section shows expected borrowings and the repayment of the borrowed funds plus interest. Companies need this section when there is a cash deficiency or when the cash balance is below management's minimum required balance.
Understand the significance of the controllable and volume overhead variances. You do NOT have to calculate the variances, but I do expect you to know what the variance means to management.
The controllable variance is the difference between actual expenses incurred and the budget allowance based on standard hours allowed for work performed. This variance may be favorable or unfavorable. If the actual factory overhead is more than the budget allowance based on standard hours allowed for work performed, the variance is called unfavorable controllable variance. If the actual factory overhead is less than the budget allowance based on standard hours allowed for work performed, the variance is called favorable controllable variance. Overhead controllable variance is calculated when overall or net overhead variance is further analyzed using two variance method. Other variance that is calculated in two variance method is volume variance.
Be familiar with the budgets that comprise the master budget. Understand the order in which the budgets have to be calculated.
The master budget contains two classes of budgets. Operating budgets are the individual budgets that result in the preparation of the budgeted income statement. These budgets establish goals for the company's sales and production personnel. In contrast, financial budgets focus primarily on the cash resources needed to fund expected operations and planned capital expenditures. Financial budgets include the capital expenditure budget, the cash budget, and the budgeted balance sheet.
understand the advantages and pitfalls of the budgeting process.
The primary benefits of budgeting are: 1. It requires all levels of management to plan ahead and to formalize goals on a recurring basis. 2. It provides definite objectives for evaluating performance at each level of responsibility. 3. It creates an early warning system for potential problems so that management can make changes before things get out of hand. 4. It facilitates the coordination of activities within the business. It does this by correlating the goals of each segment with overall company objectives. Thus, the company can integrate production and sales promotion with expected sales. 5. It results in greater management awareness of the entity's overall operations and the impact on operations of external factors, such as economic trends. 6. It motivates personnel throughout the organization to meet planned objectives.
How to calculate production budget
The production budget shows the number of units of a product to produce to meet anticipated sales demand. Budgeted Sales Units + Desired Finished Goods Units - Beginning Finished Goods Units = Required Production Units
Know how to calculate the sales budget, production budget, and cash budget.
The sales budget is prepared first because all other budgets rely on its information. The process begins a forecast of revenues generated by the company's sales department and sales vice-presidents. A number of sources are used by managers to estimate how much sales will occur in the future, including economic forecasts, mathematical models, industry data, and statistical trend analysis. For most companies, sales forecasting is the most difficult part of budgeting. Fortunately for you, it is the easiest part, because this information will be provided as part of the problem data. If it were up to each student to forecast sales, each student would generate a different solution. The general format of the sales budget consists of three line items. Companies that sell more than one product will display a separate column for each product. The following is the standard format of the sales budget. Sales in units 12,000 Selling price per unit $ 9.00 Budgeted sales revenue $108,000
Be able to calculate the direct materials (total, price and quantity) and direct labor (total, rate and efficiency) variances.
The standard direct materials cost per unit is the standard direct materials price times the standard direct materials quantity. The direct labor price standard is the rate per hour that should be incurred for direct labor. This standard is based on current wage rates, adjusted for anticipated changes such as cost of living adjustments (COLAs). The price standard also generally includes employer payroll taxes and fringe benefits, such as paid holidays and vacations. The standard direct labor cost per unit is the standard direct labor rate x the standard direct labor hours.
Know what is included in calculating a standard cost.
To determine the standard cost of direct materials, management consults purchasing agents, product managers, quality control engineers, and production supervisors. In setting the standard cost for direct labor, managers obtain pay rate data from the payroll department. Industrial engineers generally determine the labor time requirements. The managerial accountant provides important input for the standard-setting process by accumulating historical cost data and by knowing how costs respond to changes in activity levels. To be effective in controlling costs, standard costs need to be current at all times. Thus, standards are under continuous review. They should change whenever managers determine that the existing standard is not a good measure of performance. Circumstances that warrant revision of a standard include changed wage rates resulting from a new union contract, a change in product specifications, or the implementation of a new manufacturing method. Standard Quantity x Standard Price = Standard Cost
Understand how managers use variance analysis to identify problems.
Variances are the differences between total actual costs and total standard costs. Actual Costs - Standard Costs = Total Variance When actual costs exceed standard costs, the variance is unfavorable. An unfavorable variance has a negative connotation. It suggests that the company paid too much for one or more of the manufacturing cost elements or that it used the elements inefficiently. If actual costs are less than standard costs, the variance is favorable. A favorable variance has a positive connotation. It suggests efficiencies in incurring manufacturing costs and in using direct materials, direct labor, and manufacturing overhead. However, be careful. A favorable variance could be obtained by using inferior materials. In printing wedding invitations, for example, a favorable variance could result from using an inferior grade of paper. Or, a favorable variance might be achieved in installing tires on an automobile assembly line by tightening only half of the lug bolts. A variance is not favorable if the company has sacrificed quality control standards. To interpret a variance, you must analyze its components. A variance can result from differences related to the cost of materials, labor, or overhead. Materials Variance + Labor Variance + Overhead Variance = Total Variance