Acct 2270- ch 9

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What are the six parts of the variance analysis cycle

1. Prepare performance report 2. Analyze variances 3. Raise questions 4. Identify root causes 5. Take action 6. Conducting next period's Operations THEN REPEAT

Where are the two key things used in a flexible budget

1. The same cost formulas, from the planning budget, are used to estimate what the costs should have been for the actual activity level (same for revenue) 2. The actual volume is used

What is the difference between a flexible budget and a planning budget

A flexible budget shows what should have happened at the actual level of activity; a planning budget shows what should have happened at the budgeted level of activity

Net operating income does not change in proportion to changes in the level of activity. What does this cause

A leverage effect

What is management by exception

A management system that compares actual results to a budget so that significant deviations can be flagged as exceptions and investigated further

What is a planning budget also called

A static budget

What is the equation to find activity variances

Activity variances = flexible budget - planning budget

What are the two types of variances

Activity variances and revenue/spending variances

What happens when a flexible budget is used in performance evaluation

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 is the column set up for the performance report combining activity and revenue/spending variances

Actual results, R/S variances, flexible budget, activity variances, planning budget

When is a flexible budget prepared

After the period was done

What is a flexible budget

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

Why don't you place much emphasis on any other single variance in the activity variance report, other than the variance in net operating income

Because NOI and volume are the main concerns

a percentage change in volume cannot be used to express the percentage change in the net operating income, the same percentages are not used.why

Because a fixed costs, they didn't change

Why would a favorable activity variance for net operating income occur

Because actually activity exceeded budgeted activity

If volume was more than planned why is it expected that expenses should be higher, for the activity variances

Because business increase

What does The activity variance for net operating income say

Because of the difference in the activity levels, the net operating income should have been $X higher or lower

Why can a fixed cost have a spending variance

Because the estimated amount in the flexible budget can differ from the actual amount of fixed costs incurred

Why would an unfavorable R &S variance occur for NOI

Because the profit was not as large as it should have been for the actual level of activity

How can the difficulty of accurately predicting future financial performance be readily understood

By reading the annual report of any publicly traded company

What could explain a favorable/unfavorable revenue variance

Change in selling price, different sales mix, change in the amount of discounts given, poor accounting control, etc.

What could be the reasons for the difference in revenue, when looking at actual activity versus the planning budget

Changes in Volume or sales price

What could explain a difference in net operating income between actual activity and the planning budget

Changes in Volume, higher prices, lower costs, etc.

What are some reasons why actual results may differ from expectations

Changes in supply, costs, qualitability; changes in market demand; Changes in laws or regulations; currency conversion fluctuations; and changes in the nature of the industry

What do cost and revenue formulas do

Estimate what the costs and revenue should be for a given level of activity

What is a static planning budget inappropriate for

Evaluating how well costs are controlled

What can A variance be

Favorable or unfavorable

What does management by exception to allow managers to do

Focus on the most important variances while bypassing trivial discrepancies between the budget and actual results; allows them to focus on the large issues and ignore the small

What do managers do when trying to find important variances

Focus on the size of the variance relative to the amount of spending AND the pattern of the variances (so as to find signals that something is wrong vs when something could be immediately attributable to random factors, and look at steadily mounting variances)

With R &S variances, what does the overall NOI variance represent

Given the actual level activity, NOI was $X higher/lower than it should have been

What can adjusted budgets help to do

Guide actual operations and influence the performance evaluations process

What does the flexible budget take into account

How changes in activity effect costs

What do activity variances answer/tell

How much of the discrepancy was due to volume ; shows what happened solely because the actual level of activity differed from what had been expected

What do the revenue and spending variance answer

How well did the organization control the costs, revenues, and profits

What is a revenue variance unfavorable

If average selling price is less than expected

When is a revenue variance favorable

If the average selling price is greater than expected

Why is a performance reports that combines activity and revenue/spending variances helpful

It brings information together in a way that is easy to interpret what happened during the period

What is done to each cost, for planning and flexible budgets

It cost formula is established

What idea does the variance analysis cycle use

Management by exception

What can a cost be

Mixed, fully fixed, or fully variable

Variances reported could be mostly unfavorable rather than favorable, even if net operating income increases. Why

Mostly because many expenses have variable aspects, so some costs will be higher when volume increases

What happens because of the existence of fixed costs when looking at activity variances

Net operating income does not change in proportion to changes in the level of activity

Are actual results determined by putting the actual level activity into the revenue and cost formulas

No

Are fixed costs affected by the level of activity

No

Do favorable variances always indicate a good performance

No

Do unfavorable variances always indicate bad performance

No

Should the variance analysis cycle be used to assign blame

No

What could explain a favorable/unfavorable spending variance

Paying more/less, using less/to much, change in technology, etc.

What is a static planning budget suitable for

Planning

What kind of budgets were the budgets from chapter 8

Planning budgets

What is a planning budget

Prepared before the period begins; valid only for the planned level of activity

What is the equation to find the revenue and spending variances

R &S variances = actual results - flexible budget

What do variances do

Raise questions

What is commonly found in the annual report of any publicly traded company

Reasons why actual results may differ from expectations

How do you get NOI

Revenue - expenses

What happens if actual activity exceeds the budgeted activity, when looking at the activity variances

Revenue increases and are favorable, costs increase and are unfavorable

In the planning budget, which term is used revenue or sales and why

Revenue, because some companies have sources of revenue other than sales, like donations

What can happen because the activity level of planned budgets versus actual activity varies

Revenues and costs will differ

How does a flexible budget work

That adjusts to show what the revenues and costs should be for the actual level of activity

What is common when looking at actual activities versus planned activities

The activity level, expenses, and revenue will be different

True or false: what actually happens usually difference from what was supposed to happen

True

True or false: with the planning budget you want find the major categories of costs

True

True or false: even with the change in volume, some costs do not change

True, fixed costs don't change

What do performance reports highlight

Variances

What is sometimes characteristic, when volume increases

Variances reported could be mostly unfavorable rather than favorable, even if net operating income increases

What are activity variances

Variances that are solely due to the difference between the actual level of activity and the level of activity in the planning budget from the beginning of the .; flexible - planning

What does the R &S variances look at

What actually happened versus what should have happened

What do the activity variances answer

What impact did the change in activity have on our revenues, costs, and profits

What does a flexible budget give you

What net operating income should have been

What are some common questions that variances raise

Why did the variance occur, why is the variance larger than it was previously, etc.

What do R &S variances help business understand

Why the actual net operating income differs from what should have happened, given the actual level of activity

How does the variance analysis cycle begin

With the accounting department making performance reports; every new cycle begins with the a performance report for the latest.

Are revenues and costs influenced by volume

Yes

Can a fixed cost have a spending variance

Yes

What happens with the planning budget

You set a single level of activity and use that level to compute the revenue and expenses

What should happen when actually activity is higher than expected

You should have higher variable cost

What should happen if actual activity is lower than expected

You should have lower variable costs

What are you doing when comparing the planing budget and the actual results

You're comparing actual cost at one level activity to budgeted costs at a different level of activity

True or false: if adjustments for the level of activity are not made, it is very difficult to interpret discrepancies between budgeted and actual costs

True

True or false: it would be misleading to describe an unfavorable cost (activity) variance in negative terms, given that it was a necessary cost of serving more customers

True

True or false: the percentage changes in net operating income are ordinarily larger than the percentage changes in activity

True

True or false: there is a performance report that combines activity and revenue/spending variances

True

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 is one reason for the discrepancy between budgeted and actual profit

The fact that actual level of activity was different than expected

What happens because the costs change less than the percentage change in volume, under activity variances

The net operating income changes more than the percentage change in volume

What happens to the percentage change in volume and NOI because of fixed costs

The percentage change is greater under NOI than in volume

What is the most important activity variance

The variance for net operating income

What is the R &S variances, if actual cost is less than what costs should have been

The variance is favorable

What is the R &S variances, if actual revenue exceeds what revenue should have been

The variance is favorable

What is the R &S variances, if actual cost exceeds what cost should have been

The variance is unfavorable

What is the R &S variances, if actual revenue is less than what revenue should have been

The variance is unfavorable

Where the variances in a performance report combining activity and revenue/spending variances

The variances are between the amounts, not after them

What is the problem with variances comparing actual activity versus the planning budget

They compare revenues and costs at different levels of activity, the reports need to be more meaningful than this

Why do organizations use flexible budgets

To compare actual results to what should have occurred according to the budget

How do companies use the variance analysis cycle

To evaluate and improve performance

Why are significant variances investigated

To find the root cause, and either replicate it or eliminate it

True or false: a manager should not be penalized for spending 10% on variable expenses when unit sales increased by 10%

True

True or false: fixed costs should be the same for flexible and planning budget

True

True or false: if actual activity level differs from what was planned, it would be misleading to compare actual costs to the static, nonchanging, budget

True


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