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