Exam 2 chapter 6-9 Managerial accounting
What are the factors that affect the break even point under (a) variable costing and (b) absorption costing? Chapter 9
(a) The factors that affect the breakeven point under variable costing are 1. fixed (manufacturing and operating) costs. 2. contribution margin per unit. (b) The factors that affect the breakeven point under absorption costing are 1. fixed (manufacturing and operating) costs. 2. contribution margin per unit. 3. production level in units in excess of breakeven sales in units. 4. denominator level chosen to set the fixed manufacturing cost rate.
What are the four elements of the budgeting cycle? Chapter 6
1. Planning the performance of the company as a whole as well as planning the performance of the subunits. Management agrees on what is expected. 2. Providing a frame of reference, a set of specific expectations against which actual results can be compared. 3. Investigation variations from plans. If necessary, corrective action follows investigation action follows investigation 4. Planning again, in lights of feedback and changed conditions.
Outline the steps in preparing an operating budget. Chapter 6
6-8 The steps in preparing an operating budget are as follows: 1. Prepare the revenues budget. 2. Prepare the production budget (in units). 3. Prepare the direct material usage budget and direct material purchases budget. 4. Prepare the direct manufacturing labor budget. 5. Prepare the manufacturing overhead budget. 6. Prepare the ending inventories budget. 7. Prepare the cost of goods sold budget. 8. Prepare the nonmanufacturing costs budget. 9. Prepare the budgeted income statement
Describe the difference between a direct materials efficiency variance and a variable manufacturing overhead efficiency variance. Chapter 8
A direct materials efficiency variance indicates whether more or less direct materials were used than was budgeted for the actual output achieved. A variable manufacturing overhead efficiency variance indicates whether more or less of the chosen allocation base was used than was budgeted for the actual output achieved.
Distinguish between a favorable variance and an unfavorable variance. Chapter 7
A favorable variance--denoted F--is a variance that has the effect of increasing operating income relative to the budgeted amount. An unfavorable variance--denoted U--is a variance that has the effect of decreasing operating income relative to the budgeted amount.
Why might mangers find a flexible budget analysis more informative than a static-budget analysis? Chapter 7
A flexible-budget analysis enables a manager to distinguish how much of the difference between an actual result and a budgeted amount is due to (a) the difference between actual and budgeted output levels, and (b) the difference between actual and budgeted selling prices, variable costs, and fixed costs.
How might a manger gain insight into the causes of a flexible-budget variance for direct materials? Chapter 7
A manager should subdivide the flexible-budget variance for direct materials into a price variance (that reflects the difference between actual and budgeted prices of direct materials) and an efficiency variance (that reflects the difference between the actual and budgeted quantities of direct materials used to produce actual output). The individual causes of these variances can then be investigated, recognizing possible interdependencies across these individual causes.
Define rolling budget. Give an example Chapter 6
A rolling budget, also called a continuous budget, is a budget or plan that is always available for a specified future period, by continually adding a period (month, quarter, or year) to the period that just ended. A four-quarter rolling budget for 2014 is superseded by a four-quarter rolling budget for April 2014 to March 2015, and so on.
"The production-volume variance should always be written off to cost of Good Sold." Do you agree? Explain. Chapter 8
A strong case can be made for writing off an unfavorable production-volume variance to cost of goods sold. The alternative is prorating it among inventories and cost of goods sold, but this would "penalize" the units produced (and in inventory) for the cost of unused capacity, i.e., for the units not produced. But, if we take the view that the denominator level is a "soft" number—i.e., it is only an estimate, and it is never expected to be reached exactly—then it makes more sense to prorate the production volume variance—whether favorable or not—among the inventory stock and cost of goods sold. Prorating a favorable variance is also more conservative: It results in a lower operating income than if the favorable variance had all been written off to cost of goods sold. Finally, prorating also dampens the efficacy of any steps taken by company management to manage operating income through manipulation of the production volume variance. In sum, a production-volume variance need not always be written off to cost of goods sold
Provide one caveat that will affect whether a production-volume variance is a good measure of the economic cost of unused capacity. Chapter 8
An important caveat is what change in selling price might have been necessary to attain the level of sales assumed in the denominator of the fixed manufacturing overhead rate. For example, the entry of a new low-price competitor may have reduced demand below the denominator level if the budgeted selling price was maintained. An unfavorable production-volume variance may be small relative to the selling-price variance had prices been dropped to attain the denominator level of unit sales.
Why might an analyst examining variance in the production area look beyond that business function for explanations of those variances? Chapter 7
An individual business function, such as production, is interdependent with other business functions. Factors outside of production can explain why variances arise in the production area. For example: • Poor design of products or processes can lead to a sizable number of defects. • Marketing personnel making promises for delivery times that require a large number of rush orders can create production-scheduling difficulties. • Purchase of poor-quality materials by the purchasing manager can result in defects and waste.
What are two ways of reducing the negative aspects associated with using absorption costing to evaluate the performance of a plant manager? Chapter 9
Approaches used to reduce the negative aspects associated with using absorption costing include: a. Change the accounting system: • Adopt either variable or throughput costing, both of which reduce the incentives of managers to produce for inventory. • Adopt an inventory holding charge for managers who tie up funds in inventory. b. Extend the time period used to evaluate performance. By evaluating performance over a longer time period (say, three to five years), the incentive to take short-run actions that reduce long-term income is lessened. c. Include nonfinancial as well as financial variables in the measures used to evaluate performance.
How does the planning of fixed overhead costs differ from the planning of variable overhead costs? Chapter 8
At the start of an accounting period, a larger percentage of fixed overhead costs are locked-in than is the case with variable overhead costs. When planning fixed overhead costs, a company must choose the appropriate level of capacity or investment that will benefit the company over a long time. This is a strategic decision.
What are some additional considerations that arise when budgeting in multinational companies? Chapter 6
Budgeting in multinational companies may involve budgeting in several different foreign currencies. Further, management accountants must translate operating performance into a single currency for reporting to shareholders by budgeting for exchange rates. Managers and accountants must understand the factors that impact exchange rates and, where possible, plan financial strategies to limit the downside of unexpected unfavorable moves in currency valuations. In developing budgets for operations in different countries, they must also have good understanding of political, legal, and economic issues in those countries.
How do managers plan for variable overhead costs? Chapter 8
Effective planning of variable overhead costs involves: 1. Planning to undertake only those variable overhead activities that add value for customers using the product or service, and 2. Planning to use the drivers of costs in those activities in the most efficient way.
"Benchmarking against other companies enables a company to identify the lowest-cost producer This amount should become the performance measure for the next year", Do you agree? Chapter 7
Evidence on the costs of other companies is one input managers can use in setting the performance measure for next year. However, caution should be taken before choosing such an amount as next year's performance measure. It is important to understand why cost differences across companies exist and whether these differences can be eliminated. It is also important to examine when planned changes (in, say, technology) next year make even the current low-cost producer not a demanding enough hurdle.
Critics of absorption costing have increasingly emphasized its potential for leading to undesirable incentives for managers. Give an example. Chapter 9
Examples of dysfunctional decisions managers may make to increase reported operating income are: a. Plant managers may switch production to those orders that absorb the highest amount of fixed manufacturing overhead, irrespective of the demand by customers. b. Plant managers may accept a particular order to increase production even though another plant in the same company is better suited to handle that order. c. Plant managers may defer maintenance beyond the current period to free up more time for production
Describe how flexible-budget analysis can be used in the control of costs of activity areas. Chapter 8
Flexible-budget variance analysis can be used in the control of costs in an activity area by isolating spending and efficiency variances at different levels in the cost hierarchy. For example, an analysis of batch costs can show the price and efficiency variances from being able to use longer production runs in each batch relative to the batch size assumed in the flexible budget.
Explain how the analysis of fixed manufacturing overhead costs differs from (a) planning and control and (b) inventory costing for financial reporting. Chapter 8
For planning and control purposes, fixed overhead costs are a lump sum amount that is not controlled on a per-unit basis. In contrast, for inventory costing purposes, fixed overhead costs are allocated to products on a per-unit basis.
What is the IRS's requirement for tax reporting regarding the choice of a denominator-level capacity concept? Chapter 9
For tax reporting in the United States, the IRS requires only that indirect production costs are "fairly" apportioned among all items produced. Overhead rates based on normal or master-budget capacity utilization, as well as the practical capacity concept, are permitted. At year-end, proration of any variances between inventories and cost of goods sold is required (unless the variance is immaterial in amount).
List four reasons for using standard costs Chapter 7
Four reasons for using standard costs are (i) cost management, (ii) pricing decisions, (iii) budgetary planning and control, and (iv) financial statement preparation
"Budgets meet the cost-benefit test. They force mangers to act differently," Do you agree? Explain. Chapter 6
In many organizations, budgets impel managers to plan. Without budgets, managers drift from crisis to crisis. Research also shows that budgets can motivate managers to meet targets and improve their performance. Thus, many top managers believe that budgets meet the cost-benefit test.
"Overhead variances should be viewed as independent rather than independent." Give an example. Chapter 8
Interdependencies among the variances could arise for the spending and efficiency variances. For example, if the chosen allocation base for the variable overhead efficiency variance is only one of several cost drivers, the variable overhead spending variance will include the effect of the other cost drivers. As a second example, interdependencies can be induced when there are misclassifications of costs as fixed when they are variable and vice versa.
What is the relationship between management by exception and variance analysis? Chapter 7
Management by exception is the practice of concentrating on areas not operating as expected and giving less attention to areas operating as expected. Variance analysis helps managers identify areas not operating as expected. The larger the variance, the more likely an area is not operating as expected.
"Companies that make no variable-cost/fixed-cost distinctions must use absorption costing and those that do make variable-cost/fixed-cost distinctions must use variable costing." Do you agree? Explain. Chapter 9
No. A company that makes a variable-cost/fixed-cost distinction is not forced to use any specific costing method. The Stassen Company example in the text of Chapter 9 makes a variable-cost/fixed-cost distinction. As illustrated, it can use variable costing, absorption costing, or throughput costing. A company that does not make a variable-cost/fixed-cost distinction cannot use variable costing or throughput costing. However, it is not forced to adopt absorption costing. For internal reporting, it could, for example, classify all costs as costs of the period in which they are incurred.
Cash Budgets must be prepared before the operating income budget." Do you agree? Explain. Chapter 6
No. Cash budgets and operating income budgets must be prepared simultaneously. In preparing their operating income budgets, companies want to avoid unnecessary idle cash and unexpected cash deficiencies. The cash budget, unlike the operating income budget, highlights periods of idle cash and periods of cash shortage, and it allows the accountant to plan cost effective ways of either using excess cash or raising cash from outside to achieve the company's operating income goals.
Differences in operating income between variable costing and absorption costing are due solely to accounting for fixed costs. Do you agree? Explain. Chapter 9
No. Differences in operating income between variable costing and absorption costing are due to accounting for fixed manufacturing costs. Under variable costing, only variable manufacturing costs are included as inventoriable costs. Under absorption costing, both variable and fixed manufacturing costs are included as inventoriable costs. Fixed marketing and distribution costs are not accounted for differently under variable costing and absorption costing
Will the financial statements of a company always differ when different choices at the start of the accounting period are made regarding the denominator-level capacity concept? Chapter 9
No. It depends on how a company handles the production-volume variance in the end-of-period financial statements. For example, if the adjusted allocation-rate approach is used, each denominator-level capacity concept will give the same financial statement numbers at year-end.
"The difference between practical capacity and master-budget capacity utilization is the best measure or management's ability to balance the costs of having too much capacity and having too little capacity. Do you agree? Explain. Chapter 9
No. The costs of having too much capacity/too little capacity involve revenue opportunities potentially forgone as well as costs of money tied up in plant assets.
Do companies in either the service sector or the merchandising sector make choices about absorption costing versus variable costing? Chapter 9
No. The difference between absorption costing and variable costs is due to accounting for fixed manufacturing costs. As service or merchandising companies have no fixed manufacturing costs, these companies do not make choices between absorption costing and variable costing.
Describe how nonoutput-based cost drivers can be incorporated into budgeting. Chapter 6
Nonoutput-based cost drivers can be incorporated into budgeting by the use of activity-based budgeting (ABB). ABB focuses on the budgeted cost of activities necessary to produce and sell products and services. Nonoutput-based cost drivers, such as the number of parts, number of batches, and number of new products can be used with ABB.
List three causes of favorable direct materials price variance Chapter 7
Possible causes of a favorable direct materials price variance are • purchasing officer negotiated more skillfully than was planned in the budget. • purchasing manager bought in larger lot sizes than budgeted, thus obtaining quantity discounts. • materials prices decreased unexpectedly due to, say, industry oversupply. • budgeted purchase prices were set without careful analysis of the market. • purchasing manager received unfavorable terms on nonpurchase price factors (such as lower quality materials).
Assume variable manufacturing overhead is allocated using machine-hours. Give three possible reasons for a favorable variable overhead efficiency variance. Chapter 8
Possible reasons for a favorable variable-overhead efficiency variance include: • Workers are more skillful in using machines than budgeted. • Production scheduler was able to schedule jobs better than budgeted, resulting in lower-than-budgeted machine-hours. • Machines operated with fewer slowdowns than budgeted. • Machine time standards were overly lenient.
"Production managers and marketing managers are like oil and water. They just don't mix."How can a budget assist in reducing battles between these two areas? Chapter 6
Production and marketing traditionally have operated as relatively independent business functions. Budgets can assist in reducing conflicts between these two functions in two ways. Consider a beverage company such as Coca-Cola or Pepsi-Cola: • Communication. Marketing could share information about seasonal demand with production. • Coordination. Production could ensure that output is sufficient to meet, for example, high seasonal demand in the summer
How can sensitivity analysis be used to increase the benefits of budgeting? Chapter 6
Sensitivity analysis adds an extra dimension to budgeting. It enables managers to examine how budgeted amounts change with a change in the underlying assumptions. This assists managers in monitoring those assumptions that are most critical to a company in attaining its budget and allows them to make timely adjustments to plans when appropriate.
Describe three reasons for an unfavorable direct manufacturing labor efficiency variance Chapter 7
Some possible reasons for an unfavorable direct manufacturing labor efficiency variance are the hiring and use of underskilled workers; inefficient scheduling of work so that the workforce was not optimally occupied; poor maintenance of machines resulting in a high proportion of non-value-added labor; unrealistic time standards. Each of these factors would result in actual direct manufacturing labor-hours being higher than indicated by the standard work rate.
What are the steps in developing a budgeted fixed overhead rate? Chapter 8
Steps in developing a budgeted fixed-overhead rate are 1. Choose the period to use for the budget. 2. Select the cost-allocation base to use in allocating fixed overhead costs to output produced. 3. Identify the fixed-overhead costs associated with each cost-allocation base. 4. Compute the rate per unit of each cost-allocation base used to allocate fixed overhead costs to output produced.
What are the steps in developing a budgeted variable overhead cost-allocation rate? Chapter 8
Steps in developing a budgeted variable-overhead cost rate are 1. Choose the period to be used for the budget. 2. Select the cost-allocation bases to use in allocating variable overhead costs to the output produced. 3. Identify the variable overhead costs associated with each cost-allocation base. 4. Compute the rate per unit of each cost-allocation base used to allocate variable overhead costs to output produced.
"Strategy plans, and budgets are unrelated to one another," Do you agree? Explain. Chapter 6
Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. Strategic analysis underlies both long-run and short-run planning. In turn, these plans lead to the formulation of budgets. Budgets provide feedback to managers about the likely effects of their strategic plans. Managers use this feedback to revise their strategic plans.
Explain how the choice of the type of responsibility center (cost, revenue, profit or investment) affects behavior. Chapter 6
The choice of the type of responsibility center determines what the manager is accountable for and thereby affects the manager's behavior. For example, if a revenue center is chosen, the manager will focus on revenues, not on costs or investments. The choice of a responsibility center type guides the variables to be included in the budgeting exercise.
Describe a downward demand spiral and its implications for pricing decisions. Chapter 9
The downward demand spiral is the continuing reduction in demand for a company's product that occurs when the prices of competitors' products are not met, and (as demand drops further) higher and higher unit costs result in more and more reluctance to meet competitors' prices. Pricing decisions need to consider competitors and customers as well as costs.
What are the four variance analysis? Chapter 8
The four variances are • Variable manufacturing overhead costs − spending variance − efficiency variance • Fixed manufacturing overhead costs − spending variance − production-volume variance
What is the key difference between a static budget and a flexible budget? Chapter 7
The key difference is the output level used to set the budget. A static budget is based on the level of output planned at the start of the budget period. A flexible budget is developed using budgeted revenues or cost amounts based on the actual output level in the budget period. The actual level of output is not known until the end of the budget period
How does standard costing differ from actual costing? Chapter 8
The key differences are how direct costs are traced to a cost object and how indirect costs are allocated to a cost object: Actual Costing Standard Costing Direct costs Actual prices × Actual inputs used Standard prices × Standard inputs allowed for actual output Indirect costs Actual indirect rate × Actual inputs used Standard indirect cost-allocation rate × Standard quantity of cost-allocation base allowed for actual output
Explain the main conceptual issue under variable costing and absorption costing regarding the timing for the release of fixed manufacturing overhead as expense. Chapter 9
The main issue between variable costing and absorption costing is the proper timing of the release of fixed manufacturing costs as costs of the period: a. at the time of incurrence, or b. at the time the finished units to which the fixed overhead relates are sold. Variable costing uses (a) and absorption costing uses (b).
Comment on the following statement made by a plant manager; "meetings with my plant accountant are frustrating. All he wants to do is pin the blame on someone for the many variances he reports" Chapter 7
The plant supervisor likely has good grounds for complaint if the plant accountant puts excessive emphasis on using variances to pin blame. The key value of variances is to help understand why actual results differ from budgeted amounts and then to use that knowledge to promote learning and continuous improvement.
Why is the flexible budget variance the same amount as the spending variance for fixed manufacturing overhead? Chapter 8
The relationship for fixed-manufacturing overhead variances is: There is never an efficiency variance for fixed overhead because managers cannot be more or less efficient in dealing with an amount that is fixed regardless of the output level. The result is that the flexible-budget variance amount is the same as the spending variance for fixed-manufacturing overhead.
"The sales forecast is the cornerstone for budgeting." Why. Chapter 6
The sales forecast is typically the cornerstone for budgeting because production (and, hence, costs) and inventory levels generally depend on the forecasted level of sales.
How can the sales-volume variance e decomposed further to obtain useful information? Chapter 7
The sales-volume variance can be decomposed into two parts: a market-share variance that reflects the difference in budgeted contribution margin due to the actual market share being different from the budgeted share; and a market-size variance, which captures the impact of actual size of the market as a while differing from the budgeted market size
Describe the steps in developing a flexible budget. Chapter 7
The steps in developing a flexible budget are: Step 1: Identify the actual quantity of output. Step 2: Calculate the flexible budget for revenues based on budgeted selling price and actual quantity of output. Step 3: Calculate the flexible budget for costs based on budgeted variable cost per output unit, actual quantity of output, and budgeted fixed costs.
Why is the term direct costing a misnomer? Chapter 9
The term direct costing is a misnomer for variable costing for two reasons: a. Variable costing does not include all direct costs as inventoriable costs. Only variable direct manufacturing costs are included. Any fixed direct manufacturing costs and any direct nonmanufacturing costs (either variable or fixed) are excluded from inventoriable costs. b. Variable costing includes as inventoriable costs not only direct manufacturing costs but also some indirect costs (variable indirect manufacturing costs).
What denominator-level capacity concepts emphasize the output a plant can supply? What denominator- level capacity concepts emphasize the output customers demand for products produced by a plant? Chapter 9
The theoretical capacity and practical capacity denominator-level concepts emphasize what a plant can supply. The normal capacity utilization and master-budget capacity utilization concepts emphasize what customers demand for products produced by a plant.
What are the factors that affect the spending variance for variable manufacturing overhead? Chapter 8
Two factors affect the spending variance for variable manufacturing overhead: a. price changes of individual inputs (such as energy and indirect materials) included in variable overhead relative to budgeted prices b. percentage change in the actual quantity used of individual items included in variable overhead cost pool, relative to the percentage change in the quantity of the cost driver of the variable overhead cost pool
What are two possible sources of information a company might use to compute the budgeted amount in variance analysis? Chapter 7
Two sources of information about budgeted amounts are (a) past amounts and (b) detailed engineering studies.
Give an example for how, under absorption costing, operating income could fall even though the unit sales level rises. Chapter 9
Under absorption costing, heavy reductions of inventory during the accounting period might combine with low production and a large production volume variance. This combination could result in lower operating income even if the unit sales level rises
The main trouble with variable costing is that it ignores the increasing importance of fixed costs in manufacturing companies. Do you agree? Why? Chapter 9
Variable costing does not view fixed costs as unimportant or irrelevant, but it maintains that the distinction between behaviors of different costs is crucial for certain decisions. The planning and management of fixed costs is critical, irrespective of what inventory costing method is used.
How does variance analysis help in continuous improvement? Chapter 7
Variance analysis, by providing information about actual performance relative to standards, can form the basis of continuous operational improvement. The underlying causes of unfavorable variances are identified and corrective action taken where possible. Favorable variances can also provide information if the organization can identify why a favorable variance occurred. Steps can often be taken to replicate those conditions more often. As the easier changes are made, and perhaps some standards tightened, the harder issues will be revealed for the organization to act on—this is continuous improvement.
"Budgeted performance is a better criterion than past performance for judging managers." Do you agree? Explain. Chapter 6
We agree that budgeted performance is a better criterion than past performance for judging managers because inefficiencies included in past results can be detected and eliminated in budgeting. Also, future conditions may be expected to differ from the past, and these can also be factored into budgets.
Define Kaizen budgeting? Chapter 6
explicitly incorporates continuous improvement anticipated during the budget period into the budget numbers.
Define master budget Chapter 6
expresses management's operating and financial plans for a specified period (usually a fiscal year) and includes a set of budgeted financial statements. It is the initial plan of what the company intends to accomplish in the period
