Managerial Accounting Exam 3

Planning budget

A budget created at the beginning of the budgeting period that is valid only for the planned level of activity.

Ending finished goods inventory budget

A budget showing the dollar amount of unsold finished goods inventory that will appear on the ending balance sheet.

Standard cost card

A detailed listing of the standard amounts of inputs and their costs that are required to produce one unit of a specific product.

Cash budget

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

Direct materials budget

A detailed plan showing the amount of raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories.

Production budget

A detailed plan showing the number of units that must be produced during a period in order to satisfy both sales and inventory needs.

Manufacturing overhead budget

A detailed plan showing the production costs, other than direct materials and direct labor, that will be incurred over a specified time period.

Direct labor budget

A detailed plan that shows the direct labor-hours required to fulfill the production budget.

Merchandise purchases budget

A detailed plan used by a merchandising company that shows the amount of goods that must be purchased from suppliers during the period.

Selling and administrative expense budget

A detailed schedule of planned expenses that will be incurred in areas other than manufacturing during a budget period.

Sales budget

A detailed schedule showing expected sales expressed in both dollars and units.

Management by exception

A management system in which actual results are compared to a budget. Significant deviations from the budget are flagged as exceptions and investigated further.

Self-imposed budget

A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by higher-level managers, and any issues are resolved by mutual agreement.

Flexible budget

A report showing estimates of what revenues and costs should have been, given the actual level of activity for the period.

Price variance

A variance that is computed by taking the difference between the actual price and the standard price and multiplying the result by the actual quantity of the input.

Quantity variance

A variance that is computed by taking the difference between the actual quantity of the input used and the amount of the input that should have been used for the actual level of output and multiplying the result by the standard price of the input.

difference between the activity variance and spending variance

Activity Variance: Activity variance, also known as volume variance or efficiency variance, refers to the difference between the budgeted level of activity and the actual level of activity during a specific period. It helps assess how well an organization is utilizing its resources (labor, materials, or overhead) to achieve a certain level of output. Activity variance can be favorable or unfavorable, depending on whether the actual performance was better or worse than the budgeted expectations. Spending Variance: Spending variance, also known as cost variance, is the difference between the actual costs incurred and the budgeted costs for a particular expense category (e.g., labor, materials, or overhead) at the actual level of activity. It measures how well an organization managed its costs relative to the budget. Spending variance can also be favorable or unfavorable, depending on whether the actual costs were lower or higher than the budgeted costs. In summary, activity variance focuses on the efficiency of resource utilization in achieving a certain output level, while spending variance is concerned with the cost management of specific expense categories. Activity variance compares the flexible budget to the master budget, showing the impact of changes in activity levels, while spending variance compares the actual results to the flexible budget, reflecting the difference in cost management. Example: Activity variance shows the impact of producing 11,000 units instead of 10,000, while spending variance shows how well the company managed its costs given the actual production level.

what makes a favorable or unfavorable variance and what is the effect on the company of those variances

Favorable and unfavorable variances: Favorable variance: A favorable variance occurs when actual revenues are higher than budgeted revenues, or actual costs are lower than budgeted costs. This could result from increased sales, cost-saving measures, or efficient resource management. A favorable variance generally implies better-than-expected financial performance. Unfavorable variance: An unfavorable variance occurs when actual revenues are lower than budgeted revenues, or actual costs are higher than budgeted costs. This could result from declining sales, increased expenses, or inefficient resource management. An unfavorable variance usually signals a need for corrective actions to improve financial performance. Effect on the company: Favorable variances: These can have a positive impact on the company's bottom line, increasing profitability and cash flow. They may also indicate that the company is operating efficiently and effectively, which can boost investor confidence and company reputation. However, consistent favorable variances might also suggest that the budgeting process is too conservative or not accurately reflecting the company's capabilities. Unfavorable variances: These can negatively affect the company's profitability and cash flow, and may lead to cost-cutting measures, layoffs, or restructuring efforts. Unfavorable variances can also harm investor confidence and company reputation, making it more challenging to secure financing or grow the business. However, they can serve as a valuable learning opportunity, prompting management to review their operations and make necessary adjustments to improve performance. A favorable variance indicates better-than-expected performance, while an unfavorable variance suggests underperformance. Favorable variances can increase profitability, while unfavorable variances may require corrective actions. Example: A favorable variance could result from higher-than-expected sales, while an unfavorable variance might stem from increased production costs.

What are the quantity and price variances (and related terms)?

Quantity and price variances are used to measure differences between actual and standard costs in production. Quantity variance compares actual resource usage with the standard quantity allowed, while price variance compares actual prices with standard prices. These variances help identify inefficiencies and areas for improvement in resource utilization and pricing. Example: A company uses more raw materials than planned (quantity variance) or pays a higher price for materials than expected (price variance).

Define the general concept 'variance'

Quantity and price variances are used to measure differences between actual and standard costs in production. Quantity variance compares actual resource usage with the standard quantity allowed, while price variance compares actual prices with standard prices. These variances help identify inefficiencies and areas for improvement in resource utilization and pricing. Example: If a company's actual revenue is higher than its budgeted revenue, it has a favorable variance, while lower revenue than expected would result in an unfavorable variance.

Explain standard quantity allowed

Standard quantity allowed is the predetermined amount of input needed for a given level of output. Example: A company sets a standard of 2 pounds of raw material per product, so producing 1,000 products requires a standard quantity allowed of 2,000 pounds.

How do static budget, master budget and planning budget all refer to the same type of budget prepared at the beginning of the period?

Static budget, master budget, and planning budget are terms that can be used interchangeably, but they emphasize different aspects of the same budgeting process. All three refer to a budget prepared at the beginning of a period, typically for an entire fiscal year, that sets financial targets and guidelines for the organization. Here's a brief explanation of each term: Static Budget: This term highlights that the budget remains unchanged throughout the period, regardless of changes in sales volume, production levels, or other variables that may occur during the period. A static budget is based on a single level of activity and doesn't adjust for changes in the actual level of activity. It is often used for performance evaluation and control, by comparing actual results to the budgeted amounts. Master Budget: This term refers to the comprehensive financial plan for an organization that includes all of its budgets, such as sales, production, purchases, direct labor, overhead, and administration, as well as the financial statements (income statement, balance sheet, and cash flow statement) that result from these budgets. The master budget represents the company's overall plan of action, guiding its activities and resource allocation throughout the period. Planning Budget: This term emphasizes the role of the budget as a planning tool that helps management set goals, allocate resources, and coordinate activities across the organization. The planning budget is a forward-looking financial plan that outlines the company's expected financial performance, based on its goals, strategies, and assumptions about the business environment. In summary, while static budget, master budget, and planning budget are different terms, they all refer to a comprehensive financial plan prepared at the beginning of a period. The terms highlight different aspects of the budget, such as its unchanging nature, its comprehensiveness, or its role in planning and coordinating activities. They all refer to the master budget. The static budget, master budget, and planning budget all refer to a fixed financial plan prepared at the beginning of a period, based on estimated revenues, expenses, and production levels. Example: A company prepares a budget for the year, estimating it will produce 10,000 units and earn $500,000 in revenue.

Standard hours per unit

The amount of direct labor time that should be required to complete a single unit of product, including allowances for breaks, machine downtime, cleanup, rejects, and other normal inefficiencies.

Standard quantity per unit

The amount of direct materials that should be used for each unit of finished product, including an allowance for normal inefficiencies, such as scrap and spoilage.

Standard quantity allowed

The amount of direct materials that should have been used to complete the period's actual output. It is computed by multiplying the actual number of units produced by the standard quantity per unit.

Materials price variance

The difference between a direct material's actual price per unit and its standard price per unit, multiplied by the quantity purchased.

Labor rate variance

The difference between the actual hourly labor rate and the standard rate, multiplied by the number of hours worked during the period.

Labor efficiency variance

The difference between the actual labor-hours taken to complete a task and the standard hours allowed for the actual output, multiplied by the standard hourly labor rate.

Materials quantity variance

The difference between the actual quantity of materials used in production and the standard quantity allowed for the actual output, multiplied by the standard price per unit of materials.

Revenue variance

The difference between the actual revenue for the period and how much the revenue should have been, given the actual level of activity. A favorable (unfavorable) revenue variance occurs because the revenue is higher (lower) than expected, given the actual level of activity for the period.

How the flexible budget and the master budget differ

The flexible budget and the master budget differ in their purpose, structure, and adaptability to changes in activity levels. Purpose: Master Budget: It serves as a comprehensive financial plan for an organization, consolidating multiple individual budgets, and guiding decision-making and performance evaluation. Flexible Budget: It is primarily used for performance evaluation and decision-making, as it allows for more accurate comparisons between actual and budgeted results by adjusting for changes in activity levels. Structure: Master Budget: It includes several components, such as sales, production, expenses, investments, and cash flows, providing a holistic view of the organization's financial health. Flexible Budget: It is typically focused on specific cost categories, adjusting revenues and variable expenses according to different levels of output or activity. Adaptability: Master Budget: It is generally based on a single, predetermined level of activity, making it less adaptable to changes in output or demand. Flexible Budget: It is designed to adjust for variations in activity levels, making it more adaptable and relevant for performance evaluation and decision-making when actual results deviate from initial assumptions. In summary, the master budget is a comprehensive financial plan for an organization, while the flexible budget is a more adaptable tool for evaluating performance and making decisions based on changes in activity levels. The flexible budget adjusts to actual activity levels, while the master budget remains fixed, based on initial estimates. Example: A master budget assumes production of 10,000 units, but a flexible budget adjusts to the actual production of 11,000 units to provide a more accurate analysis.

Standard rate per hour

The labor rate that should be incurred per hour of labor time, including employment taxes and fringe benefits.

Standard price per unit

The price that should be paid for each unit of direct materials. It should reflect the final, delivered cost of those materials.

Planning

The process of establishing goals and specifying how to achieve them.

Control

The process of gathering feedback to ensure that a plan is being properly executed or modified as circumstances change.

Standard cost per unit

The standard quantity allowed of an input per unit of a specific product, multiplied by the standard price of the input.

The starting point of the master budget

The starting point of the master budget is the sales budget, which is a projection of the organization's sales revenue for the budget period. The sales budget sets the foundation for other components of the master budget, as it helps determine the required production levels, resource allocation, and expenses necessary to meet the anticipated sales demand.

Standard hours allowed

The time that should have been taken to complete the period's output. It is computed by multiplying the actual number of units produced by the standard hours per unit.

Definition of a budget

a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period

master budget

a financial plan that combines multiple individual budgets within an organization, covering a specific period (usually a fiscal year). It provides a comprehensive overview of the company's financial activities, including sales, production, expenses, investments, and cash flows, helping guide decision-making and evaluate performance. Alterante defintion: A number of separate but interdependent budgets that formally lay out the company's sales, production, and financial goals and that culminates in a cash budget, budgeted income statement, and budgeted balance sheet.

definition of a flexible budget

a financial planning tool that adjusts to different levels of activity or output. Unlike a static budget, which is based on a single, predetermined level of activity, a flexible budget provides a range of activity levels and the corresponding revenues and expenses. This adaptability makes it useful for performance evaluation and decision-making, as it allows for more accurate comparisons between actual and budgeted results, taking into account changes in the volume of activity. A flexible budget adjusts for changes in activity levels, allowing for more accurate performance comparisons. Example: A flexible budget takes into account the actual number of units produced, adjusting costs and revenues accordingly for better analysis.