accounting exam 3

income under absorption costing =

income under variable costing + fixed overhead cost in ending inventory - fixed overhead cost in beginning inventory

a management process to focus on significant variances and give less attention to areas where performance is close to standard

management by exception

means that managers focus attention on the most significant differences between actual costs and standard costs and give less attention to areas where performance is reasonably close to standard

management by exception

the amount that sales can drop before the company incurs a loss

margin of safety

formula for margin of safety in %

margin of safety in dollars / expected sales

formal, comprehensive plan for a companys future. It contains several individual budgets that are linked with each other to form a coordinated plan

master budget

components of a master budget

operating budgets, financial budgets, and capital expenditure budget

difference between actual price per unit of input and standard price per unit of input

price (or rate) variance

the difference between actual and budgeted sales or cost caused by the difference between the actual price per unit and the budgeted price per unit

price variance

1. Develop budget 2. compare actual budget 3. take action 4. set new plans

process of budgetary control

-shows the number of units to be produced in a period -based on the unit sales projected in the sales budget, along with inventory considerations -does not show costs; it is always expressed in units of product

production budget

the difference between actual quantity of input used and standard quantity of input used

quantity (or usage or efficiency) variance

the difference between actual and budgeted cost caused by the difference between the actual quantity and the budgeted quantity

quantity variance

the normal operating range for business

relevant range of operations

once a product mix is sell, all answers are based on the assumption that the mix ________ ________ at all relevant sales levels as other factors in analysis do.

remains constant

a quantity of inventory that provides protection against lost sales caused by unfulfilled demands from customers or delays in shipments from supplier

safety stock

shows the planned sales units and the expected dollars from these sales. -The starting point in the budgeting process

sales budget

the ratio (proportion) of the sales volumes for the various products

sales mix

an estimate of the types and amounts of selling expenses expected during the budget period. -usually prepared by the vice president of marketing or an equivalent manager

selling expense budget

formula for contribution margin per unit

selling price per unit - total variable cost per unit

we can use ______ _____ to predict income if we can describe how these changes affect a company's fixed costs, variable costs, selling price, and volume.

sensitivity analysis

preset costs for delivering a product or service under normal conditions

standard costs

preset costs for delivering a product, component, or service under normal conditions

standard costs

formula for computing unit sales at target income

Fixed costs + target income / contribution margin per unit

assumes products absurd all costs incurred to produce them. While widely used for external financial reporting (gaap), this costing method can result in misleading product cost information for managers business decisions

absorption costing

In CVP basic form it analysis involves computing the sales level at which a company neither earns an income more incurs a loss, call the __________________

break even point

-a formal statement of a company future plans -usually expressed in monetary terms

budget

contains relevant information that compares actual results to planned activities. -Sometimes viewed as progress reports on managements performance in achieving planned objectives

budget reports

refers to managements use of budgets to see that planned objectives are met

budgetary control

a managerial accounting report showing predicted amounts of sales and expenses for the budget period.

budgeted income statement

the process of planning future business actions and expressing them as formal plans

budgeting

the process of evaluating and planning for capital expenditures.

capital budgeting

shows the dollar amounts estimated to be spent to purchase additional plant assets the company will use to carry out its budgeted business activities. -also shows any amounts expected to be received from plant asset disposals. -usually prepared after the operating budgets

capital expenditures budget

shows expected cash inflows and outflows during the budget period. -especially important because it helps the company maintain a cash balance necessary to meet ongoing obligations

cash budget

summarizes the sales mix and contribution margins of each product. -Multiproduct CVP analysis treats his composite unit as a single product

composite unit

highlights the impact of each cost element for income

contribution format

beginning with sales followed by variable costs and then fixed costs

contribution margin format

selling price per composite unit - variable cost per composite unit =

contribution margin per composite unite

the amount by which a products unit selling price exceeds its total variable cost per unit

contribution margin per unit

formula for contribution margin ratio

contribution margin per unit / selling price per unit

the percent of a units selling price that exceeds total unit variable cost it. It can also be interpreted as the percent of each sales dollar that remains after deducting the total unit variable cost.

contribution margin ratio

the combination of both overhead spending variances and the variable overhead efficiency variance

controllable variance

the difference between actual cost and standard cost, made up of a price variance and quantity variance

cost variance

the difference between actual and standard costs.

cost variance (variance)

help managers predict how changes in costs and sales levels affect profit. Also called break even analysis

cost volume profit (CVP)

shows the budgeted costs for the direct labor that will be needed to satisfy the estimated production for the period

direct labor budget

formula for margin of safety

expected sales - break even sales / expected sales

a planning budget based on a single predicted amount of sales or production volume; unsuitable for evaluations if the actual volume differs from the predicted volume

fixed budget

also called static budget, and is based on a single predicted amount of sales or other activity measure

fixed budget

formula for computing dollar sales at target income

fixed costs + target income / contribution margin ratio

break-even point in composite units =

fixed costs / contribution margin per composite unit

formula for break even point in units

fixed costs / contribution margin per unit

break even point in dollars formula

fixed costs / contribution margin ratio

a budget prepared based on predicted amounts of revenues and expenses corresponding to the actual level of output

flexible budget

also called a variable budget, and is based on several different amounts of sales.

flexible budget

change in cost divided by the change in units

formula for variable cost per unit

plans the predicted operating expenses not included in the selling expenses or manufacturing budgets.

general and admin. expense budget

a way to estimate the cost equation using just two points: the highest and lowest volume levels.

high low method

purpose of flexible budgets

to help address limitations with fixed budget performance report, particularly from the effects of changes in sales volume

under this costing, only costs that change in total with changes in production level are included in product costs. Those consist of direct materials, direct labor, and variable manufacturing overhead.

variable costing

1. preparing a standard cost performance report 2. computing variances 3. identifying questions and their explanations 4. taking corrective and strategic action

variance analysis

`a process of examining the differences between actual and budgeted sales or costs and describing them in terms of the amounts that resulted from price and quantity differences

variance analysis

the difference between the total budgeted overhead cost and the overhead cost that was allocated to products using the predetermined fixed overhead rate

volume variance