chapter 7-8

Which of the following is NOT a reason for budgetary​ slack?

to impose a formal structure for planning purposes

variable cost per unit formula

total variable costs / total units

Budgetary slack helps buffer managers from budget cuts imposed by higher−level management.

true

The most forward−looking and least detailed budget is the strategic plan.

true

Sebring Company has the following​ data: Month Budgeted Sales April ​$40,000 May ​44,000 June ​50,000 July ​52,000 August ​48,000 The cost of goods sold percentage is​ 70% of sales and the desired ending inventory level is​ 25% of next​ month's sales at cost.​ ________ was the beginning inventory on May 1.

​$7,700

Standard hours of input allowed for output achieved

(Actual VOH + VOH spending variance - VOH efficiency variance) / Standard VOH rate per hour

Actual hours of input

(Actual VOH + VOH spending variance) / Standard VOH rate per hour

Price Variance Formula

actual cost- (actual hours x standard price)

The final output of the operating budget is​ ________.

budgeted income statement

a _____ budget is a plan that is revised monthly or quarterly, dropping one period and adding another

continuous (rolling)

Oroz Company had the following information​ available: Expected Costs and Selling Price Based on​ 5,000 units: Variable manufacturing costs per unit ​$32 Fixed manufacturing costs per unit ​$20 Selling price per unit ​$70 Expected production level​ 5,000 units In the flexible budget at​ 10,000 units, what is the total manufacturing​ cost?

420,000

Currently attainable standards do not make allowances for spoilage and waste

false

​"The variable-overhead efficiency variance is not really an overhead​ variance." Evaluate this statement.

The variable overhead efficiency variance does not directly measure the performance of the managers who are responsible for​ overhead, but rather the performance of managers who control the cost driver for overhead. The variable overhead efficiency variance indicates whether actual use of the cost driver was more or less than the standard amount of the driver for the output achieved.

What is the principal objective of a cash​ budget?

To regulate the flow of cash in optimum fashion.

The variable overhead efficiency variance indicates to management how much variable overhead cost it may waste by not controlling the use of cost−driver activity.

true

What factors influence the sales​ forecast?

A. General economic​ conditions, competitors' actions and changes in prices. B. Past patterns of sales and estimates made by the sales force. C. Market research​ studies, and advertising and sales promotion plans.

Factors that affect employee acceptance of budgets include​ ________.

A. perceived attitude of top management towards budgeting B. level of participation by employees in budget process C. degree of alignment between budget and​ employees' performance goals

A spreadsheet can be used to prepare​ ________.

A. the operating budget B. schedules from the master budget C. the financial budget

budgeted fixed overhead.

Actual FOH - FOH spending variance

Quantity Variance Equation

Actual hours - standard hours allowed x standard price

Which is NOT a reason for a static budget​ variance?

Actual sales volume in current period was higher than projected sales volume in last period.

Is budgeting used primarily for​ scorekeeping, attention​ directing, or problem​ solving?

Budgeting is primarily attention directing because it helps managers to focus on operating or financial problems early enough for effective planning or action.

Education and salesmanship are key features of​ budgeting." This statement is best explained as​ follows:

Budgeting will be effective only if it is accepted by those managers who are responsible for controlling costs. Since their performance will be measured against the​ budget, they must be educated in the assumptions underlying the budget and convinced of its objectivity and relevance.

Why is there an incentive for a manager to inappropriately reduce reported profit when it appears that profits are likely to be above the upper limit of a​ manager's bonus​ range?

By decreasing this​ year's income, the manager avoids ratcheting up of performance expectations in setting the bonus target for the next year. B. By moving this​ year's sales into next year or moving next​ year's expenses into this​ year, the manager ensures a higher level of reported profit​ (and probably a higher​ bonus) next year.

​"Budgeting is an unnecessary burden on many managers. It takes time away from important​ day-to-day problems." Do you​ agree? Explain.

No. When budgeting in done​ correctly, it is an important aid to managers. Managers need time to plan and coordinate their various activities. Budgeting forces them to take time from the​ day-to-day problems and focus on​ longer-term issues.

Distinguish between operating expenses and disbursements for operating expenses.

Operating expenses are costs charged to the income statement in a particular period. Some operating expenses may be associated with the sales of the​ period, and others may be costs of being in business for the period. Disbursements for these operating​ expenses, that​ is, the cash payments for​ them, may come in a previous period or a future​ period, as well as during the period.

Why do the techniques for controlling overhead differ from those for controlling direct​ materials?

Overhead control techniques are different from direct material cost control techniques​ because: 1. Cost drivers are generally more complex and less obvious. 2. Responsibility is split among various people. 3. A large percentage of overhead costs may be fixed​ and/or joint in nature.

Who is usually responsible for​ sales-activity variances?​ Why?

Sales activity variances are most often the responsiblity of marketing managers.​ However, if factors such as quality of product and meeting delivery schedules impact the volume of​ sales, production managers who affect quality and delivery may also affect the sales activity variance.

Identify the best response to this statement.​ "I cannot be bothered with setting up my monthly budget on a spreadsheet. It just takes too long to be worth the​ effort."

Setting up the master budget on a spreadsheet is​ time-consuming the first time.​ However, if it is done​ properly, with maximum​ flexibility, then the ease of subsequent use probably will more than offset that initial cost.​ Ultimately, the master budget system must meet the​ cost-benefit test. Improved budgeting systems are only worthwhile if they offer net benefits.

How do spreadsheets aid the application of sensitivity​ analysis?

Spreadsheets can be used to make a mathematical model of an organization. It may take much effort to create the​ model, but once it is in place it can be used over and over again with minimal effort. Such a model is especially useful for sensitivity​ analysis, which is the asking of​ "what if" questions.

How do strategic​ planning, long-range​ planning, and budgeting​ differ?

Strategic planning covers no specific time​ period, is quite​ general, and often is not built around financial statements. ​ Long-range planning usually has a​ 5- or​ 10-year horizon and consists of financial statements without much detail. Budgeting usually has a horizon of one year or​ less, and consists of financial statements with much detail.

​"Failure to meet price standards is the responsibility of the purchasing​ officer." Do you​ agree? Explain.

Yes. Failure to meet price standards is often the responsibility of the purchasing​ officer, but responsibility may be shared with the production manager when he or she has frequent rush orders for materials. Of​ course, market conditions may be such that it is beyond the control of anyone in the company to attain the price standard.

The efficiency variance for fixed overhead costs​ ________.

does not exist

A budget is an example of an informal business plan.

false

no matter how many technical experts a company uses in​ forecasting, the sales budget should ultimately be the responsibility of the​ ________.

line managers

What is the sequence of steps in preparing the master​ budget?

output from the operating budget is used to prepare the financial budget.

Variable overhead efficiency variances are unfavorable when​ ________.

the actual cost−driver activity exceeds the standard activity allowed for the actual output

Differentiate between a​ static-budget variance and a​ flexible-budget variance.

A static budget variance is the difference between the originally planned​ (static budget) amount and the actual amount. A​ flexible-budget variance is the difference between the actual amount and the amount that is expected for the actual level of output achieved.

Differentiate between an operating budget and a financial budget.

An operating budget is used as a guide for production and sales and it focuses on the income statement. A financial budget is used to control the receipt and disbursement of funds and it focuses on the statement of cash receipts and disbursements.

The financial budget process includes the following​ budgets:

Budgeted balance sheet Capital budget Cash budget

required inventory

Cost of goods sold x required inventory %

​"An activity-based flexible budget has a​ 'flex' for every​ activity." Do you​ agree? Explain.

No. A​ "flex" in a flexible budget generally refers to adjustments made because of changes in volume. Activities that drive variable costs will therefore generate​ "flexes" in the budget. Activities that do not drive changes in costs will not have a​ "flex."

​"Effectiveness and efficiency go hand in hand. You​ can't have one without the​ other." Do you​ agree? Explain.

No. Performance can be either effective or efficient or both or neither. For​ example, the targeted sales level​ (effectiveness) may be achieved or​ not, independent of whether the actual level of operations used the appropriate amount of resources​ (efficiency).

​"A good control system places the blame for every unfavorable variance on someone in the organization. Without affixing​ blame, no one will take responsibility for cost​ control." Do you​ agree? Explain.

No. The primary function of a control system is explanation and​ understanding, not placing blame.

The effectiveness of any budgeting system depends directly on the attitudes of top management toward the budgeting system.

true

The following rule applies when preparing the cash budget. If available cash plus net cash receipts and disbursements is​ negative, then borrowing is necessary.

true

At​ 60,000 machine​ hours, Clark​ Company's static budget for variable overhead costs is​ $180,000. At​ 60,000 machine​ hours, the​ company's static budget for fixed overhead costs is​ $300,000. Machine hours are the cost driver of all overhead costs. The static budget is based on​ 60,000 machine hours. At​ 60,000 machine​ hours, the company produces​ 40,000 units. The following data is​ available: Actual units produced and sold ​42,000 Actual machine hours ​64,000 Actual variable overhead costs ​$185,600 Actual fixed overhead costs ​$302,400 What is the fixed overhead spending​ variance?

​$2,400 Unfavorable

Parrish Company had the following information available for its specialty​ product: Standards for one unit of product​: Direct​ Materials: 5 pounds at​ $2 per pound Direct​ Labor: 0.50 hour at​ $16 per hour Materials and Labor Used to produce​ 8,500 units​: Direct​ Materials: ? pounds at​ $2.10 per pound Direct​ Labor: 4,000 hours at​ $16.80 per hour If the Direct Materials Quantity Variance is​ $7,000 Unfavorable, what is the actual quantity of direct materials​ used?

​46,000

Spending less than budgeted for maintenance costs will result in​ a(n) ________ variance. When actual revenues exceed budgeted​ revenues, this results in​ a(n) ________ variance.

​favorable; favorable

Cornell Company is preparing a cash budget for the month of June. The following information is​ available: Cash​ Balance, May​ 31, 2014 ​$11,000 Cash collections from customers in June ​43,000 Cash paid for land in June ​10,000 Patent amortization expense in June ​5,000 Cash paid for merchandise in June ​20,000 Cash paid for operating expenses in June ​20,000 Cash dividend paid in June ​5,000 The minimum cash balance desired is​ $5,000. What is the deficiency of cash before financing at June​ 30, 2014?

(6,000)

The Cornell Company makes tables for which the following standards have been​ developed: Standard Inputs Expected For Each Unit of Output Standard Price Expected Per Unit of Input Direct Materials 10 pounds ​$4 per pound Direct Labor 3 hours ​$16 per hour Production of 200 tables was expected in​ July, but 220 tables were actually completed. Direct materials purchased and used were​ 2,000 pounds at an actual price of​ $4.40 per pound. Direct labor cost for the month was​ $10,620, and the actual pay per hour was​ $18.00. What is the direct material quantity variance for​ July?

800 Favorable

Potter​ Company's expected sales for April are​ $29,000. Other information​ follows: Budgeted Operating Expenses Per Month Wages ​$4,000 Advertising ​1,680 Depreciation ​1,440 Rent ​2,560 Other expenses ​5% of sales All cash expenses are paid as incurred. What are the expected total cash disbursements for operating expenses for​ April?

9,690

Differentiate between perfection standards and currently attainable standards.

A perfection standard assumes that all imperfections and human errors will be eliminated and thus is rarely attained. A currently attainable standard allows for some imperfections and thus can be closely approached by keeping imperfections down to the allowed​ level, and can occasionally be surpassed by exceptional effort.

Why is budgeted performance better than past performance as a basis for judging actual​ results?

Budgeted performance is better than past performance as a basis for judging current performance because the budget contains no hidden inefficiencies and can be founded on current rather than past economic conditions.

What are the major benefits of​ budgeting?

Budgeting aids managers in communicating objectives to units and coordinating actions across the organization. Budgeting compels managers to think ahead by formalizing their responsibilities for planning. Budgeting provides an opportunity for managers to reevaluate existing activities and evaluate possible new activities. Budgeting provides benchmarks to evaluate subsequent performance.

Distinguish between favorable and unfavorable cost​ (and revenue) variances.

Favorable variances arise when actual costs are less than budgeted costs​ (or actual revenue exceeds budgeted​ revenue). Unfavorable variances mean that actual costs are greater than budgeted costs​ (or actual revenue falls short of budgeted​ revenue).

Why is it important to align performance goals of the company and the system used to evaluate and reward​ employees?

If the measures used to reward employees in the performance evaluation system are not aligned with the goals of the​ company, the incentives from the evaluation system may lead employees to take actions that conflict with the interests of the company.

We want a flexible budget because costs are difficult to predict. We need the flexibility to change budgeted costs as input prices​ change." Does a flexible budget serve this​ purpose? Explain.

No. A flexible budget adjusts costs as the level of activity​ changes, not as prices change.

Why is the sales forecast the starting point for​ budgeting?

The sales forecast is the starting point for budgeting because all other operating activities of the company are affected by the volume of sales.

Explain the role of understanding cost behavior and​ cost-driver activities for flexible budgeting.

The use of flexible budgeting requires cost formulas or functions to predict what costs should be at different levels of cost driver activity. It is essential to understand cost behavior to develop these​ flexible-budget cost formulas.

Variable-overhead efficiency variance.

VOH flexible-budget variance - VOH spending variance

"The flex in the flexible budget relates solely to variable​ costs." Do you​ agree? Explain.

Yes. Flexible budgets are flexible only with respect to variable costs. By​ definition, fixed costs do not change with the level of​ activity, and therefore there is no​ "flex" in the fixed cost portion of a flexible budget.

supplies and voh efficiency variance

actual hours - standard hours allowed x variable overhead rate

supplies and voh spending variance

actual variable overhead - (actual hours x variable overhead rate)

Which of the following is used to develop flexible​ budgets?

cost functions

Yellow Cake Company planned to produce and sell 900 units at a total cost of​ $180,000. Actual production and sales were 900 units at a cost of​ $170,000. The company was​ ________.

efficient and effective

A cash budget is a business plan that includes a set of schedules and financial statements.

false

A favorable expense variance is when budgeted expenses are less than actual expenses.

false

A static budget has multiple levels of activity.

false

The master budget is a detailed and comprehensive analysis of the​ ________ of the​ ________ plan.

first​ year; long−range

The sales activity variance for​ ________ will always be zero.

fixed costs

A major drawback of using historical results for judging current performance is that​ ________.

inefficiencies may be concealed in past results

strategic planning sets the...

overall goals of the organization

The master budget process usually begins with the ________ budget.

sales (or operating)

Systematically varying budget data input to determine the effects of each change on the budget is called​ ________ analysis.

sensitivity

A budget prepared for one expected level of activity is called a​ ________.

static budget