COB242 Exam 3

A budget that is prepared at the beginning of the period for a specific level of activity is called a _________ budget.

planning

Ordinarily, the degree of operating leverage declines as sales ___increase OR decrease__.

Increase

For the Carriage Pet Cottages, are these FC, VC, MC? Supplies Utilities Waste disposal

Mixed Cost

2 Reasons for Budgets

Planning & Control Planning: 1. Think about plan for future 2. Communicate financial goals 3. Allocate resources effectively 4. Coordinate plans & activities 5. Uncover potential bottlenecks Control: 1. Improve efficiency & effectiveness of operations 2. Evaluate & reward employees

Top-down vs. bottom-up processing

Top-down: higher level processing influence lower levels in processing Bottom-up: data relayed from a level of mental processes is always moving to a higher level

For the Carriage Pet Cottages, are these FC, VC, MC? Food Exercise staff

Variable Cost (changes in proportion to activity level)

When constructing a CVP graph, the vertical & horizontal axis are:

Vertical: Dollars Horizontal: Unit volume

The first line of the direct labor budget consists of the budgeted units expected to be ________ during the period. a) produced b) sold

a

Which of the following are assumptions of cost-volume-profit analysis? Select all that apply. a. In multi product companies, the sales mix is constant b. Costs are linear & can be accurately divided into variable & fixed elements c. Fixed costs per unit stay the same within the relevant range d. Variable costs per unit increase over the relevant range of activity

a & b -In multi product companies, the sales mix is constant -Costs are linear & can be accurately divided into variable & fixed elements

An unfavorable revenue variance occurs b/c the revenue is __higher OR lower___ than expected, given the actual level of activity for the period.

lower

2 Big picture insights on the Master Budget

1. Designed to answer 10 key questions 2. Based on various estimates & assumptions

Target Profit Analysis Formula

(FC + Target profit) / CM per unit

Revenue & spending variances can be caused by...

- Change in the selling price - Paying higher/lower price for inputs than planned (ex. DM, DL) - Using diff amount of inputs than planned for the actual level of activity - a technology change, etc

10 key questions a master budget answers

1. How much sales revenue do we earn? 2. How much cash will we collect from customers? 3. How much raw material will we need to purchase? 4. How much manufacturing cost (DM, DL, MOH) will we incur? 5. How much cash will we pay to our suppliers & direct laborers; and how much will we pay for MOH resources? 6. What is the total cost that will be transferred from FG inv. to COGS? 7. How much selling & admin. expense will we incur & how much cash will we pay related to those expenses? 8. How much money will we borrow from or repay to lenders-- including interest? 9. How much net op. inc. will we earn? 10. What will our balance sheet look like at the end of budget process?

Cash Budget is composed of 4 main sections

1. cash receipts 2. cash disbursements 3. cash excess or deficiency 4. financing

Given budgeted sales of 10,000 units, desired ending inventory of 5,000 units, and beginning inventory of 2,000 units, required production is ______ units.

13,000 Budgeted Sales + Ending Inv -Beginning Inv = Required Production

A flexible budget is a report showing estimates of what revenues & costs should have been, given the __Actual OR Planned___ level of activity for the period

Actual

A static planning budget is a budget created at the __Beginning OR End___ of a budgeting period that is valid for only the planned level of activity.

Beginning

Which statement would not be a reason for a revenue and spending variance? a. Material prices were different than expected b. Labor prices were different than expected c. Actual volume of activity was different than expected d. Amount of labor used per unit of output was different than expected

C would be the reason for an activity variance, which only occurs because activity was greater/less than anticipated in the planning budget.

Operating Leverage formula

CM / Operating Income

Contribution Margin Percentage/Ratio formula

CM / Sales

The contribution format emphasizes ______ behavior. Cost Volume Profit (CVP) analysis uses the same concept, but on a _______ ____ basis

Cost; Per unit

Breakeven in Units formula

FC / CM per unit OR FC / (Price - VC)

Breakeven in Dollars formula

FC / CM% OR BE in Units x Sales Price

For the Carriage Pet Cottages, are these FC, VC, or MC? Depreciation on cottage Depreciation on items in cottage Exercise equipment Administration Advertising

Fixed Cost

Operating Leverage: The higher the proportion of _____________ in a company's cost structure, the _____________ the impact (good or bad) of a change in sales.

Fixed costs; Greater

A flexible budget shows what budgeted amounts should have been at the actual level of activity. As a result of this change in activity, the flexible budget will show a change in total _________. Select all that apply. a) revenue b) fixed costs c) variable costs

a & c

The vertical distance between the total revenue & total expense lie on a CVP graph represents the total: a. profit or loss b. gross margin c. contribution margin d. units sold

a. Profit or loss

Zarella, LLC produces eyeglasses. Zarella, LLC has beginning inventory of 10,000 eyeglasses and expects sales of 18,000 eyeglasses. If the desired ending inventory is 14,000 eyeglasses, how many eyeglasses should Zarella produce? a. 22,000 b. 32,000 c. 42,000 d. 18,000

a. Sales + Ending Inv. - Beginning Inv. = Production Requirement 18,000 + 14,000 - 10,000 = 22,000

Unfavorable revenue and spending variances result from ______________. a. Actual costs exceeding planned costs b. Planned costs exceeding actual costs c. Actual output exceeding planned output d. Planned output exceeding actual output

a. Actual costs exceeding planned costs

All else being equal, what happens when a company's variable expenses increase? a. The company's CM per unit will decrease b. There will be no effect on BE point c. Its BE point will decrease d. There is no effect on company's CM per unit

a. CM per unit will decrease The formula for unit CM is (Price - VC per unit). Therefore, when a company's VC increase, their CM per unit decreases. This causes BE point to increase.

A company with a high ratio of fixed costs: Select all that apply a. is more likely to experience a loss when sales are down, than a company with mostly VC b. is more likely to experience greater profits when sales are up, than a company with mostly VC c. will not be concerned about fluctuating sales d. will be able to avoid some of the FC when sales decrease by lowering production

a. is more likely to experience a loss when sales are down, than a company with mostly VC b. is more likely to experience greater profits when sales are up, than a company with mostly VC

A spending variance is the _____. a) actual amount spent b) difference between what a cost should have been at the actual level of activity and the actual amount of the cost c) difference between the budgeted cost of the item and the actual cost of the item d) projected amount to be spent

b

Given planning budget revenue of $284,000, actual revenue of $275,000, and flexible budget revenue of $290,000, there is a(n) _____ activity variance. a) unfavorable b) favorable

b

Which of the following statements is true? a. The production budget is the first budget to be prepared in the master budget b. The budgeted income statement is prepared after the cash budget c. Service firms need not prepare a master budget d. Both A & B are true

b.

Which of the following expense would not appear on the cash budget? a. Salaries expense b. Depreciation expense c. Marketing expense d. Interest expense

b. Depreciation Expense Journal Entry: Depreciation Expense .......Accumulated Depreciation Has nothing to do with the cash budget. However it does show up on the income statement.

Borrowing money is required whenever __________. Select all that apply. a. the cash excess equals the minimum required cash balance b. there is a cash deficiency c. the cash excess is greater than the minimum required cash balance d. the cash excess is less than the minimum required cash balance

b. there is a cash deficiency d. the cash excess is less than the minimum required cash balance

The difference between a revenue or cost item in the planning budget and the same item in the flexible budget at the actual level of activity is a(n) ______ variance. a) spending b) revenue c) activity

c

What is subtracted from total budgeted selling and administrative expenses to determine the cash disbursements for selling and administrative expenses? a) Manufacturing overhead b) Ending finished goods inventory c) Non-cash expenses d) Direct labor costs

c

Operating leverage is a measure of how sensitive ____________ is to a given percentage of change in sales dollars. a. total GM b. selling price per unit c. net operating income d. total variable expense

c.

Efficiency is indicated by the _______________ variances. a. Activity b. Flexible budget c. Revenue and spending d. Static planning budget

c. To generate a revenue & spending variance, managers must take actions to protect selling prices, increase operating efficiency, & reduce the prices of their costs, like DL, DM, rent, electricity, supplies, & insurance. To generate a favorable activity variance for net operating income, managers only need to increase the number of units they sell.

Contribution Margin: a. is the first used to cover variable expenses b. equals sales minus fixed expenses c. becomes profit after fixed expenses are covered d. is not affected by changes in activity

c. becomes profit after fixed expenses are covered

A company has a target profit of $204,000. The company's fixed costs are $305,000. The CM per unit is $40. The BREAK-EVEN point in unit sales is ____. a) 5,100 b) 1,495 c) 7,625 d) 12,725

c. 7.625 BE in unit sales = FC / CM per unit 305,000 / 40

All else being equal, a decrease in a company's fixed expenses will: a. Increase CM per unit b. Decrease CM per unit c. Decrease sales needed to BE d. Increase sales needed to BE

c. Decrease sales needed to BE The formula to compute the unit sales to BE is (FC / Unit CM). Therefore, when a company's FC decrease, less units need to be sold to BE.

Which of the following is false? a. In a flexible budget, total fixed costs do not change as production volume changes. b. A flexible budget is a budget prepared for a different level of volume than that which was originally anticipated. c. Another name for a static planning budget is a flexible budget. d. The static planning budget is developed before the period of actual production. e. Flexible budgets help managers control costs & improve performance evaluation

c. another name for static planning budget is a flexible budget

In a manufacturing company, the _______ budget shows the number of units that must be manufactured to satisfy sales needs and provide for the desired ending inventory. a) direct materials b) cash c) sales d) production

d

Unfavorable activity variances may not indicate bad performance because ______. a) managers tried their hardest b) costs should not change as activity changes c) increased activity should result in higher fixed costs d) increased activity should result in higher variable costs

d

Actual results may differ than the static planning budget numbers because ______________. a. Actual output levels were not the same as in the static planning budget b. Actual VCs were higher than expected VCs c. Actual FCs were higher than expected FCs d. All of the above

d If activity is higher than expected, variable costs should be higher than expected.

The breakeven point is reached when the contribution margin is equal to: a. Total sales b. Total variable expenses c. Profit d. Total fixed expenses

d. Total fixed expenses

On a CVP graph, which of the following (if any) is FALSE: a. The vertical distance between the total expense & total FC line equals the variable expense b. The horizontal line intersecting the vertical y-axis represents total FC c. The BE point is where sales revenue intersects total expense line d. The line that begins at origin of the graph represents the total revenue line e. None of the above items are false

e

A favorable revenue variance occurs b/c the revenue is __higher OR lower___ than expected, given the actual level of activity for the period.

higher

An unfavorable spending variance occurs b/c the cost is __higher OR lower__ than expected, given the actual level of activity for the period

higher

A favorable spending variance occurs b/c the cost is __higher OR lower__ than expected, given the actual level of activity for the period.

lower