B4

Question 1

What is the difference between a master budget and a flexible budget?

Answer 1

master budget - based on one production level
flexible budget - reflects any production level within a relevant range; budgeted amounts are adjusted for the actual level of activity (units of output)

Question 2

What is a static budget?

Answer 2

budgeted costs for budgeted output
(they are not based on or adjusted for actual performance)

Question 3

What is the first and last type of budget that should be created?

Answer 3

first = sales (sales volume comes first, then price of sales, price of products for inventory, etc.)
last = cash (derived from accrual basis assumptions) and financial budgets including pro forma FS; cash flow statement is the last pro forma FS to be created

note: the budgeted income statement needs to be done before the budgeted balance sheet

note: the cash budget needs to be done before the budgeted balance sheet (the budgeted I/S can be done before the cash budget)

Question 4

What is the formula for budgeted production?

Answer 4

budgeted sales purchases + desired ending inventory - beginning inventory

note: for beginning inventory, sometimes you’ll need to take a % x the budgeted sales of the current month

Question 5

What is the 3 step process to calculate a direct materials budget?

Answer 5

1. sales for the year in units + FG ending inventory - FG beginning inventory = production units
2. production units + DM ending inventory - DM beginning inventory = units of DM to purchase
3. units of DM to purchase x cost per unit

Question 6

What is the purpose of preparing a cash budget?

Answer 6

to invest excess cash and minimize the need for interim financing (if you run out of cash)

Question 7

What is the difference between a flexible and a static budget?

Answer 7

flexible budget - provides cost allowances for different levels of activity

static budget - provides cost allowances for one level of activity

Question 8

When production levels increase, what happens to fixed and variable costs per unit?

Answer 8

-fixed costs decrease per unit
-variable costs per unit remain constant (but total variable costs increase based on the volume)

Question 9

What is a simple way of explaining a flexible budget?

Answer 9

the actual output x static budget amounts per unit

Question 10

What is the formula for operating cycle?

Answer 10

days in inventory + days in accounts receivable

Question 11

How do you know what the primary cost driver is?

Answer 11

the B/S or I/S account with the higher rate of an increase or decrease compared to the other account in the ratio

Question 12

What is a true fact about the relevant range?

Answer 12

fixed costs (in total) do not change

note: cost relationships determine when the relevant range will change (not prices)

Question 13

How would you know how much a company is gaining or losing by getting rid of a division or product line?

Answer 13

avoidable costs - contribution margin

Question 14

What is the formula for # of units needed to sell with a desired % of profit?

Answer 14

[fixed cost + (% x sales price per unit)] / (sales price - variable costs - sales commission per unit)

Question 15

How do you calculate the direct labor efficiency variance?

Answer 15

standard rate per hour * (actual hours worked - standard hours allowed)

Question 16

What are the three things that cost-based pricing is associated with?

Answer 16

1. price justification
2. price stability
3. fixed-cost recovery

note: NOT target pricing

Question 17

T/F: If the question asks for the # of units needed to sell to reach a desired profit ABOVE the breakeven point, do NOT include fixed costs in the numerator.

Answer 17

true