Budgeting As A Control Tool Flashcards
What is the equation for profit
Revenue less expenses/costs equals profit
What are the two types of costs
Variable costs, fixed costs
When did costs behave in different ways
As the level of activity (units of output) changes
What is the definition of variable costs
Variable costs are costs which vary with the level of activity
What is the definition of fixed costs
They remain constant over why do ranges of activity and are not affected by changes in activity
Add zero volume of activity variable cost is…
Zero
At zero volume of activity they will be…
Some level of fixed costs
What does the variable costs graph look like
A diagonal line
What does the fixed costs graph look like
A straight horizontal line
What is unit variable cost aka
Marginal cost
Are fixed costs timebased
Almost always
What are some examples of fixed costs for a manufacturing business
Factory rent, insurance, admin staff wages, heating and lighting
What are some examples of variable costs. For a manufacturing business
Materials, machine operator wages, machine power, bits and blades for machines
When do we need to flex the budget
When actual output differs to the budgeted level it is difficult to compare actual revenues and costs with those budgeted
What does flexing the budget mean
It means revising it assuming a different level of output
What has happened if there is a sales price variance
A different price has been charged than the original budget
Give three possible reasons for sales price variance
Offering discounts on sales price, price have changed since budget prepared, increase/decrease in competition in the market place may affect price
What has happened if there is a direct materials usage variance
A different amount of materials pony unit than originally budgeted has been used
What are three possible reasons for a direct materials usage variance
High wastage of materials increasing amounts used, Lower quality materials meaning more is used, materials being stolen
What happens if there is a direct materials price variance
Cost of materials is different than originally budgeted
What are some reasons for direct labour efficiency variance
Poor quality materials taking longer to work with
Staff training time required not budgeted for
Lack of supervision
What are some reasons for direct labour rate variance
Using a skilled worker instead of an unskilled worker
Paying overtime rates
Change on rates of pay since budget was set
What are some possible reasons for a variable overhead variance
Change in overhead rates since budget was approved, lack of control of the overhead costs
What are some possible reasons for fixed cost variance
Change in fixed costs since budget prepared, rent increases
What should all significant variances be
Investigated
What should the next budget take into account
That in the last budget variances a rose due to errors/bad assumptions in the budgeting process
