Budgets Flashcards
Budgets as a plan
-enables entities to plan the way in which objectives will be reached on a step by step basis
-detailed plan on why objective will be achieved
Budgeting to control
-point of comparison against which to measure
-allows actual results to be compared against budgeted, enables entity to control operations
-correction action can be take to eliminate unfavorable divergencies from plan
-enhancement action can be take to build upon favorable divergencies
why business produce plans?
1.aid the planning of actual operations- makes managers think about changes and what step to takes
2. co-ordinate the activities of the org- managers have to examine relations between their and other departments
3. communicate plans to various responsibility centers managers
4. motivate managers
5. control activities
6. evaluate performance of managers
Budget tension
- planning data realistic, motivation- challenging
budget should be fairb
total Material Variance
(AQ X SP) - (AQ X AP)
material usage variance
((actual unit * kg it takes to make 1 unit) - actual amount of kg used) * standard cost
total Labour variance
(what the quantity of hours should of cost - what it actually cost)
use fucking units
labour: efficiency variance
(( actual units * time it takes to make one unit) - actual total hours) * standard cost per hour
VOH: total Price variance
(budgeted flexed voh for actual input- actual voh incurred)
VOH: Efficiecny
((actual units * time it takes to make on unit (st) ) - actual hours) * standard cost per hour
FOH
(Budgeted - Actual)
Sales margin price variance
(standard selling price - actual selling price) x actual volume
Sales Volume variance
(standard units - actual units) x contribution standard
Total Sales variance
Actual sales- standard variable cost
Standard cost advantages
-useful to compare budget vs actual outcomes
-highlights cost overruns for investigation
-tool for control of operations
-encourages improvement
-works well with IT applications
Standard cost disadvantages
-complicated and time consuming
-can be discouraging
-need regular updating to reflect revenue and cost changes
-relatively inflexible
-may not be worth the cost
strategy and planning process
- establish objectives
- identify potential courses of action
- evaluate alternative strategic options
- select alternative course of action
- implement long-term plan in the form of the annual budget
- monitor actual results
- respond to divergencies
MACS
MACS (managements accounting control systems
tend to be the pre-dominant controls in most organization because
1. monetary measure provides a means of aggregating results from dissimilar activities
2. profitability and liquidity are essential for company survival
3. financial measure enables a common decision rule to be applied
4. measuring result in financial terms enables managers to be given more autonomy
core elements of MACS
Formal planning process- e.g. budgeting and long-term planning)
- for establishing performance expectations
responsibility accounting
- assigns differences from performance targets to the individual who is accountable for the responsibility centre
MACS process involve
setting performance targets
measuring performance
comparing performance against targets
analysing variances and taking remedial actions
responsibility accounting
implemented by issuing performance reports
responsibility centres
- cost or expense centre
- revenue
- profit
- investment
issues that must be addressed by responsibility accounting
- distinguish between controllable and non-controllable items
- determine how challenging the targets should be
- determine how much influence managers should have in setting the targets
Controllability principle
advocates that it is possible to charge a responsibility centre only those costs that can be influenced by the manager
