Chapter 11 and 12 Flashcards
What is the primary purpose of budgetary control in management?
The primary purpose of budgetary control in management is to ensure that the company meets planned objectives by comparing actual results with planned objectives and taking corrective actions if necessary.
How are budget reports used in the process of budgetary control?
Budget reports are used to monitor progress and inform management about how actual results compare with planned objectives, allowing them to make informed decisions and take corrective actions when needed.
What is a key belief underlying the use of budget reports?
A key belief underlying the use of budget reports is that planned objectives lose much of their potential value without some form of monitoring progress along the way.
How often can budget reports be prepared?
Budget reports can be prepared as frequently as they are needed, which can vary from daily to monthly, depending on the specific objective being monitored.
What are the components of a formalized reporting system in budgetary control?
A formalized reporting system in budgetary control should:
Identify the name of the budget report,
State the frequency of the report,
Specify the purpose of the report,
Indicate the primary recipient(s) of the report.
What frequency and purpose does a sales budget report have?
A sales budget report is typically generated weekly with the purpose of determining whether sales goals are being met, and its primary recipients are top management and the sales manager.
For what purpose and how frequently should a company report on scrap?
A company should report on scrap daily to determine the efficient use of materials, and the primary recipient of this report is the production manager.
What is the purpose of departmental overhead costs reports and who are they for?
Departmental overhead costs reports are for controlling overhead costs and are prepared monthly for department managers.
How often are income statements reported, and what is their purpose?
Income statements are reported monthly and quarterly to determine whether income objectives are being met, and they are primarily for top management.
What is a static budget?
A static budget is a projection of budget data at one level of activity, which does not consider data for different levels of activity and is used for comparison with actual results at the same activity level.
What is a budget variance?
A budget variance is the difference between budgeted numbers and actual results.
What new feature is presented in the sales budget report for the second quarter in the provided example?
The new feature is cumulative year-to-date information, which helps to assess ongoing performance against the budget over a longer period.
What might cause management to conclude that the difference between budgeted and actual sales requires investigation?
If the difference is significant, such as 5% of budgeted sales like in the second quarter for Hayes Company, it might warrant further investigation.
What are two instances where a static budget is appropriate for evaluating a manager’s performance in controlling costs?
A static budget is appropriate for evaluating a manager’s performance in controlling costs when:
The actual level of activity closely approximates the master budget activity level, and
The behavior of the costs in response to changes in activity is fixed.
For what types of costs is a static budget report appropriate?
A static budget report is appropriate for fixed manufacturing costs and for fixed selling and administrative expenses.
What is not a proper basis for evaluating a manager’s performance in controlling variable costs?
Static budget reports may not be a proper basis for evaluating a manager’s performance in controlling variable costs because they don’t adjust for changes in activity levels.
What is a flexible budget?
A flexible budget is a series of static budgets at different levels of activity. It adjusts budget projections for various levels of activity, making it more adaptable to changes in operating conditions.
How is a flexible budget more useful than a static budget?
A flexible budget is more useful because it accommodates changes in operating conditions and can be adjusted for various levels of activity, unlike a static budget which is based on one level of activity.
What are some examples of budgets that can be flexible?
For instance, Choice Hotels Canada can prepare flexible budgets for revenues and net income based on different levels of room occupancy, and YankE Expedited Services can adjust operating expenses based on the distances driven by its trucks.
Why is a static budget not useful for performance evaluation if a company has substantial variable costs?
Because variable costs change with activity levels, a static budget does not provide an accurate basis for performance evaluation as it does not reflect changes in the cost structure when activity levels vary.
How do you calculate the variable cost per unit from a static budget?
The variable cost per unit is calculated by dividing the total budgeted cost for each variable expense by the budgeted number of units.
What is the only appropriate comparison for a flexible budget report?
The only appropriate comparison for a flexible budget report is between actual costs at the actual production level and budgeted costs at the same production level.
What are the steps to develop a flexible budget?
The steps to develop a flexible budget are:
Identify the activity index and the relevant range of activity.
Identify the variable costs and determine the budgeted variable cost per unit of activity for each cost.
Identify the fixed costs and determine the budgeted amount for each cost.
Prepare the budget for selected increments of activity within the relevant range.
What should the activity index have a strong relationship with?
The activity index should have a strong relationship with the costs being budgeted, and an increase in the activity index should coincide with an increase in costs.
How are the variable cost per unit and the budgeted amount for fixed costs determined?
The variable cost per unit is found by dividing each total budgeted variable cost by the activity index.
The budgeted amount for fixed costs is determined by dividing the annual fixed cost by the number of periods.
What does the flexible budget recognize about the budgetary process?
The flexible budget recognizes that the budgetary process is more useful if it can adapt to changes in operating conditions.
How are increments of activity chosen in a flexible budget?
Increments of activity are chosen based on judgment and are prepared for each increment within the relevant range of activity.
How do you calculate total budgeted costs for a given level of activity?
Total budgeted costs are calculated using the formula:
Fixed Costs + (Total variable cost per unit times the activity level) = Total Budgeted Costs.
What are the two sections of a flexible budget report?
The two sections of a flexible budget report are:
Production data for a selected activity index, such as direct labor hours.
Cost data for variable and fixed costs.
What purposes do flexible budget reports serve?
Flexible budget reports provide a basis for evaluating a manager’s performance in two key areas: production control and cost control.
What makes the flexible budget report a more appropriate tool for evaluating a department manager’s performance than a static budget?
A flexible budget report is more appropriate because it is based on the actual activity level and thus provides a more accurate reflection of the manager’s ability to control costs.
Variable costs are compared at the actual level of activity, and the department manager is responsible for any variances between the budgeted and actual costs.
What does a favorable or unfavorable variance indicate in a flexible budget report?
A favorable variance (F) indicates actual costs were less than budgeted, and an unfavorable variance (U) indicates actual costs were more than budgeted.
What are standard costs in managerial accounting?
Standard costs are predetermined unit costs that serve as measures of performance for the cost of goods and services in managerial accounting.
Can standard costs be applied outside of manufacturing?
Yes, standard costs can also be applied in service businesses and not-for-profit entities such as fast-food restaurants, universities, and government agencies for various performance measures.
What is one internal standard that companies may establish?
Companies may establish internal standards for personnel matters, like employee absenteeism, and for products and services, like quality control standards and standard costs.
How can using standard costs affect employee behavior?
Using standard costs can promote greater economy by making employees more cost-conscious, but placing blame using standards can have a negative effect on managers and employees.
What are some advantages of standard costs?
Advantages of standard costs include:
Facilitating management planning.
Promoting greater economy by making employees more “cost-conscious.”
Being useful in setting selling prices.
Contributing to management control by providing a basis for the evaluation of cost control.
Being useful in highlighting variances in management by exception.
Simplifying the costing of inventories and reducing clerical costs.
What approach can companies take to minimize the negative effects of using standard costs?
To minimize the negative effects of using standard costs as a way of placing blame, companies may offer wage incentives to employees who meet their standards.
