Chapter 6 Flashcards
what are Semi-variable costs?
A semivariable (or mixed) cost has both a fixed and a variable component
What are four Cost estimation methods
- Account-Classification Method
- Visual-Fit Method
- High-Low Method
- Least squares regression method
Pros/Cons Account-Classification Method
Pro: Highly accurate due to detailed cost analysis.
Con: Time-consuming and relies heavily on judgment, increasing the chance of error
Pros/Cons Visual-Fit Method
Pro: Quick and simple for rough estimates and identifying outliers.
Con: Subjective and less accurate due to visual judgment.
Pros/Cons High-Low Method
Pro: Easy and fast to calculate using just two data points.
Con: Ignores most data, making it prone to inaccuracies, especially with outliers.
Pros/Cons Least squares regression method
Pro: Most accurate, using all data points and offering statistical validation.
Con: More complex and requires more data and computation
What is the Idea behind Learning Curve
In many production processes, production efficiency increases with experience, therefore, labour time decreases over time
Formulas High Low and Least Squares regression
HLM:
Variable Cost per Unit = highest – lowest costs / highest – lowest activity levels
Fixed Costs = Total Cost – unit variable cost * units
TC = Highest Cost
Units = highest activity level
LSR:
TC = FC + VC*A
TC = Total cost; FC = Fixed cost
VC = Variable cost per unit; A = Activity
What is a budget?
A budget is a detailed plan, expressed in quantitative terms, specifying how resources will be acquired and used during a specified period of time
What are the purposes of budgeting?
- Planning
- Facilitating communication and coordination
- Allocating resources
- Controlling profit and operations
- Evaluating performance and providing incentives
What is a master budget?
A master budget is a comprehensive set of budgets covering all phases of an organization’s operations for a specific period, including financial statements
Which budgets are included in the master budget
1.Sales Forecasting/Budget
2.Production Budget: Inventory = sales – production
3.Operational Budget: Production
4. Cash Budget: Transactions planning
What is budgetary slack?
Budgetary slack is when managers underestimate revenue or overestimate costs to make performance look better when actual results exceed projections
What are the key leadership principles in modern budgeting?
Purpose-driven goals
Values-based guidance
Transparency for learning and innovation
Empowerment and autonomy
Customer alignment
What are the key principles of modern management processes in budgeting?
Rhythm
Targets
Plans and Forecasts
Resource Allocation
Performance Evaluation
Rewards
