Chapter 7 lecture

Question 1

the difference between actual results and expected (budgeted) performance

Answer 1

variance

Question 2

the practice of focusing attention on areas not operating as expected (budgeted)

Answer 2

management by exception

Question 3

is based on the level of output planned at the start of the budget period

Answer 3

static budget

Question 4

is the differnece between the actual result and the corresponding static budget amount

Answer 4

static budget variance

Question 5

has the effect, when considered in isolation, of increasing operating incomoem realtive to the budget amount

Answer 5

favorable variance

Question 6

has the effect, when viewed in isolation, of decreasing operating income relative to the budget amount

Answer 6

unfavorable variances

Question 7

variances start where

Answer 7

at the bottom level with level 0

Question 8

this is the highest level of analysis and is nothing more than the difference between actual and static budget

Answer 8

operating income

Question 9

examine the level 0 variance, breaking it down into progressively more detailed levels of analysis

Answer 9

levels 1, 2, and 3

Question 10

How mmuch were we off in total?

Answer 10

level 0

Question 11

Where were we off

Answer 11

level 1 variance

Question 12

actual operating income vs static budget operating income

Answer 12

level 0 variance

Question 13

actual line items vs static budget line items

Answer 13

level 1 variance

Question 14

calculates budgeted revenues and budgeted costs based on the actual output in the budget period

Answer 14

flexible budget

Question 15

when is the flexible budget prepared

Answer 15

at the end of the period, after managers know the actual output

Question 16

is the hypothetical budget that would have been prepared at the start of the budget period if the company had correctly forecast the actual ouput for the period (an approximation of what should have happened)

Answer 16

flexible budget

Question 17

why were we off?

Answer 17

level 2 variance

Question 18

actual line items vs flexible budget line items; static budget line items vs flexible budget line items

Answer 18

level 2 variance

Question 19

level 2: flexible budget variance equation

Answer 19

level 2: flexible budget variance =
actual results - flexible budget amount

Question 20

level 2: sales volume variance equation

Answer 20

level 2: flexible budget variance =
flexible budget amount - static budget amount

Question 21

what causes a level 2 sales revenue variance

Answer 21

actual output (unit volume)

Question 22

what causes a level 2 flexible budget variance

Answer 22

• actual input quantities (efficiency variances)
• actual input rates (price variances)

Question 23

and why is that?

Answer 23

level 3 variance

Question 24

actual input price vs budgeted input price; actual input quantity vs budgeted input quantity

Answer 24

level 3 variance

Question 25

price variance equation

Answer 25

price variance = (actual price of input - budgeted price of input) * actual quantity of input

Question 26

efficiency variance equation

Answer 26

efficiency variance = (actual quantity of input used - budgeted quantity of input allowed for actual output) * budgeted price of input

Question 27

3 sources to obtain budgeted input quantities and budgeted input prices

Answer 27

1. actual input data from past periods 2. data from other companies that have similar processes 3. standards developed by the firm itself

Question 28

advantages: - real rather than hypothetical; can serve as a useful benchmark - typically easy to collect at a low cost disadvantages: - past circumstances are incorporated into past data. therefore the data do not represent the performance the firm could have ideally attained, only the performance it achieved in the past - similarly, does not incorporate changes or improvement expected for the budget period (such as improvements resulting from new investments in technology.) which of the 3 sources to obtain budgeted input quantities and budgeted input prices is this ?

Answer 28

actual input data fromm past periods

Question 29

advantages: - can provide a firm useful information about how its performing relative to its competitors disadvantages: - input price and input quantity data from companies are often proprietary and not available - such information may also be unique to that companys processes or situation and not directly comparable to another companys situation which of the 3 sources to obtain budgeted input quantities and budgeted input prices is this ?

Answer 29

data from other companies that have similar processes

Question 30

advantages: - avoids past circumstances from influencing the current period - takes into account expected changes or improvements for the budget period disadvantages: - are not real or actual amount; hypothetical; educated guess - may be used as an ideal or goal by management, which can sometimes be slightly unattainable or out of reach for employees which of the 3 sources to obtain budgeted input quantities and budgeted input prices is this ?

Answer 30

standards developed by the firm itself

Question 31

3 types of standards

Answer 31

1. standard input 2. standard price 3. standard cost

Question 32

is a carefully determined quantity of input example: square yards of cloth required for one unit of output, such as a jacket which of the 3 standards is this?

Answer 32

standard input

Question 33

is a carefully determined price a company expects to pay for a unit of input example: standard wage rate the firm expects to pay workers which of the 3 standards is this?

Answer 33

standard price

Question 34

is a carefully determined cost of a unit of output examples: standard direct manufacturing labor cost of a jacket which of the 3 standards is this?

Answer 34

standard cost

Question 35

_______ is to square as ______ is to rectangle

Answer 35

standard is to square as budget is to rectangle

Question 36

journal entry for: identify direct materials price variance when they are purchased

Answer 36

Dr. direct materials control Cr. direct materials price variance Cr. accounts payable control

Question 37

journal entry for: identify direct materials efficiency variance when they are used

Answer 37

Dr. work in process control Dr. direct materials efficiency variance Cr. direct materials control

Question 38

journal entry for: identify direct labor price and efficiency variances when they are used

Answer 38

Dr. work in process control Dr. direct manufacturing labor price variance Dr. direct manufacturing labor efficiency variance Cr. wages payable control

Question 39

journal entry for: write off price and variances at end of period

Answer 39

Dr. COGS Dr. direct materials price variance Cr. direct materials efficiency variance Cr. direct manufacturing labor price variance Cr. direct manufacturing labor efficiency variance