Control

Question 1

What is the fixed budget?

Answer 1

The master budget prepared before the beginning of the budget period.

Question 2

What does the term ‘fixed’ means with regards to budgets?

Answer 2

• Budget is prepared on the basis of estimated volume of production or output and an estimated volume of sales, but no plans are made for if actual numbers differ
• Budget is not adjusted to represent a new target for the actual level of activity.

Question 3

What is the major purpose of a fixed budget?

Answer 3

In use at the planning stage, when it seeks to define the broad objectives of the organisation.

Question 4

What is a flexible budget?

Answer 4

A budget that recognises different cost behaviour patterns and is designed to change as the volume of activity changes.

Question 5

What are the advantages of a flexible budget?

Answer 5

• Useful at the planning stage to know what the effects would be if the actual outcome differs from prediction: ‘What if?’ analysis
• Actual results may be compared with the relevant activity level in the flexible budget as a control procedure. AKA flexed budget.

Question 6

How is the budget cost allowance calculated?

Answer 6

Budget cost allowance = Budgeted fixed cost + (variable cost per unit x number of units)

Question 7

What is standard costing?

Answer 7

A control technique that reports variances by comparing actual costs to pre-set standards so facilitating action through management by exception.

Question 8

What does standard costing for control purposes involve?

Answer 8

• Establishment of predetermined estimates of the costs of products or services
• Collection of actual costs
• Comparison of the actual costs with the predetermined estimates

Question 9

When should variances between standard costs and actual costs be investigated?

Answer 9

If there is a significant difference

Question 10

What is management by exception?

Answer 10

The practice of concentrating on activities that require attention and ignoring those which appear to be conforming to expectations. Typically standard cost variances or variances from budget are used to identify those activities that require attention.

Question 11

Why should standard costs be continually monitored?

Answer 11

To ensure that they are reasonable and reliable.

Question 12

What are the advantages of standard costing?

Answer 12

• Aids budgeting
• Provides a benchmark for calculation of variances
• Motivates better performance
• Requires planning
• Allows reporting by exception

Question 13

What is a cost variance?

Answer 13

The difference between a planned, budgeted or standard cost and the actual cost incurred.

Question 14

What is variance analysis?

Answer 14

The evaluation of performance by means of variances, whose timely reporting should maximise the opportunity for managerial action.