Exam 3

Question 1

Expressing business plans in financial terms. Coordinate these plans with all areas of business.

Answer 1

Budgeting

Question 2

Combining numerous specific budgets prepared by various departments. Describes short-term objectives such as sales targets, production goals, and financial plans. Covers one year but is usually broken down by quarters.

Answer 2

Master budget

Question 3

Strategic planning, capital budgeting, and operations budgeting.

Answer 3

Three levels of planning for business activity

Question 4

Involves making long-term decisions. Examples: products to develop or discontinue.

Answer 4

Strategic planning

Question 5

Involves decisions such as whether to buy or lease equipment.

Answer 5

Capital budgeting

Question 6

Short-term plans.

Answer 6

Operations budgeting

Question 7

Planning, coordination, performance measurement, and corrective action.

Answer 7

Advantages of budgeting

Question 8

Managers think ahead about how they will direct operations. The budget formalizes and documents managerial plans and clearly communicates objectives to both superiors and subordinates.

Answer 8

Planning

Question 9

The budgeting process forces coordination among departments to promote decisions in the best interest of the company as a whole. For example, a purchasing agent may order large quantities or raw materials to obtain a discount. This can cause a storage problem for the inventory supervisor.

Answer 9

Coordination

Question 10

Budgets are specific, quantitative representations of management’s objectives. Comparing actual results to budget expectations provides a way to evaluate performance.

Answer 10

Performace measurement

Question 11

Budgeting provides advance notice of potential shortages, bottlenecks, or other weaknesses in operating plans.

Answer 11

Corrective action

Question 12

Group of detailed budgets and schedules representing the company’s operating and financial plans for a future accounting period. Includes operating budgets, capital budgets, and pro forma financial statements.

Answer 12

Master budget

Question 13

Preparing the master budget begins with the sales forecast. The accuracy of the sales forecast is critical because all other budgets are derived from this budget. Normally, the marketing department coordinates the development of the sales forecast.

Answer 13

Sales budget

Question 14

The schedule is made from projected sales. This schedule is used to prepare the cash budget.

Answer 14

Schedule of cash receipts

Question 15

Shows the amount of inventory that must be purchased each month to satisfy the demand projected in the sales budget.

Answer 15

Inventory purchases budget

Question 16

Equation:
the amount of inventory a company plans to sell that month
+
the amount of inventory the company wants on hand at the end of the month
=
?

Answer 16

Equation:
Total inventory needed

Question 17

Equation:
cost of budgeted sales(aka budgeted cost of goods sold)
+
desired ending inventory
=
total inventory needed
-
beginning inventory
=
required purchases

Answer 17

Equation:
Amount of inventory purchased

Question 18

Companies can purchase inventory with cash or on the account. If purchased on account, this schedule must be prepared.

Answer 18

Schedule of cash payments for inventory purchases.

Question 19

Amount of sales on account during the final recorded month on a sales budget.

Answer 19

Accounts receivable balance

Question 20

The sum of the total budgeted sales on a sales budget.

Answer 20

Sales revenue balance

Question 21

Effective responsibility accounting requires clear lines of authority and responsibility. Ina. small business, one person can control everything: marketing, production, management, and accounting. In a large company, authority and control must be divided among many people.

Answer 21

Decentralization concept

Question 22

Delegating authority and responsibility.

Answer 22

Decentralization

Question 23

An organizational unit that controls identifiable revenue or expense items. The unit may be a division, department, subdepartment, or even a single machine. Includes cost center, profit center, and investment center.

Answer 23

Responsibility centers

Question 24

An organizational unit that incurs expense but does not generate revenue. Research and development.

Answer 24

Cost center

Question 25

An organizational unit that incurs expenses and generates revenue. Sales/Marketing team.

Answer 25

Profit center

Question 26

Managers are responsible for revenue, expenses, and the investment of capital. High-level people (CEO, CFO, etc.).

Answer 26

Investment center

Question 27

The master budget is based solely on the planned volume (best guess) of activity. The master budget is frequently called a static budget because it remains unchanged even if the actual volume of activity differs from the planned volume.

Answer 27

Static budget

Question 28

Shows expected revenues and costs at a variety of volume levels.

Answer 28

Flexible budget

Question 29

“Planned”

Answer 29

Static/Master budget

Question 30

“Actual”

Answer 30

Flexible budget

Question 31

Equation:
sales
-
variable manufacturing
=
contribution margin
-
fixed manufacturing
-
fixed selling and administrative
=
net income

Answer 31

Equation:
Pro forma(budgeted) income statement

Question 32

The ratio of wealth generated (operating income) to the amount invested (operating assets) to generate wealth.

Answer 32

Return on investment (ROI)

Question 33

Equation:
operating income
/
operating assets

Answer 33

Equation:
Return on investment (ROI)

Question 34

Equation:
(operating income / sales)
x
(sales / operating assets)

Answer 34

Equation:
ROI performance insight

Question 35

This is a measure of management’s ability to control operating expenses relative to the level of sales. In general, high margins indicate superior performance.

Answer 35

Margin

Question 36

This is a measure of the amount of operating assets employed to support the achieved level of sales.

Answer 36

Turnover

Question 37

Equation:
operating income
/
sales

Answer 37

Equation:
Margin

Question 38

Equation:
sales
/
operating assets

Answer 38

Equation:
Turnover

Question 39

Measures a manager’s ability to maximize earnings above some targeted level. The targeted level of earnings is based on a minimum desired ROI.

Answer 39

Residual income

Question 40

Equation:
operating income
-
(operating assets x desired ROI)

Answer 40

Equation:
Residual income

Question 41

Differences between the standard (budgeted) and actual amounts.

Answer 41

Variances

Question 42

When actual sales revenue is greater than planned (expected/budgeted) revenue. When actual costs are less than standard costs.

Answer 42

Favorable variance

Question 43

When actual sales are less than expected sales. When actual costs exceed standard costs.

Answer 43

Unfavorable variance

Question 44

When comparing the master budget to the flexible budget.

Answer 44

Sales and variable cost volume variances

Question 45

Difference between the static (master/planned) budget and the flexible (actual) budget volume.

Answer 45

Sales volume variance

Question 46

Determined by calculating the differences between the static (master/planned) and flexible (actual) budget amounts.

Answer 46

Variable cost volume variance

Question 47

Equation:
(planned volume x standard cost)
-
(actual volume x standard cost)

Answer 47

Equation:
Volume variance

Question 48

The same in both static and flexible budgets because fixed costs remain unchanged regardless of the volume of activity.

Answer 48

Fixed costs

Question 49

Difference between the flexible budget and the actual costs.

Answer 49

Spending variance

Question 50

Managers compare actual results to a flexible budget based on the actual volume of activity.

Answer 50

Flexible budget variance

Question 51

Equation:
(actual volume x standard cost)
-
(actual volume x actual cost)

Answer 51

Equation:
Flexible budget variance