Final Exam Flashcards
Cash budgets are often prepared how often?
Monthly or even weekly
A performance budget compares
actual costs with budgeted costs
Variable overhead variance is affected by
input price changes and efficiency
Materials price variance formula
= (AP x AQ) - (SP x AQ)
On a segmented income statement, fixed costs are
broken down into direct fixed costs and common fixed costs
Fixed overhead volume variance is
=AFOH - BFOH
Turnover forumla
= sales / average operating assets
Normal sequence for budget preparations
Sales Budget, Budgeted Income Statement, Budgeted Balance Sheet
Required production =
= budgeted sales - beginning inventory + desired ending inventory
Margin formula
= net operating income / sales
A top-down approach to budgeting is one that is
imposed
Formula for budgeted raw materials purchases
= materials needed for prod + ending raw materials - beginning raw materials inventory
Budgeted direct labor hours
Budgeted production units x direct labor requirements per unit
Purpose of a cash budget
help managers plan ahead to make certain they will have enough cash on hand to meet operating needs
How to make a cash budget
Beginning cash balance + Budgeted cash collections - Budgeted cash payments +/-
Cash borrowed or repaid = Ending cash balance
Comparing the master budget with the flexible budget creates
a volume variance
Standard cost systems depend on which 2 types of standards?
Quantity and Price
Labor efficiency variance formula
= SR x (SH - AH)
Fixed overhead volume variance is
the difference between applied fixed overhead and budgeted fixed overhead
Rate variance
= AH x (SR - AR)
Cost center
responsibility center in which the manger does NOT have responsibility and authority over revenues
Investment center
responsibility center in which the manager has responsibility and authority over revenues, costs and assets
ROI formula
= operating income / average invested assets
= margin * turnover
Profit margin
= operating income / sales revenue
Turnover
= sales revenue / average invested assets
If the ROI of a project is greater than the hurdle rate, the residual income will be
greater than zero
Hurdle rate
minimum required return
Transfer price
= additional cost outlay - opportunity cost per unit
Residual Income (RI) formula
= operating income - (hurdle rate * operating assets)
RI greater than zero
company is earning more than minimal rate of return
Economic Value Added (EVA)
= net income after taxes - (cost of capital * total capital employed)
Positive EVA
creating economic wealth
Negative EVA
not generating enough after tax profit to cover cost of capital
Decentralization benefits
frees up sr mgmt time, breaks big problems into smaller pieces, supports use of expert knowledge, improves customer relations, leads to faster decision making, improves motivation and retention, provides training
Decentralization cons
duplication of costs, goal incongruence, suboptimal decision making
ending finished goods budget supplies information needed for the
cost of goods sold budget
Increasing sales will ___ the ROI (all else constant)
increase
A revenue variance is favorable if
the actual revenue exceeds what the revenue should have been for the actual level of activity of the period.
Contribution income statements are used to measure the performance of
both profit centers and investment centers
Spending Variance is composed of
Budget v Actuals
On manufacturing: Quantity variance and price variance
On labor: Rate variance and hours variance
Material price variances arise from
Untaken purchase discounts
Using a different (better/worse)quality material
Changes in market demand/supply
Great/Poor negotiation by the procurement staff
Better purchasing procedures, multiple bids
Larger order better discount
Material efficiency variances arise from
More experienced or inexperienced workers Lower or higher quality material Not making allowance for defects Workforce training Process automation/outdated equipment
Labor price variances arise from
Overall wage rates rise or fall
Hiring of more/less skilled labor (See offset in efficiency variance)
Bad budgeting
Ineffective/effective union negotiations
Labor efficiency variances arise from
Hiring of more/less skilled labor
Lower or higher quality material
Higher or lower learning curve than anticipated
Workforce training in improved production techniques
Poor staff morale and motivation
Excess idle time not charged correctly
Transfer price when capacity is available
variable price
Transfer price when operating at full capacity
selling price
