Financial Planning

Question 1

What is a Static Budget?

Answer 1

Budget targeted for a specific segment of a company.

Question 2

What is a Maser Budget?

Answer 2

Budget targeted for the company as a whole

Includes budgets for Operations and Cash Flows

Includes set of budgeted Financial Statements

Question 3

How do Fixed Costs affect budgeting?

Answer 3

Costs independent of the level activity within the relevant range

Property Tax is the same whether you produce 100-000 units or zero units

However - Fixed Costs per unit vary given the amount of activity

If you produce fewer units- fixed costs per unit will be greater than if you produce more units - i.e. less units to spread the cost over

Question 4

How do Variable Costs affect budgeting?

Answer 4

The more Direct Materials or Direct Labor used- the more Variable Costs per unit

However - Variable Costs per unit don’t change with the level of activity like Fixed Costs per unit

Question 5

How are Material Variances calculated?

Answer 5

SAM:

Standard Material Costs
- Actual Material Costs
= Material Variance

Question 6

How are Labor Variances calculated?

Answer 6

SAL

Standard Labor Costs
- Actual Labor Costs
= Labor Variance

Question 7

How are Overhead Variances calculated?

Answer 7

OAT

Overhead Applied
- Actual Overhead Cost
= Total Overhead Variance

Question 8

How does Absorption Costing compare to Variable Costing?

Answer 8

Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A

Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs

Question 9

How is Contribution Margin calculated?

Answer 9

Sales Price (per unit)
- Variable Cost (per unit)
= Contribution Margin (per unit)

Question 10

How is Break-even Point (per unit) calculated?

Answer 10

Total Fixed Costs / Contribution Margin (per unit)
= Break-even Point Per Unit

Assumption: Total Costs & Total Revenues are LINEAR

Question 11

What is the focus in a Cost Center?

Answer 11

Management is concerned only with costs

Question 12

What is the focus in a Profit Center?

Answer 12

Management is concerned with both costs and profits

Question 13

What is the focus in an Investment Center?

Answer 13

Management is concerned with costs- profits- and assets

Question 14

What is the Delphi technique?

Answer 14

Forecasting technique where Data is collected and analyzed

Requires judgement/consensus

Question 15

What is Regression Analysis?

Answer 15

A forecasting technique where Sales is the dependent variable.

Simple Regression - One independent variable

Multiple Regression - Multiple independent variables

Question 16

What are Econometric Models?

Answer 16

Forecast sales using Economic Data

Question 17

What are Naive Forecasting Models?

Answer 17

Very Simplistic

- Eyeball past trends and make an estimate

Question 18

How does a Moving Average compare to Exponential Smoothing?

Answer 18

Both project estimates using average trends from recent periods

Difference: Exponential Smoothing weighs recent data more heavily

Question 19

What are the characteristics of Short-term Cost Analysis?

Answer 19

Uses Relevant Costs Only

Ignore Sunk Costs

Opportunity Cost is a Must

Question 20

Absorption Approach

Answer 20

GAAP

Revenue - COGS = GM
GM - OPEX = Profit

COGS = product costs [DL+DM+OH(f&v)]

OPEX = period costs [SG&A(f&v)]

Question 21

Contribution Approach

Answer 21

Not GAAP

Rev - variable costs (all) = CM
CM - fixed costs (all) = NI

Question 22

Difference between absorption and contribution approach?

Answer 22

Fixed OH

Absorption = product costs - goes into cost of inventory

Contribution = period costs - expensed as incurred

Question 23

Simple linear regression model

Answer 23

Y = a + bX

Y = total cost
a = fixed cost
b = variable cost per unit 
X = independent variable (units)

Measures strength of relationship between X and Y. Range: -1, 1 (0 is no correlation)

Question 24

Coefficient of Determination

Answer 24

Regression analysis # squared

R^2

% of the change in total cost explained by X.

Question 25

Relevant costs

Answer 25

Direct costs
Prime costs
Discretionary costs (periodic budgeting decisions)
Controllable costs (may be relevant)
Opportunity cost (always)
Incremental costs (as more are produced, always relevant)
Sunk cost (never)
Avoidable (relevant - one more than another)
Unavoidable / uncontrollable (never)

Question 26

Opportunity cost per unit

Answer 26

CM Given Up / # units of special order

Question 27

Authoritative Standards

Answer 27

Budget (goals) set by management

Quick and efficient

Question 28

Participative Standards

Answer 28

Budget (goals) set by employees

Slow yet very effective

Question 29

Operating Budget

Answer 29

Budget sales
+ desired ending inventory
- beginning Inventory
= Budgeted Production

Same for DL, DM, and Factory OH

Question 30

OH T-account

Answer 30

Actual costs —— applied

Under applied —- over applied

Unfavorable —- favorable

Net all OH accounts

Question 31

Sales price variance

Answer 31

(Actual sp / unit - budgeted sp / unit) x actual units sold

Question 32

Sales volume variance

Answer 32

(Actual units sold - budgeted units sold) x standard CM per unit