Forecasting, Budgeting, and Analysis Chapter 2 Flashcards
How do Fixed Costs affect budgeting?
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
What is a Master Budget?
Budget targeted for the company as a whole
Includes budgets for Operations and Cash Flows
Includes set of budgeted Financial Statements
What is a Static Budget?
Budget targeted for a specific segment of a company. AKA Master Budget AKA Annual Business Plan AKA Profit Planning AKA Targeting Budget
How are Material Variances calculated?
SAM:
Standard Material Costs
- Actual Material Costs
= Material Variance
How are Labor Variances calculated?
SAL:
Standard Labor Costs
- Actual Labor Costs
= Labor Variance
How are Overhead Variances calculated?
OAT:
Overhead Applied
- Actual Overhead Cost
= Total Overhead Variance
How do Variable Costs affect budgeting?
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
How is Contribution Margin calculated?
Sales Price (per unit)
- VC (per unit)
= CM (per unit)
How is Break-even Point (per unit) calculated?
Total FC / Contribution Margin (per unit)
= BEP Per Unit
Assumption: Total Costs & Total Revenues are LINEAR
How does Absorption Costing compare to Variable Costing?
Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A
Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs
What is the focus in a Cost Center?
Management is concerned only with costs
What is the focus in an Investment Center?
Management is concerned with costs- profits- and assets
What is the focus in a Profit Center?
Management is concerned with both costs and profits
What is the Delphi technique?
Forecasting technique where Data is collected and analyzed
Requires judgement/consensus
What is Regression Analysis?
A forecasting technique where Sales is the dependent variable.
Simple Regression - One independent variable
Multiple Regression - Multiple independent variables
What are Naive Forecasting Models?
Very Simplistic
“Eyeball” past trends and make an estimate
What are Econometric Models?
Forecast sales using Economic Data
What are the characteristics of Short-term Cost Analysis?
Uses Relevant Costs Only
Ignore Sunk Costs
Opportunity Cost is a Must
What are the 2 approaches to compute sales dollars needed to achieve a desired profit? (CVP Analysis aka Cost-Volume-Profit Analysis)
1. Summation of Total costs and profits Sales dollars = VC + FC + Pretax profit If in units 2. Contribution Margin Sales = (FC + Pretax profit) / contribution margin
What is margin of safety?
The margin of safety is the excess of sales over BEP.
It can expressed in dollars or %.
Total Sales $ - BEP Sales $ = Margin of safety $
Margin of Safety $/Total Sales = Margin safety %
How does a Moving Average compare to Exponential Smoothing?
Both project estimates using average trends from recent periods
Difference: Exponential Smoothing weighs recent data more heavily
What is target costing?
TC is a technique used to establish the product cost allowed to ensure both profitability p/unit and total sales volume.
What is the Target cost computation?
Target cost = Market price - Required profit
What is transfer pricing in a non-global perspective?
When divisions within large company may engage in transaction with each other rather than going outside the company.
From a non-global perspective, a transfer price is the price charged for the sale or purchase of a product internally such as between two divisions within a domestic company.
Transfer = sales price