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BU 247 > Module 6 - What if Analysis > Flashcards

Module 6 - What if Analysis Flashcards

1
Q

what provides basis for what-if-analysis?

A

Structure and information required to prepare the master budget

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2
Q

2 what-if analyses

A

1) Evaluating decision-making alternatives

2) Sensitivity analysis

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3
Q

define what if analysis

A

A process of exploring the effects of changes in estimates on predictions in a financial model

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4
Q

define sensitivity analysis

A

The process of selectively varying a plan or budget’s key estimates for the purpose of identifying over what range a decision option is preferred

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5
Q

what is variance analysis

A

Comparison of planned (or budgeted) results with actual results

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6
Q

define variance?

A

difference between planned and actual results

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7
Q

what investigations can we do with variance analysis to determine 2 things

A

1) What caused the variance

2) What should be done to correct that variance

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8
Q

budgeting/planned costs can come from 3 sources:

A

1) Standards established by industrial engineers
2) Previous period’s performance
3) Benchmark - best in class results achieved by a competitor

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9
Q

what are financial numbers for flexible resources the product of

A

the product of a price and quantity component

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10
Q

formula for budgeted amount

A

Budgeted amount = standard price per unit * budgeted quantity

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11
Q

formula for actual amount

A

Actual amount = actual price per unit * actual quantity

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12
Q

Variance analysis explains the difference between planned and actual costs by evaluating: (2)

A

1) Differences between planned and actual prices

2) Differences between planned and actual quantities

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13
Q

why do managers focus separately on price and quantities?

A

in most organizations:

1) One department or division is responsible for the acquisition of a resource and determining the actual price.
2) A different department uses the resource and determines the quantity.

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14
Q

what is a variance in org?

A

A variance is a signal that is part of a control system for monitoring results.

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15
Q

what can managers do if specific actions they took helped lower actual costs?

A

they can obtain further cost savings by repeating those actions on similar jobs in the future

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16
Q

what can managers do if factors caused actual costs to be higher?

A

actions may be taken to prevent those factors from recurring in the future

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17
Q

what can managers do if cost changes are likely to be permanent?

A

cost information can be updated for future jobs

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18
Q

define master budget

A

A budget, typically prepared on a yearly basis, that includes operating budgets and financial budgets that identify the expected financial consequences of the activities reflected in the operating budgets

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19
Q

what is planned budget also called?

A

static budget

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20
Q

what is the first level variance?

A

static budget variance

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21
Q

formula for static budget variance

A

actual - static/master/planned/budgeted budget/cost item

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22
Q

when are static budget variance favourable?

A

if the actual costs are less than estimated static budget costs. (variance is negative)

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23
Q

when are static budget variance U

A

when actual costs exceed estimated static budget costs. (variance is positive)

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24
Q

what does flexible budget adjust?

A

adjusts the quantity forecast in the static budget for the difference between planned volume and actual volume

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25
Q

what does flexible budget reflect?

A

Reflects a cost budget or forecast based on the level of volume that is actually achieved.

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26
Q

how do we get flexible budget

A

a copy-and-paste of the standard budget, but flexed at the actual level of sales. The flexible budget presents the results that the company should have had with the actual sales units if they had kept everything else (selling price, costs) at the standard level.

27
Q

what are the second level variances?

A

planning variance and flexible budget variance

28
Q

what is planning variance also called

A

sales volume variance

29
Q

planning variance effect

A

volume effect

30
Q

planning variance formula

A

Flexible budget - static budget

31
Q

what does planning variance reflect

A

Reflect the difference between planned output and actual output

32
Q

why does planned variance arise?

A

because the planned volume of activity was not realized

33
Q

flexible budget variance effect

A

standard effect

34
Q

flexible budget variance formula

A

Actual - flexible budget

35
Q

how do second and first level variance relate?

A

Second level variance sum to first level variance

36
Q

formula for planning variance for single product org

A

(actual total sales volume - standard total sales volume) * standard unit CM

37
Q

3rd level variances for flexible budget explained

A

DM and DL flexible budget variances can be decomposed into: quantity/efficiency variances and price/rate variances

38
Q

explain quantity/efficiency variance

A

the difference between the planned and the actual use rates per unit of output

39
Q

explain cost/price/rate variance

A

the difference between the planned and the actual price or cost per unit of the various cost items

40
Q

6 3rd level variances for flexible budget

A

1) selling price variance
2) DM variance
3) DL variance
4) variable overhead variance
5) fixed overhead variance
6) fixed selling and admin variance

41
Q

formula for selling price variance

A

(actual selling price - standard selling price) * actual sales volume

42
Q

2 DM variance

A

price and quantity variance

43
Q

DM price variance formula

A

(actual DM price - standard DM price) * actual quantity of materials used (actual # items/unit * Actual sales volume)

44
Q

DM quantity variance formula

A

(actual quantity of materials used (actual # items/unit * Actual sales volume) - standard quantity of materials allowed (standard # items/unit * actual sales volume) * standard price of materials

45
Q

2 DL variance

A

rate and efficiency variance

46
Q

DL rate variance formula

A

(actual rate - standard rate) * actual # DL hours (actual hours/unit * actual sales volume)

47
Q

DL efficiency variance formula

A

(actual cost driver volume used (actual volume/unit * actual sales volume) - standard cost driver volume allowed (standard volume/unit * actual sales volume)) * standard rate

48
Q

what is the fixed overhead variance?

A

spending variance

49
Q

formula for spending variance

A

actual fixed cost - standard fixed cost

50
Q

why do we monitor fixed variances?

A

because spending on fixed costs can fluctuate from period to period

51
Q

what is the fixed selling and admin variance?

A

spending variance

52
Q

simple way to find planning variance?

A

flexible budget CM - static budget CM

53
Q

list the 2 3rd level variances for planning variances

A

sales mix variance, sales quantity variance

54
Q

what are the 3rd level variances for planning variances computed for?

A

computed for each product

55
Q

what does sales mix variance measure?

A

Measures the effect of the difference in sales mix between the flexible budget and static budget on contribution margin

56
Q

formula for sales mix variance

A

(Actual weight product i - standard weight product i) * actual total sales volume * standard unit contribution margin of product i

57
Q

what does sales quantity variance measure?

A

Measures the effect of the quantity sales differences between the flexible budget and the static budget on contribution margin

58
Q

formula for sales quantity variance

A

(actual total sales volume - standard total sales volume) * standard weight product i * standard unit contribution product i

59
Q

2 4th level planning variances under sales quantity variance

A

market size variance, market share variance

60
Q

what does market size variance measure

A

measures the effect, given the company’s planned market share, on contribution margin as planned and actual industry sales diverge.

61
Q

formula for market size variance

A

(actual market size - standard market size) * standard market share * WACM

62
Q

what does market share variance

A

measures the effect on contribution margin as the company’s market share changes, at the level of actual total industry sales.

63
Q

formula for market share variance

A

(Actual market share - standard market share) * actual market size * WACM

BU 247 (7 decks)

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