module 9

Question 1

relevant costs + income

Answer 1

are those that are different among alternative courses of action

Question 2

sunk costs

Answer 2

past costs that are irrelevant

Question 3

Incremental costs and incremental income

Answer 3

the additional income/costs resulting from an alternative course of action.
Important to consider when deciding whether to expand an operation

Question 4

opportunity cost

Answer 4

what is given up if one alternative is chosen over another

Question 5

make/buy decision

Answer 5

1. producing a product component or outsourcing.

2. providing a service in-house or outsourcing.

Question 6

avoidable costs

Answer 6

costs that will no longer be incurred if the decision is made to buy (outsource)
- key for evaluating whether to drop a product or not

Question 7

unavoidable costs

Answer 7

those that will still be incurred under either option

Question 8

special order

Answer 8

one-off request from a customer that is different from the orders usually received by the entity.

Question 9

which costs need to be considered when evaluating a special order?

Answer 9

incremental fixed costs

Question 10

idle capacity (available capacity)

Answer 10

• indicates the amount of capacity an entity has available to increase output
• if you have idle capacity, there’s some form of inefficiency or profit being lost → not 100% maximising profit

Question 11

management by exception

Answer 11

suggests that all material variances should be investigated.

Question 12

what information is needed to “flex” the budget?

Answer 12

breakdown of costs into fixed and variable

Question 13

Flexing the budget means revising the original budget estimates to…

Answer 13

the actual volumes of activity

Question 14

management-by-exception is a decision-making concept that describes

Answer 14

a technique that focuses on unplanned results, a management tool to save time and effort, made possible by establishing benchmarks.

Question 15

Any differences between the master budget and the flexible budget are due to

Answer 15

actual activity different from expected activity levels.

Question 16

overall budget variance

Answer 16

Actual profit – budgeted profit

* variance is profit line

Question 17

sales volume variance

Answer 17

budget - flexed

- variance is caused by difference in volume (quantity)

Question 18

flexed budget (cost) variance

Answer 18

flexed - actual

- caused by difference in sales price

Question 19

overall budget variance (*)

Answer 19

sales volume variance + flexed budget variance

* subtract if values are different*

Question 20

padded budgets

Answer 20

If revenues are understated or costs overstated, then the resulting favourable variance loses its meaning. → goals are set too low

Question 21

budgetary slack

Answer 21

the intentional overstatement of expenses

Question 22

what does the flexed budget show?

Answer 22

shows the budgeted revenues and expenses for the actual sales level (in units) achieved
- Isolating one particular variable to see if the variance is caused by the change in the other variable