Topic 6 - Control Flashcards

1
Q

What is the purpose of effective budgetary control?

A

The purpose is to monitor the performance of all types of responsibility centres by comparing actual costs and revenues with the budget for the period.

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2
Q

Why should actual results be compared with a realistic budget?

A

To make budget comparisons more meaningful by aligning actual results with the actual activity level achieved.

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3
Q

What is a fixed budget?

A

A budget prepared before the beginning of the budget period based on estimated production or sales, without adjustments for actual volumes. This is in the planning stage.

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4
Q

What are the characteristics of a fixed budget? 2

A
  1. It is based on estimated production and sales with no adjustments for actual variations.
  2. It is not adjusted retrospectively to represent a new target for actual activity levels.
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5
Q

What is the major purpose of a fixed budget?

A

To assist in the planning stage by defining the broad objectives of the organisation.

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6
Q

What is a flexible budget?

A

A budget that recognizes different cost behaviour patterns and is designed to change as the volume of activity changes. Bringing budget inline with activity decide if varies due to volume or cost.

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7
Q

What are the advantages of a flexible budget? 2

A
  1. At the planning stage, it helps assess the effects of different outcomes, often used in ‘What if?’ analysis.
  2. It allows actual results to be compared with relevant activity levels as a control procedure, known as a flexed budget.
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8
Q

Multiple Choice: What are the key differences between a fixed budget and a flexible budget?
a) Fixed budgets adjust for actual volumes; flexible budgets do not
b) Fixed budgets remain unchanged; flexible budgets adjust based on activity levels
c) Flexible budgets are used only at the end of the year; fixed budgets are used throughout
d) There is no difference between them

A

Correct Answer: b) Fixed budgets remain unchanged; flexible budgets adjust based on activity levels.

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9
Q

What are the two steps in the preparation of a flexible budget? 2

A
  1. Determine cost behaviour patterns (fixed, variable, or semi-variable).
  2. Calculate the budget cost allowance using the formula: Budgeted fixed cost + (Variable cost per unit × Number of units).
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10
Q

What is the formula for calculating the budget cost allowance in a flexible budget?

A

Budget cost allowance = Budgeted fixed cost + (Variable cost per unit × Number of units).

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11
Q

Multiple Choice: What describes a flexible budget?
A) A budget comprising variable production costs only
B) A budget updated with actual costs and revenues as they occur during the budget period
C) A budget showing costs and revenues at different levels of activity
D) A sales revenue budget reflecting actual unit sales price

A

Correct Answer: C) A budget showing costs and revenues at different levels of activity.

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12
Q

What is standard costing?

A

A control technique that reports variances by comparing actual costs to pre-set standards, facilitating action through management by exception. DID vs SHOULD

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13
Q

What are the three key elements of standard costing for control? 3

A
  1. Establishing predetermined estimates of costs of products or services.
  2. Collecting actual costs.
  3. Comparing actual costs with predetermined estimates.
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14
Q

What is a standard cost?

A

The expected or normal cost per unit, based on standard expectations for resource usage and price per unit of resource.

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15
Q

How is a standard cost card used?

A

It takes into account only variable costs and provides an expected cost per unit of output, useful in budgeting and cost control.

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16
Q

What is the role of standard costing in management by exception?

A

Standard costs act as benchmarks for comparison, and variances should only be reported and investigated if there is a significant difference between actual and standard costs.

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17
Q

What is ‘management by exception’?

A

The practice of concentrating on activities that require attention and ignoring those that appear to conform to expectations. Standard cost variances are used to identify activities needing attention.

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18
Q

Why should standard costs be continually monitored?

A

To ensure that they remain reasonable and reliable for budgeting and cost control purposes.

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19
Q

What are the advantages of standard costing? 4

A
  1. Aids budgeting.
  2. Provides a benchmark for variance calculation.
  3. Motivates better performance.
  4. Requires planning.
  5. Allows reporting by exception.
20
Q

Multiple Choice: Which of the following is NOT an advantage of standard costing?
A) It aids in budgeting.
B) It eliminates all variances in costs.
C) It provides a benchmark for variance calculation.
D) It motivates better performance.

A

Correct Answer: B) It eliminates all variances in costs. (Standard costing identifies variances but does not eliminate them).

21
Q

What is the summary of budgetary control? 3

A
  1. Fixed budgets are prepared in advance based on estimates.
  2. Flexible budgets are used at the planning stage, often for ‘What if?’ analysis.
  3. Flexed budgets compare actual results with the relevant activity level using standard costs and revenues as a control procedure.
22
Q

What is the summary of standard costing and standard costs? 3

A
  1. Standard costing reports variances by comparing actual costs to pre-set standards, facilitating management by exception.
  2. A standard cost is the expected or normal cost per unit based on resource usage and price expectations.
  3. Standards should be continually monitored to ensure they remain reasonable and reliable.
23
Q

What is a cost variance?

A

The difference between a planned, budgeted, or standard cost and the actual cost incurred.

24
Q

What is variance analysis?

A

The evaluation of performance by means of variances, whose timely reporting should maximize the opportunity for managerial action.

25
Q

What is a favourable variance?

A

A variance where actual results are better than expected results, denoted as (F).

26
Q

What is an adverse variance?

A

A variance where actual results are worse than expected results, denoted as (A).

27
Q

What are the three main types of variances? 3

A
  1. Variable cost variances (material, labour, and variable overhead).
  2. Fixed overhead variances.
  3. Sales variances.
28
Q

Multiple Choice: What does variance analysis aim to achieve?
A) Eliminate all differences between actual and budgeted costs.
B) Evaluate performance by identifying differences between actual and standard costs.
C) Ensure that all costs remain fixed and do not vary.
D) Reduce overall business expenses.

A

Correct Answer: B) Evaluate performance by identifying differences between actual and standard costs.

29
Q

What are some reasons for a favourable material price variance? 3

A
  1. Unforeseen discounts received.
  2. More care taken in purchasing.
  3. Material standard price set too high.
30
Q

What are some reasons for an adverse material price variance? 3

A
  1. Price increase in the market.
  2. Careless purchasing.
  3. Material standard price set too low.
31
Q

What are some reasons for a favourable material usage variance? 3

A
  1. Use of higher quality material than standard.
  2. More effective use of material.
  3. Fewer errors in allocating material to jobs.
32
Q

What are some reasons for an adverse material usage variance? 5

A
  1. Defective material.
  2. Excessive waste.
  3. Theft.
  4. Stricter quality control.
  5. Errors in allocating material to jobs.
33
Q

What are some reasons for a favourable labour rate variance? 1

A
  1. Use of apprentices or lower-paid workers.
34
Q

What are some reasons for an adverse labour rate variance? 2

A
  1. Wage rate increase.
  2. Use of higher grade labour.
35
Q

What are some reasons for a favourable labour efficiency variance? 2

A
  1. Higher output due to better motivation, equipment, materials, or methods.
  2. Fewer errors in allocating time to jobs.
36
Q

What are some reasons for an adverse labour efficiency variance? 3

A
  1. Excessive time lost beyond standard allowance.
  2. Output lower than standard due to deliberate restriction, lack of training, or substandard material.
  3. More errors in allocating time to jobs.
37
Q

Why should variances not be looked at in isolation?

A

One variance might be interrelated with another, and it may have occurred due to the existence of another variance.

38
Q

Multiple Choice: Which of the following would help to explain a favourable materials price variance?
A) A reduction in quality control checking standards
B) Using a higher quality of materials than specified in the standard
C) Achieving a lower output volume than budgeted
D) A discount offered by a materials supplier

A

Correct Answer: D) A discount offered by a materials supplier.

39
Q

What is a favourable variance?

A

A variance where actual results are better than expected results, denoted as (F).

40
Q

What is an adverse variance?

A

A variance where actual results are worse than expected results, denoted as (A).

41
Q

What is a cost variance?

A

The difference between a planned, budgeted, or standard cost and the actual cost incurred for both variable and fixed costs.

42
Q

What are the three main groups of variable cost variances? 3

A
  1. Materials (price and expenditure).
  2. Labour (rate and efficiency).
  3. Variable overheads (expenditure and efficiency).
43
Q

What are sales variances?

A

Sales variances measure the effect on expected profit of a different selling price to the standard and a different volume of sales to the original budget.

44
Q

How are sales variances measured? 2

A
  1. Sales price variance.
  2. Sales volume variance.
45
Q

What is the role of an operating statement in variance analysis?

A

It shows how the combination of variances reconcile budgeted contribution (100% estimate) and actual profit (100% actual).

46
Q

Why should variances not be looked at in isolation?

A

Individual variances may be interrelated, meaning one variance might have occurred due to another variance.

47
Q

What might be required when interpreting variances?

A

You may need to work from a set of variances back to actual or budgeted data.