Test 3 flash cards.txt

developed at beginning of some period

• based on
• *input standards
• *price standards
• *expected sales
• *expected production volume

expected revenues based on budgeted sales volume

static budget revenue = budgeted sales volume x budgeted price

expected variable costs based on budgeted sales volume

static budget variable cost = budgeted sales volume x budgeted variable cost per unit

• expected total fixed costs for the year
• not generally affected by changes in sales volume

carefully determine price, cost, or quantity used as benchmark for judging performance

expected quantity of direct material used per unit of output

expected price paid to purchase direct materials

expected direct material cost of one unit of output based on price and input standard

DM cost standard = input standard x price standard

expected quantity of direct labor used per unit of output

expected price paid for each hour of direct labor

expected direct labor cost of one unit of output based on price and input standard

DL cost standard = input standard x price standard

expected quantity of allocation base used per unit of output

expected price paid for each unit of allocation base

expected variable overhead cost of one unit of output based on price standard and input standard

vOH cost standard = input standard x price standard

• developed using same standards used to create static budget but based on actual production
• budget that would have been developed had the actual sales and production output been known

expected revenues based on actual sales volume

flexible budget revenue = actual sales volume x budgeted price

static ./. flexible budget revenue = sales activity variance for revenue.

expected variable costs based on actual sales volume

flexible budget variable cost = actual sales volume x budgeted variable cost per unit

= standard price x standard quantity allowed for actual sales volumes

static ./. flexible budget variable costs = sales activity (or volume) variance for variable costs

• expected total fixed costs we expect to incur for the year
• not generally affected by changes in sales volume
• equal to static budget fixed costs

actual revenues earned based on actual sales volume

actual revenue = actual sales volume x actual price

actual revenues ./. static budget revenues = static budget variance

actual revenues ./. flexible budget revenues = sales price variance

actual variable costs incurred based on actual sales volume

actual variable cost = actual sales volume x actual variable cost per unit

actual fixed overhead costs incurred during the period

actual ./. flexible (and static) budget fixed overhead costs = fixed overhead spending variance

difference between expected and actual results

help explain why actual income differs from budgeted income

favorible = more income than budgeted

unfavorable = less income than budgeted

No.

example: favorable variable cost = fewer units sold = bad

A practice where managers focus their attention on understanding and addressing areas that are not operating as expected.

actual ./. static budget

• sales activity variance (static ./. flexible)
• flexible budget variance (actual ./. flexible)

• variable manufacturing costs:
• price variance [(actual - standard price) x actual quantity]
• efficiency variance [(actual - standard quantity) x standard price]
• sales activity variance (flexible ./. static)

= actual ./. flexible

• variable manufacturing costs:
• further divided into price and efficiency variance

flexible + sales activity variance = static budget variance

flexible ./. static

different sales volume than expected

Analysis of causes of actual budgeted profit

• actual input quantities and prices vs. expected input quantities and prices
• process of determining price and efficiency variances

actual price vs. budgeted price of an input

actual vs. budgeted quantity of an input

• change in purchase price of the material
• Example: purchase discount for bulk purchase, higher or lower quality material

• change in input quantity per unit of output
• Example: better (worse) machines, better (worse) quality material or better (worse) trained labor workers

• change in average labor wage
• Example: raises, contract negotiations, new hires

• change in labor hours to be used per unit of output
• Example: different machines, different quality material or differently trained labor workers

• change in actual variable overhead head rate vs budgeted variable overheadhead
• Example: different indirect labor cost rates, different utility rates, different indirect labor rates

• change in usage of cost driver (allocation base) per unit of output
• Example: if cost driver is labor hours => different machines, different quality material or differently trained labor workers

change in actual vs. budgeted fixed overhead

actual sales volume differs from budgeted sales volume

changes in revenue and costs due to changes in volume

cost can be separated into fixed and variable costs

total costs and revenues are linear

selling price, variable cost per unit, total fixed cost are constant and known

The increase will be the contribution margin of that unit.

percentage of sales revenue that remains after covering variable costs

point where revenues = total costs

=> net income = 0; total contribution margin = fixed costs

no effect (income = 0)

it allows companies to consider CVP changes when there is more than one product

there is a constant proportion of sales of one product compared to the other

• extent to which company's cost structure is made up of fixed costs
• amount of fixed costs affects break-even point

higher fixed cost = higher breakeven point

expected sales volume ./. breakeven sales volume

expect sales revenue ./. breakeven sales revenue

1. Identify the alternative

2. Determine the best financial alternative

3. Consider potential qualitative factors

Both

relevant outcomes which are difficult to measure in financial or numerical terms

incorrect belief that all costs are relevant for all decisions

expected future revenue that differs among alternative courses of action

expected future costs that differ among alternative courses of action

irrelevant past cost that is unavoidable because they cannot be changed by any course of action

foregone contribution to operating income by not using a resource in its next best alternative use

• demand
• most profit per unit of the constrained resource