ACC 203 Exam #2

Benefits of budgeting

Forcing managers to plan (rather than only dealing with day-to-day) promotes coordination and communication throughout the company. Benchmarks to evaluate performance.

Rolling budget

A budget that is continuously updated so you always have the next 12 months budgeted

Top-down budgeting

When top managers create budgets

Participative budgeting or bottom-up

Participation of many levels of management in budgeting

Advantages of bottom-up budgeting

Those closer to each department know the numbers better, participating in budgeting makes people more accepting of budget

Disadvantages of bottom-up budgeting

More people = More complex: can overbudget expenses and underbudget revenue on purpose

Zero-bases budgeting

Method of budgeting in which all expenses must be justified for each new period

Master Budget

A set of budgeted financial statements and supporting schedules for the entire organization that usually starts with a sales budget

Operating budgets

Sales budget, production budget (then DM, DL, MOH), operating expenses. These culminate in the budgeted income statement.

Financial Budget

Capital Expenditures budget, cash collections and payments budgets. These culminate in the budgeted balance sheet.

Cost behavior

How costs change as volume changes

Variable costs

Incurred for every unit of volume so changes in direct proportion to changes in

volume; VC/u remains constant but total VC changes with volume

Fixed Costs

FC per unit changes but total FC don’t change with changes in volume

Committed/ uncontrollable fixed costs – little control in the short term

Discretionary or controllable fixed costs – mgmt. can control

Mixed Costs

Contain variable and fixed costs; total MC increases as volume increases but not

in direct proportion to changes in volume

Relevant range

Band of volume where total fixed costs remain constant and where VC/unit

remains constant; range of volume in which costs behave in a certain way

Step costs

Fixed over a small range of activity and then jump up to new fixed level

Scatter plots

Graph of cost and volume showing if there is a relationship or correlation

between cost and volume (relationship weak = cost equation not very useful)

High-Low method

Helps predict future costs by separating mixed costs into fixed and variable

components; uses 2 data points with the highest and lowest volume not cost

Regression analysis

Statistical procedure to estimate the cost equation using all data points