ACCT 302: Practice Exam 2 - Budgeting, Variances, and Costing Methods

Vocabulary practice flashcards covering master budgeting, variance analysis (direct materials, direct labor, variable/fixed overhead), and the comparative mechanics of variable costing versus absorption costing.

Rolling Budget

A budget that is created continually by adding a month, quarter, or year to the period that has just ended.

Sales Budget

The starting foundation of the master budget process, which must be completed before preparing the production budget, direct labor budget, or budgeted income statement.

Objectives of Budgeting

Major managerial purposes of budgeting that include coordinating activities across subunits, communicating plans, and providing a benchmark for evaluating performance and facilitating learning, rather than enforcing rigid commitment to initial targets.

Required Production Formula

The formula used to determine production needs in a production budget: $\text{Budgeted Sales in Units} + \text{Desired Ending Inventory} - \text{Beginning Inventory}$.

Flexible Budget

A budget prepared using the actual level of output (units sold or produced) combined with budgeted unit selling prices and budgeted unit variable costs.

Materials Price Variance

The difference between actual price paid and standard price for direct materials, multiplied by actual quantity purchased: $(\text{Actual Price} - \text{Standard Price}) \times \text{Actual Quantity Purchased}$.

Materials Quantity (Efficiency) Variance

The variance measuring the efficiency of direct materials usage, computed as: $\text{Standard Price} \times (\text{Actual Quantity Used} - \text{Standard Quantity Allowed})$.

Trade-off: Material Price vs. Material Efficiency Variance

A scenario where purchasing higher-than-standard quality materials results in an unfavorable price variance but leads to lower waste and better efficiency, creating a favorable efficiency variance.

Sales-Volume Variance for Materials

The component of variance caused by differences between planned and actual output volume, calculated as: $(\text{Actual Units} - \text{Budgeted Units}) \times \text{Budgeted Material Cost per Unit}$.

Variable Overhead Spending Variance

The difference between actual variable manufacturing overhead incurred and the actual input hours multiplied by the budgeted variable overhead rate: $\text{Actual Variable Overhead} - (\text{Actual Inputs} \times \text{Budgeted Rate})$.

Fixed Overhead Spending Variance

The variance between actual fixed overhead costs incurred and the budgeted fixed overhead costs, where an unfavorable variance signifies that fixed overhead items cost more than planned.

Flexible-Budget Amount for Fixed Overhead

The total budgeted fixed overhead amount, which remains the same fixed lump sum as specified in the static budget regardless of actual production volume within the relevant range.

Fixed Overhead Allocated

The dollar amount of fixed overhead assigned to products during a period, calculated as: $\text{Actual Units Produced} \times \text{Predetermined Fixed Overhead Cost per Unit}$.

Management by Exception

A practice wherein management concentrates attention and resources on areas that deviate significantly from expectations or standards while giving less attention to areas operating as planned.

Absorption Costing

A costing method that treats all manufacturing costs (direct materials, direct labor, variable overhead, and fixed manufacturing overhead) as inventoriable product costs, causing net operating income to rise when inventory levels increase because fixed overhead is deferred in ending inventory.

Variable Costing

A costing method where only variable manufacturing costs are included in inventory product costs, ensuring that unit product cost does not fluctuate with production levels within the relevant range and highlighting cost-volume relationships.

Labor Efficiency Variance

The variance that assesses labor productivity, calculated as: $\text{Standard Labor Rate} \times (\text{Actual Hours Incurred} - \text{Standard Hours Allowed})$.

Standard Hours Allowed ($SH$)

The total standard direct labor hours that should have been used to produce the actual output achieved during a period: $\text{Actual Units Produced} \times \text{Standard Labor Hours per Unit}$.