ACG 2071 Exam 3 FSU Formulas

What goes out + ending inventory - beginning

What you need (all budgets)

Price (Rate) Variance

| AP-SP | x AQ

Usage (Efficiency) Variance

| AQ-SQ | x SP

Master Budget Variance

Master Budget - Actual Results

Sales Activity (Volume) Variance

Master Budget - Flexible Budget

Flexible Budget Variance

Flexible Budget - Actual Budget

Ideal Standards

What we can achieve under optimal circumstances

Practical Standards

What we can achieve under normal/typical circumstances

Decentralized Organizations

Companies in which lower level managers have been granted substantial authority

Cost Centers

Manager only has control over costs

Has nothing to do with revenues of company

ex: Manufacturing factory that makes Ford Cars

Profit Centers

Manager has control over both revenues and costs

They are concerned with profitability

Ex: Walgreens

Investment Centers

Manager has control over profits and also investing the profits

Their success depends on both income and invested capital

Manager sets policies and makes long-term planning decisions

Ex: regional VP of Walgreens

Based on how well they keep down costs

Cost Centers

Measured based on profits

Profit Centers

Measured based on how well they are investing using ROI and RI

Investment Centers

Segment Evaluation

The process by which different segments of a company can be evaluated (using the aforementioned methods)

ROI

Income / Investment

How do you increase ROI (holding all else constant)

More Sales

Less Costs

Less Investment

Residual Income

Operating Income - (Desired ROI x Investment)

Variable Cost-Based Price

Charge the other division the variable cost to produce the item

Cost-Based Price

Charge the other division the variable + fixed cost to produce the item

Cost-Plus-Based Price

Charge the other division the Cost-Based Price PLUS some percent markup

Market-Based Price

Charge the other division the same as what they could buy the product in the open market (only if at capacity)

Market (aka Static) Budget

Budget created assuming estimated activity levels at standard prices

Flexible Budget

Budget created using actual activity levels at standard prices

Top-Down Budgeting

From the management down to the employees

Bottom-Up Budgeting

From the employees up to the management

Annual Budget

budget is prepared for 12 months, new one created every year

Rolling Budget

start with nothing and build the budget from scratch

Not included in the cash budget

Depreciation Expenses and Bad Debt Expenses

Opposite of Gross Profit Percent

COGS Percent

Sales - COGS

Gross Profit

Gross Profit - Operating Expenses

Operating Income

Operating Income - Tax Expenses

Net Income

Negotiable Price

Between Variable Price and Market Value

When preparing the master budget what is the first step

Prepare the sales budget

What is included in the cash budget

cash available - info on money borrowed

disbursements - info on money to be repaid

financing - info on interest expenses

What is a drawback to return on investment (ROI)

Projects with a reasonably good ROI are typically rejected simply because they are less than the comany's current ROI (would lower the average ROI of firm)

Compute Standard Cost

DM + DL + VOH + FOH

If a company determines that their master budget variance for revenues if favorable

the firm had higher revenues than those revenues outlined in their master budget

Decentralization works best when

Divisions are independent

When computing a company's overall profitability

Do NOT include transfer prices

Transfer Pricing

Happens when deciding what price to charge inside our company, and when divisions within a company sell products to one another

Disadvantages of Decentralized Organization

Some activites may be duplicated, incur unnecessary costs

Managers goals may not be the same as company

Advantage of Decentralized Organization

Managers with the best information make the appropriate decisions

Gives lower level chance to move up corp. ladder

The type of center that has a responsibility for generating revenue as well as controlling costs is

Profit Center

Operating Budget

A plan of all the sales, expenses, etc.

Contains: sales budget, merchandising/manufacturing companies, operating expenses budget, and budgeted income statement

Financial Budget

A plan of all the monies coming in and out

Contains: Capital expenditure budget

Cash budgets

budgeted balance sheet

Proforma a.k.a Estimated

Budgeted Balance Sheet, Budgeted Income Statement

When computing cash collections (for sales) include

Cash from that period

Credit from that period

All applicable credit from previous periods

When computing cash disbursements (for purchases) include

Cash disbursements from that period

Cash disbursements from previous periods

When computing price variance

Use the quantity purchased

When computing usage variance

Use the quantity used

If residual income is positive

The project being considered is good

If residual income is negative

The project being considered is bad

If ROI% of new investment isn't higher than current

Do NOT Invest

If residual income of new investment is positive

Invest, increases divisions residual income

Master Budget Components

Operational Budget and Financial Budget

ROI can also be identified as

Sales Margin x Capital Turnover

Minimum Transfer Price

Standard Cost

(DM + DL + VOH + FOH)

Favorable

| L < R |

Unfavorable

| L > R |

Not a reasonable way to improve ROI for a company (holding other factors constant)

Increase investment

If a division of a large firm is evaluated on residual income, then the division should invest in a capital budgeting project if

the residual income is greater than 0

Most Important Budget, all other budgets stem from it

Sales Budget

Annual budget that summarizes the planned activities of all sub units of an organization including sales, production, and financing

Master Budget

When looking at different segments of a company we use _________ to see how well each segment is doing

Metrics

Many managers prefer

Residual Income over ROI

Operating Expenses Budget

SSBAD

Sales Commission

Shipping Expenses

Bad Debt Expenses

Admin Salaries

Depreciation Expenses

Direct Materials Budget Measured in

Needs (Units x SQ)

Production Budget Measured in

Units

Which portion of the master budget predicts the organizations financial position

Pro-Forma Financial Statement