BMGT221 - Exam 2

simplifying assumptions

1. use actual values to allocate overhead (assume estimates are fully accurate)

2. allocation base for assigning fixed manufacturing overhead costs to products is always to actual number of units produced

3. manufacturing costs are constant (variable cost per unit and total fixed cost in dollars)

4. no beginning or ending work-in-process-inventory

product cost

costs that attach to units of product; capitalized as inventory and expensed when the product is sold

capitalized as inventory; expensed

product costs are ______ _____ _______ and _______ when the product is sold

period cost

any cost that is not a product cost is expensed in the period incurred and never recorded in inventory

expensed in the period incurred

a period cost is _________ ___ _____ ______ ________

variable manufacutring overhead (VMOH)

vary in direct proportion to changes in the level of production

fixed manufacutring overhead (FMOH)

remain constant as the level of production fluctuates

product costs under absorption costing

all manufacturing costs regardless of whether they are fixed or variable (DM + DL + VMOH + FMOH)

DM + DL + VMOH + FMOH

product costs under absorption costing

period costs under absorption costing

variable and fixed selling, general, and administrative expenses (SGA)

product costs under variable costing

only those manufacturing costs that vary with output (DM + DL + VMOH)

DM + DL + VMOH

product costs under variable costing

SGA

period costs under absorption costing

FMOH + SGA

period costs under variable costing

contribution margin format

income statement format under variable costing

traditional format

income statement format under absorption costing

difference in operating income

equal to the FMOH deferred in (released form) inventory

deferred

inventories increase: FMOH costs are ______ under absorption costing

released

inventories decrease: FMOH costs are ______ under absorption costing

segment

any part of an organization or activity about which a manager seeks cost, revenue, or profit data (e.g., individual store, department, service center)

traceable fixed costs

arise because of the existence of a particular segment that would disappear over time if the segment itself disappeared

common fixed costs

arise because of the overall operation of the company and would not disappear if any particular segment were eliminated

CM - traceable FC

segment margin =

segment margin

includes only those costs that are caused by the segment; useful for gauging long-run profitability

sales - VC

contribution margin =

traceable FC + common FC / company CM ratio

$BE sales (company) =

segment traceable FC / segment CM ratio

$BE sales (segment) =

changes in unit sales

variable costing income is only affected by ______ __ ____ ______

changes in unit sales; units of production

absorption costing income is affected by _________ __ ____ _______ and _______ __ ___________

segmented financial information

1. companies must report segmented results to shareholders using the same methods that are used for internal segmented reports

2. requirement can motivate managers to avoid using the contribution approach for internal reporting purposes because they would be required to:

   1. share sensitive data with the public

   2. reconcile these reports with applicable rules for consolidated reporting purposes

budget

a detailed quantitative plan for acquiring and using financial resources, materials, and labor for a specified period of time (generally 1 year)

planning

developing goals, then preparing budgets to achieve those goals

control

gathering feedback to ensure that the plan is being executed or modified

control perspective

organizations compare their budgets to actual results to:

• improve the efficiency and effectiveness of operations

• evaluate and reward employees

top-down budgeting

top management sets budgets and profit targets

limitations of top-down budgeting

top management may lack detailed operational knowledge; lower-level managers may feel less motivation to meet targets

self-imposed budgeting

budgets and profit targets are prepared with the full cooperation of management at all levels

limitations of self-imposed budgeting

lower managers may lack broad strategic perspective; budgetary slack

budgetary slack

set low targets to ensure actual results exceed the plan

master budget

the company’s initial plan for the budget period; collection of component budgets

sales, production, DM, DL, MOH, cash, budgeted IS, budgeted BS

sequence of master budget

component budgets

separate but interdependent budgets for the company’s sales, production, and financial activities

budgeted sales units x SP/unit

budgeted sales =

production budget

lists the number of units that must be produced to satisfy sales needs and to provide for the desired ending finished goods inventory

budgeted unit sales + desired EI of FG - BI of FG

budgeted (required) production =

units of DM needed + desired EI of RM - BI of RM

DM units needed to be purchased =

budgeted production x hours required x hourly wage

total wages =

DM + DL + MOH Applied

unit product cost ($/unit) =

product cost x EI units

ending inventory ($) =

beginning cash balance + cash receipts - cash disbursements ± financing

ending cash balance =

sales - COGS - SGA - interest expense

budgeted income statement =

variance

difference between budgeted numbers and “actuals”; can be used as an early warning system to detect problems, a way to understand performance, and a starting point for reevaluating assumptions

management by exception

management system that compares actual results to a budget so that significant deviations can be flagged as exceptions and investigated further

BQ x BP

planning budget =

AQ x BP

flexible budget =

AQ x AP

actual results =

favorable variance

has the effect of increasing operating income relative to the budget amount

unfavorable variance

has the effect of decreasing operating income relative to the budget amount

static (planned) budget

created before the beginning of the period; based on the budgeted quantities and budgeted prices

static budget variance

difference between the actual result and the corresponding static budget amount

flexibile budgets

take into account how changes in activity affect costs; calculate budgeted reveneus and cost based on the actual level of activity

flexible budget variance

represents the difference between the actual results and the flexible budget amounts (also referred to as revenue/spending variances)

actual result - flexible budget amount

flexible budget variance =

(actual SP - budgeted SP) x actual units sold

revenue variance =

actual cost - flexible budget cost

spending variance =

activity variance + flexible budget variance

static budget variance =

flexible budgets

prepared for any activity level in the relevant range; help managers control costs; improve performance evaluation

activity variance

arises solely due to the difference the actual level of activity included in the flexible budget and the level of activity included in the planning budget

revenue variance

difference between the actual total revenue and what the total revenue should have been, given the level of activity for the period

spending variance

difference between the actual amount of the cost and what the cost should have been, given the level of activity for the period

non-profit organizations

may receive funding from sources other than the sale of goods and services, so revenues may consist of both fixed and variable elements

fixed cost + (rate x cost driver 1) + (rate x cost driver 2)

cost formula with two cost drivers =