1FE155 Management Control and Finance
Budget
A budget is a forecast and a plan, expressed in financial and/or more general quantitative terms, which extends forward for a period into the future.
Purpose of a budget
✓Forecasting
✓Planning
✓Coordination
✓Communication
✓Authorisation
✓Motivation
✓Performance evaluation
Variance analysis
An analysis between budgets/standards and actual results
The variance analysis cycle
Is a chain of activities intended to capture the differences between the actual results and what should have occurred according to the budget → To evaluate and improve performance
Management by exception (MBE)
is a management system that compares actual results to a budget so that significant deviations can be flagged as exceptions and investigated further.
Static planning budget
• A static planning budget is prepared before the period begins and is valid for only the planned activity level.
• A static budget cannot be compared with the actual costs.
Flexible budget
• A flexible budget is an estimate of what revenues and costs should have been, given the actual level of activity for the period.
• When a flexible budget is used in performance evaluation, actual costs are compared to what the costs should have been for the actual level of activity during the period rather than to the static planning budget.
What are the key benefits and features of a flexible budget?
A flexible budget displays revenues and expenses expected at the actual activity level, can be tailored to any level within the relevant range, highlights variances stemming from effective or ineffective cost control, and enhances performance evaluation.
What fundamental principles guide the construction of a flexible budget?
Constructing a flexible budget relies on understanding that total variable costs vary directly with changes in activity levels, while total fixed costs remain constant within the relevant range.
What are the components and primary causes of variances in a flexible budget analysis?
Variances in a flexible budget analysis consist of revenue variances, reflecting differences between actual and expected total revenue, and spending variances, indicating discrepancies between actual and expected costs based on activity levels. Unfavorable variable spending variances typically stem from either overspending on resources or inefficient resource utilization.
What are the key considerations and advantages associated with incorporating multiple cost drivers into flexible budgeting?
Incorporating multiple cost drivers into flexible budgeting enhances accuracy by accounting for various activity levels. Understanding each activity's cost driver allows for more precise cost formulas. Additionally, using multiple cost drivers leads to more accurate variance analysis. Moreover, spending variances can be broken down to assess resource usage and acquisition price control separately, providing deeper insights into cost management.
What components make up the direct material standards, and how are they utilized in determining the standard direct materials cost per unit?
The direct material standards consist of the standard quantity per unit (SQ), which accounts for the amount of materials needed per finished product unit, including allowances for normal inefficiencies like scrap and spoilage, and the standard price per unit (SP), representing the expected cost per unit of direct materials, including delivery costs.
The standard direct materials cost per unit is determined by multiplying the standard quantity per unit by the standard price per unit.
What are the components of direct labor standards, and how are they utilized to calculate the standard direct labor cost per unit?
The direct labor standards consist of the standard hours per unit (SH), representing the expected labor hours required to produce one unit of finished goods, and the standard rate per hour (SR), indicating the company's anticipated direct labor wage rate per hour inclusive of employment taxes and fringe benefits. The standard direct labor cost per unit is calculated by multiplying the standard hours per unit by the standard rate per hour.
What are the components of variable manufacturing overhead standards, and how are they used to determine the standard variable manufacturing overhead cost per unit?
Variable manufacturing overhead standards consist of the standard hours per unit (SH), indicating the allocation base needed per unit of finished goods according to the predetermined overhead rate, and the standard rate per unit (SR), representing the expected cost per unit of variable overhead, derived from the variable portion of the predetermined overhead rate. The standard variable manufacturing overhead cost per unit is obtained by multiplying the standard hours per unit by the standard rate per unit.
How does standard cost variance analysis decompose spending variances, and what are the components of this analysis?
Standard cost variance analysis breaks down spending variances from the flexible budget into two components: a price variance and a quantity variance. The price variance is the difference between the actual amount paid for an input and the standard amount that should have been paid, multiplied by the actual quantity purchased. The quantity variance is the difference between the actual amount of input used and the standard amount that should have been used, expressed in dollar terms using the standard price of the input.
What are the key components and applications of standard costs in performance measurement?
Standard costs serve as benchmarks for performance evaluation. They consist of quantity standards, indicating the amount of input required per unit of output, and price standards, specifying the cost per unit of input. These standards are applied to
1.direct materials
2.direct labor
3.variable manufacturing overhead costs
enabling comparison with actual costs to assess performance.
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