What is a Master Budget?
Budget targeted for the company as a whole
Includes budgets for Operations and Cash Flows
Includes set of budgeted Financial Statements
What is a Static Budget?
Budget targeted for a specific segment of a company.
How do Fixed Costs affect budgeting?
Costs independent of the level activity within the relevant range
Property Tax is the same whether you produce 100-000 units or zero units
However – Fixed Costs per unit vary given the amount of activity
If you produce fewer units- fixed costs per unit will be greater than if you produce more units – i.e. less units to spread the cost over
How do Variable Costs affect budgeting?
The more Direct Materials or Direct Labor used- the more Variable Costs per unit
However – Variable Costs per unit don’t change with the level of activity like Fixed Costs per unit
How are Material Variances calculated?
SAM:
Standard Material Costs
- Actual Material Costs
= Material Variance
How are Labor Variances calculated?
SAL
Standard Labor Costs
- Actual Labor Costs
= Labor Variance
How are Overhead Variances calculated?
OAT
Overhead Applied
- Actual Overhead Cost
= Total Overhead Variance
How does Absorption Costing compare to Variable Costing?
Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A
Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs
How is Contribution Margin calculated?
Sales Price (per unit)
- Variable Cost (per unit)
= Contribution Margin (per unit)
How is Break-even Point (per unit) calculated?
Total Fixed Costs / Contribution Margin (per unit)
= Break-even Point Per Unit
Assumption: Total Costs & Total Revenues are LINEAR
What is the focus in a Cost Center?
Management is concerned only with costs
What is the focus in a Profit Center?
Management is concerned with both costs and profits
What is the focus in an Investment Center?
Management is concerned with costs- profits- and assets
What is the Delphi technique?
Forecasting technique where Data is collected and analyzed
Requires judgement/consensus
What is Regression Analysis?
A forecasting technique where Sales is the dependent variable.
Simple Regression - One independent variable
Multiple Regression - Multiple independent variables
What are Econometric Models?
Forecast sales using Economic Data
What are Naive Forecasting Models?
Very Simplistic
“Eyeball” past trends and make an estimate
How does a Moving Average compare to Exponential Smoothing?
Both project estimates using average trends from recent periods
Difference: Exponential Smoothing weighs recent data more heavily
What are the characteristics of Short-term Cost Analysis?
Uses Relevant Costs Only
Ignore Sunk Costs
Opportunity Cost is a Must
