Activity Variance - The diffrence between a revenue or cost item in the static planning in the static planning budget and the same item in the flexible budget. An activity variance is due soley to the difference between the level of activity assumed in planning budget and the actual level of activity used in flexable budgets.
Flexible budget - A report showing estimates of what revenues and costs should have been, given the actual level of activity.
Planning budget - Abudget at the beginning of the budgeting period that is valid only for the planned level of activity.
Revenue Variance - The differnce how much the revenue should have been the actual level of activity, and the activity revenue for the period. A favorable revenue variance occurs because the revenue is higher than expected, given the actual level of activity for the period.
Spending Varince - The difference between how much a cost should have been, given the actual level of activity, and the actual amount of cost. A favorable spending variance occurs because the cost is lower the expected, given the actual level of activity for a period.
Monday, April 2, 2012
Inventory Purchases
Merchandising company would prepare a merchandise purchases budget showing the amount of good to be purchased from suppliers during the period.
Budget cost of goods .............................................XXXXX
Add desired ending merchandise inventory...........XXXXX
Total Needs............................................................XXXXX
Less beginning merchandise inventory..................XXXXX
Required Purchases................................................XXXXX
Budget cost of goods .............................................XXXXX
Add desired ending merchandise inventory...........XXXXX
Total Needs............................................................XXXXX
Less beginning merchandise inventory..................XXXXX
Required Purchases................................................XXXXX
The Production Buget
The production budget is prepared after the sales budget. The Production budget lists the number of units that must be produced to satisfy sales needs and to provide for the desired ending inventory.
Budgeted sales in case................................................................XXXXX
Add desired ending inventory of finished goods........................XXXXX
Total Needs
Less Beginning inventory of finished goods..............................XXXXX
Required production in case.......................................................XXXXX
Budgeted sales in case................................................................XXXXX
Add desired ending inventory of finished goods........................XXXXX
Total Needs
Less Beginning inventory of finished goods..............................XXXXX
Required production in case.......................................................XXXXX
The self-Imposed Buget
The initial flow of the budget data in a participative budgeting system is from lower levels of responsibility to higher levels of responsibility. Each person with responsibility for cost control will prepare his or her own budget estimates and submit them to the next higher level of management. These estimates are reviewed and consolidated as they move upward in the organization.
Self-Imposed budget - is a budget that is prepared with the full cooperation and participation of managers at all levels.
Self-Imposed budget - is a budget that is prepared with the full cooperation and participation of managers at all levels.
The basic framework of Budgeting
A budget is a detailed plan for the future that is usually expressed in formal quantitative terms. Budgets are used for two distinct purposes, planing and control. Planning involves developing goals and preparing various budgets to achieve those goals. Control involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change.
Advantages of budgeting
Budgets communicate management's plans throughout the organization.
Budgets force managers to think about the plan for the future.
The budgeting provides a means of allocating resources to those parts of the organization where they can be used most effectively.
The budgeting process can uncover potential bottlenecks before they occur.
Budgets coordinate the activities of the entire organization by integrating the plans of it's various parts.
Budgets define goals and objectives that can serve as a benchmark for evaluating subsequent performance.
Advantages of budgeting
Budgets communicate management's plans throughout the organization.
Budgets force managers to think about the plan for the future.
The budgeting provides a means of allocating resources to those parts of the organization where they can be used most effectively.
The budgeting process can uncover potential bottlenecks before they occur.
Budgets coordinate the activities of the entire organization by integrating the plans of it's various parts.
Budgets define goals and objectives that can serve as a benchmark for evaluating subsequent performance.
Monday, March 12, 2012
Common Mistakes in reation to segmented income statements
Companies often make mistakes when assigning cost to segments. they omit some costs, inappropriately assign traceable fixed costs, and arbitrarily allocate common fixed costs.
Companies do not correctly handle traceable fixed expenses on segmented income statements.
------1) They do not trace fixed expenses to segments even when it is feasible to do so.
------2) They use inappropriate allocation bases to allocate traceable fixed expenses to segments.
Failure to trace Cost Directly - Cost that can be traced directly to a specific segment should be charged directly to that segment and should not be allocated to other segments.
Inappropriate Allocation base - Some Companies us arbitrary allocation bases to allocate costs to segments. Example: Some companies allocate selling and administrative expenses on the of sales revenues. Thus, if a segment generates 20% of total company sales, it would be allocated 20% of the company's selling and administrative expenses as it " fair share".
Arbitrarily Dividing common costs among segments - The 3rd business practice that leads to distorted segment costs is the practice of assigning non-traceable costs to segments. example: Some companies allocate the common costs of the corporate headquarters building to products on segment reports
Companies do not correctly handle traceable fixed expenses on segmented income statements.
------1) They do not trace fixed expenses to segments even when it is feasible to do so.
------2) They use inappropriate allocation bases to allocate traceable fixed expenses to segments.
Failure to trace Cost Directly - Cost that can be traced directly to a specific segment should be charged directly to that segment and should not be allocated to other segments.
Inappropriate Allocation base - Some Companies us arbitrary allocation bases to allocate costs to segments. Example: Some companies allocate selling and administrative expenses on the of sales revenues. Thus, if a segment generates 20% of total company sales, it would be allocated 20% of the company's selling and administrative expenses as it " fair share".
Arbitrarily Dividing common costs among segments - The 3rd business practice that leads to distorted segment costs is the practice of assigning non-traceable costs to segments. example: Some companies allocate the common costs of the corporate headquarters building to products on segment reports
Segmented Income Statements
In the segmented income statements are statements that allow a company to makes decisions and evaluate managerial performance by creating a contribution format income statements segmented by the company's divisions, product lines, and sales channels.
To prepare a segmented income statement, variable expenses are deducted from sales to yield the contribution margin for the segment. the contribution margin tells us what happens to profits as volume changes the two components of contribution margin.
To prepare a segmented income statement, variable expenses are deducted from sales to yield the contribution margin for the segment. the contribution margin tells us what happens to profits as volume changes the two components of contribution margin.
Difference between variable and absorption expense
The difference between Variable Costing and Absorption costing is that variable costing the fixed manufacturing overhead is treated as a period cost and like selling and administrative expenses, it is expensed in its entirety each period. Where Absorption costing treats all manufacturing costs as product costs, regardless of whether they are variable or fixed.
Omission of cost
The costs assigned to a segment should include all costs attributable to that segment from the company's entire value chain.
To avoid having to maintain two costing systems and provide consistency between internal and external reports, many companies also use absorption costing for their internal reports such as segmented income statements.
To avoid having to maintain two costing systems and provide consistency between internal and external reports, many companies also use absorption costing for their internal reports such as segmented income statements.
Chapter 6 Glossary
Absorption Costing - A costing method that includes all manufacturing cost in unit product cost. This will include direct materials, direct labor and both variable and fixed manufacturing overhead.
Common Fixed Cost - A fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segment. Even if that segment were entirely eliminated, there would be no change in a true common fixed cost.
Segment - Any part or activity of an organization about which managers seek cost, revenue, or profit data.
Segment Margin - A segment contribution margin less its traceable fixed cost. it represents the margin available after a segment has covered all of its own traceable costs. The segment margin is the best gauge of the long run profitability of a segment because it includes only those costs that are caused by the segment. If a segment can't cover its own costs, then that segment probably should be dropped.
Traceable fixed cost - a fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated.
Variable costing - A costing method that includes only variable manufacturing costs ( direct materials, direct labor and both variable manufacturing overhead ) in product costs.
Common Fixed Cost - A fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segment. Even if that segment were entirely eliminated, there would be no change in a true common fixed cost.
Segment - Any part or activity of an organization about which managers seek cost, revenue, or profit data.
Segment Margin - A segment contribution margin less its traceable fixed cost. it represents the margin available after a segment has covered all of its own traceable costs. The segment margin is the best gauge of the long run profitability of a segment because it includes only those costs that are caused by the segment. If a segment can't cover its own costs, then that segment probably should be dropped.
Traceable fixed cost - a fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated.
Variable costing - A costing method that includes only variable manufacturing costs ( direct materials, direct labor and both variable manufacturing overhead ) in product costs.
Friday, March 9, 2012
Common fixed cost
A common fixed cost that supports the operations of more than one segment, but is not traceable in whole or part to any one segment.
Traceable fixed cost
A traceable fixed cost of a segment is fix cost that is incurred because of the existence of the segment - if the segment had never existed, the fixed cost would not have been incurred; and if the segment were eliminated, the fixed cost would disappear.
Wednesday, March 7, 2012
The margin of Safety
The Margin of safety is the excess of budgeted or actual sales dollars over the break-even volume of sales dollars. It is the amount by which sales can drop before losses are incurred.
The formula for margin of safety is:
Margin of safety = total budgeted ( or actual) sales - break-even sales
Margin of safety % = margin of safety in dollars divided by the total budgeted ( or actual ) sales in dollars
The formula for margin of safety is:
Margin of safety = total budgeted ( or actual) sales - break-even sales
Margin of safety % = margin of safety in dollars divided by the total budgeted ( or actual ) sales in dollars
Quiz
Had a hard time finding the Fix expenses in some of the questions. Target Profit analysis in terms of dollars you don't need the fixed expenses, you can calculate the total sales by taking the units sold and multiply by the price of one unit.
Tuesday, March 6, 2012
Operating Leverage
To know how sensitive Net Operating income is to a given percentage of change in dollar sales. The Net Operating income serves as an Multiplier. If the operating leverage is high, a small percentage increase in sales can produce a much larger percentage increase in net operating income. To determined what your Degree of operating leverage is use this formula: Degree of operating leverage = CM divided by Net Operating income. If your degree of operating leverage is a 4 then that would mean that your net operating income grows four times as fast as its sales.
Break-even Analysis
The Break-even Analysis is very similar to the Target Profit Analysis, the only difference is that the target profit is zero in the break-even analysis. So having said that the formula is: units sales to break even = 0$ + fixed expenses divided by unit CM. Now that you know how to get the amount of units sold, how do we calculate the the dollar sells needed to attain the target profit? Use the units sold to attain break-even point then multiply by the unit selling price.
Target Profit Analysis
The Target Profit Analysis is used to determine an estimate of sales volume is needed to achieve a certain profit target. In other words if an owner would like to know how much he would have to sell of a product to reach a target profit of a certain amount. to find this out we can use the formula Method: Unit sales to attain the target profit = Target profit + Fixed expenses divided by the unit CM. Now that you know how to get the amount of units sold, how do we calculate the the dollar sells needed to attain the target profit? Use the units sold to attain target profit multiply by the unit selling price. Another way is to use this formula Profit = CM ratio multiply by sales minus the fixed expenses.
Variable Expenses Ratio
The Variable Expenses Ratio is the ratio of Variable expenses to sales. to compute the VER is done by dividing the total Variable Expenses by the total sales, or in a single product it can calculated by dividing the variable expenses per unit by the unit selling price.
Contribution Margin Ratio
We can use the Contribution Margin Ratio in an CVP calculations. The contribution format income statement will show the Sales revenues and the Variable expenses and the contribution margin. We will apply percentages to each variable expressed as 100% for sales revenues, % for variable expenses divided by sales revenues and a % for Contribution margin divided by variable expenses. The Contribution Margin Ratio is computed as CM ratio = Contribution Margin divided by sales and CM ratio = Unit Contribution margin divided by Unit selling price
Cvp Relationships in Graphic Form
Graphs can be used to show the relationships between revenue, cost, profit, and volume. This type of graph is called a Cost-volume-profit Graph or a CVP graph. You will be able to see relationships over a wide range of activities.
CVP Relationships in Equation Form
The formula for Net Operating income is: Profit = (Sales - Variable expenses) - Fixed expenses
or if the company has only one product, the this formula can be expressed as: 1) Sales = Selling price per unit X Quantity sold = P X Q , and Variable expenses = Variable expenses per unit X Quantity sold = V X Q, or 2) Profit = ( P X Q - V X Q) - Fixed expenses.
To determine the profit sales we will need to use this formula: Profit = unit CM X Q - Fixed expenses
or if the company has only one product, the this formula can be expressed as: 1) Sales = Selling price per unit X Quantity sold = P X Q , and Variable expenses = Variable expenses per unit X Quantity sold = V X Q, or 2) Profit = ( P X Q - V X Q) - Fixed expenses.
To determine the profit sales we will need to use this formula: Profit = unit CM X Q - Fixed expenses
Beak-even point
The Break-even point is when the net operating income will rise by the price of the Unit Contribution Margin for each addition units sold.
Contribution Margin
Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted. It is the amount to cover fixed expenses and then to provide profits for the period.
1) Contribution Margin is used first to cover the Fixed Expenses. 2) What you have left will go in to profits.1) If the Contribution Margin will not cover the Fixed Expenses, 2) Then a loss will be assessed for that period.
1) Contribution Margin is used first to cover the Fixed Expenses. 2) What you have left will go in to profits.1) If the Contribution Margin will not cover the Fixed Expenses, 2) Then a loss will be assessed for that period.
Cost-volume-profit (cvp)
CVP analysis focuses on how profits are afftected by the following five factors:
1. selling prices
2. sales volume
3. unit variable
4. total fixed cost
5. mix of products sold
1. selling prices
2. sales volume
3. unit variable
4. total fixed cost
5. mix of products sold
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