Class Activity Week 5
9–1 What is a static planning budget? A static budget is a budget that does not change as volume changes. If a company’s annual master budget is a static budget, the budget for sales commissions expense will be one amount such as $200,000 for the year. In other words, in a static budget the budgeted amount for sales commissions expense will remain at $200,000 even if the actual sales during the year are $3 million, $4 million or $5 million.
9–2 What is a flexible budget and how does it differ from a static planning budget? A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. The flexible budget is more sophisticated and useful than a static budget, which remains at one amount regardless of the volume of activity. The difference between static budget and a flexible budget is that a static budget does not change with the output while a flexible budget changes with the level of outputs. Static budget has a limited application while a flexible budget has a variety of applications.
9–3 What are some of the possible reasons that actual results may differ from what had been budgeted at the beginning of a period? The differences are usually due to a change in the level of activity, changes in prices, and changes in how effectively resources are managed.
9–4 Why is it difficult to interpret a difference between how much expense was budgeted and how much was actually spent? A difference between the budget and actual results can be due to the level of activity that impact on costs. From a manager's perspective, a variance that is due to a change in activity is very different from a variance that is due to changes in prices and changes in how effectively resources are managed. A variance of the first kind requires very different actions from a variance of the second kind. Consequently, these two kinds of variances should be clearly separated from each other. When the budget is directly compared to the actual results, these two kinds of variances are lumped together.
9–5 What is an activity variance and what does it mean? An activity variance is the net income gained or lost through failure to achieve the budgeted sales in units for the period. To calculate this variance, multiply the difference between budgeted sales and actual sales by the budgeted contribution margin per unit.
10–1 What is a quantity standard? What is a price standard? Quantity standards specify how much of an input should be used to make a product or provide a service. Price standards specify how much should be paid for each unit of the input. (Garrison 419)
10–2 Distinguish between ideal and practical standards. Ideal standards can be attained only under the best circumstances. They allow for no machine breakdowns or other work interruptions, and they call for a level of effort that can be attained only by the most skilled and efficient employees working at peak effort 100% of the time. Some managers feel that such standards spur continual improvement. These managers argue that even though employees know they will rarely meet the standard, it is a constant reminder of the need for ever-increasing efficiency and effort. Few organizations use ideal standards. Most managers feel that ideal standards tend to discourage even the most diligent workers. Moreover, variances from ideal standards are difficult to interpret. Large variances from the ideal are normal and it is therefore difficult to “manage by exception.” Practical standards are standards that are “tight but attainable.” They allow for normal machine downtime and employee rest periods, and they can be attained through reasonable, though highly efficient, efforts by the average worker. Variances from practical standards typically signal a need for management attention because they represent deviations that fall outside of normal operating conditions. Furthermore, practical standards can serve multiple purposes. In addition to signaling abnormal conditions, they can also be used in forecasting cash flows and in planning inventory. By contrast, ideal standards cannot be used for these purposes because they do not allow for normal inefficiencies and result in unrealistic forecasts. (Garrison 421)
10–3 What is meant by the term management by exception? Actual quantities and actual costs of inputs are compared to these standards. If either the quantity or the cost of inputs departs significantly from the standards, managers investigate the discrepancy to find the cause of the problem and eliminate it. This process is called management by exception. (Garrison 419)
10–4 Why are separate price and quantity variances computed? Separating price and quantity variances gives insight into what causes variances to be favorable or unfavorable, and is a tool useful for seeing if costs were too high or if too much material was used.
10–5 Who is generally responsible for the materials price variance? The materials quantity variance? The labor efficiency variance? The purchase manager is generally responsible for the materials price variance. The production manager is responsible for the materials quantity variance. The hiring manager is responsible for the labor efficiency variance.