Managerial Accounting

Homework Submission
Chapter #8 & #9
Nota, Oscar C. Jr.
CHAPTER 8

(8-1) What is static planning budget?

 Static planning budget is an amount that the company expects to incur at a particular level of activity.

(8-2) What is a flexible budget and how does it differ from a static planning budget?
 A flexible budget is a report showing estimates of what revenues and cost should have been given the actual
level of activity for a period. A flexible can be modified to get estimated cost for the actual level of activity.

(8-3) What are some of the possible reasons that actual results may differ from what had been budgeted at the
beginning of a period?

 Untrained workers
 Excessive waste
 Paying for a higher price
 Change in technology
 Weak supervision
 Loose internal control

(8-4) Why is it difficult to interpret a difference between how much expense was budgeted and how much was
actually spent?

 The reason behind this is because the planned costs/expenses and actual costs incurred are not the same in
terms of the level of activity.
 The difference between the budget and actual results may be due to the level of activity that impact 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.

(8-5) What is a revenue variance and what does it mean?

 Revenue variance is the difference between the budgeted and actual revenue. This is the difference between
how much the revenue should have been, given the actual level of activity and the actual revenue earned.

(8-6) What is a spending variance and what does it mean?

 Spending variance is the difference between the budgeted and the actual expenses. This is the difference
between how much the cost should have been, given the actual level of activity and the actual cost incurred.

(8-7) What does a flexible budget performance report do that a simple comparison of budgeted to actual results
does not do?
 Flexible budget improves the accuracy because it can be modified to compare the budgeted and
actual cost incurred in the same level of activity.
 The flexible budget performance report cleanly separates the differences between the static planning
budget and the actual results that are due to changes in activity (the activity variances) from the
differences that are due to changes in prices and the effectiveness with which resources are managed
(the revenue and spending variances
Managerial Accounting
Homework Submission
Chapter #8 & #9
Nota, Oscar C. Jr.
(8-8) How does a flexible budget based on two cost drivers differ from a flexible budget based on a single cost
driver?
 The flexible budget based on a single cost driver and the one based on two cost drivers differ only in the cost
formulas. When two cost drivers exist, some costs may be a function of the first cost driver, some costs may
be a function of the second cost driver, and some costs may be a function of both cost drivers.

(8-9) What is a quantity standard?

 A quantity standard is the ideal quantity in making an output. It is set to determine whether the production
is within the ideal production. It is the amount set forth by the company which must be incurred when buying
materials needed for production

What is a price standard?

 Price standard is the price that should be paid for materials at a given level of activity.

(8-10) Why are separate price and quantity variances computed?

 Separating the price and quantity variances identifies which causes variances to be favorable or unfavorable,
this is a tool which is very useful in seeing if costs were too high or if too much materials were used this
determines which is responsible for the deviations, and is done in order to eliminate problems and take
immediate actions concerning the discrepancies.

(8-11) Who is generally responsible for the materials price variance? The materials quantity variance? The labor
efficiency variance?

 The purchasing manager is the responsible for the material price variance, and for the production manager
for the material quantity variance, but both or either of them may be held responsible for the labor efficiency
variance.

(8-12) The materials price variance van be computed at what two different points in time? Which point is better?
Why?

 The materials price variance can be computed when materials are purchased or when these materials are
placed into production, the variance is better computed when materials are purchased because during his
point in time, the purchasing manager, the one having the responsibility for this variance, has already
completed his or her work. This also simplifies bookkeeping because it allows the company to carry its raw
material inventory at standard cost.

(8-13) If the materials price variance is favorable but the materials quantity variance is unfavorable, what might this
indicate?
 This may indicate that the company purchased a low-quality materials at a price which is discounted but
these materials created production problems.

(8-14) “Our workers are all under labor contracts; therefore, our labor rate variance is bound to be zero." Discuss.
 The fact that the company are in labor contract, the hourly rate/labor rate is already determined and will be
set as standard, therefore no labor efficiency will arise.

(8-15) What effect, if any, would be expect poor-quality materials to have on direct labor variances

 Poor quality materials would not ordinarily affect the labor rate variance, these only result to excessive labor
time and therefore an unfavorable labor efficiency variance.
Managerial Accounting
Homework Submission
Chapter #8 & #9
Nota, Oscar C. Jr.
(8-16) If variable manufacturing overhead is applied to production on the basis of direct labor-hours and the direct
labor efficiency variance is unfavorable, will the variable overhead efficiency variance be favorable or
unfavorable, or could it be either? Explain.
 Since the basis for the computation of the direct labor efficiency variance and variable overhead efficiency
variance are the same, there will be an unfavorable variable efficiency variance.

(8-17) Why can undue emphasis on labor efficiency variances lead to excess work in process inventories?
 This is due to the reason that excessive unfinished goods will result if labor efficiency variance is highly
unfavorable, if the standard’s quality of work is better than that of the actual, then unfinished goods will arise.

CHAPTER 9

(9-1) What is meant by the term decentralization?

 Decentralization spreads decision-making authority across an entire organization, rather than being confined to a
few top executives.

(9-2) What benefits result from decentralization?

 It enables top management to concentrate on strategy, higher-level decision-making, and coordinating activities.
 It often increases motivation, resulting in increased job satisfaction and retention, as well as improved performance.
 It acknowledges that lower-level managers have more detailed information about local conditions that enable them
to make better operational decisions.
 It provides lower-level managers with the decision-making experience they will need when promoted to higher level
positions.
 It enables lower-level managers to quickly respond to customers.

(9-3) Distinguish between a cost center, a profit center, and an investment center.

 Managers of cost centers (Service departments such as accounting and finance are generally considered cost centers)
have control over costs alone, but not over revenue or use of investments funds. Managers of profit centers have
control over costs and profits, but not over investments (similar to the likes of a manager at an amusement park).
Investment center managers, on the other hand, have control over costs, profits and investments in operating assets,
such as the vice president of general motors in North America.

(9-4) What is meant by the terms margin and turnover in ROI calculations?

 Margin is net operating income divided by sales, and is ordinarily improved by increasing selling price, reducing
operating expenses, or increasing unit sales.
 Turnover is sales divided by average operating assets. If excess funds are tied up in operating asset investments, it
will depress turnover, and result in a lower ROI.

(9-5) What is meant by residual income?

 Residual income is the net operating income that an investment center earns above the minimum required rate of
return on operating assets. It measures the net operating income earned less the minimum required rate of return on
average operating assets, whereas ROI measures income relative to investment in operating assets.
Managerial Accounting
Homework Submission
Chapter #8 & #9
Nota, Oscar C. Jr.
(9-6) In what way can the use of ROI as a performance measure for investment centers lead to bad decisions? How does
the residual income approach overcome this problem?

 If ROI is used to evaluate performance, a profitable investment opportunity whose rate of return exceeds the
company's required rate of return but whose rate of return is less than the investment center's current ROI. Managers
of an investment center may reject The residual income approach overcomes this problem because any project whose
rate of return exceeds the company's minimum required rate of return will result in an increase in residual income.

(9-7) What is the difference between delivery cycle time and throughput time? What four elements make up throughput
time? What elements of throughput time are value-added and what elements are non-value added?

 The difference between delivery cycle time and throughput time is the waiting period between when an order is
received and when production on the order is started.
 The 4 elements of Throughput time are the following:
(VALUE-ADDED)
1. Process time

(NON-VALUE ADDED)

2. Inspection time
3. Move time
4. Queue time

(9-8) What does a manufacturing cycle efficiency of less than 1 mean? How would you interpret an MCE of .40?

 MCE OF LESS THAN 1 means that the production process includes non-value added time.
 An MCE of (.40) for example, means that 40% of the throughput time consists of actual processing, and that the other
60% consists of moving, inspection, and other non-value-added activities.

(9-9) Why do the measures used in a balanced scorecard differ from company to company?

 A company's balanced scorecard should be derived from and support its strategy, the reason why measures used in
a balanced scorecard differ from company to company is because different companies have different strategies,
therefore, their balanced scorecards should be different.

(9-10) Why does the balanced scorecard include financial performance measures as well as measures of how well
internal business processes are doing?

 The purpose of the balanced scorecard is to support the company's strategy, which is a theory about what actions
will further the company's goals. Assuming that the company has financial goals, measures of financial performance
must be included in the balanced scorecard as a check on the reality of the theory. If the internal business processes
improve, but the financial outcomes do not improve, the theory may be flawed and therefore, the strategy should be
changed.