Module 3

Strategic Planning; BUDGETING

In the last 2 sessions, you covered:

Rationale/advantages of budgeting (forward thinking, sub-unit coordination, performance evaluation framework, personnel motivation) Walk-through of producing pro-forma income statement (underscoring budgeting's coordination promotion goal, and setting stage for responsibility acctg and variance analysis) NB: be very familiar w/ Exhibit 6-2.

Intro to variance analysis (purpose, use as motivator in being basis for reward-and-punishment and as tool to improve later budgeting, detailing levels of variances)

I highlight:
Importance of Planning; Budgeting as an important tool in this managerial task. Budget = numberized plan Management uses of variances not for fixing blame ! Benchmarking and variances

Management Uses of Variances

To understand underlying causes of variances Recognition of inter-relatedness of variances Performance Measurement
Managers ability to be Effective Managers ability to be Efficient

Benchmarking and Variances

Benchmarking is the continuous process of comparing the levels of performance in producing products and services against the best levels of performance in competing companies Variances can be extended to include comparison to other entities

Exercises: Question 1:
The master budget is: a. a flexible budget b. a static budget c. developed at the end of the period d. based on the actual level of output

Exercises: Question 2:
A flexible budget: a. is another name for management by exception b. is developed at the end of the period c. is based on the budgeted level of output d. provides favorable operating results

Exercises: Question 3:
An unfavorable variance indicates that: a. actual costs are less than budgeted costs b. actual revenues exceed budgeted revenues c. the actual amount decreased operating income relative to the budgeted amount d. All of these answers are correct.

Exercises: Question 4:
A favorable variance indicates that: a. budgeted costs are less than actual costs b. actual revenues exceed budgeted revenues c. the actual amount decreased operating income relative to the budgeted amount d. All of these answers are correct.

This applies to questions 5 to 7:

Abernathy Corporation used the following data to evaluate their current operating system. The company sells items for $10 each and used a budgeted selling price of $10 per unit. Actual Budgeted Units sold 92,000 units 90,000 units Variable costs $450,800 $432,000 Fixed costs $ 95,000 $100,000

Question 5:
What is the static-budget variance of revenues? a. $20,000 favorable b. $20,000 unfavorable c. $2,000 favorable d. $2,000 unfavorable

Question 6:
What is the static-budget variance of variable costs? a. $1,200 favorable b. $18,800 unfavorable c. $20,000 favorable d. $1,200 unfavorable

Question 7:
What is the static-budget variance of operating income? a. $3,800 favorable b. $3,800 unfavorable c. $6,200 favorable d. $6,200 unfavorable