Test 2 Study Guide.docx - (7 Budgets Operating budgets...

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(7) Budgets Operating budgets - Financial budgets – quantify the outcomes of operating budgets in summary financial statements Master budget- a plan that presents the expected revenues, costs, and profit corresponding to the expected sales volume as of the beginning of that period. Revenue budget – the first line on an income statement. Determines volume and expectations such as costs, materials, and labor. Production budget- the second step in preparing the master budget. Combines demand information provided by the revenue budget and the company’s inventory policy regarding finished goods to determine production levels in the coming period. Direct Materials Usage Budget – follws the production budget. estimate variable and fixed manufacturing costs Direct Labor Budget – follows the production budget. Determines the labor hours per lot Manufacturing Overhead Cost Budget – manufacturing overhead cosists of variable and fixed costs. Variable consists of supplies used by employees, oil, platic wrap etc. Variable cost of goods manufactured budget – the sum of materials, labor, and variable overhead Variable costs of good sold budget – COGS=cost of beginning inventory + cost of goods manufactured – costs of ending inventory Why budgets are used - Planning, coordination and control (p 262) How to use the inventory equation to find the missing values Beginning Inventory + Inventory Purchases – End Inventory = Cost of Goods Sold How to prepare a cash budget Inflows from operations, outflows from operations, and special items How a static or master budget differs from a flexible budget Flexible budget – the budget at the actual level of sales. The only difference between master and flexible budget it a difference between budgeted and actual sales. Concepts of favorable and unfavorable variances Favorable Variance (F) – performance exceeded the expectations Unfavorable Variance (U) – performance fell short of expectations Sales volume variance = flexible budget profit – master budget profit = (actual sales quantity – budgeted sales quantity) x budgeted unit contribution margin Flexible budget variance = actual profit – flexible budget profit Sales price variance = actual revenue – flexible budget revenue = (actual sales price x actual sales quanity) – (budgeted sales price x actual sales quantity) = (actual sales price – budgeted sales price) x actual sales quantity How to interpret variances Budget reconciliation report is the starting point. This report reconciles the actual profit with the planned profit in master budget. Variances can arise in the normal course of operations or due to change in operating conditions or due to excessively tight/loose standards.

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