Flash Cards and Puzzlers

Flash Cards and Puzzlers - Week 2 Puzzlers Explain what is...

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Week 2 Puzzler’s Explain what is meant by sensitivity analysis in budgeting, and discuss how Managers might use sensitivity analysis in practice. Answer: Sensitivity analysis is a “what-if” technique that examines how results will change if the original predicted data are not achieved or if an underlying assumption changes. Managers often use financial planning models, which are mathematical representations of relationships among the factors that influence the master budget. It is possible, using these models, to examine the financial impact of one or more parameters that influence a master budget, for example selling price and material cost. Management could consider three levels of each of these two parameters, resulting in nine scenarios of different selling prices and material costs. The financial model could then present a master budget based on each of these changes, and demonstrate the financial impact on the original data given changes in selling prices and/or material costs. Management could use these predictions to make contingency plans, change their strategies, or simply update the budgets as environmental conditions change. Explain the difference between a static budget and a flexible budget. Explain what is meant by a static budget variance and a flexible budget variance. A static budget is one based on the level of output planned at the start of the budget period. A flexible budget calculates budgeted revenue and budgeted costs based on the actual output in the budget period. The only difference between the static budget and the flexible budget is that the static budget is prepared for the planned output, whereas the flexible budget is prepared based on the actual output. A static budget variance is the difference between the actual results and the corresponding budgeted amounts in the static budget. A flexible-budget variance is the difference between an actual result and the corresponding flexible-budget amount based on the actual output in the budget period. Abby Company has just implemented a new cost accounting system that provides two Variances for fixed manufacturing overhead. While the company's managers are familiar with the concept of spending variances, they are unclear as to how to interpret the production-volume overhead variances. Currently, the company has a production capacity of 54,000 units a month, although it
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Week 2 Puzzler’s generally produces only 46,000 units. However, in any given month the actual
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Flash Cards and Puzzlers - Week 2 Puzzlers Explain what is...

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