Capital Budgeting Final Study Guide

Capital Budgeting Final Study Guide - Capital Budgeting...

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Capital Budgeting Final Study Guide Definitions to Know 1. Administrative Budget – A formal and comprehensive financial plan through which management can control day-to-day business affairs and activities. 2. Analysis of Variances – Analysis and investigation of causes for variances between standard costs and actual costs. It is also called variance analysis. A variance is considered favorable if actual costs are less than standard costs. It is unfavorable if actual costs exceed standard costs. 3. Annual Budget – A budget prepared for a calendar or fiscal year. 4. Balanced Budget – A budget in which total expenditures equal total revenue. An entity has a budget surplus if expenditures are less than tax revenues. It has a budget deficit if expenditures are greater than tax revenues. 5. Break-even Analysis – Analysis that determines the break-even sales, which is the level of sales where total costs equal total revenue. 6. Budget – A quantitative plan of activities and programs expressed in terms of the assets, equities, revenues, and expenses that will be involved in carrying out the plans or in other quantitative terms, such as units of product or service. The budget expresses the organizational goals in terms of specific financial and operating objectives. 7. Budget Variance – 1. Any difference between a budgeted figure and an actual figure. 2. Flexible budget variance. This is the difference between actual factory overhead costs and standard (flexible budget) costs, multiplied by the standard units of activity allowed for actual production. The budget variance is used in the two-way analysis of factory overhead. It includes the fixed and variable spending variances and the variable overhead efficiency variance which are used in the three-way analysis. 8. Capital Budget – A budget or plan of proposed acquisitions and replacements of long-term assets and their financing. A capital budget is developed by using a variety of capital budgeting techniques, such as the payback method, the net present value (NPV) method, or the internal rate of return (IRR) method. 9. Cash Budget – A budget for cash planning and control, presenting expected cash inflow and outflow for a designated time period. The cash budget helps management keep cash balances in reasonable relationship to its needs. It aids in avoiding idle cash and possible cash shortages. 10. Contribution Margin (CM) Variance – The difference between actual contribution margin per unit and the budgeted contribution margin per unit, multiplied by the actual number of units sold. If the actual CM is greater than the budgeted CM per unit, a variance is favorable. Otherwise, it is unfavorable. CM variance = (actual CM per unit – budgeted CM per unit) x actual sales 11. Cost/Benefit Analysis – An analysis to determine whether the favorable results of an alternative are sufficient to justify the cost of taking that alternative. This analysis is widely used in connection with capital expenditure projects. 12. Direct Labor Budget
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This note was uploaded on 05/09/2011 for the course BUS 225 taught by Professor Guy during the Fall '09 term at Northeast State.

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Capital Budgeting Final Study Guide - Capital Budgeting...

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