Budget: detailed plan for the future that is usually expressed in formal quantitative terms.
Planning: developing goals and preparing various budgets to achieve those goals.
Control: involves gathering feedback to ensure that the plan is being properly executed or modified as
circumstances change.
Responsibility accounting: a manager should be held responsible only for items that the manager can
control to a significant extent.
Continuous/Perpetual budget: 12-month budget that rolls forward one month (or quarter) as the
current month (or quarter) is completed
Self-imposed/Participative budget: budget that is prepared with the full cooperation and participation
of managers at all levels.
Budget committee: usually responsible for overall policy relating to the budget program and for
coordinating the preparation of the budget itself.
Master budget: consists of a number of separate but interdependent budgets that formally lay out the
company’s sales, production, and financial goals.
1. Sales budget: detailed schedule showing the expected sales for the budget period.
2. Production budget: lists the number of units that must be produced to satisfy sales needs and
to provide for the desired inventory.
Merchandise purchases budget (If not manufacturing): Amount of goods to be purchased from
suppliers during the period.
3. Direct materials budget: Details the raw materials that must be purchased to fulfill the
production budget and to provide for adequate inventories.
4. Direct labor budget: shows the direct labor-hours required to satisfy the production budget.
5. Manufacturing overhead budget: lists all costs of production other than direct materials and
direct labor.
6. An ending finished goods inventory budget: budget that helps determine cost of unsold units
7. Selling and administrative expense budget: lists budgeted expenses for areas other than
manufacturing.
8. Cash budget: detailed plan showing how cash resources will be acquired and used.
9. Budgeted income statement
10. Budget balance sheet
Planning budget: prepared before the period begins and is valid for only the planned level of activity.
Flexible budget: an estimate of what revenues and costs should have been, given the actual level of
activity for the period.
Activity variances: difference in the level of activity between the planning budget from the beginning of
the period and the actual level of activity.
Revenue variance: difference between what the total revenue should have been, given the actual level
of activity for the period, and the actual total revenue. (F Actual > Flexible, U if Actual < Flexible)
Spending variance: difference between how much a cost should have been, given the actual level of
activity and the total amount of the cost (F Actual < Flexible, U if Actual > Flexible)
Management by exception: investigate discrepancy to find the cause of the problem and eliminate it.
Ideal standards: Attainable only under the best circumstances.
Practical standards: Tight but attainable.
Standard price per unit: reflects the final, delivered cost of the materials
Standard quantity per unit: reflects the amount of material required for each unit of finished product as
well as an allowance for unavoidable waste.
Standard rate per hour: for direct labor includes hourly wages, employment taxes, and fringe benefits.
Standard hours per unit: the direct labor time required to complete a unit of product.
Standard cost per unit: for variable manufacturing overhead is computed the same way as for direct
materials or direct labor.
Quantity variance: the difference between how much of an input was actually used and how much
should have been used and is stated in dollar terms using the standard price of the input.
Price variance: the difference between the actual price of an input and its standard price, multiplied by
the actual amount of the input purchased.
Standard quantity allowed/ Standard hours allowed: amount of an input that should have been used to
produce the actual output of the period.
Quantity Variance: AQ X SP – SQ X SP = SP (AQ – SQ)
Price Variance: AQ X AP – AQ X SP = AQ (AP – SP)
Spending Variance: AQ X AP – SQ X SP
Would be unfavorable if the amount that was actually spent exceeded the amount that should have
been spent.
Materials quantity variance: measures the difference between the quantity of materials used in
production and the quantity that should have been used according to the standard.
Materials price variance: measures the difference between what is paid for a given quantity of materials
and what should have been paid according to the standard.
Labor efficiency variance: measures the productivity of direct labor. Widely believed that increasing
direct labor productivity is vital to reducing costs.
Labor efficiency variance = (AH X SR) – (SH X SR) = SR(AH – SH)
Labor rate variance: price variance for direct labor
Labor rate variance = (AH X AR) – (AH X SR) = AH (AR – SR)
Variable overhead efficiency variance = (AH X SR) – (SH X SR) = SR (AH – SH)
Variable overhead rate variance = (AH X AR) – (AH X SR) = AH (AR – SR)
Decentralized organization: decision making authority is spread throughout the organization rather
than being confined to a few top executives.
Responsibility center: For any part of an organization whose manager has control over and is
accountable for cost, profit, or investments.
Cost center: has control over costs, but not over revenue or the use of investment funds.
Profit center: has control over both goods and revenue, but not over the use of investment funds.
Investment center: has control over cost, revenue, and investments in operating assets.
Return on investment (ROI): defined as net operating income divided by average operating assets.
ROI = Net operating income/Average operating assets
Net operating income: income before interest and taxes and is sometimes referred to as EBIT
Operating assets: include cash, accounts receivable, inventory, plant and equipment, and all other
assets held for operating purposes.
ROI = Margin X Turnover
Margin = Net operating income/Sales
Turnover = Sales/Average operating assets
ROI = Net Operating Income / Sales * Sales / Average operating assets
Residual income: net operating income that an investment center earns above the minimum required
return on its operating assets.
Economic Value Added (EVA*): adaptation of residual income that has been adopted by many
companies.
Delivery cycle time: the amount of time from when a customer order is received to when the completed
order is shipped.
Throughput time (Manufacturing cycle time): amount of time required to turn raw materials into
completed products.
Manufacturing cycle efficiency (MCE): relates the value-added time to the throughput time.
MCE = Value-added time (process time) / Throughput (manufacturing cycle) time
Balanced scorecard: consists of an integrated set of performance measures that nare derived from and
support a company’s strategy.