Study "MANAGERIAL ACCOUNTING", a flashcard deck on FORKSAI.
Define budgetary control.
Budgetary control is the process of comparing actual results to budgeted results to evaluate performance. It helps organizations monitor and manage their financial activities effectively.
What is a static budget?
A static budget is based on one fixed level of activity and does not change, even if actual activity differs. It provides a benchmark for performance but may not be suitable for evaluating performance when activity levels vary.
How does a flexible budget differ from a static budget?
A flexible budget adjusts based on actual activity levels, recalculating costs using actual output and separating variable and fixed costs. In contrast, a static budget remains fixed regardless of the actual activity level.
A company budgeted 10,000 units for production with a variable cost of $5 per unit and fixed costs of $20,000. If actual production was 12,000 units, what would be the total budgeted cost under a flexible budget?
Under a flexible budget, the variable cost would be $5 * 12,000 units = $60,000. The fixed costs remain $20,000. Therefore, the total budgeted cost would be $60,000 + $20,000 = $80,000.
What is the primary purpose of responsibility accounting?
Responsibility accounting assigns revenues and costs to managers who are responsible for them. This system helps to evaluate the performance of individual managers and their respective segments of the organization.
Distinguish between a cost center and a profit center.
A cost center is a segment of an organization whose manager is responsible only for costs. A profit center, on the other hand, is a segment whose manager is responsible for both revenues and costs.
What key measures are used to evaluate performance in investment centers?
Key measures used to evaluate performance in investment centers include Return on Investment (ROI) and Residual Income. These metrics help assess how effectively managers are using assets to generate profits.
Calculate the Return on Investment (ROI) for an investment center with operating income of $150,000 and average operating assets of $1,000,000.
ROI is calculated as Operating Income ÷ Average Operating Assets. So, ROI = $150,000 ÷ $1,000,000 = 0.15 or 15%. This indicates the percentage return generated on the assets employed.
Why is a flexible budget considered more accurate for performance evaluation than a static budget?
A flexible budget is more accurate because it adjusts for actual activity levels, providing a 'like-for-like' comparison. It separates variable and fixed costs, allowing for a fair evaluation of how well managers controlled costs given the actual output.
A department's static budget showed $50,000 for supplies at 5,000 units. The variable cost for supplies is $8 per unit. If actual activity was 6,000 units, what would be the flexible budget amount for supplies?
First, find the fixed cost: $50,000 (total) - ($8/unit * 5,000 units) = $50,000 - $40,000 = $10,000 (fixed). For 6,000 units, the flexible budget for supplies would be ($8/unit * 6,000 units) + $10,000 = $48,000 + $10,000 = $58,000.