ACT 220 1st EditionFinal Exam Study Guide Chapters: 7,8,9 & 10Chapter 7: Budgeting for Planning and Control What are Budgets?  Budgets are plans for the future (involves time, money, and other resources) Communicates long-term and short-term goals to employees and stakeholders Used to facilitate planning and control functions within a business (see below)What are the Purposes of Budgets within a business? Formalize managements’ plans in quantitative terms Expresses management’s plans for coming periods Increases motivation to achieve stated goals Causes mangers to anticipate result, and to act to correct poor results What are some Benefits Budgets give businesses? Employees are more cost-conscious (they are aware of the budget so they conserve resources) Business better coordinates activities Communication of plans (managers become aware of other manager’s plans) Facilitates review and revision of plans (when needed) Develops more visionary management (visions that might not have been there without budget) Management by exception (devote attention to results that have deviated from plan levels)Define a Master Budget (HINT: name the smaller budgets used in the master budget). A master budget consists of a projected income statement and a projected balance sheet showing the organization’s objectives and proposed ways of attaining them. The process begins with management’s plans and objectives for the next period. Below are the smaller budgets that make up the entire master budgetWhat is included in the Sales Forecast/ Sales Budget? The sales budget should be prepared first in units and then in dollars.What is included in the Production Budget? Set after the sales budget is completed. The level of demand during each period must beweighed against the advantage of a steady level of production when setting production levels. Subdivided into budgets for materials, labor, and manufacturing overhead. Some of these elements will vary with production within a given relevant range of production. Stated in units, and the effects on inventory levels should be analyzed and stated in dollars. Includes the Budgets for:o Direct Materials Budgeto Direct Labor Budgeto Overhead BudgetWhat is included in the Selling and Administrative Budget? Prepared in the same manner as production budgets.What is included in the Cash Receipts? An estimate of the amount and timing of cash inflows and outflows for the budget period.o Collections and cash payments from sales and purchased materialsWhat is included in the Summary of Cash Budget? An estimate of the amount and timing of cash inflows and outflows for the budget period Cash collections from sales Cash payments for purchases of materials Other cash collections and paymentsChapter 8: Control Through Standard CostsExplain the estimated measures commonly referred to as standards. Also, explain the type different types of standard costs we refer to in this chapter. Standard Costs: Carefully predetermined amounts used for planning labor, material, and OH requirements, as well as, expected level of performance (measures performance)o Ideal Standards: Based on perfection and therefore are typically unattainable (theses standards discourage employees)o Practical Standards: Set at levels that are currently attainable with reasonable and sufficient effort (“tight but attainable”)How do you compute standard costs per unit? Sum together the amounts of direct materials, direct labor, and variable OH on a per unitbasis List some of the advantages and disadvantages of standard costs within a business. Advantages of Standard Costs (4): Improved cost control and performance evaluation, better information for planning and decision-making, reduced production costs and record keeping, and reasonable inventory measurements AND allows us to create various budgets at various levels (i.e. flexible budgets) Disadvantages of Standard Costs (3): Emphasis on negative aspects has a negative impact on morale, difficult to determine which variances are significant, and emphasis on negative exceptions may lead to under-reportingWe can use standards for control purposes by computing variances. Define variance analysis and why actual results differ from the budget amounts. Also, how does this term related to management by exception? Variance Analysis:o It can pinpoint causes of various problems and also help create a solution to fix these issueso Trigger investigations in a specific department who incurred the cost from a givenmistakeo Management by Exception: refers to the tactic managers us to only evaluate the most significant variances Explain the 6 different variances we use in this class. In other words, explain what each variance determines. Also, explain how to determine if the variance is favorable or unfavorable (equations will be given for the exam). Direct Material (DM) and Direct Labor (DL) Variances: These ask whether we paid/used more or less than expectedo Materials Price Variance: AP and SP are on a per unit basis A negative value means it is favorable and vice versa (see first bullet for reasoning) = (Actual Price – Standard Price)* Actual Quantity Purchasedo Materials Usage Variance:  A negative value means it is favorable and vice versa (see first bullet for reasoning) = (Act. Quan. Used – Std. Quan. Allowed) * Standard Priceo Labor Rate Variance:  A negative value means it is favorable and vice versa (see first bullet for reasoning) = (Act. Rate – Std. Rate) * Actual Hours Worked o Labor Efficiency Variance:  A negative value means it is favorable and vice versa (see first bullet for reasoning) = (Act. Hours Worked – Std. Hours Worked) * Standard Rate Overhead Variances: These are considered to remain constant, as production increases/ decreases this number will vary o Overhead Budget Variance: Shows how OH services were purchased and how efficiently they were used (both fixed and variable costs); Budgeted OH is calculated by multiply actual hours (or measurement) of direct labor and the standard rate of direct labor hours  A negative value means it is favorable and vice versa (see first bullet for reasoning) = (Actual Overhead – Budgeted Overhead)o Overhead Volume Variance: Cause by producing at a level other than the one used for computing the standard OH rate (relates only to fixed costs); Applied OHis