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information for comparison Flashcards

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1
Q

types of comparison (can be financial/non-financial)

A

previous periods, corresponding periods, budgets, forecasts

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2
Q

comparing actual results with other info helps to

A

put them in context + spot errors

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3
Q

most common comparison of a previous period

A

one year’s final figures are compared with the previous year’s

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4
Q

figures of comparisons with previous periods (this year+last year’s rev+exp) are useful to

A

shareholders

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5
Q

comparisons with previous periods are less useful to management accountants bc

A
  • insufficient
    so need reports of month by month/quarter
    However demand for many products fluctuates season-by-season
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6
Q

+ of comparisons of previous periods

A

last period’s info is usually readily available

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7
Q
  • of comparisons of previous periods
A

period lengths will normally not match- comparing current 3m with last 12m

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8
Q

corresponding period info

A

comparing result of 1/1/25 - 31/3/25 to that of 1/1/24 - 31/3/24
+: takes into account of any seasonal factors that may be relevant

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9
Q

why are budget comparisons popular

A

they show whether budget holders are achieving their targets

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10
Q

forecast/budget info

A

often used to set targets + compare current actual info with budget info- will give a feel for whether or not the org is on target to meet budget

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11
Q

comparison with other orgs

A

within sector/industry corresponding to size+location+market+demographics
judge performance on: market share, gross profit, overhead costs

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12
Q

purpose of making comparisons (between actual results+budgets)

A
  • control performance (management action to bring higher costs than expected down
  • judge manager’s performance- if budget not met then they’ve underperformed
  • correct+improve next time’s budget
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13
Q

purpose of making comparisons (between this year results+last year’s)

A
  • understand how performance might be improving/deteriorating,
  • judge manager’s performance,
  • identify unusual change as these could indicate accounting errors
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14
Q

Feedback control

A

an event requiring attention has already occurred
Example, sales in February were lower than budgeted. Therefore a correction is needed to try to bring sales for March back up to those budgeted

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15
Q

when do feedback+feed forward become possible

A

once budgets+forecasts have been established

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16
Q

Feed forward control

A

feed forward control the event has not yet occurred
Example, the cash flow budget predicts a cash shortage September. Therefore take action now to deal with that problem, perhaps by reducing expenditure or negotiating a larger overdraft.

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17
Q

fixed budget

A

drawn up for one level of activity only (10,000 units)

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18
Q

-ve of fixed budget

A

of limited comparative value if actual production+sales are vry diff to budget
so, some companies draw up in advance flexible budgets, at varying activity levels

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19
Q

flexible budget

A

drawn up in advance for several levels of activity. Often the levels chosen are where the behaviour of costs change and the flexible budgets make it easier to draft budgets at other levels of activity
(8000, 9000, 10000units)

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20
Q

+ve of flexible budgets
(range of possible forecasts)

A
  • range of possible forecasts make comparisons to actual results
  • more meaningful + facilitates creating additional budgets between two existing flexible budgets
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21
Q

flexed budget

A

drawn at the level of activity achieved
budget that is based on the actual level of activity, used for comparison purposes

when you adjust the budget in line for units produced

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22
Q

amounts that need to be flexed are those which vary with production volume: typically

A
  • raw material
  • variable labour
  • variable overheads (machine costs)

fixed costs are NOT flexed

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23
Q

variance

A

difference between actual and budgeted expenditure or income

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24
Q

Favourable variances

A

actual results > budgeted

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25
standard quantity:
the amount of material you need to make 1 unit of product e.g. direct materials to make a chair SQ would be 10kg of plastic
26
2 causes of materials cost variances
- diff in purchase price of materials - diff in quantity used
27
total materials variance:
materials price variance + materials usage variance
28
materials price variance
AQ(actual quantity used) x AP(actual price paid for materials) compare with AQ(actual quantity used) x SP(standard price paid for materials)
29
materials usage variance
AQ(actual quantity used) x SP(standard price paid for materials) compare with SQ(standard quantity used) x SP(standard price paid for materials)
30
to calc SQ
need to know how much based on actual output- you need to flex it to actual production /finished goods
31
2 causes of labour cost variances
- diff in rate paid (labour rate variance) - diff in hours worked (labour efficiency variance)
32
total labour variance
labour rate variance + labour efficiency variance relationship: high rates mean more efficient workers
33
calcs for total labour variance
AQ(actual rate in hours) x AP(actual efficiency) compare with AQ(actual rate in hours) x SP(standard efficiency) compare with SQ(standard rate in hours) x SP(standard efficiency)
34
2 causes of sales cost variances
- diff in selling price (sales price variance) - diff in sales volume (sales volume variance)
35
total sales variance
sales price variance + sales volume variance
36
selling price variance
(Actual price - Budgeted price) x Actual unit sales
37
sales volume variance
(Actual units sold - Budgeted units sold) x Budgeted price per unit
38
reasons for cost variance
- Material cost (changes in material prices or amounts used- due to price fluctuations from suppliers, changes in process, or more efficient/inefficient workers) - Labor Cost (Variances arise from wage rate differences or productivity levels. Causes can include negotiations, workforce efficiency, or poor supervision) - Sales Variances (Differences in prices and volumes sold compared to budgeted expectations. Causes include market changes, competitor actions, or economic conditions)
39
Exception reporting
focuses on significant deviations from budget or forecast. If results align with the budget, no action is needed. However, large variances indicate the need for management attention. For example, if sales are under budget, management may adjust advertising or pricing. Large variances demand investigation and may trigger corrective actions
40
Decision to investigate or otherwise depends on whether the variance is
- Controllable : can be rectified by Managers, or - Uncontrollable: due to external factor beyond the Managers’ control
41
influences on whether or not to investigate variance
- cost v benefit - size of variance - sign of variance - likelihood that variance can be controlled - natural variability
42
Budgets
financial plans showing income and costs for a period
43
organisation's vision statement
sets out what it would like to achieve
44
objectives
measurable steps towards achieving goals
45
Goals
general statements of what the organisation wants to do to achieve its vision
46
Action plans
detailed plans to **achieve objectives** and the resources required
47
Budgeting relies on the principal budget factor
element that limits the activities of the organisation
48
Some comparators are
budget, forecast, corresponding period, or previous period
49
Exception reporting
ensures that managers only get the information they need to act on by reporting the significant variances
50
essential to consider whether a variance is controllable or non-controllable
manager can correct controllable variances, but factors beyond the manager’s control cause non-controllable variances
51
Feedback control
compares actual results with relevant control data, analyses the variances, and acts to bring future results into line with the plan. Feedback action occurs after something has gone wrong, and a variance has already happened
52
Feed-forward control
compares budget figures with forecasts to inform managers where expected future variances are likely to occur. - allows them to act to prevent an adverse variance in the future
53
material price/cost variance
AQ AP AQ SP (price variance) SQ SP (usage variance)
54
inter-relationship between variances:
when a cost or sales variance is caused by another cost or sales variance
55
variances can be interdependent
single factor affecting more than one variance (a) Buying a better quality of material may increase the cost of materials due to its higher price, but usage of the material may be improved as there is less wastage. It could also decrease the labour cost for a given level of production as fewer hours may be needed to process the material if it is easier to work with, or fewer rejects are produced. (b) Using unskilled labour rather than skilled labour for a particular task may cut the cost of labour in terms of rate of pay, but they may take longer to complete the job which will increase the labour cost again. Unskilled workers may also use more material than skilled labour, causing an adverse material variance.
56
hospital decides to cut costs by reducing the number of cleaners employed by 10%. This results in a favourable variance in the budget reports. Is it good for the hospital? Helping hand. Think of any other impacts a drop in a number of cleaners might have.
Helping hand. This illustrates not only the importance of non-financial objectives, but also how failure to meet non-financial objectives may impact upon financial objectives. This is only good if the necessary standards of cleanliness can be maintained. If they can be, then there were probably too many cleaners before. If standards fall, there will be other effects (like more patient infections) which will cost more in the long term and damage the chief goal of improving health
57
A flexible budget is a budget which recognises different cost behaviour patterns and is designed to change as volume of activity changes.
 A flexible budget is designed at the planning stage to vary with activity levels. A flexed budget is a revised budget that reflects the actual activity levels achieved in the budget period.
58
A budget is expressed in monetary terms. Is this true or false?
organisation's plan expressed in monetary terms
59
flexed budgets used when
actual production level diff from original budget
60
adverse variances are not always BAD favourable variances are not always GOOD
61
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