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Cost Accounting Test 3
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Terms in this set (21)
What is a budget?
A quantititavie expression of a proposed plan to carry out planned selling and production activity during a specific time and a tool to estimate financial outcomes.
What is the master budget?
A budget that generally covers a one year span of time. It is short -range profit plan of operating and financing decisions.
Compare and contrast long-term and short-term budgets?
Long-term budgets should reflect strategic plans but are generally less detailed.
Short-run budgets reflect operating plans and include details about day-to day operations.
What are the objectives of a budgeting system?
1. Budgets promote coordination and communication
2. Provide a framework to evaluate performance
3. Can be used to motivate employees.
4. Foster planning of operations
When are budgets most useful?
Administrator: When they:
1. Promote coordination and communication
2. Provide a framework to evaluate performance
3. Can be used to motivate employees.
What are some challenges associated with standard budgeting systems?
1) Uncertaintly in making annual forecast estomates
2) Requires a substantion almount of time
3) May include budgetary slack - biased communication
4) Can motivate managers to make harmful decisions
5) Predicted sale and cost can change rapidly
What are some companies doing to address these challenges?
Eliminate slack through using benchmarks or other estimation mathods
More frequent budgeting with shorter time periods uses time and effort to focus on estimates that have higher certainty.
Reward people for higher and more accurate forecasts.
Is there an order to the budgeting process?
Yes, It starts with a sales/revenue forecast. See 190 for the rest of the order of budgets.
Describe each of different methods used to determine sales?
Sales staff - most common because they are most knowledgeable
market researchers - outside companies whose job is to forecast sales.
Delphi technique - group forecasting that begins with anonymous individual forecasts
Trend analysis - looks at trends over time
econometric models - regression model that consider multiple possible factors
What is participative budgeting and why is it useful?
Budgeting process that obtains inputs from all levels of employees. While it is costly and time consuming, it enhances employee acceptance of goals and increases motivation to achieve goals. It can also yield information that employees know but managers do not, so it can be more accurate.
What types of financial statements results from the budgeting process?
Budgeted financial statements, also called pro-forma statements, include balance sheets, statement
How can sensitivity analaysis be used in planning?
Sensitivity analysis of our static budget can be used if we have a range of expectations about sales volume or about certain costs. It allow us to see how operating income will change at different levels of sales volume and expected costs.
Name 5 methods of determining a cost function
1. Account Analysis method
2. Engineering Method
3. High-Low Analysis
4. Regression Analysis
5. Conference Method
Why do we want to estimate a cost function?
1. We can use cost functions to estimate future costs.
2. We can use cost functions to determine the usefulness of a possible cost driver.
What 2 assumptions are used in estimating cost functions?
1. Variations in a single activity (cost driver) explains the variation in costs.
2. Within the relevant range of the activity, cost behavior is linear.
How should the intercept of a cost function be interpreted?
The intercept represents the fixed cost associated with operating in the relevant range.
Discuss the advantages and disadvantages of the high-low and regression methods for estimating a cost function.
1. Both are quite simple.
2. High-low only requires 2 data points. Regression requires more than two data points. The more data points, the better regression works.
3. The quality of high-low estimates are limited because they only use 2 data points. Regression uses all of the data points available. Again, the more data point there are, the better the regression results will be.
4. Regression results can be used to select between two potential cost drivers. Doing this with the high-low method may not be accurate because only a few data points are used.
In the high-low method, which data points should be used?
The highest and lowest level of activity. These points define the relevant range of the cost function.
In regression analysis, how do we assess the overall quality of the equation for predicting cost?
We can use
1. The coefficient of correlation, r
2. Coefficient of determination , R-square
3. Standard error of regression
When using either coefficient, the closer the number is to one, the better.
The coefficient of determination is the square of the coefficient of determination. An added advantage of using the coefficient of determination is that the number represents the percent of cost variance that is explained by the change in cost driver.
Alternatively you could use standard error or regression which, shows on average how far your estimation might be in error. The smaller the number the better.
In regression analysis, how do we assess whether the cost driver is significantly influencing the costs?
We can use
1. t-stat
2. P-value
3. standard error of the coefficient
The higher the t-stat the better. The lower the p-value the better. The lower the standard error of the coefficient the better.
What is a static budget?
A static budget is a budget developed at the beginning of some period of time based on input standards, price standards, and expected sales and production volume.
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