Chapter 8 & 9

Nota, Oscar C. Jr. CHAPTER 3 (page 142)

(8-1) What is static planning budget?

 Static planning budget is an amount that the company expects to incur at a particular level of
activity.

(8-2) What is a flexible budget and how does it differ from a static planning budget?

 A flexible budget is a report showing estimates of what revenues and cost should have been
given the actual level of activity for a period. A flexible can be modified to get estimated cost for
the actual level of activity.

(8-3) What are some of the possible reasons that actual results may differ from what had been
budgeted at the beginning of a period?

 Untrained workers
 Excessive waste
 Paying for a higher price
 Change in technology
 Weak supervision
 Loose internal control
(8-4) Why is it difficult to interpret a difference between how much expense was budgeted and
how much was actually spent?

 The reason behind this is because the planned costs/expenses and actual costs incurred are not
the same in terms of the level of activity.
 The difference between the budget and actual results may be due to the level of activity that
impact costs. From a manager's perspective, a variance that is due to a change in activity is very
different from a variance that is due to changes in prices and changes in how effectively
resources are managed. A variance of the first kind requires very different actions from a
variance of the second kind. Consequently, these two kinds of variances should be clearly
separated from each other.

(8-5) What is a revenue variance and what does it mean?

 Revenue variance is the difference between the budgeted and actual revenue. This is the
difference between how much the revenue should have been, given the actual level of activity
and the actual revenue earned.
(8-6) What is a spending variance and what does it mean?

 Spending variance is the difference between the budgeted and the actual expenses. This is the
difference between how much the cost should have been, given the actual level of activity and
the actual cost incurred.

(8-7) What does a flexible budget performance report do that a simple comparison of budgeted to
actual results does not do?
 Flexible budget improves the accuracy because it can be modified to compare the
budgeted and actual cost incurred in the same level of activity.
 The flexible budget performance report cleanly separates the differences
between the static planning budget and the actual results that are due to
changes in activity (the activity variances) from the differences that are due to
changes in prices and the effectiveness with which resources are managed (the
revenue and spending variances

(8-8) How does a flexible budget based on two cost drivers differ from a flexible budget based on a
single cost driver?
 The flexible budget based on a single cost driver and the one based on two cost drivers differ
only in the cost formulas. When two cost drivers exist, some costs may be a function of the first
cost driver, some costs may be a function of the second cost driver, and some costs may be a
function of both cost drivers.

(8-9) What is a quantity standard?

 A quantity standard is the ideal quantity in making an output. It is set to determine whether the
production is within the ideal production. It is the amount set forth by the company which must
be incurred when buying materials needed for production

What is a price standard?

 Price standard is the price that should be paid for materials at a given level of activity.

(8-10) Why are separate price and quantity variances computed?

 Separating the price and quantity variances identifies which causes variances to be favorable or
unfavorable, this is a tool which is very useful in seeing if costs were too high or if too much
materials were used this determines which is responsible for the deviations, and is done in order
to eliminate problems and take immediate actions concerning the discrepancies.

(8-11) Who is generally responsible for the materials price variance? The materials quantity variance?
The labor efficiency variance?

 The purchasing manager is the responsible for thr material price variance, and for the
production manager for the material quantity variance, but both or either of them may be held
responsible for the labor efficiency variance.
(8-12) The materials price variance van be computed at what two different points in time? Which
point is better? Why?

 The materials price variance can be computed when materials are purchased or when
these materials are placed into production,the variance is better computed when
materials are purchased because during his point in time, the purchasing manager, the
one having the responsibility for this variance, has already completed his or her work.
This also simplifies bookkeeping because it allows the company to carry its raw material
inventory at standard cost.

(8-13) If the materials price variance is favorable but the materials quantity variance is unfavorable,
what might this indicate?
 This may indicate that the company purchased a low-quality materials at a price which is
discounted but these materials created production problems.
(8-14) “Our workers are all under labor contracts; therefore, our labor rate variance is bound to be
zero." Discuss.
 The fact that the company are in labor contract, the hourly rate/labor rate is already determined
and will be set as standard, therefore no labor effiency will arise.
(8-15) What effect, if any, would be expect poor-quality materials to have on direct labor variances
 Poor quality materials would not ordinarily affect the labor rate variance, these only result to
excessive labor time and therefore an unfavorable labor efficiency variance.

(8-16) If variable manufacturing overhead is applied to production on the basis of direct labor-hours
and the direct labor efficiency variance is unfavorable, will the variable overhead efficiency
variance be favorable or unfavorable, or could it be either? Explain.
 Since the basis for the computation of the direct labor efficiency variance and variable overhead
efficiency variance are the same, there will be an unfavorable variable effiency variance.

(8-17) Why can undue emphasis on labor efficiency variances lead to excess work in process
inventories?
 This is due to the reason that excessive unfinished goods will result if labor effiency variance is
highly unfavorable, if the standard’s quality of work is better than that of the actual, then
unfinished goods will arise.
 CHAPTER 9
(9-1) What is meant by the term decentralization?
 Decentralization spreads decision-making authority across an entire organization, rather
than being confined to a few top executives.
(9-2) What benefits result from decentralization?
 It enables top management to concentrate on strategy, higher-level decision-making, and
coordinating activities.
 It often increases motivation, resulting in increased job satisfaction and retention, as well
as improved performance.
 It acknowledges that lower-level managers have more detailed information about local
conditions that enable them to make better operational decisions.
 It provides lower-level managers with the decision-making experience they will need when
promoted to higher level positions.
 It enables lower-level managers to quickly respond to customers.

(9-3) Distinguish between a cost center, a profit center, and an investment center.

 Managers of cost centers (Service departments such as accounting and finance are generally
considered cost centers) have control over costs alone, but not over revenue or use of
investments funds. Managers of profit centers have control over costs and profits, but not over
investments (similar to the likes of a manager at an amusement park). Investment center
managers, on the other hand, have control over costs, profits and investments in operating
assets, such as the vice president of general motors in North America.

(9-4) What is meant by the terms margin and turnover in ROI calculations?

 Margin is net operating income divided by sales, and is ordinarily improved by increasing selling
price, reducing operating expenses, or increasing unit sales.
 Turnover is sales divided by average operating assets. If excess funds are tied up in operating
asset investments, it will depress turnover, and result in a lower ROI.

(9-5) What is meant by residual income?

 Residual income is the net operating income that an investment center earns above the
minimum required rate of return on operating assets. It measures the net operating income
earned less the minimum required rate of return on average operating assets, where as ROI
measures income relative to investment in operating assets.

(9-6) In what way can the use of ROI as a performance measure for investment centers lead to bad
decisions? How does the residual income approach overcome this problem?

 If ROI is used to evaluate performance, a profitable investment opportunity whose rate of

return exceeds the company's required rate of return but whose rate of return is less than the
investment center's current ROI. managers of an investment center may reject The residual
income approach overcomes this problem because any project whose rate of return exceeds the
company's minimum required rate of return will result in an increase in residual income.
(9-7) What is the difference between delivery cycle time and throughput time? What four elements
make up throughput time? What elements of throughput time are value-added and what elements are
non-value added?

 The difference between delivery cycle time and throughput time is the waiting period between
when an order is received and when production on the order is started.
 The 4 elements of Throughput time are the following:
(VALUE-ADDED)
1. Process time

(NON-VALUE ADDED)

2. Inspectiom time
3. Move time
4. Queue time

(9-8) What does a manufacturing cycle efficiency of less than 1 mean? How would you interpret an MCE
of .40?

 MCE OF LESS THAN 1 means that the production process includes non-value added time.
 An MCE of ( .40) for example, means that 40% of the throughput time consists of actual
processing, and that the other 60% consists of moving, inspection, and other non-value-added
activities.

(9-9) Why do the measures used in a balanced scorecard differ from company to company?

 A company's balanced scorecard should be derived from and support its strategy, the reason
why measures used in a balanced scorecard differ from company to company is because
different companies have different strategies, therefore, their balanced scorecards should be
different.

(9-10) Why does the balanced scorecard include financial performance measures as well as measures of
how well internal business processes are doing?

 The purpose of thr balanced scorecard is to support the company's strategy, which is a theory
about what actions will further the company's goals. Assuming that the company has financial
goals, measures of financial performance must be included in the balanced scorecard as a check
on the reality of the theory. If the internal business processes improve, but the financial
outcomes do not improve, the theory may be flawed and therefore, the strategy should be
changed.