Budgeting and Costing Principles

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Questions and Answers

What is a primary difference between absorption costing and variable costing?

Variable costing includes fixed manufacturing costs in inventory.
Absorption costing only accounts for direct materials in product costs.
Variable costing provides a more comprehensive view of company performance.
Absorption costing includes fixed manufacturing costs in inventory. (correct)

In preparing a production budget, which of the following formulas is correct for determining desired production?

Desired Production = (Sales + Desired Ending Inventory) x Beginning Inventory.
Desired Production = Total Sales - Desired Ending Inventory.
Desired Production = Sales + Desired Ending Inventory - Beginning Inventory. (correct)
Desired Production = Sales - Beginning Inventory + Total Sales.

What is the role of a cash budget in the budgeting process?

It projects the direct materials purchases needed for production.
It summarizes overall sales figures for each department.
It lists the production costs and reconciles actual and budgeted expenses.
It summarizes the cash effects of all other budgets to determine borrowing needs. (correct)

Which statement accurately describes segment reporting?

It presents information that helps evaluate the performance of individual segments. (B) Signup and view all the answers

What is the first step in the budgeting process according to typical practices?

Sales budget. (D) Signup and view all the answers

What is the primary advantage of using a flexible budget over a static budget?

It adjusts budget items based on actual activity levels. (D) Signup and view all the answers

What are activity variances primarily concerned with?

Analyzing differences in costs associated with different activity levels. (D) Signup and view all the answers

Which type of variance would involve comparing actual spending to budgeted spending?

Spending variances (C) Signup and view all the answers

What is a significant limitation of static budgets?

They do not consider changes in external economic conditions. (D) Signup and view all the answers

How does revenue variance differ from spending variance?

Revenue variance focuses on income, while spending variance focuses on expenses. (D) Signup and view all the answers

Flashcards

Absorption vs. Variable Costing

Different methods of assigning costs to products, affecting reported income under different accounting methods. Absorption costing includes all manufacturing overhead, but variable costing only includes variable manufacturing overhead in the product cost.

Reconciling Absorption and Variable Costing

Adjusting the difference between Absorption costing and Variable costing income statements, often due to fixed manufacturing overhead treated as a period cost in variable costing.

Segment Margin

Profit of a segment after deducting its traceable fixed costs, showing profitability of that individual segment.

Production Budget

A budget that determines the number of units to produce based on forecasted sales and desired inventory levels.