501. Conversely, if there is a cash excess during any budget period that is greater than the minimum required cash balance, the company can invest the excess funds or repay principal and interest to lenders.502. This occurs because, unless stated otherwise, we always assume that the company will, as far as it is able, repay the loan plus accumulated interest on the last day of the final period included in the cash budget.503. Once the sales budget has been set, the production budget and the selling and administrative expense budget can be prepared because they depend on how many units are to be sold.504. The significant variances are investigated so that their root causes can be either replicated or eliminated.505. The emphasis should be on highlighting superior and unsatisfactory results, finding the root causes of these outcomes, and then replicating the sources of superior achievement and eliminating the sources of unsatisfactory performance.506. This approach enables managers to focus on the most important variances while bypassing trivial discrepancies between the budget and actual results.507. On the other hand, a variance of 10% of spending is much more likely to be a signal that something is wrong.508. When a flexible budget is used in performance evaluation, actual costs are compared to what the costs should have been for the actual level of activity during the period rather than to the static planning budget.509. Therefore, the differences between the flexible budget and the planning budget show what should have happened solely because the actual level of activity differed from what had been expected.510. For reasons such as this, we would like to caution you against assuming that unfavorable variances always indicate bad performance and favorable variances always indicate good performance.511. The short answer is: Because of the presence of fixed costs. When we apply the 10% increase to the budgeted net operating income to estimate the profit at the higher level of activity, we implicitly assume that the revenues and all of the costs increase by 10%. But they do not.512. Note that when the activity level increases by 10%, three of the costs—rent, liability insurance, and employee health insurance—do not increase at all.513. Because of the existence of fixed costs, net operating income does not change in proportion to changes in the level of activity.514. If actual revenue exceeds what the revenue should have been, the variance is labeled favorable. If actual revenue is less than what the revenue should have been, the variance is labeled unfavorable.515. Consequently, the cost formula for electricity would be more accurate if it were stated in terms of both the number of client visits and the hours of operation rather than just in terms of the number of client-visits.516. In this chapter, we learn how to use standard costs to decompose spending variances into two parts—a part that measures how well the acquisition prices of resources were controlled and a part that measures how efficiently those resources were used.517. If either the quantity or acquisition price of an input departs significantly from the standard, managers investigate the discrepancy to find the cause of the problem and eliminate it.518. I’m afraid I can’t provide the answers off the top of my head, but if you give me about a week I can set up a system that can routinely answer questions relating to worker productivity, material waste, and input prices.519. Therefore, it is important to clearly distinguish between deviations from price standards (the responsibility of the purchasing manager) and deviations from quantity standards (the responsibility of the production manager).520. Many factors influence materials purchase prices including the quantity and quality of materials purchased, the number of purchase orders placed with suppliers, how the purchased materials are delivered, and whether the materials are purchased in a rush order.
