U3

Answer
B.1. Strategic Planning A master budget documents specific short-term operating performance goals for a
period of time, normally one year or less. The plan generally includes an operating
Question (nonfinancial) budget as well as a financial budget.
Define a master budget.

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U3
Answer
B.1. Strategic Planning The five external forces identified by Porter that affect the competitive environment and
profitability of a firm are:
Question
List Porter's five external forces that affect the competitive environment and profitability Barriers to market entry
of a firm. Market competitiveness (intensity of competition)
Existence of substitutes
Bargaining power of the customers
Bargaining power of the suppliers

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U3
Answer
B.1. Strategic Planning The five basic competitive strategies are:

Question Cost leadership focused on a broad range of buyers

What are the five basic competitive strategies, and what do the main components mean? Cost leadership focused on a narrow range (niche) of buyers
Differentiation focused on a broad range of buyers
Differentiation focused on a narrow range (niche) of buyers
Best cost provider

Cost leadership: Lowest overall costs

Differentiation: Unique features that create loyalty/value
Best cost: Low cost leader among rivals and unique features

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U3
Answer
B.2. Budgeting Concepts Direct Materials (DM)
Direct Labor (DL)
Question Manufacturing Overhead (MO)
Name the three components of product cost and identify which of these components
are categorized as prime costs and conversion costs. Prime Cost = DM + DL
Conversion Costs = DL + MO

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U3
Answer
B.2. Budgeting Concepts Controllable margin represents the difference between the contribution margin
(Revenue – Variable costs) and controllable fixed costs (those costs that managers can
Question impact in less than one year).
Define controllable margin.

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U3
Answer
B.2. Budgeting Concepts Currently attainable standards represent costs that result from work performed by
employees with appropriate training and experience but without extraordinary effort.
Question
Define currently attainable standards.

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U3
Answer
B.2. Budgeting Concepts Ideal standards represent costs that result from perfect efficiency and effectiveness in
job performance.
Question
Define ideal standards.

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U3
Answer
B.3. Forecasting Techniques Linear regression is a method for studying the relationship between two or more
variables. Linear regression is used to predict the value of a dependent variable [e.g.,
Question total cost (y)] corresponding to given values of the independent variables [e.g., fixed
What is linear regression? costs (A), variable cost per unit (B), and production expressed in units (x)].

Simple regression involves only one independent variable.

Multiple regression involves more than one independent variable.

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U3
Answer
B.3. Forecasting Techniques Learning curve analysis is based on the premise that as workers become more familiar
with a specific task, the per-unit labor hours will decline as experience is gained and
Question production becomes more efficient.
Explain the concept of a learning curve.
The calculation begins with the first unit/batch. As cumulative production doubles (from
one unit to two units, to four units, to eight units, etc.), cumulative average time per unit
falls to a fixed percentage (the learning curve rate) of the previous average time.

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U3
Answer
B.3. Forecasting Techniques A flexible budget is a budget that can be adjusted to any activity level; it shows how
costs vary with production volume.
Question
Define flexible budget.
Fixed costs in total are constant over the relevant range of activity level.

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Answer
B.4. Budgeting Methodologies
Sales budget
Question Production budget
List the operating budgets included in the master budget. Direct materials budget
Direct labor budget
Overhead budget
Cost of goods sold budget
SG&A budget

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U3
Answer
B.4. Budgeting Methodologies
Cash budget
Question Pro forma financial statements
List the financial budgets included in the master budget.

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U3 Page 6 of 9
U3 B.5. Annual Profit Plan and Supporting Schedules: Part Answer
Revenue
1
Less: Variable costs
Question Contribution margin
What is the formula for the contribution approach? Less: Fixed costs
Net income

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U3 B.5. Annual Profit Plan and Supporting Schedules: Part Answer

1
Question
How is operating margin calculated?

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U3 B.5. Annual Profit Plan and Supporting Schedules: Part Answer

1 Units of direct materials needed for a production period

+ Desired ending inventory at the end of the period
Question – Beginning inventory at the start of the period
What is the equation for the direct materials purchases budget? = Units of direct materials to be purchased for the period
× Cost per unit
= Cost of direct materials to be purchased for the period (purchases at cost)

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U3 B.5. Annual Profit Plan and Supporting Schedules: Part Answer

Beginning inventory at cost
1
+ Purchases at cost
Question – Ending inventory at cost
What is the equation for the direct materials usage budget? = Direct materials usage (cost of materials used)

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U3 Page 8 of 9
U3 B.5. Annual Profit Plan and Supporting Schedules: Part Answer
Budgeted production (in units)
1
× Hours (or fractions of hours) required to produce each unit
Question = Total number of hours needed
What is the equation for the direct labor budget? × Hourly wage rate
= Total wages

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U3 B.5. Annual Profit Plan and Supporting Schedules: Part Answer

2 Cash available: consists of cash balances (cash on hand) and cash collections from
Question sales.
Explain the sections of the cash budget. Cash disbursements: cash outlays associated with purchases and operating
expenses.
Financing: primarily involves using a line of credit to maintain minimum cash
balances.

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