Planning, Performance, and Control
Domain 2 - Planning, Performance, and Control. This section tests the master budget sequence, forecasting techniques, flexible budgets, variance analysis, responsibility accounting, transfer pricing and the balanced scorecard. Most items are computational and hinge on getting the operating budget ordering right before any variance is calculated.
Core rules
- Master budget order: sales budget, production budget, direct materials purchases, direct labour, manufacturing overhead, ending inventory and cost of goods sold, cash budget, then budgeted statements.
- Production units = sales units + desired ending finished goods − beginning finished goods.
- Materials purchases = production usage + desired ending raw materials − beginning raw materials.
- Variances: static budget variance splits into a flexible budget variance (price and efficiency) and a sales-volume variance. Controllable variances belong to the manager who influences them.
- Balanced scorecard balances financial, customer, internal process, and learning and growth measures; lagging and leading indicators are paired.
Worked example
Budgeted sales are 10,000 units, beginning finished goods 1,500, ending finished goods 2,000. Production = 10,000 + 2,000 − 1,500 = 10,500 units. Each unit needs 3 kg at $5. Beginning raw materials 2,500 kg, desired ending 4,000 kg. Usage = 31,500 kg; purchases = 31,500 + 4,000 − 2,500 = 33,000 kg, or $165,000. If actual usage were 32,000 kg for 10,400 units, standard quantity allowed is 31,200 kg, so the usage variance is (32,000 − 31,200) × $5 = $4,000 unfavourable.
Traps
- Reversing beginning and ending inventory in the production or purchases budget.
- Including depreciation in the cash budget - it is a non-cash charge.
- Assuming every favourable variance is good; cheap material bought at a favourable price often produces an unfavourable usage variance.
- Evaluating cost control against the static budget instead of the flexible budget.