acct exam 3

Question 1

Responsibility centers

Answer 1

-Investment center
-Cost Center
-Profit Center

Question 2

Investment center

Answer 2

-division keeps their eye on invested capital
-evaluate using Return on investment or residual income

Question 3

Return on investment

Answer 3

-income/investment
-large ROI is good
-in form of percentage
-sales margin x capital turnover
-good if it is at LEAST their current ROI
-goal congruence

Question 4

goal congruence

Answer 4

-a division might do something that is in their best interest, but not the best interest of the company
-goal congruence for a division if it is denying something that is bad for them BUT good for company (vice versa) (look at RI)

Question 5

Sales margin

Answer 5

-measures the operating income earned on every $1 of sales
-income/sales
-measure of profitability
-larger is better

Question 6

Capital turnover

Answer 6

-measures the sales generated on every $1 of investment
-sales/investment
-measures efficiency
-larger is better

Question 7

Residual income

Answer 7

-use because ROI leads to goal congruence
-measures a division’s income above and beyond company threshold
-income -(%cost of capital x(assets))
-if positive, it is good (vice versa)

Question 8

cost of capital

Answer 8

-also called:
-target rate of return
-hurdle rate
-desired ROI
-return on invested capital

Question 9

Third rule for ROI and RI

Answer 9

-ROI is GREATER than company hurdle rate, then residual income will be positive
-ROI is LESS than company hurdle rate, then residual income is negative

Question 10

Cost center

Answer 10

-try to keep costs as low as possible
-evaluate by looking at a performance report

Question 11

Profit center

Answer 11

-division is in charge of both revenues and costs
-evaluate looking at a segmented income statement
-can also look at performance report

Question 12

Segmented income statement

Answer 12

-basis on which any segment should be judged is their segment margin

Question 13

Variances

Answer 13

-difference between what we budget and what happens
-can be favorable or unfavorable

Question 14

BVA

Answer 14

budgeted versus actual analysis

Question 15

materiality threshold

Answer 15

-if a variance exceeds this threshold (favorable or unfavorable), it gets our attention

Question 16

Standards

Answer 16

-call estimates for a budget “standards”
-ideal standards (perfection)
-practical standards (attainable)

Question 17

ideal standards

Answer 17

what can be achieved under optimal circumstances
-assume no waste or errors

Question 18

practical standards

Answer 18

what can be achieved under normal circumstances
-assume there is reasonable amount of errors or waste

Question 19

Flexible budget

Answer 19

to get a handle on variances, firms create a flexible budget
-borrows all fake numbers from master budget but uses the REAL activity level

Question 20

Performance reports and variances

Answer 20

-once variances are computed, info is put together in form of performance report
-shows budgeted revenues, expenses, etc. compared to total performance
-management by exception= managers focus on large variances and basically ignore small ones

Question 21

advanced variance

Answer 21

-flexible budget variance breaks down into two other variances- price (rate) and usage (quantity)

Question 22

price or rate variance formulas

Answer 22

-RATE var. DL= Act. DL Hrs logged (Act. DL Rate-Std. DL Rate)

-PRICE var. DM= Qty. of DM Purch. (Act. Price - Std. Price)

-if this variance is unfavorable then we paid more money than expected (vice versa)
- favorable is NEG, unfavorable is POS

Question 23

Quantity/efficiancy formulas

Answer 23

Efficiency Var. DL= Std. DL Rate( DL hrs log - DL hrs allowed)

Quantity Var. DM= Std. DM Price (Qty DM used- qty dm allowed)

-favorable, then workers are efficient

Question 24

standard input ratio

Answer 24

-the amount of hours per unit
-the amount of dm per unit

Question 25

TOTAL DM VARIANCE FORMULA

Answer 25

Total DM= (qty DM used)(Act. DM price) - (qty DM allowed)(std DM price)

Question 26

CONCEPTS FOR VARIANCES

Answer 26

-standards are used by companies at beginning of period to aid in budgeting

-standards are used again at end of period to evaluate performances (compute variances)

-DM price variance can be computed early, usually at point of purchase:
-responsibility of purchasing manager

-all other variances (DM quant, DL rate, DL effic) are computed at point of production
-responsibility of production manager