acct exam 3 Flashcards
Responsibility centers
-Investment center
-Cost Center
-Profit Center
Investment center
-division keeps their eye on invested capital
-evaluate using Return on investment or residual income
Return on investment
-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
goal congruence
-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)
Sales margin
-measures the operating income earned on every $1 of sales
-income/sales
-measure of profitability
-larger is better
Capital turnover
-measures the sales generated on every $1 of investment
-sales/investment
-measures efficiency
-larger is better
Residual income
-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)
cost of capital
-also called:
-target rate of return
-hurdle rate
-desired ROI
-return on invested capital
Third rule for ROI and RI
-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
Cost center
-try to keep costs as low as possible
-evaluate by looking at a performance report
Profit center
-division is in charge of both revenues and costs
-evaluate looking at a segmented income statement
-can also look at performance report
Segmented income statement
-basis on which any segment should be judged is their segment margin
Variances
-difference between what we budget and what happens
-can be favorable or unfavorable
BVA
budgeted versus actual analysis
materiality threshold
-if a variance exceeds this threshold (favorable or unfavorable), it gets our attention
Standards
-call estimates for a budget “standards”
-ideal standards (perfection)
-practical standards (attainable)
ideal standards
what can be achieved under optimal circumstances
-assume no waste or errors
practical standards
what can be achieved under normal circumstances
-assume there is reasonable amount of errors or waste
Flexible budget
to get a handle on variances, firms create a flexible budget
-borrows all fake numbers from master budget but uses the REAL activity level
Performance reports and variances
-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
advanced variance
-flexible budget variance breaks down into two other variances- price (rate) and usage (quantity)
price or rate variance formulas
-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
Quantity/efficiancy formulas
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
standard input ratio
-the amount of hours per unit
-the amount of dm per unit
TOTAL DM VARIANCE FORMULA
Total DM= (qty DM used)(Act. DM price) - (qty DM allowed)(std DM price)
CONCEPTS FOR VARIANCES
-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
