Ch2 Flashcards
Special Order Decisions
EXCESS CAPACITY
Accept only if:
Selling price/unit is > VC/unit (relevant costs)
Special Order Decisions
FULL CAPACITY
If company is operation at full capacity, OPPORTUNITY COST is taken into consideration.
Accept only if
Selling price> VC/unit(relevant costs)+Opportunity costs/unit
Formula for Opportunity cost/unit:
CM in $/Size of special order
TARGET COSTING
TARGET COST= Market price-Required Profit
*Markert price/Sales price= Profit+Cost
TO MAXIMIZE PROFIT AT FULL CAPACITY
CM is a better measure because it includes all VC
CURRENT RATIO
A company wants a ration greater than 1
A ration of at least 1 means that current assets>greater than current liabilities
ASSUMPTIONS UNDERLYING COST-VOLUME-PROFIT ANALYSIS INCLUDE
- All costs can be divided into fixed and variable elements.
- Volume is the only relevant factor affect cost.
- All costs behave in a linear fashion in relation to production volume.
- Cost behaviors are anticipated to remain constant over the relevant range of production volume because of the assumption of production does not change
- Costs show greater variability over time. The longer the period, the greater the % of VC. The shorter the period the greater % of FC
DELPHI FORECASTING METHOD
Relies mostly on judgement. This method involves the use of multiple teams in geographically remote locations. information is shared and gathered in a central point and compiled and then redistributed for comment. This method is highly interpersonal and requires significant judgement.
AN INCREASE IN PRODUCTION WITHIN A RELEVANT RANGE MOST LIKELY WOULD RESULT IN
An increase in production levels within the the relevant range would likely cause VC to increase. While FC in total would remain constant (FC/unit will decrease) therefore total costs would increase.
WHICH OF THE FOLLOWING METHODS WILL YIELD THE LOWEST INVENTORY VALUE?
- Variable
- Absorption
- Process
- Hybrid
Variable
Variable costing typically produces the lowest inventory value since only VC are capitalized. Other methodologies of inventory accounting will account for FC in inventory in greater values than VC.
WHEN USING A COEFFICIENT OF CORRELATION TO MEASURE STRENGTH OF CVR WHAT COEFFICIENT MOST LIKELY IS GONNA BE FOUND WHEN REVIEWING VC AND VOLUME?
Coefficient of Correlation of +1
because of the strong relationship assumed in CVP analysis where Total VC increased proportionally with volume
WHAT IS MOST USEFUL WHEN RISK IS BEING PRIORITIZED?
Expected Value
because it assigns probabilities to potential outcomes quantify both the likelihood (%) and outcome (amounts) into a single value.
TACTICAL PLANNING
IS ALSO KNOW AS?
Tactical plans are also called single-used plans because they are developed to apply to specific circumstances during a specific time frame. Usually short term up to 18 months.
WHAT IS AN ANNUAL BUDGET
Is a type of single use tactical plan. Budgets translate the strategic plan and implementation into a period-specified operational guide.
Placing responsibility for achievement of strategic goals in the hands of managers promotes routine accomplishment of strategy as part of managers job function.
WHAT IS OPERATIONAL AND TACTICAL PLANNING?
Operational and tactical planning is the process of determining the specific objectives and means by which strategic plans will be achieved.
Tactical plans are short term and cover periods up to 18 months.
BUDGET POLICIES SHOULD INCLUDE?
To effectively budget, an organization should implement formal budget policies that include:
- Managements participation
- Budget guidelines.
- based on the entities strategic goals and long term plan.
What are Ideal Standards?
Represents the costs that result from perfect efficiency and effectiveness in job performance. They are forward looking and no provision is made for spoilage or downtime.
Advantage of Ideal Standards?
Implied emphasis on continuous quality improvement (CQI) to meet ideal.
Disadvantages of Ideal Standards?
Demotivation of employees by the use of unattainable standards and the inability to use standards in standard COGS.
WHAT ARE CURRENTLY ATTAINABLE STANDARDS?
Represents costs that result from work performed by employees with appropriate training and experience but without extraordinary effort. provisions are made for normal spoilage and downtime.
ADVANTAGE OF CURRENTLY ATTAINABLE STANDARDS?
They are reasonable standards.
DISADVANTAGE OF CURRENTLY ATTAINABLE STANDARDS?
Require use of judgment and potential manipulation.
AUTHORITATIVE STANDARDS
The are set exclusively by management.
they can be implemented quickly and will likely include all costs but workers might not accept imposed standards.
PARTICIPATIVE STANDARDS
Are set by both managers and individuals who are held accountable to those standards. workers are more likely to accept participative standards but they are slower to implement.
MASTER BUDGET
A master budget or annual business plan documents short term operating performance goals for a period, normally one yr or less. The plan normally includes an operating (non financial) budget and a financial budget that outlines sources of funds and detailed plans for their expenditure.