Chapter 4 Flashcards
What are the two classes of decision makers?
Decision makers exist inside the firm (internal decision makers) and outside the firm (external decision makers)
What is the role of accounting for decision makers? (i.e. what does it help them do?)
Accounting helps decision makers measure the costs and benefits of decision options
What kind of decisions to external decision makers have to make?
Whether to invest in the firm, lend money or calculate taxes owed
What are the 3 issues that external decision makers have with information needs?
- Differ Across users
- Not cost effective to produce information
- Confidentiality issues
What are the solutions to the issues with external decision makers?
Comprehensive reports (financial statements), Defined rules (GAAP) with guidelines by organizations such as the IAS or the AcSB
What kind of decisions do internal decision makers have to make?
Whether to run promotion, what to purchase, who to hire
What are the 3 issues that internal decision makers have with information needs?
- Differ across users
- Need specific data for the “smaller” decisions
- Might need both financial data and non-financial data
What are the solutions to the issues with internal decision makers?
Decision specific data is produced, no-pre-set rules for how to process, produced as needed
What are the 7 factors that differentiate financial and managerial accounting? How do these factors differ for Financial and Managerial Accounting?
- Users (A: External persons, M: Managers Plan and Control)
- Time Focus (A: Historical Perspective, M: Future Oriented)
- Emphasis (A: Objectivity and verifiability, M: Relevance for planning and control)
- Importance (A: Precision of information, M: Timeliness of information)
- Subject Focus (A:Summarized data for the whole organization, M: Detailed segment reports of an organization)
- GAAP (A: Must follow GAAP and prescribed formats, M: Need Not follow GAAP)
- Requirement (A: Mandatory for external reports, M: Not mandatory)
What functions do managers need information to perform?
Strategy formulation, Planning, Control, Decision Making and Directing/Motivating
Describe a Vision Statament.
Describes the desired future position of the organization (i.e. be a market leader) and sets objectives based on this vision
Describe Strategic Management.
The art and science of formulating, implementing and evaluating cross-functional decisions that enable an organization to achieve its objectives.
Describe a Stratetigic Plan.
This is a company’s game plan that results from tough managerial choices from numerous good alternatives. Signals commitment to specific markets, policies, procedures and operations.
Describe the Planning Process for Managers.
Identify Alternatives –> Select alternative that does the best job of furthering objectives –> Develop budgets toward selected alternative
List the 4 keystones of directing and motivating.
- Employee work assignments
- Routine problem solving
- Conflict resolutions
- Effective communications
What does the control function ensure?
That plans are being followed
What is an essential part of the control function?
Feedback in the form of performance reports that compare actual results with the budget are an essential part of the control function.
What is Variance?
The difference between actual cost and budgeted cost.
What makes variance unfavourable?
If actual cost is greater than budgeted cost.
What makes variance favourable?
If actual cost is less than budgeted cost.
Describe a budget.
Detailed plan that sets out in monetatry terms plans for income and expenditure in a future period.
What are budgets based on when being planned?
The company objectives and strategy
What is the order in which budgets are planned?
Start with a sales budget and build up to a master budget.
What is a forecast used for?
Making predictions
Describe the order for the budget making process.
Forecast –> planning –> budget preparation
Desccribe the budget committee.
Senior managers who are responsible for designing strategy, they receive intial budgets from functional managers and suggest changes if needed to meet strategy
Describe the Accounting department
Works with operations managers to begin budget preparation, advise and assist in budget preparation, accounting staff must understand business operation
Go through the sequence of the budgetary process.
Communicate objectives and strategy –> Communicate procedures –> Prepare intial set of budgets –> negotiate budgets with line managers –> coordinate and review budgets –> accept budgets in final form –> ongoing review
What is a bottom up budget?
A budget that is started by inviting those who will implement the budget to be involved in setting the budget
What is a top-down budget?
Set by management and imposed on those who will implement the budget
Are are the 4 benefits of budgeting?
- Planning
- Control
- Communication and co-ordination
- Basis for performance evaluation
What is the 4-step framework for decisions?
Step 1: Specify the decision problem, including the decision maker’s goals.
Step 2. Identify Options.
Step 3. Measure benefits (advantages) and costs (disadvantages) to determine the value (benefits reaped less costs incurred) of each option.
Step 4: Make the decision, choosing the option with the highest value
What do effective decisions require?
Identify goals clearly, understand the factors that influence goals and their relative importance
Why do goals vary across individuals?
Goals depend on the importance the indivdual attaches to money, leisure, risk, fame, etc.
What is the equation for value?
Value = Benefits - costs
What does the measuring of value consider?
The Status Quo and only FUTURE costs and Benefits
What is the role of accounting?
Identify and measure the costs and benefits
What is opportunity cost?
The value of the next best option OR the potential benefit that is given up when one alternative is selected over another
What is an organization?
Collection of individuals enagaged in a collectively beneficial mission
Goals vary across what types of organizations?
For-Profit, Not-for-profit, governments
What are three methods for reducing loss due to conflicting goals of individuals and organizations?
- Policies and procedures
2. Monitoring, incentive schemes 3.Performance evaluation
What do decision makers consider when choosing the best mix of methods to reduce loss due to conflicting goals of organizations and individuals?
The cost and benefits of each option
Describe the Planning and Control Cycle.
Plan –>Implement –>Evaluate –>Revise… Repeat. “Plan” is Planning intensive and “Evaluate” is Control intensive
Do ethics and decision making influence every step of the 4-step framwork for decisions?
Yes
Describe the Key Players in Organizations
CEO, CFO, CIA, controller, treasurer
Describe the Corporate Hierarchy.
Board of Directors OVER CEO OVER Division mangers, CFO and Functional Managers
List the 5 Cost Concepts and Terminology
- Function
- Behaviour
- Traceability
- Controllability
- Relevance
List the current assets of a merchanidiser.
Cash, Recievables, prepaid expenses, Merchandise inventory
List the current Assets of a manufacturer.
Cash, Receivables, prepaid expenses, Inventories: Raw Materials/Work in Process/Finished Goods
What is the major difference between the income statement of a manufacturer vs. the income statement of a merchanidiser?
Manufacturer = Cost of Goods Manufactured, Merchanidiser = Cost of goods purchased
What is the process to get cost of goods sold as a manufacturer?
Beginning Finished good inventory + Cost of Goods Manufactured - Ending Finished Goods Inventory = Cost of goods sold
What three kind of costs exist in inventory for manufacturers?
Direct Labour, Direct Material, Manufacturing Overhead
What is Direct Material?
The cost of raw material that is used to make and can be traced to the finished product
What is direct labour?
Cost of salaries, wages and fringe benefits for personnel who work directly on manufactured products.
What is Manufacturing overhead? Name the costs encompassed by it.
All other manufacturing costs: indirect material, indirect labour, other costs
What is indirect material?
Materials used to support the production process. (I.E. Lubricants to oil the machinery)
What is indirect labour?
Cost of personnel that do not work directly on the product (superviors or maintenance workers)
What can other costs (under manufacturing overhead) encompass?
Amortization, property taxes, rent, insurance, utilities, overtime premium, idle time.
What is cost allocation when considering overhead in the manufacturing process?
A procedure to allocate common costs to the Work in process inventory.
What is a Prime Cost?
Costs in the manufacturing process that are under direct material or direct labour costs.
What is a conversion cost?
Costs the in manufacturing process that are under either direct labour or manufacturing overhead.
Describe the cost flows for a manufacturing company.
Balance Sheet: Material purchases made in raw materials move into the WIP which adds diret labour costs and manufacturing overhead costs. WIP moves into the finished goods, which provides the COGS. Income Statement: COGS and selling and administrative expenses included.
What is cost Behaviour?
How a cost will react to changes in the level of business activity.
What happens when “activity changes”?
Total variable costs change when activity changes, total fixed costs remain unchanged when activity changes
Describe the two types of fixed costs.
Committed: Long-term, cannot be significantly reduced in the short term Discretionary: May be altered in the short term by current managerial decisions
What is an example of a committed fixed cost?
Depreciation on Buildings and equiement and real estate taxes
What is an example of a discretionary fixed cost?
Advertising and research and development
Classify Direct Costs and Indirect Costs by traceability.
Direct Costs: Costs Traceable to a single cost object. Indiret Costs: Costs that cannot be traced to a single cost object
Classify a controllble cost and a non-controllable cost by controllability.
Controllable Cost: A cost which is capable of being regulated by a manager. Non-Controllable Cost: one which is not capable of being regulated by a manager
What does the degree of control depend upon?
The level of management in the organization
How is a cost or benefit determined to be relevant?
Two Questions: Is this a future cost or benefit? Will the future cash flow change because of the decision? If the answer is yes to both then it is to be classed relevant
What is a sunk cost?
Costs incurred in the past that cannot be avoided or changed. Sunk Costs should not be considered in decisions.
What is an Out-Of-Pocket cost?
A cost that requires a future outlay of cash. Out of pocket costs should be considered in decisions.
What is decentralization?
The delegation of freedome to make decisions, the lower in the organization that this freedom exists the more decentralized it is
Describe Centralization vs. Decentralization
Centralization: Max constraints, min Freedom… Decentralization: Min Constraints, Max Freedom
What are the 5 benefits of decentralization?
- Lower level managers gain experience in decision making
- Top management can focus on strategy
- Decision making authority leads to job satisfaction
- lower level decision often based on better information
- lower level managers can respond quickly to customers
What are the 5 disadvantages of decentralization?
- Duplication of costs and efforts
- Lower-level managers may make decisions without seeing the big picture
- Lower level managers objectives may not be those of the organization
- May be difficult to spread innovative ideas
- May be a lack of coordination among autonomous managers
What is responsibility accounting?
Accounting information structured by responsibility center, used to measure performance, developed to motivate, evaluate and reward only on what we can control
What are the 4 responsibility centers in accounting?
Cost Center, Revenue Center, Profit Center, Investment Center
What is the equation for margin?
Operating income over sales
What is the equation for turnover?
Sales over average operating assets
What is the equation for ROI?
Operating Income over Average Operating Assets
What are the 3 ways to increase ROI?
Increase Sales, Reduce Expenses, Reduce Assets
What are the advantages of ROI (3)?
Easily understood, Encourages managers to concetrate on projects that make the best use of resources, most widely used measure of dividional performance
What are the disadvantages of ROI (3)?
Problems defining the amount of investment funding, problems defining the profit controllable by the division, manager of one division may avoid a project that lower the average ROI but would be better for organization as a whole.
