Chapters 1-10 Flashcards
Planning
involves establishing goals and specifying how to achieve them; look to the future; often accompanied by a budget stated in quantitative terms
Controlling
involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change; looks at variance in performance reports by comparing budgeted to actual results
Decision making
involves selecting a course of action from competing alternatives; Ch 7 make vs. buy, add vs drop segment
Financial vs managerial accounting
Financial - Managerial
Prepared for EXTERNAL parties - Prepared for INTERNAL parties
Summarizes PAST activities (“for the year ended”) - Has strong emphasis on FUTURE (preparing budget for future)
Data should be OBJECTIVE AND VARIFIABLE - Focus on providing RELEVANT DATA even if not completely objective or verifiable
Focuses on PRECISION - Aids decision makers by providing GOOD ESTIMATES as soon as possible rather than waiting for precise data later
Concerned with COMPANYWIDE REPORTS - Focuses on SEGMENT REPORTS
Conforms to GAAP and IFRS - not bound by GAAP or IFRS
MANDATORY - NOT mandatory
Value Chain
Consists of the major business functions that add value to a company’s products and services; co. has to add value at every step of the process
–idea is to eliminate non-value added
Lean production
management approach that organizes resources such as people and machine around the flow of business processes and that only produces units in response to customer orders
- just in time
- low inventory
- eliminates wait time
- eliminates waste or anything non-value added
enterprise risk management
identify the risks that a company faces and manage those risks
Theory of Constrainsts
effectively managing constraints is the key to success
constraint
anything that prevents you from getting more of what you want
Cost behavior
how a cost will react to changes in the level of activity
cost behavior for Variable Cost
in total –> VC increases directly as activity increases
per unit –> VC remains constant as activity increases
cost behavior for Fixed Cost
in total –> FC remains constant as activity increases
per unit –> FC decreases as activity increases (because costs are spread out more)
Variable cost examples
DM, DL, sometimes sales commission
Fixed cost examples
Depreciation, salaries, rent, insurance
Product costs
DM, DL, Mfg OH
Period costs
selling and admin
if a store is not manufacturing (ie merchandising)…
then all costs are period
mixed cost
cost that contains both variable and fixed elements
Traditional vs Contribution approach
- traditional approach separates product costs as required for external reporting purposes from selling and admin expenses (does not focus on cost behavior)
- contribution approach separates into fixed and variable categories (sales - VC = CM - FC = NOI); used as an internal planning and decision making tool
Relevant costs
differs between alternatives, something happening in the future
differential costs
difference in cost between any two alternatives
opportunity cost
potential benefit that is given up when on alternative is selected over another; foregone benefit/ profit
sunk cost
cost that has already been incurred and cannot be changed now or in the future (NEVER RELEVANT)
ex: existing equipment or cost of goods inventory
Breakeven in Units
= Fixed Cost / CM/unit
(you can then take BE in units x selling price = BE$
Breakeven in $
= Fixed Cost / Contribution Margin Ratio
Target Profit in Units
= (Fixed Cost + Target Profit) / CM/unit
Operating Leverage
= CM / NI
the higher the Operating Leverage, the greater use of fixed cost
measure how sensitive net income is to changes in sales
% change in Net Income
= Operating Leverage x % Change in Sales
an increase in operating leverage results in an increase in net income
Margin of Safety (in $)
= Budgeted or actual TOTAL sales - Breakeven Sales in $
contribution margin ratio
= contribution margin / sales
or
= CM/unit / SP (per unit)
$ increase in CM
= CMR x $ increase in sales
Predetermined Overhead Rate
= total estimated overhead in $ / total estimated allocation base
Applied Overhead
= predetermined OH rate x actual use of allocation base
the overhead that goes in WIP
(add in DM and DL to get the total cost of the job)
applied vs actual
applied > actual — overapplied (COGS is too high, deduct)
applied
Job Order Costing
used when many different products are produced each year, products are manufactured to order, and the unique nature of each order requires tracing or allocating costs to each job
Cost of Goods manufactured
cost of goods that got finished and moved to finished goods (doesn’t touch the income statement)
amount transferred from WIP to Finished Goods
Cost of Goods sold
cost of things you actually sold (touches income statement)
As goods are sold, their costs are transferred from Finished goods to COGS
segmented income statement
sales -VC =segment CM - traceable FC = segment Margin - common FC = Net operating income
traceable FC
tied directly to each segment; if segment disappears the TFC would go away
**Dropping a segment - lost CM vs Avoidable FC (traceable FC are avoidable, not common costs)
common FC
supports the operations of more than one segment; continues even if segment closes (tends to be corporate)
Activity based costing
-nonmfg AND mfg costs may be assigned to products on a cause and effect basis (ex: Abc may assign sales commission or shipping costs to a specific product)
ABC always excludes two costs
- organization sustaining
2. costs of unused or idle capacity
ABC problem setup
Cost pools –> Activity Measure –> Activity Rate ($ cost / number of act. measure) –> x actual use of activity measure = Applied cost
unit level activities
performed each time a unit is produced (power used to run processing equipment)
**Bach level activities
performed each time a batch is handled or processes regardless of how many units are in batch (setting up equipment and shipping customer orders)
**Product level activities
relate to specific products and must be carried out regarless of how many batches are run or units are produced/sold ( product design, advertising for product, R&D for product)
customer level activities
relate to specific customers and are not tied to any specific product (sales calls, catalog mailings)
organization-sustaining activities
carried out regardless of which customers are served, which products produced, how many batches are run, or how many units are made (ex: heating or cleaning factory)
traditional vs ABC
- traditional allocates all MOH to products. ABC only assigns MOH costs related to products to products
- traditional only uses volumerelated allocation basses. ABC uses volume and nonvolume related allocatin basses to assign costs to products
- traditional disregards selling and admin expenses. ABC will include some such as shipping costs
special order
incremental revenue
vs
incremental cost (VC)
add/drop product line or segment
loss on CM
vs avoidable FC
constrained resources
CM / Constraint (ex: you’ll get CM/hr); rate the highest number as the first choice
sell or process further
incremental revenue (sales price after further price vs sales price at split)
vs
incremental costs
if incremental revenue exceeds costs then accept
benefits of budgeting
-communicate mangaments plan throughout the organization
2. fore managers to think about and plan for the future
3. provides a means of allocating resources to those parts of the org where they can be used most effectively
4. can uncover potential bottlenecks
5. coordinate the activities of the entire organization
6 define goals and objectives that can serve as benchmarks for evaluating performance
planning
developing objectives and preparing various budgets to achieve those objectives; look toward the future
sequence of budgets (check)
sales production (DM, DL budget) purchasing selling and admin cash budget
budgets - add____ and deduct ___
desired Ending inventory; beginning inventory
static/planning budget
prepared for a single, planned level of activity
flexible budget
adapted to actual level of activity
activity variance
difference between planning and flexible budget
revenue spending variance
difference between spending and actual
