Chpt 11 PPT Flashcards
What is a major function of managmetn
to control operations
How does management control opeartions
by means of budget reports which compare actual results with planned objectives
What does the budget reports provide for management
feedback on operations
What are the steps for management
- develop budgets
- analyze difference between actual and budget
- take corrective actions
- modify future plans
how does budgetary control work best
when a company has a formulized reporting system
Describe a formalized reorting system
- identifies the name of the budget report (such as sale budget)
- states the frequency of the report (weekly or monthly)
- Specifies the purpose of the report
- indicates recipient of the report
Without a well-conceived plan against which to compare actual performance
it is difficult to determine how a company is doing.
it is difficult to determine what a company could do to improve.
a company will not be able to make a profit.
both a. and b.
both a. and b.
What is static budget reports
- projection of budget data at one level of activity
- ignores data for different levels of activity
- always compares actual results wit the budget data at the activity level used in the master budget
What is the simple report headings for a static budget report
Product line | budget| Actual| difference: Favourable (F) / Unfavorable (U)
What are the uses for a static budget
good for evaluating a manager’s effectiveness in controlling costs when:
- actual level of activity closely approximates the master budget activity level
- behaviour of the costs is fixed in response to changes in activity
What is a static budget appropriate for
fixed costs
What is a static budget not appropriate for
variable costs
The limitation of a static budget is: timeliness. timeliness and specificity. data at one level of activity. data at many levels of activity.
data at one level of activity.
What are flexible budgets
projects budget data for various levels of activity
- essentially a series of static budgets at different activity levels
- budgetary process is more useful if it is adaptable to changes in operating conditions
- can be prepared for each type of budget in a master budget
what are the steps in a developing a flexible budget
- identify the activity index and the relevant range of activity
- identify the VC and determine the budgeted VC per unit of acitivty for each cost
- identify the FC and determine the budgeted amount for each cost
- prepare the budget for selected increments of activity within the relevant range
Using the budgeted data, management can use this formula to determine the total budgeted costs at any level of activity
fixed costs - VC = total budgeted costs
Is a flexible budget report an internal report or external report
internal
What are the sections of the flexible budgeted report
2 sections
Section 1. production data for a selected activity index such as DL hours
section2: cost data for VC and FC
When in a flexible budget report used
in production and service departments to evaluate a manager’s performance in production control and cost control
What does management by exception focus on
- Focus of top management’s review of a budget report:
- difference between actual and planned results - able to focus on problem areas
- investigate only material and controllable exceptions (express materiality as a percentage difference form budget)
- controllability relates to those items controllable by the manager
To develop the flexible budget management should take the following steps:
Identify the activity index and the relevant range of activity.
Identify the variable costs, and determine the budgeted variable cost per unit of activity for each cost.
Identify the fixed costs, and determine the budgeted amount for each cost.
All of the above
all of the above
What does the concept of responsibility accounting involve
accumulating and reporting costs on the basis of the manager who has the authority to make the day-to-day decisions about the items
What does responsibility accounting mean
means a manager’s performance is evaluated on ten matters directly under the manager’s control
Is there only one level of responsibility?
no there are different levels of responsibility
What are the conditions for using responsibility accounting?
- Costs and revenues can be directly associated with the specific level of management responsibility
- the costs and revenues are controllable at the level of responsibility with which they are associated
- budget data can be developed for evaluating the manager’s effectiveness in controlling the costs and revenues
What is a responsibility centre
any individual who has control and is accountable
With the responsibility accounting it may extend from what?
lowest levels of management to top strata of management
Responsibility accounting is especially valuable in what
in a decentralized company with control of operations delegated to many managers throughout the organization
Responsibility accounting applies to what type of businesses?
both profit and not-for profit entities
Profit entities: maximize net income
Not for Profit: minimize cost of providing services
Controllable vs noncontrollable revenue and costs - all costs are controlled by….
top management
controllable vs non controllable revenue and costs - how are controllable costs controlled
fewer costs controllable as one moves down to lower levels of management
What are controllable costs
costs incurred directly be a level of responsibility that are controllable at that level
What are non-controllable costs
costs incurred indirectly which are allocated to a responsibility level
What does a responsibility reporting system involve
involves preparation of a report for each level of responsibility in the company’s organization chart
What does the repsonsbility reporting system report being with and end with
begins with lowest level of responsibility and moves upward to higher levels
What does a responsibility report system permit
- permits management by exception at each level of responsibility
- permits comparative evaluations
What is the usefulness of a responsibility system report
plant managers can rank the department manager’s effectiveness in controlling manufacturing costs
what does comparative ranking provide in a responsibility reporting system
provides incentives for a manger to control costs
What are the principles of Performance evaluation
- contain only data that are controllable by the manger
- provide accurate and reliable budget data to measure performance
- highlight signigicant differences b/w actual results and budgeted goals
- be tailor-made for the intended evaluation
- be prepared at reasonable intervals
What doe the principles of performance evaluation relate mostly to
internal reports
provide the basis for evaluating performance
What is critical in performance evaluation
human factor
What are the behaviour principles in performance evaluation
- managers of responsibility centres should have direct input into the process of establishing budget goals for their area of responsibility
- the evaluation of performance should be based entirely on matters that are controllable by the manager being evaluated
- top management should support the evaluation process
- the evaluation process must allow managers to respond to their evaluations
- the evaluation should identify both good and poor performance
Which of the following is NOT a common form of a responsibility centre? Cost centre Investment centre Division centre Profit centre
division Centre
What are the 3 basic types of responsibility centres
- cost centers
- profit centres
- investment centers
the cost center is responsible for
responsible for expenses
ex. production centre or service department
the profit centres are responsible for
responsible for revenue and expenses
ex. individual retail store, bank branch
investment centres are responsible for
responsible for revenue, expenses and return on investment
ex. subsidiary company
What are cost centres based on
a manager’s ability to meet budgeted goals for controllable costs
What do cost centers result in
responsibility reports which compare actual controllable costs with flexible budget data
- include only controllable costs in reports
- no distinction between variable and FC
Responsibility reports for cost centres compare actual controllable costs with flexible budget data. The main feature of a Responsibility report is to:
identify areas where management would like to receive more information.
identify costs where management would like more analytical information on Favourable or Unfavourable variances.
identify costs where management would like to analyze the Unfavourable variances.
identify costs where management would like to analyze the Favourable variances
identify costs where management would like more analytical information on Favourable or Unfavourable variances.
What is the profit center based on
detailed information form both controllable revenues and controllable costs
- managers control operating revenues such as sales
- managers control all VC (and expenses) incurred by the center because they vary with sales
What does the profit center show
may have both direct and indirect costs
Profit centre: what are Direct fixed costs also calld
traceable costs
Profit center: what are direct fixed costs
related specifically to a responsibility center
- incurred for the sole benefit of the centre
- mostly controllable by the profit center manager
Profit center: indirect fixed costs pertain to what
company’s overall operating activities
- incurred for the benefit of more than one profit center
- mostly not controllable by the profit center manager
What do profit center profitability reports show?
show budgeted and actual controllable revenues and costs
How are profit centers responsibility reports prepared
using CVP income statement format
- deduct controllable FC form CM
- Controllable margin - excess of CM over Controllable FC - best measure of manager’s performance in controlling revenues and costs
- do not report non controllable FC
What does the responsibility accounting for investment center - roi show
ROI shows the effectiveness of te manager in utilizing the assets at their disposal
How is ROI Calculated
Controllable Margin / Average Operating assets = ROI
What do operating assets include (investment center)
current assets and plant assets use in operations by the center
What does operating assets exclude (investment center)
non- operating assets such as idle plant assets and land held for future use
What do the base average operating assets on
the beginning and ending cost or book values of the assets
What are the judgement factors in ROI
- Valuation of operating assets
- may be valued at acquisition cost, book value, appraised value or market value - margin (income ) measure
- may be controllable margin income form operations or net income
How can ROI be improved
- increasing controllable margin or
2. reducing average operating assets
What is the expanded formula for ROI
(operating income / sales ) x (Sales / Operating assets) = ROI
Profit margin x investment turnover - ROI
What does profit margin show in the expand ROI formual
how the operating margin can be improved by increasing the margin on each dollar of sales
what does the investment turnover show in the expand ROI formula
how investment turnover can be improved by generating more sales for each dollar invested
he formula for calculating the ROI for an investment centre is:
Operating Income X Sales/Operating Assets = ROI.
(Operating Income /Sales) X (Sales /Operating Assets) = ROI.
Controllable Margin /Average Operating Assets = ROI.
Both b. and c. are correct
d both b and c are correct
What do most companies use ROI for
to evaluate investment performance
What is a significant disadvantage of ROI
ignores the minimum rate of return on operating assets
- rate at which costs are covered and a profit earned
Residual income compared to ROI what is the residual income approached used for
to evaluate performance using the minimum rate of return
What is residual income
the income that remains after subtracting from controllable margin the minimum rate of return on average operating assets
What are the weakness of residual income
attempting to evaluate a company only on maximizing residual income ignores the fact that one division might use substantially fewer assets to attain the same level of residual income
For what purpose do companies calculate residual income?
To determine whether decentralization is possible or not
To motivate managers through possible termination
To evaluate management performance
To measure company profits
c. to evaluate management performance
