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MA1 exam 3 notes PPT > Chpt 11 PPT > Flashcards

Chpt 11 PPT Flashcards

1
Q

What is a major function of managmetn

A

to control operations

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2
Q

How does management control opeartions

A

by means of budget reports which compare actual results with planned objectives

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3
Q

What does the budget reports provide for management

A

feedback on operations

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4
Q

What are the steps for management

A
  1. develop budgets
  2. analyze difference between actual and budget
  3. take corrective actions
  4. modify future plans
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5
Q

how does budgetary control work best

A

when a company has a formulized reporting system

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6
Q

Describe a formalized reorting system

A
  1. identifies the name of the budget report (such as sale budget)
  2. states the frequency of the report (weekly or monthly)
  3. Specifies the purpose of the report
  4. indicates recipient of the report
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7
Q

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.

A

both a. and b.

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8
Q

What is static budget reports

A
  1. projection of budget data at one level of activity
  2. ignores data for different levels of activity
  3. always compares actual results wit the budget data at the activity level used in the master budget
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9
Q

What is the simple report headings for a static budget report

A

Product line | budget| Actual| difference: Favourable (F) / Unfavorable (U)

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10
Q

What are the uses for a static budget

A

good for evaluating a manager’s effectiveness in controlling costs when:

  1. actual level of activity closely approximates the master budget activity level
  2. behaviour of the costs is fixed in response to changes in activity
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11
Q

What is a static budget appropriate for

A

fixed costs

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12
Q

What is a static budget not appropriate for

A

variable costs

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13
Q 
The limitation of a static budget is: 
timeliness.
timeliness and specificity.
data at one level of activity.
data at many levels of activity.
A

data at one level of activity.

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14
Q

What are flexible budgets

A

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
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15
Q

what are the steps in a developing a flexible budget

A
  1. identify the activity index and the relevant range of activity
  2. identify the VC and determine the budgeted VC per unit of acitivty for each cost
  3. identify the FC and determine the budgeted amount for each cost
  4. prepare the budget for selected increments of activity within the relevant range
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16
Q

Using the budgeted data, management can use this formula to determine the total budgeted costs at any level of activity

A

fixed costs - VC = total budgeted costs

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17
Q

Is a flexible budget report an internal report or external report

A

internal

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18
Q

What are the sections of the flexible budgeted report

A

2 sections
Section 1. production data for a selected activity index such as DL hours
section2: cost data for VC and FC

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19
Q

When in a flexible budget report used

A

in production and service departments to evaluate a manager’s performance in production control and cost control

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20
Q

What does management by exception focus on

A
  1. Focus of top management’s review of a budget report:
    - difference between actual and planned results
  2. able to focus on problem areas
  3. investigate only material and controllable exceptions (express materiality as a percentage difference form budget)
    - controllability relates to those items controllable by the manager
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21
Q

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

A

all of the above

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22
Q

What does the concept of responsibility accounting involve

A

accumulating and reporting costs on the basis of the manager who has the authority to make the day-to-day decisions about the items

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23
Q

What does responsibility accounting mean

A

means a manager’s performance is evaluated on ten matters directly under the manager’s control

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24
Q

Is there only one level of responsibility?

A

no there are different levels of responsibility

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25
Q

What are the conditions for using responsibility accounting?

A
  1. Costs and revenues can be directly associated with the specific level of management responsibility
  2. the costs and revenues are controllable at the level of responsibility with which they are associated
  3. budget data can be developed for evaluating the manager’s effectiveness in controlling the costs and revenues
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26
Q

What is a responsibility centre

A

any individual who has control and is accountable

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27
Q

With the responsibility accounting it may extend from what?

A

lowest levels of management to top strata of management

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28
Q

Responsibility accounting is especially valuable in what

A

in a decentralized company with control of operations delegated to many managers throughout the organization

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29
Q

Responsibility accounting applies to what type of businesses?

A

both profit and not-for profit entities
Profit entities: maximize net income
Not for Profit: minimize cost of providing services

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30
Q

Controllable vs noncontrollable revenue and costs - all costs are controlled by….

A

top management

31
Q

controllable vs non controllable revenue and costs - how are controllable costs controlled

A

fewer costs controllable as one moves down to lower levels of management

32
Q

What are controllable costs

A

costs incurred directly be a level of responsibility that are controllable at that level

33
Q

What are non-controllable costs

A

costs incurred indirectly which are allocated to a responsibility level

34
Q

What does a responsibility reporting system involve

A

involves preparation of a report for each level of responsibility in the company’s organization chart

35
Q

What does the repsonsbility reporting system report being with and end with

A

begins with lowest level of responsibility and moves upward to higher levels

36
Q

What does a responsibility report system permit

A
  1. permits management by exception at each level of responsibility
  2. permits comparative evaluations
37
Q

What is the usefulness of a responsibility system report

A

plant managers can rank the department manager’s effectiveness in controlling manufacturing costs

38
Q

what does comparative ranking provide in a responsibility reporting system

A

provides incentives for a manger to control costs

39
Q

What are the principles of Performance evaluation

A
  1. contain only data that are controllable by the manger
  2. provide accurate and reliable budget data to measure performance
  3. highlight signigicant differences b/w actual results and budgeted goals
  4. be tailor-made for the intended evaluation
  5. be prepared at reasonable intervals
40
Q

What doe the principles of performance evaluation relate mostly to

A

internal reports

provide the basis for evaluating performance

41
Q

What is critical in performance evaluation

A

human factor

42
Q

What are the behaviour principles in performance evaluation

A
  1. managers of responsibility centres should have direct input into the process of establishing budget goals for their area of responsibility
  2. the evaluation of performance should be based entirely on matters that are controllable by the manager being evaluated
  3. top management should support the evaluation process
  4. the evaluation process must allow managers to respond to their evaluations
  5. the evaluation should identify both good and poor performance
43
Q 
Which of the following is NOT a common form of a responsibility centre? 
Cost centre
Investment centre
Division centre
Profit centre
A

division Centre

44
Q

What are the 3 basic types of responsibility centres

A
  1. cost centers
  2. profit centres
  3. investment centers
45
Q

the cost center is responsible for

A

responsible for expenses

ex. production centre or service department

46
Q

the profit centres are responsible for

A

responsible for revenue and expenses

ex. individual retail store, bank branch

47
Q

investment centres are responsible for

A

responsible for revenue, expenses and return on investment

ex. subsidiary company

48
Q

What are cost centres based on

A

a manager’s ability to meet budgeted goals for controllable costs

49
Q

What do cost centers result in

A

responsibility reports which compare actual controllable costs with flexible budget data

  • include only controllable costs in reports
  • no distinction between variable and FC
50
Q

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

A

identify costs where management would like more analytical information on Favourable or Unfavourable variances.

51
Q

What is the profit center based on

A

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
52
Q

What does the profit center show

A

may have both direct and indirect costs

53
Q

Profit centre: what are Direct fixed costs also calld

A

traceable costs

54
Q

Profit center: what are direct fixed costs

A

related specifically to a responsibility center

  • incurred for the sole benefit of the centre
  • mostly controllable by the profit center manager
55
Q

Profit center: indirect fixed costs pertain to what

A

company’s overall operating activities

  • incurred for the benefit of more than one profit center
  • mostly not controllable by the profit center manager
56
Q

What do profit center profitability reports show?

A

show budgeted and actual controllable revenues and costs

57
Q

How are profit centers responsibility reports prepared

A

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
58
Q

What does the responsibility accounting for investment center - roi show

A

ROI shows the effectiveness of te manager in utilizing the assets at their disposal

59
Q

How is ROI Calculated

A

Controllable Margin / Average Operating assets = ROI

60
Q

What do operating assets include (investment center)

A

current assets and plant assets use in operations by the center

61
Q

What does operating assets exclude (investment center)

A

non- operating assets such as idle plant assets and land held for future use

62
Q

What do the base average operating assets on

A

the beginning and ending cost or book values of the assets

63
Q

What are the judgement factors in ROI

A
  1. Valuation of operating assets
    - may be valued at acquisition cost, book value, appraised value or market value
  2. margin (income ) measure
    - may be controllable margin income form operations or net income
64
Q

How can ROI be improved

A
  1. increasing controllable margin or

2. reducing average operating assets

65
Q

What is the expanded formula for ROI

A

(operating income / sales ) x (Sales / Operating assets) = ROI

Profit margin x investment turnover - ROI

66
Q

What does profit margin show in the expand ROI formual

A

how the operating margin can be improved by increasing the margin on each dollar of sales

67
Q

what does the investment turnover show in the expand ROI formula

A

how investment turnover can be improved by generating more sales for each dollar invested

68
Q

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

A

d both b and c are correct

69
Q

What do most companies use ROI for

A

to evaluate investment performance

70
Q

What is a significant disadvantage of ROI

A

ignores the minimum rate of return on operating assets

- rate at which costs are covered and a profit earned

71
Q

Residual income compared to ROI what is the residual income approached used for

A

to evaluate performance using the minimum rate of return

72
Q

What is residual income

A

the income that remains after subtracting from controllable margin the minimum rate of return on average operating assets

73
Q

What are the weakness of residual income

A

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

74
Q

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

A

c. to evaluate management performance

MA1 exam 3 notes PPT (20 decks)

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