CMA Part I Flashcards
Capital Intensity Ratio
The capital intensity ratio is the amount of assets required per dollar of sales. It is assets that increase when sales increase divided by sales. The capital intensity ratio of a firm affects its capital requirements. A company with a high assets-to-sales ratio will require more assets for a given increase in sales and therefore will have a greater need for external financing than a company with a lower assets-to-sales ratio.
The variance if the probability of improper operation is:
In order to determine this percentage, we must determine at what percentage of likelihood of error the expected cost of the investigation is equal to the expected cost of not investigating. In case of investigation, total costs will be equal to the sum of the cost of investigation itself ($6,000) and the expected cost of correction ($18,000X), where “X” is the probability of improper operations. The expected cost of not doing an investigation is $33,000X. Equating both sides would allow us to find X, or the probability at which it would make no difference whether to investigates or not.
The formula to calculate exponential smoothing:
The formula to calculate a forecast using exponential smoothing is Ff+1=aYt + (1-a)Ft Where: Ft+1 = forecast for the next period Yt = actual value for period t Ft = forecasted value for period t a = smoothing constant (0-1)
The formula for exponential smoothing using alpha is:
(a x Last Month’s Actual Sales) + ([1 - a] x Last Month’s Exponential Smoothing Forecasted Sales) = This Month’s Forecasted Sales
a = alpha
Net cash flow from operating activities (Indirect Method)
Net cash flow from operating activities, using the indirect method, is:
Net income
- Increase in accounts receivable
- Increase in inventory
+ Depreciation expense
+ Increase in accounts payable
+ Increase in accrued liabilities
Net cash flow from operating activities
The increase in inventory is calculated as: Ending inventory excluding depreciation minus beginning inventory including depreciation.
The formula to use for accounts receivable is:
Beginning Accounts Receivable
+ Sales
- Cash Collections
= Ending Accounts Receivable.
These will all cause the company’s requirements for external financing to increase:
When the dividend payout ratio increases, it means the company is paying out more of its net income in dividends and so it will have less retained earnings and cash available. When the company changes its credit terms to increase the time it gives customers to pay, this will cause accounts receivable to increase and collections and cash to decrease. Lower prices will decrease the profit margin and will decrease collections from sales, which will result in less cash available.
To find Direct Labor Used, Using formula for COGS:
Direct Labor Used is one of the components of Cost of Goods Manufactured. To find Direct Labor Used, we will need to know what Cost of Goods Manufactured is. Cost of Goods Manufactured is one component of the calculation of Cost of Goods Sold. To know what Cost of Goods Manufactured is, we need to use the Cost of Goods Sold
formula.
The formula is:
Beginning Finished Goods Inventory
+ Cost of Goods Manufactured
- Ending Finished Goods Inventory.
= COGS
The formula for Cost of Goods Manufactured:
Beginning WIP Inventory \+ Direct Materials Used \+ Direct Labor Used \+ Manufacturing Overhead Applied - Ending WIP Inventory. = COGM
.
The three most significant items to coordinate in budgeting seasonal sales volume:
Budgets usually start with the development of the sales budget, and it is the most difficult budget to prepare. (1) Production volume and (2) finished goods inventory budgets are the next budgets to be prepared, and their development is based on the assumptions made in preparing the sales budget. When the business is seasonal in nature it is even more difficult to predict sales volume and subsequent budgets. Thus, for any type of business including seasonal it is critical to coordinate production volume, finished goods inventory, and sales volume first of all.
The expected value is:
The expected value is the weighted average of all the possible outcomes, with the probability of each possible outcome serving as its weight.
The most appropriate basis on which to evaluate the performance of a division manager is:
A manager’s performance valuation should be based on the factors controllable by the manager A contribution income statement that presents net revenue minus controllable division costs can be used to isolate the controllable costs of a business unit from its non-controllable costs such as depreciation or allocated central costs. According to the contribution income statement approach to evaluation, a division manager usually controls the division’s revenues, variable costs and a portion of its fixed costs.
The amount of depreciation expense for the flexible budget:
The flexible budget is a budget that is prepared for the actual level of activity achieved during the period. Only budgeted variable costs are adjusted in a flexible budget. Fixed costs are the same in the flexible budget as they are in the static budget, because fixed costs remain the same regardless the level of activity. Since depreciation is a fixed cost, the amount of depreciation expense for the flexible budget is equal to the depreciation expense for the static budget.
When budgetary slack exists:
When a budget is easily achieved, it is said to have budgetary slack in it. When budgetary slack exists, either revenues are understated or expenses are overstated or both. Hence, management won’t work hard on cost-minimization as they simply have to achieve “easily attainable goals”. Hence, the resources most likely will be allocated inefficiently.
Strategic analysis:
Strategic analysis is focused on the long-term and looks at the strengths, weaknesses, opportunities and threats that the company will face in the future. Research, design, production methods will be included in the strategic analysis.
When budgeting, the items to be considered by a manufacturing firm in going from a sales quantity budget to a production budget would be the:
To decide what quantity should be manufactured during a period given the amount of sales for the period, the levels of finished goods inventory and work-in-process inventories should also be considered.
In the standard regression equation y = a + bx.
The constant coefficient is represented by “a” in the equation given. It represents the y intercept, because this is the value of y when x = 0.
The “b” in the equation represents the variable coefficient. It represents the amount of increase in y for each unit of increase in x, or “ b” is the slope of the line.
The dependent variable is represented by “y” in the equation.
The independent variable is represented by “x” in the equation given.
All of the following are criticisms of the traditional budgeting process
1) it is not used until the end of the budget period to evaluate performance.
2) it overemphasizes a fixed time horizon such as one year.
3) it makes across-the-board cuts when early budget iterations show that planned expenses are too high.
A budget is quantitative and does not include non-financial measures in its output.
When preparing a performance report for a cost center using flexible budgeting techniques, the planned cost column should be based on the:
The actual results need to be compared to the flexible budget.
The flexible budget is the budget developed for the actual level of output. When preparing a performance report, the actual results need to be compared to what the expected results were for the actual level of production.
Monitoring is what type of function:
Monitoring is a control function, and not a planning function. Though monitoring is very important to the company, it is not a reason for planning.
The formula for the physical flow of finished goods:
Beginning Inventory
+ Units Produced
- Units Sold
= Ending Inventory.
Cost of goods sold calculation:
Cost of goods sold (COGS) for a manufacturing firm is defined as
Beginning finished goods inventory
+ cost of goods manufactured (COGM)
- ending finished goods inventory.
The COGM may be expanded in this report, where COGM is defined as budgeted direct materials used (not purchased), budgeted direct labor, and budgeted factory overhead.
Pro forma cash flow formula:
Cash flow from operations (Net Income) \+ depreciation expense – increase in working capital – expenses paid = Pro forma cash flow
Which of the following is not a quality of a direct labor budget:
Direct labor budgets are not broken down into fixed and variable direct labor because all direct labor is variable.
Combination Budgeting approach:
In an authoritative budget (top-down budget), top management sets everything from strategic goals down to the individual items of the budget for each department and expects lower managers and employees to adhere to the budget and meet the goals. In a participative budget (bottom-up or self-imposed budget), managers at all levels and certain key employees cooperate to set budgets for their areas, and top management usually retains final approval. The ideal process combines the features of each and falls somewhere between these methods.
The expected value of perfect information is the
The expected value of perfect information is the maximum amount one would pay to obtain the perfect information. It is calculated as the difference between the expected value under certainty and the expected value without perfect information, that is, the expected value of the best action under uncertainty.
The most important criterion in accurate cost allocations
The most important criterion in accurate cost allocations is through the use of homogeneous cost pools. Homogeneous cost pools are a group of overhead costs associated with activities that can utilize the same cost driver.
The direct method of service department cost allocation
The direct method eliminates the service performed between service departments.The direct method of service department cost allocation does not recognize the servicing of service departments. All services are assumed to go to production departments only.There are no inter-service department services.
Individual departmental rates vs plant-wide rate for applying overhead
Individual departmental rates rather than a plant-wide rate for applying overhead would be used if the departments have different cost drivers and the manufactured products differ in the resources consumed from the individual departments in the plant. For example, one department may be labor-intensive, while another may be machine-intensive, or use highly automated processes.
Backflush Costing System
Backflush costing system omits recording some or all of the sequential journal entries relating to the four trigger points that traditional costing systems use: purchase of materials, production, completion of finished goods, and sale of finished goods.
Overapplied overhead
Overapplied overhead implies a credit balance in the overhead account (debit overhead for actual costs and credit overhead for applied). To eliminate this balance, a debit to overhead is required. Since the overapplied amount is considered significant, the amount must be distributed between accounts that hold some part of the actual factory overhead, i.e., cost of goods sold, WIP inventory and finished goods inventory.
Theory of Constraints (TOC)
The TOC uses three measurements: Throughput contribution, investments, and operating costs.
In the TOC, exploiting the constraint changes how the organization uses the constraint without spending more money. Elevating the constraint requires investing more money to increase the constrained resource’s capacity.
Plant-wide Overhead rate Calculation:
With a plant-wide overhead rate, the overhead amounts and the labor-hours amounts are totaled and the total plant overhead is divided by the total units of the cost driver: labor-hours = $ labor-hour.
Which of the three methods (direct, step-down, reciprocal) will result in the same amount of service department costs being allocated to each operating department, regardless of the order in which the service department costs are allocated?
Direct and reciprocal methods of cost allocating will result in the same amount of service department costs being allocated to each operating department, regardless of the order in which the service department costs are allocated.
Material Requirements Planning (MRP)
An MRP system is an integrated production and inventory control system used to determine:
- what to make, when to make it, and how much to make; and,
- what to purchase, when to purchase it, and how much to purchase.
Therefore, it helps determine optimal inventory levels.
MRP is used to set production and purchasing schedules. It facilitates the coordination of purchasing activities to take advantage of bulk purchasing and quantity discounts. Since MRP is used to plan production and inventory levels based upon sales forecasts, and forecasts are subject to variability, there is always the possibility that the system will lead to over-production of products and/or to purchasing too much raw materials and too many purchased parts.
MRP is an integrated production and control system that has three objectives:
- Ensuring materials are available for production and products are available for customers at the proper time and in the right quantities;
- Maintaining the lowest possible levels of inventory; and,
- planning manufacturing activities, delivery schedules, and purchasing activities.
Theoretical Capacity vs Practical Capacity
Using theoretical capacity when calculating overhead allocations would mean that a large denominator activity level would be used, resulting in a lower overhead allocation to individual units of product, distorting allocated costs and provide management with costs too low. Practical capacity represents the highest level of capacity that can be achieved, while allowing for unavoidable losses of productive time.
Prevention Costs:
Prevention costs include all costs incurred to try to prevent production of goods and services that do not conform to quality standards. The prevention costs presented are design engineering, labor training, product testing, and supplier evaluation.
The sum of : design engineering ($300,000) \+ labor training ($150,000) \+ product testing ($65,000) \+ supplier evaluation ($240,000) = $755,000.
*Note: Prevention costs are design engineered to train labor and test products that evaluate suppliers.
A quality audit involves all these elements:
Involves an in-depth analysis of its best and worst practices within a company and compare these results to other companies, and form a long-term plan for strategic quality improvement.
Prevention Costs:
Prevention costs include all costs incurred to try to prevent production of goods and services that do not conform to quality standards. The prevention costs presented are design engineering, labor training, product testing, and supplier evaluation.
The sum of :
design engineering ($300,000)
\+ labor training ($150,000)
\+ product testing ($65,000)
\+ supplier evaluation ($240,000)
= $755,000.
or
1) Quality training and planning costs
2) Equipment maintenance costs
3) Supplier training and confirmation costs
4) Information systems costs
*Note: Prevention costs are designed to train labor and test products that evaluate suppliers.
Completeness Controls:
Completeness controls are measures taken to account for all transactions. Poor control over blank forms, blank checks, or unnumbered forms can provide access to assets and allow transfers to unauthorized personnel.
Top-down, Risk Assessment (TDRA):
TDRA is a hierarchical approach that applies specific risk factors to determine the scope of work and evidence required in the assessment of internal controls. The steps in TDRA are:
1) Identifying significant accounts or disclosures.
2) Identifying material misstatement risks within these accounts or disclosures.
3) Determining which entity-level controls sufficiently address the risks.
4) Determining which transaction-based controls compensate for possible entity-level control failures.
5) Determining the nature, extent, and timing of evidence gathering tests needed to complete the assessment of the internal controls.
Business Process Re-engineering (BPR)
By definition, BPR is the fundamental analysis and radical redesign of business processes within and between enterprises to achieve dramatic improvements in performance measures. BPR promotes the idea that sometimes wiping the slate clean and radically redesigning and reorganizing an enterprise is necessary to lower costs and increase the quality of a product or service.
Benchmarking
Through benchmarking, a firm identifies best levels and conducts a benchmarking study to help define how those levels can be adopted to create improved performance. Agreement on a data-gathering method, identification of organizations to benchmark, and collection of data are the logical activities when attempting to identify best-in-class performance.
Foreign Corrupt Practices Act requirements:
Requirement regarding a company’s system of internal control under the Foreign Corrupt Practices Act of 1977
1) The recorded accountability for assets is compared with the existing assets at reasonable intervals, and appropriate action is taken with respect to any differences.
2) Transactions are executed in accordance with management’s general or specific authorization.
3) Transactions are recorded as necessary (1) to permit preparation of financial statements in conformity with GAAP or any other criteria applicable to such statements, and (2) to maintain accountability for assets.
Section 302 of the Sarbanes-Oxley Act of 2002 requires:
Section 302 of the Sarbanes-Oxley Act of 2002 requires that a publicly held corporation’s CEO and CFO verify the corporation’s quarterly and annual financial reports and requires the corporation’s management to design and implement internal controls to ensure the preparation of reliable financial reports. Documenting the assessment of the effectiveness of the internal control structure and procedures is a requirement of SOX Section 404, not section 302.
Detection Risk
Detection Risk = (Audit Risk) ÷ (Inherent Risk × Control Risk).
Detection risk is the probability that a misstatement will not be discovered by the auditor, as detection risk decreases, the planned audit evidence required will decrease. The formula for detection risk shows that inherent risk is inversely related to planned detection risk and directly related to planned evidence.
Disaster recovery policies and procedures (business continuance plans):
Disaster recovery policies and procedures—also called business continuance plans—are designed to enable the firm to carry on business in the event that an emergency, such as a natural disaster, disrupts normal function. A company’s disaster recovery plan should define the roles of all members of the disaster recovery team, appointing both a primary leader and an alternate leader for the process. The plan should specify backup sites for alternate computer processing.
Control risk is:
Control risk is an assessment of the effectiveness of a firm’s internal controls in preventing or detecting misstatements.
Edit checks:
Edit checks are executed upon data entry(input control). Their purpose is to detect and correct problems in data input. They are performed upon data entry prior to updating a file to assure accuracy of the update. The edit checks prevent the phenomenon of “garbage in, garbage out.”
Audit Risk
Audit Risk = (Inherent Risk × Control Risk × Detection Risk). The risk that the auditor with provide the wrong opinion that the misstatement is not present when in fact it does.
Inherent risk is the probability of a misstatement due to an error or fraud. Control risk is the probability that the misstatement gets by the client’s internal control system. Detection risk is the probability that the misstatement is not detected by the auditor.
A check digit:
A check digit is an input control used during the data entry process of an individual record.
The Master Budget consists of:
An operating budget is broken down into the different operational budgets of the organization, including a (1) sales budget, (2) production budget, (3) direct materials budget, (4) direct labor budget, (5) overhead budget, (6) cost of goods sold budget, and (7) selling and administrative expense budget. Not a cash budget. A cash budget is one of the subsets of the financial budget.
What is the risk of a company allowing its managers to regularly revise the budget whenever they feel that circumstances merit a change:
Employees may be confused due to less clear operating guidelines is not a risk. Regular revisions usually provide clearer operating guidelines.
The logical order for the Planning Process
The logical order for the activities listed is 1) vision and mission, 2) strategic objectives, 3) tactical goals, and 4) operational plans. An operational plan formulates specific goals for each SBU, with detailed revenue and expense budgets.
Cumulative Average Time Learning Curve
Using a cumulative average time learning curve, as the cumulative output doubles, the cumulative average direct labor hours per unit becomes the learning curve percentage times the previous cumulative average direct labor hours per unit.
So, if the first lot used 5,000 direct labor hours and the second lot required 3,000 direct labor hours, then the total for the 2 lots would be 8,000 direct labor hours and the cumulative average hours for the two lots would be 4,000 direct labor hours (8,000 direct labor hours / 2).
Therefore, the learning curve percentage would be calculated by taking the cumulative average hours for the two lots (4,000 direct labor hours) and dividing it by the number of direct labor hours used for the first lot (5,000), or 4,000 / 5,000 = 0.8, or 80%.
Exponential Smoothing uses:
Exponential smoothing uses a weighted average of past time series, selecting only one weight, that of the most recent set of data. The calculation computes a value comparing the forecast and actual value for the last time series before the series being forecast. It employs a smoothing constant between zero and one that is derived through a series of trials and errors on an initial set of data.
Exponential smoothing is a statistical technique that is used for sales forecasting.
Activity-based Budgeting (ABB)
An activity-based budgeting places emphasis on teamwork, synchronized activity, and customer satisfaction. Traditional budgeting places emphasis on increasing management performance.
ABB adds activity-based cost drivers to the traditional volume-based cost drivers but doesn’t remove any options. ABB also separates similar acting costs such as fixed and variable costs into their own cost pools.
Determine the budgeted cost of purchases:
To determine the , the number of units to be produced should be adjusted by the change in inventory and then multiplied by the budgeted purchase cost.
Begin with budgeted amounted needed.
Need in production in units, \+ the desired ending inventory of circuit boards, − the expected beginning inventory x the purchase cost = budgeted cost of purchases
The direct materials budget:
The direct usage budget
+ the direct materials purchase budget
= the direct materials budget.
A potential drawback of a Kaizen budget:
A potential drawback of a Kaizen budget is that managers may lower quality levels or move practices to cheaper labor markets in order to meet the goals set by a system that stresses continuous improvement.
Cash Collection using Accounts Receivable (A/R Formula)
Cash collections, first quarter,
Beginning of quarter Balance
+ net, or 95% of sales for first quarter
− accounts receivable balance at end of first quarter
= net accounts receivable balance
The increase in production to cover an increase in income.
Increasing production over sales allows the company to “bury” fixed overhead costs in the ending inventory, resulting in an increase in net income. The increase in net income from the extra production can be calculated as follows:
Increase in net income = (fixed overhead rate)(excess of production over sales) = 20 x 1,500 = 30,000
Fixed overhead rate = (fixed manufacturing costs)/(the denominator activity level) Fixed overhead rate = $100,000 / 5,000 units = $20 per unit
Therefore, the increase in production over sales = $30,000 / $20 per unit = 1,500 units
Which of the following correctly orders the breakdown of budgets from most general to most specific?
Operating, sales, production, overhead
Operating budgets include sales budgets; sales budgets include production budgets and selling and administrative expense budgets.
Production budgets are broken down into direct materials, direct labor, overhead, and cost of goods sold budgets.
Which of the following is least likely to be a factor in determining medium- and long-term cash forecasts
When determining medium- and long-term cash flows, it is important to consider changes in any factors that can be reasonably forecast. Changes in production (fixed and variable costs), wage expenses, and increases in the cost of natural resources can typically be predicted with varying degrees of accuracy. Since potential governmental tax law changes cannot be known until signed into law, it would be difficult for a business to accurately anticipate these changes.
Pro forma cash flow =
The amount a company can use for capital expenditures without having to resort to outside financing sources is equal to the pro forma amount of cash flow from operations. The pro forma cash flow from operations is calculated by taking the pro forma net income plus the pro forma depreciation less the pro forma increase in working capital.
Pro forma cash flow:
Cash flow from operations
+ depreciation expense
− increase in working capital
= Pro forma cash flow
Production volume variance:
Production volume variance is defined as budgeted fixed overhead minus applied fixed overhead, where:
budgeted fixed overhead = standard quantity times x fixed overhead rate
applied fixed overhead = actual quantity x standard fixed overhead rate.
Production volume variance is favorable in this example because overhead is a cost and this cost was less than expected due to a lower than expected actual quantity of the cost driver.
Mix Variance Calculation
Weighted Average Standard Price Actual Mix
- Weighted Average Standard Price Standard Mix
x Actual Quantity
or
WASPAM - WASPSM x AQ
- Multiply the budgeted cost per unit times the actual total quantity times the actual mix ratio for each item
- Add these two amounts:
- Multiply the budgeted cost/unit times the actual total quantity used times the budgeted mix ratio for each item:
- Add these two amounts:
- The first sum less the second sum equals the mix variance:
Goal congruence is enhanced:
Goal congruence is enhanced by lower management participation in budgeting and by Management By Objective (MBO). MBO identifies managers’ areas of responsibility and ties performance measurements to the areas. It pushes responsibilities for meeting goals and objectives down to the lowest possible management levels and encourages participation.
Substitution variance:
When a product has two or more ingredients that can be substituted for one another, the product can have a mix variance or a variance in the usage of the substitutable materials.
The overhead spending variance calculation:
Overhead Spending Variance = (actual overhead) − (budgeted overhead at actual direct labor hours used)
Budgeted overhead at the actual direct labor hours used = (fixed overhead) + (actual direct labor hours)(rate of labor hours used to apply variable overhead)
Fixed overhead volume variance (FOVV) calculation:
Fixed Overhead Volume Variance = (fixed overhead rate) x [(normal base level of production − actual production level)]
Variable overhead efficiency variance calculation:
Variable overhead efficiency variance = standard variable overhead rate per direct labor hour (SRV) x (actual direct labor hours − standard direct labor hours)
Using full costs as a transfer price would:
Using full costs as a transfer price would allow the selling division to pass on any cost increases to the buying division. The seller would have no incentive to control the costs of the item transferred.
An advantage of using a flexible budget compared to a static budget is that in a flexible budget:
When using a flexible budgeting system, the activity levels for all costs are adjusted according to that activity level. Unlike a static budget, in a flexible budget, fixed cost variances are more clearly presented as those fixed costs are related directly to the activity level of the given period.
An allocation approaches will ensure that the production departments do not underestimate their planned usage of service at the start of the budget period:
The ensure a production department does not underestimate their planned usage of service at the start of the budget period, as well as make the service department’s costs cost efficient is to develop budgeted rates and standard hours allowed for output attained for variable costs and budgeted rates and capacity available for fixed costs.
Profit center accounting where the manager who has the responsibility to make decisions incurring the costs:
Profit center accounting is accounting used for profit centers. If a sales manager had the control over costs associated with the sale, he/she is a profit center manager and is/are charged with the additional costs associated with a rush order.
A dual pricing arrangement
A dual pricing arrangement promotes goal congruence between the supplying and buying subunits of the firm.
The most appropriate basis on which to evaluate the performance of a division manager is:
Responsibility accounting involves holding managers responsible for only those things under his/her discretion and control, such as net revenue and controllable division costs.
The methods that would not be helpful in measuring international business performance:
Measuring international business performance relies on the same principles as measuring domestic business performance. Time series analysis relies on historical information, but cannot be relied on to predict present and future performance. Balanced scorecard, activity-based costing, and total quality management are the three most widely used methods of measuring business performance.
