Exam 4: Ch. 22-24 Flashcards
Decentralization
Departmentalize; Unit managers make decisions and top management evaluates their performance
Performance evaluation for the three responsibility centers
Cost: success in controlling actual costs
Profit: success in generating income
Investment: use of assets to generate income
Cost center
Incurs costs without generating revenue, such as services and office salaries
Profit center
Makes revenue and has costs. Usually product lines
Investment center
Generates revenue and incurs costs but involves use of assets
Responsibility accounting
Evaluates unit managers based on activities they can control
Responsibility accounting performance report
Lists actual costs that a manager is responsible for and their budgeted amounts with analysis of differences. Higher level managers is less detailed
Balanced scorecard
A system of performance measurement that collects information on several key performance indicators within each of four perspectives: customer, internal processes, innovation and learning, and financial
Avoidable vs unavoidable costs
Avoidable- eliminated when segment goes
Unavoidable- remain when segment is eliminated
Relevant costs
Out of pocket, opportunity, avoidable
Sunk cost- irrelevant
Incremental
Incremental revenues- additional revenue from selecting a course of action over another
Incremental costs- additional costs from selecting a course of action
Incremental income=IR-IC
Prepare departmental income statement
- Accumulate sales, direct expenses, and indirect expenses by department.
- Allocate indirect expenses to both service and operating departments.
- Allocate service department expenses to operating departments.
Special pricing
Prepare CM income statement and see if income increases
Value basis of allocation of joint costs
Allocates joint cost in proportion to the sales value of the output produced by the process at the split off point
Payback period benefits and costs
It uses cash flows, ignores time value of money, ignores cash flows after payback period
ARR strengths and weaknesses
Uses income, easy to compute, ignores time value of money, doesn’t directly consider cash flows
NPV strengths and weaknesses
Uses cash flows, reflects time value of money, reflects changing risks over projects life, difficult to compare projects
IRR strengths and weaknesses
Uses cash flows, reflects time value of money, allows comparisons of projects, ignores changing risks over project’s life
Break even time
When cumulative PV of net cash flows gets to zero
Internal rate of return
Where the PV factor lines up with the number of periods, equals rate that yields a NPV of zero
When would target costing be used
When competition is high and companies are price takers
Capital budgeting definition
Process of analyzing long term investments and deciding which assets to acquire or sell
Out of pocket cost
Required future outlay of cash
Hurdle rate
Required rate of return, if IRR>Hurdle rate then invest
