Final Flashcards
What is the break even point defined as
where the contribution margin equals total fixed expenses
OR
where total sales revenue equals total expenses (variable and fixed) –> net incomes = 0
what is the contribution margin ration
contribution margin as a percentage as sales
example: 100,000/250,000 =40percent
for each $1 extra of sales there will be 40 cents increase to CM
Assumptions of CVP Analysis:
-sales price is constnant
-costs can accurately be divided into fixed and variable elements
-sales mix constant
-in manufacturing companies inventory doesn’t change
what is operating leverage
a measure of sensitive net income is to percentage change in sales
what is plant wide overhead rate
a single overhead rate used throughout an entire factory. simple but can distort product costs
activity cost pool
a cost bucket in which costs related to a particular activity are accumulated
what does shifting of overhead cost mean when a company implements ABC
overhead cost often shifts from high volume to low volume products with a higher unit product cost resulting for the low volume products
What are 3 benefits to ABC
-more accurate product costing
-better cost estimation
-ability to implement activity based management
2 limitations of ABC
- Cost of implementation may exceed benefits.
Product costs are not always relevant when making decisions.
4 categories of quality costs
prevention costs: cost to prevent future defects or errors
appraisal costs: costs to carry out quality inspection activities
internal failure costs: cost associated with fixing an error before its delivered to the customer
external failure costs: cost to fixing an error once the error is found by the customer
what is a relevant cost
a cost that differs in total between alternatives, and is thus relevant for making a decision.
differential cost
different in costs between 2 alternatives
opportunity cost
Are the benefits that are foregone as a result of pursuing some course of action.
not usually in dollar and not recorded in accounts of organization
avoidable costs
Costs that can be eliminated (in whole or in part) by choosing one alternative over another
2 examples of unavoidable costs
sunk costs
future costs that don’t differ between alternatives
What does the comparative income approach tell us
only to drop a line if profit would increase meaning that the fixed cost savings exceed the lost contribution margin
planning
involves developing objectives and preparing various budgets to achieve these objectives
control
involves the steps taken by management that attempt to ensure the objectives are attained
advantages of budgeting
communicating plans
coordinate activities
define goals and objectives
uncover potential bottlenecks
means of allocating resoruces
think about and plan for future
what is a fiscal year
A Fiscal Year is a one-year accounting period used for calculating annual financial statements
what is zero based budgeting
where managers have to set everything back o 0 and then justify every part of their budgets not just take from last years budget
if you were developing budget for your own company, what would be the first department you would prepare a budge for?
sales
master budget order for manufacturing company
- sales budget
- production budget
- selling and admin expenses budget
- cash budget
- budgeted income statement
- budgeted balance sheet
What is the budget committee
standing committee responsible for overall policy matters relating to budget and coordination preparation of the budget
self imposed budget
a budget that is prepared with the full cooperation and participation of managers at all levels.
responsibility accounting
Managers should be held responsible for those items — and only those items — that
the manager can actually control to a significant extent.
What is “centralized” vs decentralized???
centralized: single manager or small management teams makes most of the decisions including strategic and day to day operations
decentralized: decision making spread throoughouth the organization with manager at various levels making decisions that pertaint to their area of responsibility
advantages of decentralization
- Lower-level managers gain experiences in decision-making
- Lower level decision often based on better info
- Top management freed to concentrate on strategy
- Decision-making authority leads to job satisfaction
Improved ability to evaluate managers
disadvantages of decentralization
- Lower level managers may make decisions without seeing the big picture
- Lower level managers objectives may not be those of the org.
- May be a lack of coordination among autonomous managers
May be difficult to spread innovative ideas in the organization
3 types of responsibility centres
cost centre
profit centre
investment centre
cost centre
manager has control over costs but not revenues or profits
profit centre
manager has control over both costs and revenues but no control over investment funds
investment centre
manager has control over costs, revenues, profit and investments in operating assets
3 ways to improve ROI
- Increase sales
- Reduce expenses
Reduce assets
what is the minimum internal rate of return
the minimum target of profitability for any new project
criticisms of using ROI to determine incentive pay
- management may choose to increase ROI in a way that could be inconsistent with the company strategy/needs
- managers often inherit committed cost over which they have no control
- manager evaluated on ROI may reject profitable investment opportunities
what is the one major disadvantage of residual income
cannot be used to compare the performance of division of different sizes
