Final

Question 1

What is the break even point defined as

Answer 1

where the contribution margin equals total fixed expenses

OR

where total sales revenue equals total expenses (variable and fixed) –> net incomes = 0

Question 2

what is the contribution margin ration

Answer 2

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

Question 3

Assumptions of CVP Analysis:

Answer 3

-sales price is constnant
-costs can accurately be divided into fixed and variable elements
-sales mix constant
-in manufacturing companies inventory doesn’t change

Question 4

what is operating leverage

Answer 4

a measure of sensitive net income is to percentage change in sales

Question 5

what is plant wide overhead rate

Answer 5

a single overhead rate used throughout an entire factory. simple but can distort product costs

Question 6

activity cost pool

Answer 6

a cost bucket in which costs related to a particular activity are accumulated

Question 7

what does shifting of overhead cost mean when a company implements ABC

Answer 7

overhead cost often shifts from high volume to low volume products with a higher unit product cost resulting for the low volume products

Question 8

What are 3 benefits to ABC

Answer 8

-more accurate product costing
-better cost estimation
-ability to implement activity based management

Question 9

2 limitations of ABC

Answer 9

• Cost of implementation may exceed benefits.

Product costs are not always relevant when making decisions.

Question 10

4 categories of quality costs

Answer 10

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

Question 11

what is a relevant cost

Answer 11

a cost that differs in total between alternatives, and is thus relevant for making a decision.

Question 12

differential cost

Answer 12

different in costs between 2 alternatives

Question 13

opportunity cost

Answer 13

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

Question 14

avoidable costs

Answer 14

Costs that can be eliminated (in whole or in part) by choosing one alternative over another

Question 15

2 examples of unavoidable costs

Answer 15

sunk costs
future costs that don’t differ between alternatives

Question 16

What does the comparative income approach tell us

Answer 16

only to drop a line if profit would increase meaning that the fixed cost savings exceed the lost contribution margin

Question 17

planning

Answer 17

involves developing objectives and preparing various budgets to achieve these objectives

Question 18

control

Answer 18

involves the steps taken by management that attempt to ensure the objectives are attained

Question 19

advantages of budgeting

Answer 19

communicating plans
coordinate activities
define goals and objectives
uncover potential bottlenecks
means of allocating resoruces
think about and plan for future

Question 20

what is a fiscal year

Answer 20

A Fiscal Year is a one-year accounting period used for calculating annual financial statements

Question 21

what is zero based budgeting

Answer 21

where managers have to set everything back o 0 and then justify every part of their budgets not just take from last years budget

Question 22

if you were developing budget for your own company, what would be the first department you would prepare a budge for?

Answer 22

sales

Question 23

master budget order for manufacturing company

Answer 23

1. sales budget
2. production budget
3. selling and admin expenses budget
4. cash budget
5. budgeted income statement
6. budgeted balance sheet

Question 24

What is the budget committee

Answer 24

standing committee responsible for overall policy matters relating to budget and coordination preparation of the budget

Question 25

self imposed budget

Answer 25

a budget that is prepared with the full cooperation and participation of managers at all levels.

Question 26

responsibility accounting

Answer 26

Managers should be held responsible for those items — and only those items — that
the manager can actually control to a significant extent.

Question 27

What is “centralized” vs decentralized???

Answer 27

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

Question 28

advantages of decentralization

Answer 28

• 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

Question 29

disadvantages of decentralization

Answer 29

• 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

Question 30

3 types of responsibility centres

Answer 30

cost centre
profit centre
investment centre

Question 31

cost centre

Answer 31

manager has control over costs but not revenues or profits

Question 32

profit centre

Answer 32

manager has control over both costs and revenues but no control over investment funds

Question 33

investment centre

Answer 33

manager has control over costs, revenues, profit and investments in operating assets

Question 34

3 ways to improve ROI

Answer 34

• Increase sales
• Reduce expenses
  Reduce assets

Question 35

what is the minimum internal rate of return

Answer 35

the minimum target of profitability for any new project

Question 36

criticisms of using ROI to determine incentive pay

Answer 36

1. management may choose to increase ROI in a way that could be inconsistent with the company strategy/needs
2. managers often inherit committed cost over which they have no control
3. manager evaluated on ROI may reject profitable investment opportunities

Question 37

what is the one major disadvantage of residual income

Answer 37

cannot be used to compare the performance of division of different sizes