Final Exam Review Flashcards
Managerial accounting is the process of:
Identifying Measuring Analyzing Interpreting Communicating information throughout an organization
Four organized set of activities of the management team:
Directing activities
Decision making
Planning
Controlling
How Managerial Accounting Adds Value to the Organization
- Providing info for decision making and planning.
- Assisting managers in directing and controlling activities.
- Motivating managers and other employees towards organization’s goals.
- Measuring performance of subunits, activities, managers, and other employees.
- Assessing the organization’s competitive position.
Controller
The chief managerial and financial accountant
Controller’s Responsibilities
Supervising accounting personnel.
Preparation of information and reports, managerial and financial.
Analysis of accounting information.
Planning and decision making.
Treasurer’s Responsibilities
Responsible for raising capital and safeguarding the organization’s assets.
Supervises relationships with financial institutions.
Work with investors and potential investors.
Manages investments.
Establishes credit policies.
Manages insurance coverage.
Theoretical Capacity
Upper limit on the amount of goods or services if everything works perfectly.
Practical capacity
allows for normal occurrences such as cash register downtime and cashier fatigue or illness.
Managers need cost information to perform each of these functions:
Strategy formulation Planning Control Decision Making Directing
An important first step in managerial accounting is to gain an understanding of the various types of _____ incurred by an organization.
Costs
Cost
Measure of resources given up to achieve a particular purpose.
Associated with goods for sale until the time period during which the products are sold.
Product costs
Costs that are expensed during the time period in which they are incurred.
Period costs
Expenses are..
the consumption of assets for the purpose of generating revenue.
Product Costs
COGS or operating expenses?
COGS
Period Costs
COGS or operating expenses?
Operating expenses
Manufacturing Costs
Direct Material
Direct Labor
Manufacturing Overhead
Materials used to support the production process
Indirect material
Cost of personnel who do not work on the product.
Indirect labor
Other MOH costs:
depreciation, property taxes, insurance, etc
Manufacturing Overhead
Indirect Material
Indirect Labor
Other
Prime Cost
combination of direct materials and direct labor
Conversion Cost
combination of direct labor and manufacturing overhead
Cost behavior
How a cost will react to changes in level of business activity
Total Variable Costs
change in direct proportion to a change in the level of activity
Total Fixed Costs
Remain unchanged when activity changes
Activity
refers to a measure of the organizations output of products or services
Costs that can be easily and conveniently traced to a product or department
Direct costs
Costs that must be allocated in order to be assigned to a product or department
Indirect Costs
Opportunity Cost
Potential benefit that is given up when on alternative is selected over another
Sunk Costs
All costs incurred in the past that cannot be changed by any decision made now or in the future are sunk costs. SHOULD NOT BE CONSIDERED IN DECISIONS
Differential Costs
Costs that differ between alternatives
Extra cost incurred to produce one additional unit
Marginal Costs
Total cost to produce a quantity divided by the quantity produced.
Average Costs
Relationship between cost and activity is called:
cost behavior
Step-variable costs
total cost remains constant within a narrow range of activity and the total cost increases to a new higher cost for the next higher range of activity
Step-fixed costs
Total cost doesn’t change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity
Semivariable Cost
Partly fixed and partly variable
Curvilinear Cost
A straight-line closely approximates a curvilinear line within a relevant range
Committed Costs
Long-term, cannot be reduced in the short term.
Discretionary costs
May be altered in the short term by current managerial decision
Engineered Costs
Physical relationship with activity measure.
Cost Estimation Methods
Account-classification
Visual-fit
High-low
Least-Squares Regression
Visual-Fit Method
A scatter diagram of past cost behavior may be helpful in analyzing mixed costs
The High-Low Method
Used the highest and lowest levels of activity to compute the variable cost per unit and the total fixed cost.
Account-Classification Method
Cost estimates are based on a review of each account making up the total cost being analyzed.
Least-Squares Regression Method
Regression is a statistical procedure used to determine the relationship between variables such as activity and cost.
Learning Curve Effect
A concept that describes how new skills or knowledge can be quickly acquired initially, but subsequent learning becomes much slower
Data Collection Problems
- Missing data
- Outlier data points
- Mismatched time period costs
- Trade-offs in choosing the time period
- Allocated and discretionary costs
- Inflation
Contribution Margin
Total revenue minus total variable costs (amount of revenue left to cover fixed expenses and profit after paying variable expenses)
Unit Contribution Margin
Unit sales price less unit variable costs
Break-Even Point
Point in the volume of activity where the organization’s revenues and expenses are equal
Break-even Point (in units) Formula
= Fixed Expenses/Unit Contribution Margin
Break-even Point (in dollars) Formula
=Fixed Expenses/CM Ratio
CM Ratio
=Contribution Margin/Sales
Formula for Units sold to earn the target profit
(Fixed expenses + Target profit)/Unit Contribution Margin
Before-tax net income formula
=Target after-tax net income/(1 - tax rate)
Safety Margin
The difference between budgeted sales revenue and break-even sales revenue
aka
the amount by which sales can drop before losses occur
Sales mix
The relative combination in which a company’s products are sold
Assumptions Underlying CVP Analysis
- Selling price is constant throughout the entire relevant range.
- Costs are linear over the relevant range.
- In multi-product companies, the sales mix is constant.
- In manufacturing firms, inventories do not change (units produced = units sold).
Decision-Making Process
- Clarify the decision problem
- Specify the criterion
- Identify the alternatives
- Develop a decision model
- Collect the data
- Make a decision
Data must be:
Relevant
Accurate
Timely
Relevant
Pertinent to a decision problem
Accurate
Information must be precise
Timely
Available in time for a decision
Information is relevant to a decision problem when…
- It has a bearing on the future
2. It differs among competing alternatives
Avoidable costs
Expenses that will no longer be incurred if a particular action is taken
Unavoidable
Expenses that will continue to be incurred even if an activity is eliminated
With excess capacity relevant costs will usually be the the _______ costs (and benefits) associated with the special order.
Variable
Without excess capacity relevant costs will usually be the variable costs associated with the special order but the _________ _______ of using the firm’s facilities for the special order are also relevant
Opportunity cost
Outsource a Product or Service
A decision concerning whether an item should be produced internally or purchased from an outside supplier is often called a “make or buy” decision.
Add or Drop
One of the most important decisions managers make is whether to add or drop a product service or department
Used for production of large, unique, high-cost items
Job-Order Costing
Two Types of Job-Order Costing
Job-shop operations - products manufactured in very low volumes or one at a time
Batch-production operations - multiple products in batches of relatively small quantity
Used for production of small, identical, low cost items
Process Costing
Mass produced in automated continuous production process
Process Costing
Costs can be directly traced to each unit of product
Job-Order Costing
Costs cannot be directly traced to each unit of product
Process Costing
Job-cost record
Primary document for tracking the costs associated with a given job
Form used to authorize the use of materials on a job
Materials Requisition form
Accumulate direct labor costs by means of a work record
Time Ticket
Apply manufacturing overhead to jobs using a:
Predetermined overhead rate
Actual Costing
Actual direct material and direct labor combined with actual overhead.
Normal Costing
Actual direct material and direct labor combined with predetermined overhead
Benefit of using a predetermined overhead rate?
Estimate total job costs sooner because the actual rate isn’t known until the end of the period
Applied Overhead =
POHR * Actual amount of allocation base
POHR =
Budgeted manufacturing overhead cost/Budgeted amount of cost driver
Job-Order Costing Document Flow
Production Order for Job
Material Requisition
Labor Time Records
Apply Manufacturing Overhead
What is required if actual and applied manufacturing overhead are not equal at year-end?
An adjustment to the appropriate accounts
Changing Technology in Manufacturing Operations
- Computerized data interchange has eliminated much of the paperwork associated with job-order cost systems
- Scanning devices have simplified data entry to record material and labor use
Two-Stage Cost Allocation:
Stage One: Costs assigned to pools
Stage Two: Costs applied to products
How Managerial Accounting Adds Value to the Organization:
- Providing info for decision making and planning.
- Assisting managers in directing and controlling activities.
- Determining product costs for both internal and external use.
- Measuring performance of subunits, activities, managers, and other employees.
- Assessing the organization’s competitive position.
WIP Includes:
Direct Labor
Direct Materials
Manufacturing Overhead
Overhead costs:
- Not traceable
- Part of the production cost for individual products
- Can include both variable and fixed components
- Sum of all indirect manufacturing costs
Four elements of cost allocation:
- Cost pool
- Cost object
- Cost Drive
- Denominator volume
Cost Pool
total costs to allocate
Cost object
Items to which we allocate costs
Cost driver
Allocation basis
Denominator volume
Sum of cost driver amounts
Basic Steps of Cost Allocation
- Determine the allocation rate
- Allocate cost to cost object
Allocation rate =
Total costs in pool / Denominator volume
Allocated amount =
of driver units in object rate * rate
The Cost Driver should:
- have a certain degree of correlation with the costs of overhead
- Be easy to track/quantify
- Not be too costly to track
Activity-Based Costing
A method of assigning overhead costs to the products a firm produces
Choices we make when allocating costs determine the validity of:
- Firm’s estimated profit margin
- Estimated product costs for pricing decisions
ABC improves the traceability of costs by focusing on the _________ caused by a product.
activities
Advantages of ABC
- Captures the complexity of production process
- Highlights that not every cost is related to volume
- Produces more accurate costs, enabling better decisions (avoids cross-subsidization)
- Allocating the same costs but the hope is you will make better manage costs and make better pricing decisions
An activity is an event that causes the consumption of:
overhead resources
Stage One of ABC
Identify significant activities and assign overhead costs to each activity in proportion to resources used
Stage Two of ABC
Identify cost drivers appropriate to each activity and allocate overhead to the products
ABC Process
- Form & define activity cost pools
- Assign overhead costs to activity cost pools
- Identify cost driver for each cost pool
- Measure denominator of driver
- Calculate pool rate
- Compute the total activity cost for each product line
- Compute the cost per unit for each product line
Collecting ABC Data
Interviews and Paper Trails
Storyboarding
Multidisciplinary ABC Project Teams
Financial Planning and Analysis Systems
Helps managers assess the company’s future and know if they are reaching their performance goals
FP&A System should include subsystems for:
- Planning
- Measuring and Recording results
- Evaluating Performance
The planning component of the FP&A system is called the:
master budget
The master budget is intended to:
help ensure that plans are consistent and yield a result that makes sense for the organization
Budget
A detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time
Purposes of Budgeting Systems
- Planning
- Facilitating Communication and Coordination
- Allocating Resources
- Controlling Profit and Operations
- Evaluating Performance and Providing Incentives
Capital budgets with acquisitions that normally cover several years
Long Range Budgets
Continuous or Rolling Budget
This budget is usually a twelve-month budget that rolls forward one month or one quarter as the current month or quarter is completed
When the interactions of the elements of the master budget are expressed as a set of mathematical relations, it becomes a financial planning model that can be used to answer “_________” questions about unknown variables.
What if
Advantages of Flexible Budgets
- Show revenues and expenses that should have occurred at the actual level of activity
- May be prepared for any activity level in the relevant range
- Reveal variances due to good cost control or lack of cost control
- Improve performance evaluation
Spending Variance
Results from paying more or less than expected for overhead items and from excessive usage of overhead items
Efficiency Variance
A function of the selected cost driver - it does not reflect overhead control
Budget Variance
Results from paying more or less than expected for overhead items
Volume Variance
Results from the inability to operate at the activity level planned for the period - has no significance for cost control
Responsibility Accounting
used to measure the performance of people and departments to foster goal congruence
Goal congruence
results when the managers of subunits throughout an organization strive to achieve the goals set by top management
Responsibility center
Subunit in an organization whose manager is held accountable for specified financial results
Responsibility center is a unit of analysis:
- almost like a mini-business
- clearly defined budgets, goals, and authority
Process of dispersing decision-making governance
Decentralization
Why do firms decentralize?
Because as organizations grow, the number of types of decisions that are made increase substantially.
Cost Center
Segment has control over the incurrence of costs
Revenue Center
Segment is responsible for the revenue of a unit
Profit Center
Segment has control over both costs and revenues
Investment Center
Segment has control over profits and invested capital
Goal of Cost Center:
minimize the cost of producing a specified level of output or the cost of delivering a specified level of service
Goal of Investment Center:
aim to maximize the returns from invested capital, or to put the capital invested by owners and shareholders of their organizations to the most profitable use - managers can make decisions on input mix, product mix, selling prices, and capital expenditures
Show the budgeted and actual amounts, and the variances between these amounts, of key financial results appropriate for the type of responsibility center
Performance Reports
Cost Allocation
The process of assigning the costs in the cost pool to the cost objects is called cost allocation or cost distribution
Cost Allocation Bases
A measure of activity, physical characteristic, or economic characteristic that is associated with the responsibility centers, which are the cost objects in the allocation process
Segment
Any part of activity of an organization about which a manager seeks cost, revenue, or profit data
The preparation of accounting reports by segment and for the organization as a whole
Segmented Reporting
Key Features of Segmented Reporting:
- Contribution format
- Controllable versus uncontrollable expenses
- Segmented income statement
Advantages of Decentralization
- Allows organization to respond more quickly to events
- Uses specialized knowledge and skills of managers
- Frees top management from day-to-day operating activities
Goal Congruence is a challenge of:
decentralization
Goal Congruence:
Managers of the subunits make decisions that achieve top-management goals
Investment Center Evaluation
ROI
Residual income
Economic Value Added
ROI Formula
= Income/Invested Capital
Sales Margin Formula
=Income/Sales Revenue
Capital Turnover
=Sales Revenue/Invested Capital
Three ways to improve ROI
- Increase Sales Prices
- Decrease Expenses
- Lower Invested Capital
Residual Income Formula
=Investment center profit - investment charge
Investment charge Formula
Investment capital * imputed interest rate
Imputed interest rate
Investment center’s minimum required rate of return
Residual income encourages managers to make profitable investments that would be rejected by managers using ______.
ROI
Residual Income Advantage
Intuitive economic interpretation
Residual Income Disadvantage
Depends on the rate used
What assets should be included in measuring the investment capital?
Only the assets controllable by the manager being evaluated
Measuring Investment Capital
- What assets should be included?
- Should we measure the investment at the beginning or end-of-period amount, or should we use an average of beginning and end-of-period amounts?
- Should the assets be shown at historical or current cost?
Costs to exclude when measuring investment center income:
- costs traceable to the division but not controlled by the division maker
- common costs incurred elsewhere and allocated to the division
Economic Value Added
EVA tells us how much shareholder wealth is being created
EVA Formula
=Investment center’s after-tax operating income - Investment charge
Investment Charge Formula
=(Investment center’s total assets - investment center’s current liabilities) * WACC
Characteristics of effective performance measures:
- Aligns employee and organizational goals
- Yields maximum info about the decisions or actions of the individual or organizational unit
- Is easy to measure
- Is easy to understand and communicate
Balanced Scorecard
A balanced approach to the area of performance evaluation. Employees are evaluated on a series of financial and nonfinancial measures in a variety of areas
Financial performance measures are known as ____ indicators.
Lag
_____ indicators are also needed
Lead
Balance Scorecard Defined
A carefully selected set of measures derived from an organizations strategy. The measures selected for the scorecard represent a tool for leaders to use in communicating to employees and external stakeholders the outcomes and performance
“Balanced Scorecard” reflects the balance between:
- Short-term and long-term objectives
- Financial and non-financial measures
- Lagging (outcome) and leading (performance) indicators
- External and internal performance perspectives
Transfer price
Affects the profit measure for both the selling division and buying division
Demand for Transfer Prices
- Computing product cost
- Determining tax burden
- Determine divisional profit and provide economic information for resource allocation across the company and performance evaluation for a specific division
- Roles often conflict between divisions especially when tax rates differ
Goal Congruence and Transfer Price
The ideal transfer price allows each division manager to make decisions that maximize the company’s profit, while attempting to maximize his/her own division’s profit.
Transfer Price Formula
=Additional outlay cost per unit + Opportunity cost per unit to the org bc of the transfer
Transfer Price General Rule when No Excess Capacity
When the selling division is operating at capacity, the transfer price should be set at the market price.
When the battery division is selling fewer batters than it can make, the appropriate transfer price is the _________ _____ of the transferring division.
Variable costs
Transfer Price General Rule when Excess Capacity
When the selling division is operating below capacity, the minimum transfer price is the variable cost per unit.
The value placed on transfer goods is used to make it possible to transfer goods between divisions while allowing them to _____ _____ _________.
retain their autonomy
Conflicts may arise between the company’s interests and an individual manager’s interests when ________-_____-______ performance measures are used.
transfer-price-based
Transfer Price Conflicts may be resolved by:
- Direct intervention by top management
- Centrally established transfer price policies
- Negotiated transfer prices
Negotiating the Transfer PRice
A system where transfer prices are arrived at through negotiation between managers of buying and selling divisions.
There is an incentive for multi-national businesses to increase _______ in lower taxed countries, and to increase ______ in higher taxed countries.
revenues; costs
Is market-based or variable cost based transfer prices in theory more sound because it provides the best measure of the opportunity cost of inter-divisional transfers when there is no excess capacity?
Market-based transfer prices
Sacrifice made, usually measured by the resources given up, to achieve a particular purpose
Cost
Cost incurred when an asset is used up or sold for the purpose of generating revenue
Expense
The costs of the actual merchandise inventory plus all costs incurred in bringing a unit to usable or salable condition and location
Product costs
All costs that aren’t product. They don’t go into inventory, and they’re expensed in the period they are incurred.
Period
The Goal of Activity-Based Management
Identify and eliminate non-value added activities and thus non-value added costs
Uses activity-based costing to determine the activities, costs, and profit associated with serving particular customers
Customer profitability analysis
Function that can’t be represented with a straight line but instead is represented with a curve that reflects either increasing or decreasing marginal costs
Curvlinear cost
Why is understanding cost behavior important?
- To plan: make budgets
- To control: figure out quickly whats going on if costs are not behaving as expected
- To make decisions
Cost that bears a definite physical relationship to the cost driver
Engineered cost
Data collection problems
missing data outliers mismatched time periods allocated and discretionary costs inflation
Detailed plan expressed in quantitative terms, that specifies how limited resources will be acquired and used during a given period of time
Budget
Comprehensive profit plan that ties together all phases of an organization’s operations
Master budget
Operation budgets:
Sales Production Direct material Direct labor Manufacturing overhead COGM COGS SG&A Income statement
When is a flexible budget prepared?
End of the period
The goal of variance analysis is for managers to understand why variances arise, to learn, and to improve ________ _________.
Future performance
General rules for analyzing variances:
investigate significant variances
examine trends
recurring variances
consider total picture
5 general purposes of budgets:
planning coordination allocating control performance evaluation
ROI
=(Income/Sales)*(Sales/Invested Capital)
Residual Income
=Profit - (Invested Capital)*(Imputed Interest rate)
Residual income is the amount of profit that remains after what?
an imputed interest charge
EVA measures the amount of what being created?
Shareholder wealth
Criteria for cost to be relevant:
- bearing on the future
- differs among alternatives
Sunk costs
have already been incurred and are irrelevant in decision making bc the amounts can’t be changed by any alternatives
Cost/benefit of a foregone alternative
opportunity cost
Price one subunit charges for a product or service supplied to another subunit of the same organization
transfer price
General rule for setting MAX transfer price is that transfer price = ?
market price
General rule for setting MINIMUM transfer price is that transfer price = ?
additional outlay cost/unit + opportunity cost/unit
Transfer pricing options:
Market-based
Cost-based
Negotiated
Popular management control system to evaluate employees because it takes into account short-term and long-term factors
Balanced Scorecard
4 key criteria of balanced scorecard:
financial perspective
customer perspective
business process perspective
learning & growth perspective
5 key do’s for balanced scorecard:
- Have consistency
- Think big AND small
- Goldilocks - have the right # of measures
- Make sure scorecard aligns with strategy
- Be willing to tweak your scorecard
Controllable Profit Margin =
Segment Contribution Margin - Controllable fixed costs traceable to division
Segment Profit Margin =
Controllable Profit Margin - Uncontrollable fixed costs traceable - Allocated corporate overhead
EVA =
=Investment centers after-tax operating income - [(Total assets-Current Liabilities)*WACC]
