Financial Management Chapter B Flashcards
An example of a relevant cost
Opportunity costs such as reducing fixed overhead in a make or buy decision. Opportunity costs should also be part of the decision-making process. Common make or buy opportunity costs include:
Whether some part of the fixed overhead could be reduced by out-sourcing.
Whether some part of the space being used during internal production could be used for some other purpose.
What is the objective of transfer pricing
The objective of transfer pricing is to lower an organization’s effective worldwide tax obligations by shifting income to a division in a lower tax country
Budgeting techniquethat identifies value-added versus non-value-added processes, encourages teamwork and synchronization of the entire organization toward customer satisfaction, and expressly avoids a focus on departments or products
Activity-based budgeting. An activity-based budget (ABB) focuses on activities. ABB proponents feel that traditional budgeting, which focuses on departments or products, obscures the relationship between costs and outputs by oversimplifying the measurements. ABB encourages teamwork, continuous improvement, and customer satisfaction, and it identifies value-added versus non-value-added activities. It also coordinates and synchronizes the activities of the entire organization to serve customers.
Absorption vs Variable costing
The symptoms of increasing inventory, especially for items that absorb the highest fixed manufacturing costs, are due to using absorption costing for internal reporting purposes. While absorption costing must be used for external financial reporting, variable costing can provide disincentives for accumulating excess inventory and emphasizes the impact of fixed costs on profits, so this method should be recommended for internal reporting.
Normal vs Standard vs Actual Costing
Organizations interested in smoothing out cost fluctuations in cost per unit turn to normal costing. Standard costing is less likely to incorporate past inefficiencies. Actual costing can distort period costs due to overhead items such as property taxes that are billed once or twice a year. Overhead costs in those billing periods would be higher than in other periods.
Responsibility accounting encourages managers to
generate budgets that will be as close as possible to actual results. Responsibility accounting holds managers responsible for variances between the budget and actual results. Therefore the manager will be motivated to produce accurate budgets.
Job Order Costing vs Operations Costing vs Process Costing
A job order costing system assigns costs to a specific job and is used by many organizations such as for repair jobs in service organizations. Operations costing is a hybrid system that includes characteristics of job order costing and process costing. It is useful for organizations that have similar processes for high-volume activities but that need to use different materials for different jobs such as a clothing manufacturer. Process costing is used by manufacturers that mass produce large quantities of similar or identical products such as in oil refining.
A benefit of variable costing
Variable costing can fix improper management incentives because it gives managers less latitude about what to produce. It can provide a disincentive for accumulating inventory, such as a percentage carrying charge for all ending inventory.
In what decision applications would relevant cost analysis information help a manager decide whether to improve the flexibility or quality of a service?
Sell or process further decisions. Sell or process further decisions concern whether to sell a product or service before an intermediate processing step, or to add further processing, such as improving the flexibility or quality of a service, and then selling the product or service for a higher price.
A flexible budget is a quantitative expression of a plan that
is developed for the actual level of output achieved for the budget period.
The fundamental criterion employed to determine whether job costing or process costing should be employed is
The nature and amount of the product or service is the fundamental criterion for determining whether job costing or process costing is employed. Job costing would be employed if resources are expended to bring a distinct, identifiable product or service to the market; a company would be providing heterogeneous products or services that are often customized for the consumer. Process costing would be employed when masses of identical or similar units of products or services are provided for general consumer use.
Best describe responsibility accounting.
Managers are held responsible for line items they control . Responsibility accounting is the process of recognizing responsibility centers (subunits) within an organization, assigning responsibilities to the managers of those subunits, and evaluating the performance of those managers. It links specific responsibilities and specialized knowledge to specific performance measures, and it holds managers responsible for deviations between budgeted goals and actual results.
Cost-volume-profit (CVP) analysis assumes what?
That the price of a product or service will not change as volume changes.
Absorption costing shows a higher or lower net income than variable costing when inventory is increasing?
Higher. Under absorption costing,, if more units are bought than sold (inventory is increasing), net income will be higher than under variable costing because costs are all sitting in inventory.
Standard Costing
Under standing costing, the unit standard cost = quantity standard x price standard. The quantity standard is the amount of input that should be used per unit of output. The price standard is the amount that should be paid for the quantity of input to be used.
