Lecture 2

Question 1

Decentralization

Answer 1

Can improve decision making by giving authority to the people who understand the situation

Question 2

Responsibility center

Answer 2

Organizational unit directed by a single party (individual or committee) that is evaluated based on its own set of managerial reports

Each responsibility center has its own targets, budgets and evaluation

Question 3

Four types of responsibility centers:

Answer 3

Cost: Accountable for costs only (e.g. production, IT, HR)

Revenue: Accountable for revenues only (e.g. sales)

Profit: Accountable for revenues and costs (E.g. a combined production and sales department

Investment: Accountable for investments, revenues and costs (e.g. a whole company division)

Question 4

Responsibliity centers deal with questions such as

Answer 4

Profit and investment centers are better cost and revenue center: why
How would you evaluate a revenue center

Question 5

How might someone game the system

Answer 5

-Decrease the sales price to increase sales
-Tons of unprofitable sales  cost center gets blamed for high costs

Question 6

Profit and investment centers are better than cost and revenue centers; why?

Answer 6

 Managers can be held responsible for their own profit/loss and their return on investment
So if you want to improve performance reporting, change cost and revenue centers into investment centers by having them “sell” their goods to each other

Question 7

feedback function

Answer 7

Use responsibility centers along with budgeting to create feedback for your organization
Differences relative to budget/norms are variances
Variances are useful information
-Early warning
_Evaluate performance and strategy
-Communicate goals and priorities
Make and encourage necessary adjustments

Question 8

Bloomfields law of measure management:

Answer 8

Measure management arises when incentivized measures capture performance constructs with error, the people being evaluated know the details of how performance is measured and people have discretion to distort either operations or reporting

Question 9

Performance measures:
Good performance measures have:
Goal congruence/alignment:

Answer 9

The measure encourages your employees to do what you want them to do

Question 10

controllability

Answer 10

Employees are held accountable for things within their own control

Question 11

Balanced scorecard

Answer 11

Kaplan and norton developed the balanced scorecard as a way to focus on overall strategy rather than just financial end results

Question 12

Balanced scorecard strategy map

Answer 12

Learning and growth –>
Internal business –>
Customer –>
Financial

 Doesn’t just work on and measure the end goal (financial success), work on the steps before that
 Have performance measures for each goal

Question 13

Leading measure

Answer 13

A variable whose change is associated with a later change in another (lagging) varaible. On time delivery leads to improvements in customer satisfaction

Question 14

Lagging measure

Answer 14

A variable whose change is associated with a previous change in another (leading) variable. improvements in customer satisfaction lag behind on time delivery

Question 15

Four methods of estimating costs industrial engineering (work-measurement method)

Answer 15

Break out the stopwatch and scale
Time consuming
Watching people may change their behavior

Question 16

four methods for estimating costs conference method

Answer 16

Ask experts for the cost function
Fast but experts aren’t always right

Question 17

four methods for estimating costs Account analysis method:

Answer 17

use accounting theory to classify costs

Question 18

Quantitative analysis (e. high-low, regression)

Answer 18

Data driven, mathematical; only works within a relevant range

Independent variables: cost drivers

Dependent variable: cost of a cost object

Question 19

High-low method

Answer 19

Find the highest and lowest production levels and compare price –> variable and fixed costs

Very fast and easy
Overly simplistic, often inaccurate

Question 20

CPV: cost volume profit

Answer 20

Given our cost structure how much volume do we need to achieve profit of X$

Managers want to know how profits will change as the number of units sold of a product or service changes

Managers like to use what if analysis to examine the possible outcomes of different decisions so they can make the best one

Question 21

Total contribution margin (TCM) formula

Answer 21

(p-v)*Q

Question 22

breakeven point (units)

Answer 22

The Q such that (p-v)*Q-F = 0

often denoted as Qbe

Question 23

Target units

Answer 23

The Q such that (p-v)*Q - F = pi

Often denoted as Q*

Question 24

fter tax profit (net income) can be calculated by

Answer 24

Net income = operating income * (1-tax rate)

Operating income = Net income / 1 - tax rate

Question 25

argin of safety (mos)

Answer 25

Budget sales - Qbe

a low MOS means were at risk of losing money. Can also be expressed as a ratio of budgeted sales

Question 26

Tradeoff point

Answer 26

Suppose we have two options

Option 1 has F1 and v1

Option 2 has F2 and v2

To find the indifference point
(I.e. the point where we like both options equally), set the two equations equal to each other and solve for Q

pQ – v1Q – F1 = PQ – v2Q -F2Q

–> Q = F2 -F1/v1-v2

Question 27

Government/non-profit

Answer 27

Formula changes a little bit

Pi always equals 0

R is set by the budget, not by Q

So lets find the cost structure that allows for the highest Q!

0 = R - F - vQ

Question 28

Overhead

Answer 28

All indirect and fixed costs

Question 29

Allocating costs

Answer 29

Allocating costs means assigning them to inventory

both U.S. GAAP and IFRS require us to allocate all production costs, even overhead

That easy to do with direct costs, but how do we allocate overhead

Question 30

Steps to cost a job (figuring out the cost of a single job/unit

Answer 30

1) Identify cost object
2) Identify direct costs of the job
3) Trace direct costs to the job
4) Accumulate overhead (indirect) costs in cost pools
5) Accumulate overhead (indirect) costs in cost pools
6) Select an allocation base (preferably cost driver)
7) Calculate the overhead rate per unit
8) Allocate overhead costs to jobs based on application base (cost driver)

Question 31

Cost pool

Answer 31

Grouping of cost items for temporary purposes

Question 32

Cost allocation base

Answer 32

Way to apply cost from the cost pool to the cost object

Question 33

Cost driver

Answer 33

What actually causes cost in the cost pool to increase

ideally the cost driver and cost allocation base are the same thing

Sometimes its really hard to measure the cost driver (or we dont know what it is, or there isnt one) so we use some other allocation base instead

Question 34

How to allocate overhead
actual costing
end of period

Answer 34

Add up all actual overhead costs and divide by actual allocation base to calculate a rate

Apply overhead to jobs by multiplying the rate by actual allocation usage

Question 35

very few firms use actual costing: why?

Answer 35

Actual rates arent known until the end of the period

Moving standard

the customer for job 1 wants to know how much his project costs. With actual costing, your reply is “ i wont know until I finished it and all my other projects this year!”

Question 36

normal costing

Answer 36

beginning of period

Add up all estimated overhead costs and divide by estimated allocation base

Apply overhead based on actual allocation usage

Question 37

True costs vs allocated costs

Answer 37

Allocated costs were based on estimated numbers while true costs are actual numbers

Question 38

Numberator effects

Answer 38

we budgeted the wrong amount of costs

Question 39

Denominator effects

Answer 39

We budgeted the wrong amount of allocation base

Question 40

Adjusted allocation rate approach

Answer 40

At the end of the year, recalculate all allocation based ona ctual numbers

Most accurate approach

Same problem as actual costing - moving benchmarking

Question 41

Proration approach

Answer 41

The difference is allocated proportionally across work in progress inventory, finished goods inventory and cost of goods sold

Question 42

write off appraoch

Answer 42

The difference is written off to COGS

Most important approach

Technically wrong but close enough to the right answer that we are usually okay with

Question 43

standard costing

Answer 43

Just use budgeted number

Everything gets a standard cost

Question 44

Standard costing

Answer 44

Instead of assigning costs based on what actually happend (actual costing) or a combination of budgetted rates and actual usage, lets assign costs based on waht they should be

We should use 5$ of direct materials, 8$ of direct labor and 3$ of overhead, so well say each item costs 5 + 8 + 3 = 16

At the end of the period we will compare actual costs with these “standard costs” the difference are variances