Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Management accounting > Lecture 9 > Flashcards

Lecture 9 Flashcards

1
Q

Relevant costs and revenues:
Not all costs and revenues are relevant
Relevant:

A

1) Relevant costs and revenues:
Expected future costs or revenues
Need to differ among alternatives

2) Opportunity costs
-Not always easily visible

3) Qualitative factors
E.g. Customer satisfaction, reputation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Relevant costs and revenues:
Not all costs and revenues are relevant
Irrelevant

A

1) sunk costs
Past (historical) costs often irrelevant
(e.g. investment in plants, machines): cannot be changed

Costs “sunk” in the short-run may “surface” in the long run

2) Unit costs
Problematic as they can contail fixed (sunk?) costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What other factors (besides financials) should wooden memory consider

A

E.g. reputation effect for existing and future relations

Business strategy is key for evaluating the effect of these decisions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

How would decision change if current production was already 100 000 i.e. already at (near) capacity?

A

If production capacity is extended: “fixed” costs (e.g. rent, leases) are not really fixed any more –> previously irrelevant costs become relevant

If other business is sacrificed: Compensation for lost business becomes relevant (add opportunity costs as relevant costs)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Outsourcing Pros:

A

Lower costs due to competitive advantage of suppliers
Location (e.g. lower wages)

Skills (more advanced technology or knowledge)

No fixed costs in own books

Leaner production

Focus on core activities and strategic strengths

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Outsourcing cons:

A

Proprietary costs (losing business secrets)

Dependencies (e,g, loss of knowledge/experties that cannot easily be “reactivated”)

Local/ communal responsibility: can mean laying off employees

Employee identity and corporate culture

Reputation risks

Quality concerns

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Quality: what is important

A

Quality can be a way to guarantee customer satisfaction (which increases sales)

QUality is a competitive advantage; reduces costs and increases revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Types of quality

A

Conformance quality and design quality

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Conformance quality

A

Is the performance of a products/services according to the design & prodct specifications

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Design quality

A

How close do characteristics of products/services match needs and wants of customers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How can we keep track of quality

A

Develop financial and non financial measures to monitor both types of quality

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Costs of quality:

A

Control costs: include
Prevention costs
Appraisal costs

Failure of control costs: include
Internal failure costs
External failure costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Control costs

A

Cost incurred to prevent low quality products

Prevention and appraisal costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Failure of control costs

A

Costs arising as a result of low-quality products

Internal failure costs

External failure costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Prevention costs

A

Eg: design engineering
Supplier evaluations
Training

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Appraisal costs

A

Eg:
Inspection
Product testing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Internal failure costs

A

Eg
Rework and retests
Breakdown maintenance
Delays

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

External failure costs

A

Customer support
Liability claims
Trainsportation costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

opportunity costs

A

Loss of potential gain from (the best of) the other alternatives when one alternative is chosen

20
Q

Theory of constraints

A

A technique where the primary goal is to maximize throughput while simultaneously maintaining or decreasing inventory and operating costs

21
Q

Theory of contraints: cycle

A

1) identify the system constraints (is the constraint internal (e.g. in production, engineering or planning) or external (e.g. in the market)?

2) Decide how to maximize the output from the constraint

3) subordinate everything else to this decisions
(the production capacity of the bottleneck resource should determine the production schedule for the organization)

4) Eleviate the systems bottlenecks:
Take actions to increase bottleneck efficiency and capacity (e.g. training, additional machines, outsourcing) after taking into account the cost of such actions

22
Q

Throughput accounting

A

Focus on the contrained resource
The objective is to increase throughput contribution minus the incremental costs of alleviating constraint/s

Throughput contribution (=price - direct material cost)

23
Q

Role of the management accountant

A

Calculate the throughput contribution
Calculate the identify relevant and irrelevant costs
Conduct cost-benefit analyses of alternative actions to increase efficiency and capacity

24
Q

Complexities

A

More machines and products can significantly increase complexity
Different orders (of prioritizing lucrative products) possible
Analytical or simulation

25
Q

Net present value (formula)

A

Cash inflows (discounted) - Cash outflows (discounted)

= SUM(cash inflows/(1+r)^n)) - SUM(cash outflows/(1+r^n))

26
Q

What is the “interest” rate (cost of capital rate) for the NPV calculation

A

Opportunity costs
E.g. actual interest rates

27
Q

Internal rate of return (IRR)

A

Rate at which NPV = 0
I.e. Solve equation for r given information on cashflows and timing

0 = SUM(cash inflows/(1+r)^n) - SUM(cash outflows/(1+r)^n)

IF

Cost of capital > IRR –> Project is not lucrative (because NPV will be <0)
IRR > cost of capital –> Project is lucrative (because NPV will be >0)

28
Q

Return on investment: Formula

A

ROI = Income/investment

Income: net profit or operating profit
Investment: Total assets or some specific assets

Widely used measure

ROI is an intuitive “accounting” rate of return (often compared with average investment return)

ROI for new project <–> Average investment return (for current projects)

29
Q

Performance measures: ROI (II)
Disadvantages:

Ratio (denominator or numerator) effects

A

Expensive investments might not be undertaken despite potentially high absolute profit

Managers might decide on unwanted reductions of the asset base

30
Q

Performance measures: ROI (II)
Disadvantages:

Compensation on average ROI achievement might induce gaming

A

Goal congruence issues: lucrative projects rejected when return is lower than the current average ROI

Managers might shift costs and benefits to manipulate accounting numbers used to calculate ROI

Short term focus: may lead to reduction of investments with long term benefits

31
Q

Performance measures: ROI (II)
Disadvantages:

When used to compare alternative investments

A

Investment holding periods are ignored (no adjustments for time value of money)

Riskiness of the investments are not considered

32
Q

Residual income

A

Income - r*operating capital
r: the cost of capital rate

33
Q

Economic value added: (EVA)

A

Idea: operating profit after taxes needs to be higher than costs of debt and equity

EVA = NOPAT - ((Total assets - current liabilities) * WACC)

NOPAT = net operating profit after tax

34
Q

Different metrics say different things about performance: ROI, RI, EVA

A

Can only be applied to investment centers

Are financial measures
Not forward-looking (focus on past performance)
No direct link with strategy
Aggregated and general

35
Q

Different metrics may lead to different conclusions about performance

Alternative/extension: non financial measures

A

Can be individual aligned with strategy and strategic needs

Forward-looking: “Leading factor” (they (should) lead to future financial performance)

36
Q

Balanced scorecard (BSC)

A

Translates strategy into a comprehensive set of performance metrics

Strength in making (causal) connections between non-financial and financial measures

37
Q

Financial KPI:

A

To succeed financially, how should we appear to our shareholders

38
Q

Internal KPI

A

To satisfy our shareholders and customers, what business processes must we excel at?

39
Q

Innovation and learning KPI

A

To achieve our vision, how will we sustain our ability to change and improve

40
Q

Customer KPI

A

To achieve our vision, how should we appear to our customers

41
Q

Besides the need to be theoretically good, performance measures need to be:

A

understandable

Acceptable

Economically feasible

42
Q

Besides the need to be theoretically good, performance measures need to be:

Understandable

A

Clear metrics formulated in a simple and comprehensible way

Calculations that are understandable and intuitively clear for employees

Clear and intuitive purpose

Understandability is required for acceptance

43
Q

Besides the need to be theoretically good, performance measures need to be:

acceptable

A

often performance metrics are introduced when a company is restrucutred

There is generally resistance towards “new” performance metrics

Sometimes: theoretically superior, but rejected metrics < Theoretically inferior, but accepted metrics

44
Q

Besides the need to be theoretically good, performance measures need to be:

Economically feasible

A

Costs of implementation

Costs of capturing performance

costs of evaluation

45
Q

what transfer price leads to the optimal coordination and aligns interests

A

TP = MC

Management accounting (34 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions