Management Accounting Flashcards
What is a sensitivity analysis?
Quantitative Worst/Best case scenario comparisons.
start with the expected results and then vary the key assumptions to accommodate the possibility of different outcomes.
What is Deferential Income?
Is an income that can change as a result of a mgmt decision
What is an opportunity cost?
Represents any potential loss of current cash flows due to accepting a new project
What is variable costing?
An inventory valuation where only variable OH costs are included as inventory. All fixed and non-manufacturing costs are period costs and expensed in the period which they are incurred. This method is for internal decisions only
What is absorption costing?
An inventory valuation that includes both fixed and variable costs. This is the external reporting format required by ASPE/IFRS.
What is activity-based costing? Pros/Cons?
A costing method that identifies each activity that creates costs and allocates the costs to each cost pool. A cost driver is assigned to each pool.
o Pros
Provides mgmt. with a more accurate representation of the cost of the product
Allows for better strategic decisions like pricing and capacity mgmt
o Con
Costly to implement and must maintain two systems, one absorption costing for external reporting
Steps for ABC
o Identify the cost objective o Identify activities and cost drivers o Assign indirect costs to cost pools o Calculate activity rates o Assign indirect costs to cost objectives
Activity-based mgmt. - What is physical Output? Pros/Cons?
Joint costs are allocated based on physical measures such as weight.
o Pro
Simple and easy to understand
o Con
May not be reasonable to measure all products as the same unit of measure. This can result in some products appearing unprofitable when they aren’t
Activity-based mgmt. – What is sales value at split off point? Pros/Cons?
Joint costs are allocated based on relative sales at the split off point
o Pro
Simple and easy to understand
o Con
Cannot be used when some products are not sold at the split-off point
Activity-based mgmt. – What is net realizable value? Pros/Cons?
Joint costs are allocated based on NRV, where the final selling price is calculated for each product, less separate costs
o Pro
Focuses mgmt. attention to each product’s ability to pay for joint costs
o Con
Moderately complex, and may give the impression that one product is more profitable than another, even when joint processing is necessary
Job costing vs process costing
o Job costing is used when products or services can be uniquely identified
o Process costing is used when products are massed produced, and is not applicable to services. It would divide total costs of producing similar products by total units to obtain a per-unit cost.
Accounting for Spoilage
o Must be accounted for as an additional cost or a separate cost, depending if normal or abnormal spoilage
o Normal spoilage = OH
o Abnormal spoilage = period expense
Process Costing- Weighted Average EU vs FIFO EU
FIFO EU (Equivalent unit) does not include the beginning inventory, only the work performed in the period
Service department cost allocations – What is direct allocation? Pros/Cons?
o Allocated to operating departments based on the quality of an allocation base, w/o considering costs from other service depts.
o Pro
Easy to perform and understand
o Con
No service dept costs are allocated to other service depts
Service department cost allocations – What is step-down allocation? Pros/Cons?
o Costs are allocated to both operating and service depts
o Start with the service dept that provides the most services.
o The proceeding service depts will allocate to the other depts, but not to the departs preceding it
o Pro
Fairly easy to perform
o Con
Accounts for only some of the support services among service depts
Service department cost allocations – What is reciprocal allocation? Pros/Cons?
o Service costs are allocated to all departments based on their cost driver (hours, headcount)
o Pro
Most accurate method because it considers the services provided to all departments
o Con
May be difficult for managers to understand
What is a cost-based transfer pricing method? Pros/Cons?
o Prices based on a formula applied to some measure of the product’s cost (Full cost (absorption) or variable cost)
o Pros:
Most useful when market prices are unavailable
Simple
o Cons:
May lead to decisions that are not in the best interest of the company as a whole.
The distribution of the profits may be unfair to seller or buyer
It may encourage production inefficiencies because costs are passed to the buyer
What is a market-based transfer pricing method? Pros/Cons?
o Prices are based on external market conditions such as supplier prices or customer prices
o Pros:
It’s simple if external prices are available
If selling division is at full capacity it will encourage transfers only if they are beneficial to the company as a whole
o Cons:
External prices may not be available
Suboptimal decisions may be made if seller has excess capacity
What is a negotiated transfer pricing method? Pros/Cons?
Seller and buyer work together to come up with a price.
o Pros:
Divisions are given independence and control
Divisions build relationships
Price usually benefits the overall company
o Cons:
Price is determined by each division’s negotiating ability
Time consuming
Minimum transfer price formula
Variable costs up to the point of transfer + Opportunity cost to the selling division
Affect to the minimum transfer price if seller has idle capacity
Minimum transfer price = Variable costs up to the point of transfer
Affect to the minimum transfer price if seller has no idle capacity
Minimum transfer price = Market price
Affect to the minimum transfer price if no market price exists
Minimum transfer price = Variable costs up to the point of transfer
Product Lifecycle
o Development o Introduction o Growth o Maturity o Decline
Characteristics of elastic demand
o The quantity demanded or supplied are sensitive to price changes
o Prevalent in highly competitive markets
o Slight decreases in sales may lead to larges change in sales volumes
Types of pricing strategies
o Cost-based pricing ex: mark-up o Variable Product costs o Full absorption costs o Lifecycle costs o Target-based costs o Demand-based pricing o Predatory pricing o Penetration pricing o Price Skimming ex: electronics o Price bundling o Peak-load pricing ex: airlines o Loss lender pricing o Value-based pricing
Qualitative pros/cons to outsourcing
- Focus on core business
- Supplier may be a specialist in the industry if it is a core competency
- Management freed up time
- if market is declining then transfer risk to supplier
- Loss of control
- risk of increasing costs
- potential layoffs
- decreased flexibility
- potential quality or supply issues
Budget variance analysis - Quick calc:
Flexible budget
Rate variance
Efficiency variance
A = AQ x AP B = AQ x SP C = SQ x SP
Flexible Budget = A-C
Rate variance = A-B
Efficiency variance = B-C
Static budget variance
(Actual qty x Actual price) – (Budget Qty x Budget price)
Flexible budget variance
(Actual total price – Budgeted total price) x Actual Qty sold
Sales Volume Variance
(Actual Qty – Budgeted Qty) x budgeted price
Rate variance
(Actual unit cost – Budget unit cost) x Actual unit input Qty
OR
Total actual costs – (Actual Qty sold x standard price)
Efficiency Variance
(Actual input Qty – Budget input Qty of unit for actual outputs achieved) x Budgeted unit Cost
OR
(Actual inputs qty x standard price) – Total Standard costs
Break-Even in Units
Fixed cost / CM per unit
Break-Even in dollars
Fixed cost / CM ratio
Break-Even units - Multiple products
Fixed cost / WACM per unit
Break-Even dollars - Multiple products
Fixed cost / WACM ratio
What are the 3 transfer pricing models
Market Price
Cost-Based Price
Negotiated Price
Breakeven sales price
(Total Fixed Cost/Volume)+ VC per unit
Sales price with target profit - using breakeven analysis
(Total Fixed Cost + target profit/Volume)+ VC per unit
