Managerial Accounting II Flashcards
Consists of the organization’s operating and financial plans for a specified period.
Master budget
The master budget consists of:
1) Operating plans
2) Financial plans
The emphasis is on obtaining and using current resources.
Operating budget
Operating budget contains the:
1) Sales budget,
2) Production budget,
3) Direct materials budget, etc.
The emphasis is on obtaining the funds needed to purchase operating assets.
Financial budget
Financial budget contains the:
1) Capital budget,
2) Cash budget,
3) Pro forma statement of financial position, etc.
Is the starting point for the cycle that produces the annual profit plan (the master budget). It is based on the sales forecast.
Sales budget
Follows directly from the sales budget. It is concerned with units only.
Production budget
Is concerned with both units and input prices.
Direct materials budget
Depends on wage rates, amounts and types of production, numbers and skill levels of employees to be hired.
Direct labor budget
Reflects the nature of overhead as a mixed cost.
Manufacturing overhead budget
Combines the projections for the three major inputs (materials, labor, and overhead). The result directly affects the pro forma income statement.
Cost of goods sold budget
Is the largest cost for a manufacturer.
Cost of goods sold
Consists of the individual budgets for R&D, design, marketing, distribution, customer service, and administrative costs.
Nonmanufacturing budget
The variable and fixed portions of selling and administrative cost must be treated.
Separately
Is used to decide whether the budgeted activities will result in an acceptable level of income.
Pro forma income statement
Types of budget methodologies are:
1) Project budget,
2) Activity-based budgeting (ABB),
3) Zero-based budgeting (ZBB),
4) Continuous budget
Consists of all the costs expected to attach to a particular project.
Project budget
Applies activity-based costing principles to budgeting. It focuses on the numerous activities necessary to produce and market goods and services and requires analysis of cost drivers.
Activity-based budgeting (ABB)
Is a budget and planning process in which each manager must justify his or her department’s entire budget every budget cycle.
Zero-based budgeting (ZBB)
Is revised on a regular basis. Typically, such a budget is continuously extended for an additional month or quarter in accordance with new data as the current month or quarter ends.
Continuous budget
Is a tool for understanding the interaction of revenues with fixed and variable costs.
Cost-volume-profit (CVP) analysis [also called breakeven analysis]
Is the level of output at which all fixed costs and cumulative variable costs have been covered.
Breakeven point
= Unit selling price - Unit variable cost
Unit contribution margin (UCM)
= Fixed costs divided by UCM
Breakeven point in units
= Fixed costs divided by Contribution margin ratio
Breakeven point in dollars
Is the amount by which sales can decline before losses occur
Margin of safety
= Total sales in dollars - Breakeven point in dollars
Margin of safety in dollars
= Margin of safety (in dollars) divided by Total sales (in dollars)
Margin of safety (%)
By treating target income as an additional fixed cost, CVP analysis can be used to calculate
Target unit volume
= (Fixed costs divided by Target operating income) divided by UCM
Target unit volume
= (Fixed costs divided by Target operating income) divided CMR
Target sales in dollars
Operating income can be substituted with net income using the following formula:
Net income = Operating income x (1 - Tax rate)
In decision making, an organization must focus only
Relevant revenues and costs
To be relevant, the revenues and costs must:
1) Be made in the future,
2) Differ among the possible alternative courses of action, and
3) Be avoidable
Terminates an operation, product or product line, business segment, branch, or major customer.
Disinvestment decisions
In general, the firm should disinvest if.
The marginal cost of a project exceeds the marginal revenue.
When a manufacturer has excess production capacity,
There is no opportunity cost involved when accepting a special order.
When a manufacturer has excess production capacity: The company should accept the order if
The minimum price for the product is equal to the variable costs.
When a manufacturer lacks excess production capacity,
The differential (marginal or incremental) costs of accepting the order must be considered
The entity should use available resources as efficiently as possible before
Outsourcing
In determining whether to sell a product at the split-off point or process the item further at additional cost, the joint cost of the product is
Irrelevant because it is a sunk cost
The primary distinction between centralized and decentralized organizations is
The degree of freedom of decision making by managers at many levels
A well-designed responsibility accounting system establishes responsibility centers. Their purposes are to:
1) Encourage managerial effort to attain organizational objectives,
2) Motivate managers to make decisions consistent with those objectives, and
3) Provide a basis for managerial compensation
Responsibility centers are classified as:
1) Cost centers,
2) Revenue centers,
3) Profit centers, and
4) Investment centers.
Are charged by one segment of an organization for goods and services it provides to another segment of the same organization.
Transfer prices
Is used by profit and investment centers (a cost center’s costs are allocated to producing departments).
Transfer pricing
There are three basic methods for determining transfer prices.
1) Cost plus pricing
2) Market pricing
3) Negotiated pricing
Set price at the selling segment’s full cost of production plus reasonable markup.
Cost plus pricing
Uses the price the selling segment could obtain on the open market.
Market pricing
Gives the segments the freedom to bargain among themselves to agree on a price.
Negotiated pricing
The minimum price that a seller is willing to accept is calculated as follows:
Minimum transfer price = Incremental cost to date divided by Opportunity cost of selling internally
