Module 1: Intro to Managerial Accounting & Using Costs Flashcards
what is management accounting?
process of supplying managers and employees in an org with relevant info, both financial and nonfinancial, for making decisions, allocating resources, monitoring, evaluating and rewarding performance
financial accounting vs managerial accounting
1) financial: retrospective, primarily oriented towards external stakeholders, stresses the form it is communicated in
2) management: retrospective and prospective, primarily oriented to needs of managers/employees, no prescribed form or rules about content
what is a balanced scorecard?
- provides system for measuring/managing all aspects of company performance
- balances financial measures of success (profits etc) with non financial measures (customer loyalty)
- measures org performance across different perspectives
4 perspectives of balanced scorecard?
- perspectives are linked and are derived from org mission, vision, strategy
- financial
- customer
- process
- learning and growth
what does a balanced scorecard enable org to do?
- track financial growth
- monitor how they are building capabilities for future growth and profitability (with customers, processes, employees, systems)
behavioural implications: measurements
- as measurements are made, behaviour changes
- people react to being measured
- people focus on variables and behaviour measured
behavioural implications: changes
- employees familiar with current system may resist changes
- employees have expertise in old system
- employees may feel committed to decisions on the info old system produced
behavioural implications: managers
1) Management accountants must understand and anticipate the reactions of individuals to information and measurements.
2) When the measurements are used not only for information, planning, and decision-making, but also for control, evaluation, and reward, employees and managers place great emphasis on the measurements themselves.
define cost driver
common term used for a variable or activity that causes a cost
explain variable cost (2 points)
One that increases proportionally with changes in the activity level of some variable; = variable cost per unit of the cost driver x cost driver units
graph of variable cost
Graph with x axis is volume and y axis is $, graph is linear, increasing
Slope = variable cost per unit of cost driver
variable cost in real life
not linear, but increasing due to economies, diseconomies of scale
define fixed asset/cost (3 points)
1) an asset not wholly consumed when 1 unit of product is made;
2) The cost that is associated with capacity-related resources.
3) The amount of fixed costs is related to the planned rather than the actual level of activities
4) provides capacity to produce
graph of fixed cost
horizontal for relevant range
explain mixed cost with example
variable cost component and fixed cost component ex. phone cost with fixed phone plan and extra data is variable
explain step variable cost with example
Increases in steps as quantity increases; ex. 1 supervisor for every 20 workers
explain relevant cost
ANY cost that changes as a result of a decision/change in a course of action
explain incremental cost (2 definitions)
1) Cost of the next unit of production (marginal cost in economics);
2) The amount by which the total costs of production and sales increase when one additional unit of a product is produced and sold
explain avoidable cost
A cost that can be avoided when undertaking a course of action
example of avoidable cost
if production ceases, all variable costs associated with that production process are avoided and the salaries of the production workers, which is a fixed cost
explain opportunity cost
Maximum value foregone when a course of action is chosen
what is opportunity cost for each option: Option A - profit $10, option B - profit $12, option C - profit $14
A - 14, B - 14, C - 12
explain sunk cost (2pts)
1) Cost from a previous commitment that can’t be recovered;
2) Sunk costs should not be considered in subsequent decisions because they can’t be changed
example of sunk cost
rent (year lease), phone plan (2 year contract), depreciation on a building
sunk cost phenomenon
People who stick with a course of action that is hopeless because they take into account sunk costs (ex. A car that they keep repairing)
what kind of cost is depreciation?
fixed cost
is sunk cost a relevant cost?
no
what does CVP stand for?
cost volume profit
define CVP
uses variable and fixed costs to identify profit associated with various levels of activity
define contribution margin
difference between total revenue and total variable cost
define contribution margin / unit
contribution each unit makes to covering fixed costs and providing a profit
define contribution margin ratio
ratio of contribution margin per unit to selling price per unit; it is the fraction of each sales dollar that is available to cover fixed expenses and produce a profit
4 assumptions of CVP
1) units sold = units produced; 2) all costs are either fixed or variable;
3) unit selling price and variable cost per unit remain the same over all levels of production;
4) fixed costs remain the same over all levels of production
what is the CVP formula
X = (F + pi / (1-TR)) / unit CM
what is pi in CVP formula?
net income / net profit / target profit
extra assumption for multiproduct CVP analysis
The sales mix is constant i.e. the weight of each product in the sales total remains the same over all levels of production
how do you get product mix for each product
total units sold of product / total units sold
3 steps to solve multiproduct CVP analysis for breakeven
1) calculate WACM = sum of CM * sales mix for each product
2) calculate total units to break even (X = F / WACM)
3) calculate units / product: product i = X * sales mix for product i
what does nonfinancial management accounting info include?
measures related to customer satisfaction and loyalty, process quality and timeliness, innovation and employee motivation
what does financial management accounting info include
cost of producing product, cost of delivering service, cost of performing an activity or business process, reported expenses of operating department, cost of serving a customer
definition: strategy
Describes how a company will gain competitive advantage by being different or better than its competitors. Examples of strategies include low cost, complete customer solutions, and product leadership
definition: plan-do-check-act cycle
A method of budget setting
that uses a joint decision-making process in which all relevant parties agree about setting the budget targets.
plan in plan-do-check-act cycle
1) identify objectives
2) choose a course of action to achieve desired objectives
do in plan-do-check-act cycle
implement chosen course of action
check in plan-do-check-act cycle
1) monitor (measure) the results of the implemented course of action
2) evaluate results by comparing them with results expected when plan was developed
act in plan-do-check-act cycle
maintain current direction if results are acceptance otherwise return to plan stage to develop and implement an alternative course of action
behavioural implications: managers unethical behaviour
1) Managers and employees may take unexpected and undesirable actions to influence their score on the performance measure.
2) Managers seeking to improve current bonuses based on reported profits may skip discretionary expenditures that may improve performance in future periods.
definition: balanced scorecard
A strategic management system that translates an organization’s strategy into clear objectives, measures, targets, and initiatives organized into 4 perspectives
explain financial perspective in balanced scorecard
focuses on financial measures of an organization’s success, such as return on investment and operating income
explain customer perspective in balanced scorecard
identifies objectives and measures for the targeted customer segments, and for the value proposition for customers in these segment
explain process perspective in balanced scorecard
describes how a strategy will be executed. It identifies the operating, customer management, innovation, and regulatory and social processes that are most important to meet the expectations of shareholders and customers
explain learning and growth perspective in balanced scorecard
identifies the objectives for employee capabilities, information systems, and organizational climate that will create long-term growth and improvement
2 essential components of a good strategy
1) A clear statement of the company’s advantage in the competitive marketplace
2) The scope for the strategy, where the company intends to compete most aggressively
define: measures
Descriptions of how success in achieving Balanced Scorecard objectives will be determined
define: target
The level of performance or rate of improvement required for a Balanced Scorecard measure
define: strategy map
A comprehensive visual representation of the linkages among objectives and measures in the four perspectives of the Balanced Scorecard
define: value proposition
Clear and short statement of competitive value that the organization will deliver to its target customers—how it will compete for, or satisfy, customers
4 types of processes
operations management, customer management, innovation, regulatory and social
3 learning and growth categories and subcategories
1) HR - strategic competency available
2) info tech - strategic info availability
3) org culture and alignment - culture and climate, goal alignment, knowledge sharing
example of where Cost information is pervasive throughout decision-making situations
Pricing Product planning Budgeting Performance evaluation Contracting
formula for CM ratio
TR - TVC / TR
formula for CVP if we want to set target profit as 20% of revenues
x = FC / CM - (20%*Price per unit)
define: what-if analysis
A process of exploring the effects of changes in estimates on predictions in a financial model.
formula for incremental profit and what does the variable mean?
= incremental CM - incremental cost (incremental cost means nonvariable incremental cost)
define: breakeven point
The level of sales units or sales dollars at which the contribution from sales revenue less variable costs covers fixed costs. At the breakeven point, net income equals zero.
what is opportunity cost when all alternatives can be done?
0
explain short-term product mix decisions
1) Organizations often face competing demands for their limited production resources.
2) The relevant costs concept should be applied to these decisions.
Key concept: Contribution margin per unit of scarce resource (ex. labour hrs)
