Questions week 2-3 Flashcards
- Explain how CVP analysis can be used for managerial planning.
CVP analysis allows managers to focus on prices, volume, costs, profits, and sales mix. Many different “what-if” questions can be asked to assess the effect on profits of changes in key variables.
- Why might a multiple-product firm choose to calculate just overall break-even revenue rather than the break-even quantity by product?
A multiple-product firm may not care about the individual product break-even points. It may feel that some products can even lose money as long as the overall picture is profitable. For example, a company that produces a full line of spices may not make a profit on each one, but the availability of even the more unusual spices in the line may persuade grocery stores to
purchase from the company
- Why does the activity-based costing approach to CVP analysis offer more insight than the conventional approach does?
Activity-based costing reminds managers that costs may vary with respect to unit and nonunit variables, such as the number of batches or number of products. This insight prevents a single-minded focus on unit-based costs, to the exclusion of factors which might change fixed costs.
- Explain how a plantwide overhead rate, using a unit-based driver, can produce distorted product costs. In your answer, identify two major factors that impair the ability of plantwide rates to assign cost accurately.
Plantwide overhead rates assign overhead to products in proportion to the amount used of the unit-based driver. If all products consume overhead in proportion to this unit-based driver, no distortion will occur. Cost distortion can occur if the products consume some
overhead activities in different proportions than those assigned by the unit-based driver (the product diversity factor). No significant distortion will occur unless the activities that are consumed in different proportions make up a significant proportion of the total over-head costs. Thus, two key factors are product diversity and significant non-unit-level overhead
costs.
- What is activity-based product costing?
Activity-based product costing is a costing approach that first assigns costs to activities and then to products. The assignment is made possible through the identification of activities, their costs, and the use of cost drivers.
- What are the steps that define the design of an activity-based costing system?
The six steps are: (1) identify, define, and classify activities and key attributes; (2) assign the cost of resources to activities; (3) assign the cost of secondary activities to primary activities; (4) identify cost objects and specify the amount of each activity consumed by specific cost objects; (5) calculate primary activity rates; and (6) assign activity costs to cost objects.
- How does TDABC simplify ABC?
TDABC simplifies ABC by eliminating the need to do detailed interviews and surveys to assess activity costs. By using objectively determined capacity cost rates, activity rates can be calculated directly.
- Explain why it is easy to update a TDABC model.
Updating a TDABC model is easy because activity rates are updated simply by updating the capacity cost rate. Most changes in operating conditions are reflected by changes in either resource costs or system time. These changes are reflected in the capacity cost rate which is
then used to update the activity rate.
- Define budget and control and how they are used in planning and control.
Budgets are the quantitative expressions of plans. Budgets are used to translate the goals and
strategies of an organization into operational terms.
Control is the process of setting standards, receiving feedback on actual performance, and taking corrective action whenever actual performance deviates from planned performance. Budgets are the standards, and they are compared with actual costs and revenues to provide feedback.
- Discuss some of the reasons for budgeting
Budgeting forces managers to plan, provides resource information for decision making, sets benchmarks for control and evaluation, and improves the functions of communication and coordination.
- While many small firms do not put together a complete master budget, nearly every firm creates a cash budget. Why do you think that is so? Also differentiate master budget, operating budget and financial budget.
The master budget is the collection of all individual area and activity budgets. Operating budgets are concerned with the income-generating activities of a firm. Financial budgets are concerned with the inflows and outflows of cash and with planned capital expenditures.
Small firms often do not engage in a comprehensive master budgeting process. (Although that may be a mistake: The budgeting process helps management more fully understand the business and helps them to plan for the coming year.) Even small businesses create cash budgets, however, because cash flow is critically important. For example, it is possible to
have positive operating income, but negative cash flow (e.g., if sales on account are high, but customers are slow to pay). Negative cash flow could put a company out of business in short order.
- Discuss the shortcomings of the traditional master budget. In what situations would the master budget perform well?
The master budget has been criticized for the following reasons: it does not recognize the
interdependencies among departments, it is static, and it is results rather than process oriented. These criticisms are especially apparent when companies are in a competitive, dynamic environment. When the environment changes slowly, if at all, the master budget would do a good job of both planning and control.
- What are the steps involved in building an activity-based budget? How do these steps differentiate the ABB from the master budget?
The activity-based budget starts with output, determines the activities necessary to create that output, and then determines the resources necessary to support the activities. This differs from the traditional master budgeting process in that the master budget leaps directly from output to resources. Some of the resource levels are assumed to be fixed. This makes them
independent of volume changes and hides the drivers that actually do affect the fixed resources. As a result, the budget format does not support the creation of value and the thinking that would go into determining the sources of waste.
