Selection of questions from tutorials Flashcards
Identify two major factors that impair the ability of plantwide rates to assign cost accurately
- Product diversity (i.e. different product consume different amounts of overhead)
- Significant non-unit-level overhead costs
What are the steps that define the design of an activity-based costing system?
(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.
Define budget
Budgets are the quantitative expressions of plans. Budgets are used to translate the goals and strategies of an organization into operational terms. Budgets are the standards, and they are compared with actual costs and revenues to provide feedback.
Define control
Control is the process of setting standards, receiving feedback on actual performance, and taking corrective action whenever actual performance deviates from planned performance.
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.
The shortcomings of the traditional master budget
- It does not recognize the interdependencies among departments
- It is static
- It is results rather than process oriented
(These criticisms are especially apparent when companies are in a competitive, dynamic environment)
What are the steps involved in building an activity-based 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.
What are two disadvantages of ROI?
(1) ROI may discourage managers from investing in projects that would increase the profitability of the firm but decrease the division’s ROI.
(2) It may encourage managers to focus on short-run profitability and to take actions that may harm long-run profitability.
The transfer pricing problem (three objectives)
Is finding a transfer price that simultaneously satisfies three objectives:
- accurate performance evaluation,
- goal congruence,
- preservation of divisional autonomy.
Identify three “cost-based” transfer prices
- Full cost
- Full cost plus mark up
- Variable cost plus fixed fee
Explain internal linkages
Internal linkages are relationships among the
activities within a firm’s value chain.
Explain external linkages
External linkages describe the relationship between a firm’s value chain and the value chain of its suppliers and customers
Structural cost driver
A structural cost driver is a factor that drives costs associated with the organization’s structure, such as scale and scope factors. Examples include number of plants and management style
Executional cost driver
Executional cost drivers are factors that determine the cost of activities related to a firm’s ability to execute successfully. Examples include degree of employee participation and plant layout efficiency.
What are the three viewpoints of product life cycle? (+orientation)
- The marketing viewpoint (revenue-oriented)
- The production viewpoint (expense-oriented)
- The consumption viewpoint (customer-value-oriented)
What are the two dimensions of the activity-based management model?
- cost dimension (accurate cost assignment)
- process dimension (cost driver analysis)
Identify and define four different ways to manage activities so that costs can be reduced
(1) Activity elimination: the identification and elimination of activities that fail to add value.
(2) Activity selection: the process of choosing among different sets of activities caused by competing strategies.
(3) Activity reduction: the process of decreasing the time and resources required by an activity.
(4) Activity sharing: increasing the efficiency of necessary activities using economies of scale.
Strategic-based responsibility accounting system
- Converts an organization’s mission and strategy into operational objectives and measures for four perspectives (BSC)
- It adds two perspectives to the responsibility dimension: the customer perspective and the learning and growth perspective. (Compared to AB responsibility accounting)
Identify three methods for achieving strategic alignment.
- Communication (employees aware)
- Incentives (Rewards tied to strategy)
- Resource allocation (Funds are allocated to support the strategy)
Identify three objectives of the learning and growth perspective
- Increase employee capabilities
- Increase motivation/empowerment/alignment
- Increase information systems capabilities
The three types of agency costs
- Monitoring or control expenditures
- Bonding expenditures (incentive pay received by agents)
- The residual loss
What are advantages of the bonus bank incentive system compared to traditional incentive systems?
- Bonus payments are over an extended period of time - often several years. It therefore fosters the long-term determination of decision makers in a company instead of rewarding short-term profits
When designing incentive systems, what should you consider? Why?
All four dimensions of the balanced scorecard should be considered for evaluating the performance of employees: Financial, process, customer and learning and growth.
Upside: Future oriented
(Most companies base their incentive pay on financial indicators, such as ROI or sales. Downside: Past orientation)
Identify and discuss the four kinds of quality costs.
- Prevention costs are incurred to prevent defects in products
- Appraisal costs are costs incurred to determine whether products are conforming to specifications
- Internal failure costs are incurred when nonconforming products are detected prior to shipment
- External failure costs are incurred because nonconforming products are delivered to customers.
What are the four categories of environmental costs? Define each category.
Prevention costs are costs incurred to prevent degradation to the environment.
Detection costs are incurred to determine if the firm is complying with environmental standards.
Internal failure costs are costs incurred to prevent emission of contaminants to the environment after they have been produced.
External failure costs are costs incurred after contaminants have been emitted to the environment.
What is a relevant cost? Explain why depreciation on an existing asset is always irrelevant
Relevant costs and revenues are future costs and revenues that differ across alternatives. Depreciation on an existing asset represents an allocation of a past cost. Past costs are never relevant.
What role do past costs play in tactical cost analysis?
The only role of past costs is predictive. They can be used to help predict future costs
Why would a firm ever offer a price on a product that is below its full cost?
If a firm has unused production capacity and sufficient unused activity capacity, a one-time special order may bring in more revenues than the increase in resource spending needed to fill the order.
Give several reasons why a Company may choose not to drop a Loser product line
(a) customers of all lines prefer to deal with a “full-service” com-pany
(b) “Loser” is projected to begin making a profit later on
(c) workers on the “Loser” line are learning new technology with spillover benefits for all products; and
(d) “Loser” is really part of the marketing efforts for the entire company
How does absorption costing differ from variable costing?
Absorption costing differs from variable costing in that fixed factory overhead is included in unit cost under absorption costing. The result is that absorption-costing operating income is sensitive to fluctuations in inventory.
