Test 2

Question 1

3 advantages of variable costing financial statements

Answer 1

1. Enabling CVP analysis
   - because it categorizes costs as fixed and variable while absorption costing mixes them
   - in absorption costing net operating income can be distorted by changes in inventory and may not agree with the results of CVP
2. Explaining changes in Net Operating Income: Variable costing is clear and easily explained while absorption costing statements can be confusing and easily misinterpreted.
3. Supporting decision making: correctly identifies the additional variable cost of making one more unit and emphasizes the impact of fixed costs on profits.

Question 2

Lean Production

Answer 2

• Goods are produced in response to customer orders
• Eliminates finished inventories and reduces work in progress inventory to almost nothing
• # of units produced tend to = # of units sold
• Reduces difference between variable and absorption costing NOI to almost nothing
• Standardized of production

Question 3

Segment margin

Answer 3

• Represents the margin available after a segment has covered all of its own costs.
• Based off of traceable cost
• Best gauge of long run profitability of a segment
• Does not include common fixed cost
• Useful in major decisions that affect capacity

Question 4

Contribution margin

Answer 4

• The amount remaining from sales revenue after variable expenses have been deducted.
• Amount available to cover fixed expenses THEN to provide profits
• Useful in decisions involving short run changes in volume.

Question 5

Operating Activities

Answer 5

• What the company actually does, anything that impacts net income
• Will impact revenue, expense, and changes in current liabilities and current assets. (an increase in A/R -> subtract from net income, all current assets act that way, all current liabilities are the opposite)
• Examples: wages, paying interest (ie interest expense), depreciation, Gain/loss on stock

Question 6

Investing Activities

Answer 6

• Transactions affecting long-term assets
• Generate cash inflows and out flows related to acquiring or disposing of noncurrent assets.
• Examples; purchasing property, plan, equipment, buying/selling stock in another company, long-term investments, loans to other companies, etc

Question 7

Financing Activities

Answer 7

• Transactions affecting long-term debit and stockholders equity
• Generate cash inflows and outflows related to borrowing from and repaying principal to creditors and completing transactions with the company’s owners
• Examples: issuing bonds, selling/repurchasing common stock, dividends, etc

Question 8

Statement of cash flows that uses the indirect method .

Answer 8

• Net income is adjusted to a cash basis
• Cash sales, cash expenses, etc are derived indirectly by removing any times that do not affect cash flows from net income.
• shows the reasons for any differences between net cash provided by operating activities and net icome

Question 9

Relevant cost

Answer 9

cost that differ between 2 alternatives. These are the only cost that should be considered when doing a differential analysis

 - Avoidable cost
 - Opportunity cost

Question 10

Strengths of ROI

Answer 10

• Easily compare across segments
• Can compare against past returns and the returns of other companies
• widely used
• reflects in a single figure man aspects of the manager’s responsibilities

Question 11

Weaknesses of ROI

Answer 11

• Managers may increase ROI in a way that is inconsistent with the company’s strategy or in a way that can harm the company in the long run.
• committed cost make it more difficult to fairly assess manager performance
• Manager may reject opportunities that are good for the company but would have a negative impact on the manager’s performance evaluation
• ROI increases automatically with depreciation (ie incentive to hold onto old assets)

Question 12

Strengths of Residual Income

Answer 12

-encourages managers to make investments that are profitable for the entire company but would be rejected by ROI managers.

Question 13

Weaknesses of Residual Income

Answer 13

• not comparable to other divisions due to size differences (ie more RI simply because a division is bigger.
• incentive to hold on to assets still there

Question 14

Controversies in ROI and RI

Answer 14

• how average operating assets are determined (ie what segment do those belong to)
• committed cost allocation

Question 15

Operating performance measures

Answer 15

• nonfinancial measures
• measure the actions that drive organizational performance (the increase/decrease in financial measures are the results of these actions)
• e: Delivery Cycle Time, Throughput time, and Manufacturing Cycle efficiency

Question 16

Balanced Scorecard

Answer 16

• integrated set of performance measures that are derived from and support the organization’s strategy
• Performance measures tend to fall in 4 groups: financial , Customer, Internal business processes, and learning and growth
• focused on continual improvement

Question 17

Balanced Scorecard measures should be (CUL FQ)

Answer 17

1. Consistent with the organizations strategy
2. Understandable and controllable by those being evaluated
3. linked by cause and effect
4. frequently and timely reported
5. Should not have too many performance measures (quantity)

Question 18

What is a Balanced Scorecard used for?

Answer 18

1. Bonuses/compensation
2. Measure improvement
3. Theory of how a company can concentrate actions to attain financial outocmes

Question 19

Supplemental allocation can be changed by

Answer 19

1. Changing the base

2. Changing the order in which cost are allocated