ACT 202 Chapters 8,9,10,11

what are payback period ignores

-cash inflows that occur after payback has been reached -desired rate of return -time value of money

Know that investment vs finance are...

2 separate decisions

Project A costs $5,000 and will generate annual after-tax net cash inflows of $1,800 for five years. What is the NPV using 8% as the discount rate?

Using the annuity table given in class 1800 x8% at 5 years= 3.993 x 1800= $7,187 7,187- investment of 5,000= $2,187

How much must be invested now to receive $30,000 for 10 years if the first $30,000 is received one year from now and the rate is 8%?

Using the annuity table given in class 30,000 x 8% x 10 years= 6.710 x 30,000= $201,300

Relevant information must be...

a cash flow. For example, depreciation is NOT a cash flow. If it is a cash flow, must be a cash flow that changes with alternatives.

transfer pricing is used by...

divisions in decentralized companies

What are sunk costs?

expenditure made in the past and that expenditure cannot be changed by present or future actions. Sunk costs are never relevant Ex. Ugly ties that we need to sell because we cannot go back and get rid of that cost to make the ugly ties

Disadvantages of decentralization

higher monitoring costs higher costs because of multiple accounting, finance, etc departments Employee may not act in the best interest of the company Can try for goal congruence, but hard to achieve

What are some possible reasons for a labor rate variance? hiring of less qualified workers an excess of material usage material price increase utilities usage change

hiring of less qualified workers

Financing decisions deal with

how to raise capital (debt/equity) to fund an investment made by treasurer and top management Interest is a financing decision

This standard is set at a level that could be achieved if everything ran perfectly. ideal standard attainable standard unattainable standard variance from standard

ideal standard

With the market price approach...

the transfer price paid by the purchaser is the price the seller would use for an outside customer

what is payback period

time required for projects cash inflows to equal the original investment -the longer it takes to recover the original investment, the greater the risk -the faster capital is returned, the more rapidly it can be invested in other projects -Management can set a maximum payback period

what are perfection standards?

unattainable standards/ideal standards

When is the material quantity unfavorable? when the actual quantity used is greater than the standard quantity when the actual quantity used is less than the standard quantity when the actual price paid is greater than the standard price when the actual price is less than the standard price

when the actual quantity used is greater than the standard quantity

What are one advantage and one disadvantage of the payback method?

Advantage is it does consider cash flows, but just not cash flows after the payback period. Also shows how long you can get back your investment

Advantages of Decentralization

Better moral Usually improves motivation and retention Better training (necessary) Identifies good decision makers better able to make quick decisions better use of management times

what is profitability index

Compares PV of net cash flows to net investment -Measures efficiency of the use of capital -should be greater than or equal to 1 -does not calculate rate of return Formula: PV of Net Cash flows/Net Investment

Discuss the advantages and disadvantages of a cost-based transfer pricing approach.

Disadvantages would be it's going to affect the profit of the selling division and if all products are sold internally, they are going to have little ambition to sell their products

what is internal rate of return method

Discount rate where PV of cash inflows= PV of cash outflows NPV= 0 -Hurdle rate is the lowest acceptable return on investment (or at least equal to the cost of capital)

Qualitative Capital Budgeting Examples

Employee Moral, Safety, and Responsibility Corporate image social responsibility market share growth strategic planning sustainability

what is net present value

Evaluates if project rate of return is greater than, equal to, or less than the desired rate of return (most common used by business.) Downfall is it doesn't give you a rate of return.

What are different approaches to setting standard costs?

Historical Data Engineering studies Continuous improvement goals

Residual Income Formula

Income- [average total assets) * cost of capital %]

Return on Investment (ROI) Formula

Income/average total assets (or total assets)

This calculation determines profitability or growth potential of an investment, expressed as a percentage, at the point where NPV equals zero internal rate of return (IRR) method net present value (NPV) discounted cash flow model future value method

Internal rate of return method

Discuss the advantages and disadvantages of a market-based transfer pricing approach.

Keep up to date costs

what is centralization

Management is at the top and makes all of the big decisions where as departments and department managers get told what to do and could really only make small decisions

Quantitative Capital Budgeting Examples

Payback period Net present value Internal rate of return Profitability Index

What are the strengths and weaknesses of NPV?

Strengths are that it uses time value of money and considers cash flows. Reinvests earnings at the required rate of return. Disadvantages is it doesn't give the true rate of return of the project (or internal rate of return)

What are the strengths and weaknesses of IRR?

Strengths uses cash flows, time value of money, gives the true rate of return of the project. Disadvantages is that a shorter project gives a higher rate of return

what are the benefits of standards

aids management planning by providing unit amounts for budgeting aids in spotting potential problem areas, through the use of variances helps motivate employees by serving as benchmarks provides unit costs useful in setting sales prices

In centralized organizations, primary decisions are made by ________. an individual at the top of the organization various managers throughout the organization outside consultants low-level management

an individual at the top of the organization

what is an investment center

an organizational segment in which a manager is accountable for profits (revenues-expenses) and the invested capital used by the segment Ex. Chevy, GM, Buick, Cadillac

what is a revenue center

an organizational segment in which a manager is held accountable only for revenues Ex. district sales territory

what is a cost center

an organizational segment in which a manager is held responsible only for costs. In these types of responsibility centers, there is a direct link between the costs incurred and the product or services produced Ex. Manufacturing dept.

what is a profit center

an organizational segment in which a manager is responsible for both revenues and costs. Ex. one store in a chain of stores, like a car dealership

This standard is set at a level that may be reached with reasonable effort. ideal standard attainable standard unattainable standard variance from standard

attainable standard

A standard cost is a...

carefully computed predetermined cost

Relevant revenues/benefit are...

cash inflows that change with alternatives.

Which of the following is not a type of responsibility center? concentrated cost center investment center profit center cost center

concentrated cost center

the other type of standards are...

currently attainable or practical standards

A transfer pricing arrangement that uses the price that would be charged to an external customer is a ________. market-based approach negotiated approach cost approach decentralized approach

market based approach

what is decentralization

means that decision authority is pushed down to lower organization levels, like down to departments and department managers

Quantitative information

not sure what to put here...

________ are the costs associated with not choosing the other alternative. Sunk costs Opportunity costs Differential costs Avoidable costs

opportunity costs

Which of the following does not assign a value to a business opportunity using time-value measurement tools? internal rate of return (IRR) method net present value (NPV) discounted cash flow model payback period method

payback period method

We have a volume variance when we...

produce more that what was budgeted

A responsibility center in which managers are held accountable for both revenues and expenses is called a ________. discretionary cost center revenue center cost center profit center

profit center

A key advantage of a decentralized organization is ________. increased administrative costs quicker decisions and response time the ease of aligning segment and company goals duplication of efforts

quicker decisions and response time

what is discounting future cash flows

reduce the future value (FV) of cash flows by the portion that represents interest Variables are -length of time until the cash flow is received or paid -required rate of return on capital- discount rate

Revenues will be

relevant

Types of decisions

special pricing/special orders Dropping products/segments/divisions Make or buy/outsourcing Sell or process further or scrap instead of reworking keep or replace equipment

Which type of incurred costs are not relevant in decision-making (i.e., they have no bearing on future events) and should be excluded in decision-making? avoidable costs unavoidable costs sunk costs differential costs

sunk costs

The IRR method assumes that cash flows are reinvested at ________. the internal rate of return the company's discount rate the lower of the company's discount rate or internal rate of return an average of the internal rate of return and the discount rate

the internal rate of return

When the transfer price uses a cost approach...

the price may be based on either total variable cost, full cost, or a cost plus scenario

This variance is the difference involving spending more or using more than the standard amount. favorable variance unfavorable variance no variance variance

unfavorable variance

When is the material price variance favorable? when the actual quantity used is greater than the standard quantity when the actual quantity used is less than the standard quantity when the actual price paid is greater than the standard

when the actual price paid is greater than the standard

When is the material price variance unfavorable? when the actual quantity used is greater than the standard quantity when the actual quantity used is less than the standard quantity when the actual price paid is greater than the standard price when the actual price is less than the standard price

when the actual price paid is greater than the standard price

When is the material quantity variance favorable? when the actual quantity used is greater than the standard quantity when the actual quantity used is less than the standard quantity when the actual price paid is greater than the standard price when the actual price is less than the standard price

when the actual quantity used is less than the standard quantity

Investment decisions deal with

which assets to acquire made by divisional managers and top management