Perf Management

Define cost assignment.

Cost assignment is a general term that encompasses the assignment of both direct and indirect costs to a cost object. Direct costs are traced to a cost object, while indirect costs are allocated to a cost object.

Describe four signs that help indicate when ABC systems are likely to provide the most benefits.

"Tell-tale" signs that indicate when ABC systems are likely to provide the most benefits are as follows: 1. Significant amounts of indirect costs are allocated using only one or two cost pools. 2. All or most indirect costs are identified as output-unit-level costs (i.e., few indirect costs are described as batch-level, product-sustaining, or facility-sustaining costs). 3. Products make diverse demands on resources because of differences in volume, process steps, batch size, or complexity. 4. Products that a company is well suited to make and sell show small profits, whereas products that a company is less suited to produce and sell show large profits. 5. Operations staff has significant disagreements with the accounting staff about the costs of manufacturing and marketing products and services.

Define the following: 1. Direct material costs 2. Direct manufacturing-labor costs 3. Manufacturing overhead costs 4. Prime costs 5. Conversion costs

1. Direct material costs are the acquisition costs of all materials that eventually become part of the cost object (work in process and then finished goods) and can be traced to the cost object in an economically feasible way. 2. Direct manufacturing labor costs include the compensation of all manufacturing labor that can be traced to the cost object (work in process and then finished goods) in an economically feasible way. 3. Manufacturing overhead costs are all manufacturing costs that are related to the cost object (work in process and then finished goods) but cannot be traced to that cost object in an economically feasible way. 4. Prime costs are all direct manufacturing costs (direct material and direct manufacturing labor). 5. Conversion costs are all manufacturing costs other than direct material costs.

What is a cost driver. Provide one example.

A cost driver is a variable, such as the level of activity or volume, that casually affects total costs over a given time span. A change in the cost driver results in a change in the level of total costs. Example: the number of vehicles assembled is a driver of the costs of steering wheels on a motor vehicle assembly line.

Define cost object and give three examples.

A cost object is anything for which a separate measurement of costs is desired. Examples include a product, a service, a project, a customer, a brand category, a department.

Describe the difference between a direct materials efficiency variance and a variable manufacturing overhead efficiency variance.

A direct materials efficiency variance indicates whether more or less direct materials were used than was budgeted for the actual output achieved. A variable manufacturing overhead efficiency variance indicates whether more or less of the chosen allocation base was used than was budgeted for the actual output achieved.

Explain why a favorable sales-quantity variance occurs.

A favorable sales-quantity variance arises because the actual units of all products sold exceed the budgeted units of all products sold.

What are two possible sources of information a company might use to compute the budgeted amount in variance analysis?

A favorable variance--denoted F--is a variance that has the effect of increasing operating income relative to the budgeted amount. An unfavorable variance--denoted U--is a variance that has the effect of decreasing operating income relative to the budgeted amount.

Define fixed cost.

A fixed cost remains unchanged in total for a given time period. Ex: rent

Why might managers find a flexible budget analysis more informative than a static budget analysis?

A flexible-budget analysis enables a manager to distinguish how much of the difference between an actual result and a budgeted amount is due to (a) the difference between actual and budgeted output levels, and (b) the difference between actual and budgeted selling prices, variable costs, and fixed costs.

Describe three features of a good balanced scorecard.

A good balanced scorecard design has several features: 1. It tells the story of a company's strategy by articulating a sequence of cause-and-effect relationships. 2. It helps to communicate the strategy to all members of the organization by translating the strategy into a coherent and linked set of understandable and measurable operational targets. 3. It places strong emphasis on financial objectives and measures in for-profit companies. Nonfinancial measures are regarded as part of a program to achieve future financial performance. 4. It limits the number of measures to only those that are critical to the implementation of strategy. 5. It highlights suboptimal trade-offs that managers may make when they fail to consider operational and financial measures together.

Describe two ways in which a house-construction company may use job-cost information.

A house construction firm can use job cost information (1) to determine the profitability of individual jobs, (2) to assist in bidding on future jobs, and (3) to evaluate professionals who are in charge of managing individual jobs.

How might a manager gain insight into the causes of a flexible budget variance for direct materials?

A manager should subdivide the flexible-budget variance for direct materials into a price variance (that reflects the difference between actual and budgeted prices of direct materials) and an efficiency variance (that reflects the difference between the actual and budgeted quantities of direct materials used to produce actual output). The individual causes of these variances can then be investigated, recognizing possible interdependencies across these individual causes.

Define rolling budget. Give an example.

A rolling budget, also called a continuous budget, is a budget or plan that is always available for a specified future period, by continually adding a period (month, quarter, or year) to the period that just ended. A four-quarter rolling budget for 2014 is superseded by a four-quarter rolling budget for April 2014 to March 2015, and so on.

Per our class discussion, please explain the difference between a traditional budget and a rolling budget.

A traditional budget is made once a year for the entire fiscal year. A rolling budget is a budget that the month (or quarter) that just ended is budgeted for the next year and added to the already existing budget so twelve months are always budgeted. For example, when February 2015 is finished the budget for February 2016 is made and added on to the current budget that had ended with January 2016.

Explain why unit costs must be interpreted with caution.

A unit cost is computed by dividing some amount of total costs (the numerator) by the related number of units (the denominator). In many cases, the numerator will include a fixed cost that will not change despite changes in the denominator. It is erroneous in those cases to multiply the unit cost by activity or volume change to predict changes in total costs at different activity or volume levels.

Define variable cost.

A variable cost changes in total in proportion to changes in the related level of total activity or volume.

Companies budget to coordinate, motivate, and evaluate. Concerning coordination, which of the below is an advantage if a company uses a bottom-up budgeting process opposed to a top-down budgeting process. A. Information flows from the most informed (local managers) to least informed B. Local managers feel they have had influence on the budget C. Since the evaluation criteria are set by themselves, local managers tend to think they are judged fairly. D. Local managers might not see the "big picture". They might see "the trees and not the forest". E. Budgetary slack!! Fat budgets!!

A.

Measures of the balanced scorecard's customer perspective include: A. market share B. number of on-time deliveries C. number of process improvements D. revenue growth E. None of the above are correct

A.

Which of the following is true of master-budget capacity utilization? A. It hides the amount of unused capacity. B. It represents the maximum units of production intended for current capacity. C. It provides the best cost estimate for benchmarking purposes. D. It is an average that provides no meaningful feedback to a firm's marketing manager for a particular year.

A.

9-31 (page 365)

Absorption costing. Part 1: compute the fixed MOH per barrel for each scenario Part 2: Part 2: operating income. Essentially revs - costs Step 1: revs (Q * price) Step 2: costs available for sale (NOT COST OF GOODS SOLD) Step 2a. variable manufacturing costs Step 2b:: allocate the fixed MOH by the rates by units produced Step 2c: sum Step 3: get the COGS Step 3a: deduct the ending inventory (since we didn't sell it)

What are the key reasons for product cost differences between simple costing systems and ABC systems?

An ABC approach focuses on activities as the fundamental cost objects. The costs of these activities are built up to compute the costs of products, and services, and so on. Simple costing systems have one or a few indirect cost pools, irrespective of the heterogeneity in the facility while ABC systems have multiple indirect cost pools. An ABC approach attempts to use cost drivers as the allocation base for indirect costs, whereas a simple costing system generally does not. The ABC approach classifies as many indirect costs as direct costs as possible. A simple costing system has more indirect costs.

What is an activity-based approach to designing a costing system?

An activity-based approach refines a costing system by focusing on individual activities (events, tasks, or units of work with a specified purpose) as the fundamental cost objects. It uses the cost of these activities as the basis for assigning costs to other cost objects such as products or services.

Why might an advertising agency use job costing for an advertising campaign by Pepsico, whereas a bank might use process costing to determine the cost of checking account deposits?

An advertising campaign for Pepsi is likely to be very specific to that individual client. Job costing enables all the specific aspects of each job to be identified. In contrast, the processing of checking account withdrawals is similar for many customers. Here, process costing can be used to compute the cost of each checking account withdrawal.

Why might an analyst examining variances in the production area look beyond that business function for explanations of those variances?

An individual business function, such as production, is interdependent with other business functions. Factors outside of production can explain why variances arise in the production area. For example: Poor design of products or processes can lead to a sizable number of defects. Marketing personnel making promises for delivery times that require a large number of rush orders can create production-scheduling difficulties. Purchase of poor-quality materials by the purchasing manager can result in defects and waste.

How does the planning of fixed overhead costs differ from the planning of variable overhead costs?

At the start of an accounting period, a larger percentage of fixed overhead costs are locked-in than is the case with variable overhead costs. When planning fixed overhead costs, a company must choose the appropriate level of capacity or investment that will benefit the company over a long time. This is a strategic decision.

An unfavorable efficiency variance for direct manufacturing labor might probably indicate that: A. work was efficiently scheduled B. machines were not properly maintained C. budgeted time standards are too lax (aka easy or low) D. more higher-skilled workers were scheduled than planned E. all of the above are correct

B.

Morton Graphics successfully bid on jobs printing standard notebook covers during the year using last year's price of $0.27 per cover. This amount was calculated from prior year costs, noting that no changes in any costs had occurred from the past year to the current year. At the end of the year, the company manager was shocked to discover that the company had suffered a loss. "How could this be?" she exclaimed. "We had no increases in cost and our price was the same as last year. Last year we had a healthy income." Which is the best explanation of the company's loss in income this current year? A. Their costs were all variable costs and the amount produced and sold increased. B. Their costs were mostly fixed costs and the amount produced and sold this year was less than last year. C. They used a different cost object this year than the previous year. D. Their costs last year were actual costs but they used budgeted costs to make their bids.

B.

When all other factors remain the same, if a firm decides to ___________________ the selling price of its product, its unit contribution margin is ______________________. A. Increase; Decreased B. Increase; Increased C. Increase; Unaffected D. Decrease; Increased E. Decrease; Unaffected

B.

Explain the role of benchmarking in evaluating managers.

Benchmarking or relative performance evaluation is the process of evaluating a manager's performance against the performance of other similar operations. The ideal benchmark is another operation that is affected by the same noncontrollable factors that affect the manager's performance. Benchmarking cancels the effects of the common noncontrollable factors and provides better information about the manager's performance.

What is broad averaging, and what consequences can it have on costs?

Broad averaging (or "peanut-butter costing") describes a costing approach that uses broad averages for assigning (or spreading, as in spreading peanut butter) the cost of resources uniformly to cost objects when the individual products or services, in fact, use those resources in non-uniform ways. Broad averaging, by ignoring the variation in the consumption of resources by different cost objects, can lead to inaccurate and misleading cost data, which in turn can negatively impact the marketing and operating decisions made based on that information.

What are some additional considerations that arise when budgeting in multinational companies?

Budgeting in multinational companies may involve budgeting in several different foreign currencies. Further, management accountants must translate operating performance into a single currency for reporting to shareholders by budgeting for exchange rates. Managers and accountants must understand the factors that impact exchange rates and, where possible, plan financial strategies to limit the downside of unexpected unfavorable moves in currency valuations. In developing budgets for operations in different countries, they must also have good understanding of political, legal, and economic issues in those countries.

Theoretical capacity: A. represents the realistic capacity available to the company B. provides the best perspective of actual long-run costs C. when used for product costing results in the lowest cost estimate of the four capacity options D. replicates the cost of capacity in a competitor's cost structure E. both A and B are correct

C.

Define cost pool, cost tracing, cost allocation and cost-allocation base.

Cost pool--a grouping of individual indirect cost items. Cost tracing--the assigning of direct costs to the chosen cost object. Cost allocation--the assigning of indirect costs to the chosen cost object. Cost-allocation base--a factor that links in a systematic way an indirect cost or group of indirect costs to cost objects.

"Cost written off as depreciation on equipment already purchased is always irrelevant." Do you agree? Why?

Cost written off as depreciation is irrelevant when it pertains to a past cost such as equipment already purchased. But the purchase cost of new equipment to be acquired in the future that will then be written off as depreciation is often relevant.

What is costing system refinement? Describe three guidelines for refinement.

Costing system refinement means making changes to a simple costing system that reduces the use of broad averages for assigning the cost of resources to cost objects and provides better measurement of the costs of overhead resources used by different cost objects. Three guidelines for refinement are 1. Classify as many of the total costs as direct costs as is economically feasible. 2. Expand the number of indirect cost pools until each of these pools is more homogenous. 3. Use the cause-and-effect criterion, when possible, to identify the cost-allocation base for each indirect-cost pool.

Why is customer profitability analysis an important topic for managers?

Customer profitability analysis highlights for managers how individual customers differentially contribute to total profitability. It helps managers to see whether customers who contribute sizably to total profitability are receiving a comparable level of attention from the organization.

An unfavorable flexible-budget variance for direct materials may be the result of: A. using more input quantities (feet, pounds, etc.) than were budgeted B. paying higher prices for inputs (feet, pounds, etc.) than were budgeted C. selling output (finished goods) at a higher selling price than budgeted D. Both A and B are correct E. Both B and C are correct F. Both A and C are correct

D.

Frost Bank owns the largest building in downtown Austin. Which of the following describes the opportunity cost to Frost Bank of their decision to occupy several floors of the building? A. The total overhead cost of those floors B. The cost of overhead plus their investment in finishing the space, including fixed assets C. The cost of adding one additional cubic foot of space to the building D. The net loss in revenue from not leasing the space to someone else and locating Frost's offices in a less expensive but equally suitable building. E. The revenue expected to be earned from business on those floors less the total cost of occupancy on those floors.

D.

The purpose of the balanced scorecard is BEST described as helping an organization: A. develop customer relations B. mobilize employee skills for continuous improvements in processing capabilities, quality, and response times C. introduce innovative products and servies desired by target customers D. translate an organization's mission and strategy into a set of performance measures that help to implement the strategy.

D.

Define direct and indirect costs.

Direct costs of a cost object are related to the particular cost object and can be traced to that cost object in an economically feasible (cost-effective) way. Indirect costs of a cost object are related to the particular cost object but cannot be traced to that cost object in an economically feasible way.

How do managers plan for variable overhead costs?

Effective planning of variable overhead costs involves: Planning to undertake only those variable overhead activities that add value for customers using the product or service, and Planning to use the drivers of costs in those activities in the most efficient way.

Name three factors that will affect the classification of a cost as direct or indirect.

Factors affecting the classification of a cost as direct or indirect include: 1. the materiality of the cost in question 2. available information-gathering technology 3. design of operations

Describe four decisions for which ABC information is useful.

Four decisions for which ABC information is useful are 1. pricing and product mix decisions, 2. cost reduction and process improvement decisions, 3. product design decisions, and 4. decisions for planning and managing activities.

Describe four levels of a cost hierarchy.

Four levels of a cost hierarchy are (i) Output unit-level costs: costs of activities performed on each individual unit of a product or service. (ii) Batch-level costs: costs of activities related to a group of units of products or services rather than to each individual unit of product or service. Product-sustaining costs or service-sustaining costs: costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced. (iv) Facility-sustaining costs: costs of activities that cannot be traced to individual products or services but support the organization as a whole.

What type of decision can Activity-Based-Costing information be useful? A. Pricing decisions B. Product mix decisions C. Cost reduction decisions D. Both A and B are correct E. Both A and C are correct F. Both B and C are correct G. A, B, and C are correct

G.

Which of the following is a way to make a costing system more accurate? A. Classify as many of the total costs as direct costs as is economically feasible. B. Expand the number of indirect cost pools until each of these pools is more homogenous. C. Use the cause-and-effect criterion, when possible, to identify the cost-allocation base for each indirect-cost pool. D. Both A and B are correct E. Both A and C are correct F. Both B and C are correct G. A, B, and C are correct

G.

How does a job-costing system differ from a process-costing system?

In a job-costing system, costs are assigned to a distinct unit, batch, or lot of a product or service. In a process-costing system, the cost of a product or service is obtained by using broad averages to assign costs to masses of identical or similar units.

"Budgets meet the cost-benefit test. They force managers to act differently." Do you agree? Explain.

In many organizations, budgets impel managers to plan. Without budgets, managers drift from crisis to crisis. Research also shows that budgets can motivate managers to meet targets and improve their performance. Thus, many top managers believe that budgets meet the cost-benefit test.

Why is it important to distinguish between the performance of a manager and the performance of the organization sub-unit for which the manager is responsible? Give an example.

In some cases, the subunit's performance may not be a good indicator of a manager's performance. For example, companies often put the most skillful division manager in charge of the weakest division in an attempt to improve the performance of the weak division. Such an effort may yield results in years, not months. The division may continue to perform poorly with respect to other divisions of the company. But it would be a mistake to conclude from the poor performance of the division that the manager is performing poorly. A second example of the distinction between the performance of the manager and the performance of the subunit is the use of historical cost-based ROIs to evaluate the manager even though historical cost-based ROIs may be unsatisfactory for evaluating the economic returns earned by the organization subunit. Historical cost-based ROI can be used to evaluate a manager by comparing actual results to budgeted historical cost-based ROIs.

"Increasing the number of indirect-cost pools is guaranteed to sizably increase the accuracy of product or service costs." Do you agree? Why?

Increasing the number of indirect-cost pools does NOT guarantee increased accuracy of product or service costs. If the existing cost pool is already homogeneous, increasing the number of cost pools will not increase accuracy. If the existing cost pool is not homogeneous, accuracy will increase only if the increased cost pools themselves increase in homogeneity vis-à-vis the single cost pool.

Distinguish between inventoriable costs and period costs.

Inventoriable costs are all costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold when the product is sold. These costs are included in work-in-process and finished goods inventory (they are "inventoried") to accumulate the costs of creating these assets. Period costs are all costs in the income statement other than cost of goods sold. These costs are treated as expenses of the accounting period in which they are incurred because they are expected not to benefit future periods (because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs immediately best matches expenses to revenues.

Why is it important to classify costs into a cost hierarchy?

It is important to classify costs into a cost hierarchy because costs in different cost pools relate to different cost-allocation bases and not all cost-allocation bases are unit level. For example, an allocation base like setup hours is a batch-level allocation base, and design hours is a product-sustaining base, both insensitive to the number of units in a batch or the number of units of product produced. If costs were not classified into a cost hierarchy, the alternative would be to consider all costs as unit-level costs, leading to misallocation of those costs that are not unit-level costs.

Define Kaizen budgeting.

Kaizen budgeting explicitly incorporates continuous improvement anticipated during the budget period into the budget numbers.

Why do managers consider direct costs to be more accurate than indirect costs?

Managers believe that direct costs that are traced to a particular cost object are more accurately assigned to that cost object than are indirect allocated costs. When costs are allocated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object.

What are three different types of inventory that manufacturing companies hold?

Manufacturing companies have one or more of the following three types of inventory: 1. Direct materials inventory. Direct materials in stock and awaiting use in the manufacturing process. 2. Work-in-process inventory. Goods partially worked on but not yet completed. Also called work in progress. 3. Finished goods inventory. Goods completed but not yet sold.

Describe how manufacturing, merchandising and service sector companies differ from one another.

Manufacturing-sector companies purchase materials and components and convert them into various finished goods, for example automotive and textile companies. Merchandising-sector companies purchase and then sell tangible products without changing their basic form, for example retailing or distribution. Service-sector companies provide services or intangible products to their customers, for example, legal advice or audits.

Describe moral hazard.

Moral hazard describes situations in which an employee prefers to exert less effort (or to report distorted information) compared with the effort (or accurate information) desired by the owner because the employee's effort (or validity of the reported information) cannot be accurately monitored and enforced.

"ABC systems only apply to manufacturing companies." Do you agree? Explain.

No, ABC systems apply equally well to service companies such as banks, railroads, hospitals, and accounting firms, as well merchandising companies such as retailers and distributors when products make diverse demands on resources because of differences in volume, process steps, batch size, or complexity.

"Managers should be rewarded only on the basis of their performance measures. They should be paid no salary." Do you agree? Explain.

No, rewarding managers on the basis of their performance measures only, such as ROI, subjects them to uncontrollable risk because managers' performance measures are also affected by random factors over which they have no control. A manager may put in a great deal of effort but her performance measure may not reflect this effort if it is negatively affected by various random factors. Thus, when managers are compensated on the basis of performance measures, they will need to be compensated for taking on extra risk. Therefore, when performance-based incentives are used, they are generally more costly to the owner. The motivation for having some salary and some performance-based bonus in compensation arrangements is to balance the benefits of incentives against the extra costs of imposing uncontrollable risk on the manager.

"A customer profitability profile highlights those customers a company should drop to improve profitability." Do you agree? Explain.

No. A customer‑profitability profile highlights differences in the current period's profitability across customers. Dropping customers should be the last resort. An unprofitable customer in one period may be highly profitable in subsequent future periods. Moreover, costs assigned to individual customers need not be purely variable with respect to short‑run elimination of sales to those customers. Thus, when customers are dropped, costs assigned to those customers may not disappear in the short run.

"Activity-based costing is the wave of the present and the future. All companies should adopt it." Do you agree? Explain.

No. An activity-based approach should be adopted only if its expected benefits exceed its expected costs. It is not always a wise investment. If the jobs, products, or services are alike in the way they consume indirect costs of a company, then a simple costing system will suffice.

"Cash budgets must be prepared before the operating income budget." Do you agree? Explain.

No. Cash budgets and operating income budgets must be prepared simultaneously. In preparing their operating income budgets, companies want to avoid unnecessary idle cash and unexpected cash deficiencies. The cash budget, unlike the operating income budget, highlights periods of idle cash and periods of cash shortage, and it allows the accountant to plan cost effective ways of either using excess cash or raising cash from outside to achieve the company's operating income goals.

"Department indirect-cost rates are never activity cost rates." Do you agree? Explain.

No. Department indirect-cost rates are similar to activity-cost rates if (1) a single activity accounts for a sizable fraction of the department's costs, or (2) significant costs are incurred on different activities within a department but each activity has the same cost-allocation base, or (3) significant costs are incurred on different activities with different cost-allocation bases within a department but different products use resources from the different activity areas in the same proportions.

"A branch office or business segment that shows negative operating income should be shut down." Do you agree? Why?

No. For example, if the revenues that will be lost exceed the costs that will be saved, the branch or business segment should not be shut down. Shutting down will only increase the loss. Allocated costs and fixed costs that will not be saved are irrelevant to the shut-down decision.

"Management should always maximize sales of the product with the highest contribution margin per unit." Do you agree? why?

No. Managers should aim to get the highest contribution margin per unit of the constraining (that is, scarce, limiting, or critical) factor. The constraining factor is what restricts or limits the production or sale of a given product (for example, availability of machine-hours).

"All future costs are relevant." Do you agree? Why?

No. Relevant costs are defined as those expected future costs that differ among alternative courses of action being considered. Thus, future costs that do not differ among the alternatives are irrelevant to deciding which alternative to choose.

"A component part should be purchased whenever the purchase price is less than its total manufacturing cost per unit." Do you agree? Why?

No. Some of the total manufacturing cost per unit of a product may be fixed and, hence, will not differ between the make and buy alternatives. These fixed costs are irrelevant to the make-or-buy decision. The key comparison is between purchase costs and the costs that will be saved if the company purchases the component parts from outside plus the additional benefits of using the resources freed up in the next best alternative use (opportunity cost). Furthermore, managers should consider nonfinancial factors such as quality and timely delivery when making outsourcing decisions.

"Variable costs are always relevant and fixed costs are always irrelevant." Do you agree? Why?

No. Some variable costs may not differ among the alternatives under consideration and, hence, will be irrelevant. Some fixed costs may differ among the alternatives and, hence, will be relevant.

"Managers should always buy inventory in quantities that result in the lowest purchase cost per unit." Do you agree? Why?

No. When deciding on the quantity of inventory to buy, managers must consider both the purchase cost per unit and the opportunity cost of funds invested in the inventory. For example, the purchase cost per unit may be low when the quantity of inventory purchased is large, but the benefit of the lower cost may be more than offset by the high opportunity cost of the funds invested in acquiring and holding inventory.

Define opportunity cost.

Opportunity cost is the contribution to income that is forgone (rejected) by not using a limited resource in its next-best alternative use.

Why should managers worry about product overcosting or undercosting?

Overcosting may result in overpricing and competitors entering a market and taking market share for products that a company erroneously believes are low-margin or even unprofitable. Undercosting may result in companies selling products on which they are in fact losing money, when they erroneously believe them to be profitable.

2-22

Part 1. Find the variable manufacturing cost per vehicle. Step 1. Add all of the variable costs (hint: there's three things; the city license is not one) Part 1.1: Find the fixed manufacturing cost PER MONTH Step 1: Identify all of the fixed manufacturing costs (hint: there's three things) Step 2: Convert to monthly figures. Step 3: Add the new monthly costs Part 1.2: Find the fixed manufacturing cost PER MONTH for EACH INCREMENT Step 1: Convert the number of tires increments to the number of surfers. This will give us the buckets. Step 2: in each bucket, add the fixed costs. Part 2: Graph variable manufacturing costs AND fixed manufacturing costs (2 separate graphs) Step 1: plot total variable costs X tires per month Step 2: plot total fixed costs X tires per day Part 3: Create a table for each ordering scenario. Step 1: Find the number of tires produced for each. Step 2: Find the fixed cost per month (from fixed manufacturing cost from earlier) Step 3: Find the unit fixed cost per vehicle. Step 4: Find the unit variable cost per vehicle (from part 1) Step 5: Sum the total unit total cost per vehicle (fixed + variable)

4-27 (part 1 and 2 only)

Part 1: Step 1: Calculate the Direct Labor hours Step 2: Allocate the budgeted direct labor hour rate to get the manufacturing overhead Step 3: sum everything to get your total cost

11-38 (Page 468)

Part 1: Step 1: Find the CM per unit Step 2: Find the CM per hour of the constrained resource Step 3: Find the total CM from selling ONLY one or the other Step 4: Less any costs Step 5. Net value & provide recommendation

4-20

Part 1: Step 1: id the allocation base for each department. Step 2: divide the total by the allocation base Part 2: Step 1: take the allocation rates from part 1 and apply them to the new figures given Part 3: calculate how much we over or underallocated vs actuals Step 1: they give us the actual MOH, now we just need to multiply the allocation bases by their respective rates (budgeted) to give us the delta

4-21

Part 2: is a bit weird. Part 3: 1. Apply the margin rate from part 2 to the total cost calculated, OR

What are three pitfalls to avoid when implementing a balanced scorecard?

Pitfalls to avoid when implementing a balanced scorecard are the following: 1. Don't assume the cause-and-effect linkages are precise; they are merely hypotheses. An organization must gather evidence of these linkages over time. 2. Don't seek improvements across all of the measures all of the time. 3. Don't use only objective measures in the balanced scorecard. 4. Don't fail to consider both costs and benefits of different initiatives before including these initiatives in the balanced scorecard. 5. Don't ignore nonfinancial measures when evaluating managers and employees.

List three causes of a favorable direct materials price variance.

Possible causes of a favorable direct materials price variance are purchasing officer negotiated more skillfully than was planned in the budget. purchasing manager bought in larger lot sizes than budgeted, thus obtaining quantity discounts. materials prices decreased unexpectedly due to, say, industry oversupply. budgeted purchase prices were set without careful analysis of the market. purchasing manager received unfavorable terms on nonpurchase price factors (such as lower quality materials).

Assume variable manufacturing overhead is allocated using machine hours. Give three possible reasons for a favorable variable overhead efficiency variance.

Possible reasons for a favorable variable-overhead efficiency variance include: • Workers are more skillful in using machines than budgeted. • Production scheduler was able to schedule jobs better than budgeted, resulting in lower-than-budgeted machine-hours. • Machines operated with fewer slowdowns than budgeted. • Machine time standards were overly lenient.

"Production managers and marketing managers are like oil and water. They just don't mix." How can a budget assist in reducing battles between these two areas?

Production and marketing traditionally have operated as relatively independent business functions. Budgets can assist in reducing conflicts between these two functions in two ways. Consider a beverage company such as Coca-Cola or Pepsi-Cola: • Communication. Marketing could share information about seasonal demand with production. • Coordination. Production could ensure that output is sufficient to meet, for example, high seasonal demand in the summer.

Distinguish between quantitative and qualitative factors in decision making.

Quantitative factors are outcomes that are measured in numerical terms. Some quantitative factors are financial--that is, they can be easily expressed in monetary terms. Direct materials are an example of a quantitative financial factor. Other quantitative nonfinancial factors, such as on-time flight arrivals, cannot be easily expressed in monetary terms. Qualitative factors are outcomes that are difficult to measure accurately in numerical terms. An example is employee morale.

Define relevant costs. Why are historical costs irrelevant?

Relevant costs are expected future costs that differ among the alternative courses of action being considered. Historical costs are irrelevant because they are past costs and, therefore, cannot differ among alternative future courses of action.

5-24 (page 182)

Remember for ABC costing, we pool together the indirect costs to get the total Indirect cost rate per machine hour. This means we group together the total machine hours and the total indirect cost rate per machine hour. We don't do it for each individual product. We allocate the indirect cost rate to each machine to get the individual total cost.

Describe three reasons for an unfavorable direct manufacturing labor efficiency variance.

Some possible reasons for an unfavorable direct manufacturing labor efficiency variance are the hiring and use of underskilled workers; inefficient scheduling of work so that the workforce was not optimally occupied; poor maintenance of machines resulting in a high proportion of non-value-added labor; unrealistic time standards. Each of these factors would result in actual direct manufacturing labor-hours being higher than indicated by the standard work rate.

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Step 1: For each product, identify which costs are relevant and irrelevant. (Hint: think in terms of costs that are already incurred vs. future costs. Think also in terms of which costs are fixed and cannot be changed. Step 2: sum up each of the relevant costs for each product. Part 2: Think of qualitative factors.

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Steps for computing manufacturing unit costs. Part 1: Step 1: Sum up the total for each cost pool. Step 2: Sum up the total manufacturing cost for each cost object. Step 3: Allocate the FIXED COSTS at the FIXED COST ALLOCATION RATE (fixed costs ÷ total direct labor) * direct labor for that product. Step 5: Calculate the Variable Cost = difference between the TOTAL MANUFACTURING COSTS and the allocated fixed costs. Step 6: Calculate the cost per unit (total manufacturing cost ÷ units produced) Step 7: Calculate the variable cost per unit (variable ÷ units produced) Done Part 2: see explanation

Define strategy.

Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives.

"Strategy, plans and budgets are unrelated to one another." Do you agree? Explain.

Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. Strategic analysis underlies both long-run and short-run planning. In turn, these plans lead to the formulation of budgets. Budgets provide feedback to managers about the likely effects of their strategic plans. Managers use this feedback to revise their strategic plans.

Explain how the choice of the type of responsibility center (cost, revenue, profit or investment) affects behavior.

The choice of the type of responsibility center determines what the manager is accountable for and thereby affects the manager's behavior. For example, if a revenue center is chosen, the manager will focus on revenues, not on costs or investments. The choice of a responsibility center type guides the variables to be included in the budgeting exercise.

The controller of a retail company has just had a $50,000 request to implement an ABC system quickly turned down. A SVP, in rejecting the request, noted "Given a choice, I will always prefer a $50,000 investment in improving things a customer sees or experiences, such as our shelves or our store layout. How does a customer benefit by our spending $50,000 on a supposedly better accounting system?" How should the controller respond?

The controller faces a difficult challenge. The benefits of a better accounting system show up in improved decisions by managers. It is important that the controller have the support of these managers when seeking increased investments in accounting systems. Statements by these managers showing how their decisions will be improved by a better accounting system are the controller's best arguments when seeking increased funding. For example, the new system will result in more accurate product costs, which will influence pricing and product mix decisions. The new system can also be used to reduce product costs, which will lower selling prices. As a result, the customer will benefit from the new system.

Describe the five key forces to consider when analyzing an industry (Porter's five forces.)

The five key forces to consider in industry analysis are: (1) competitors, (2) potential entrants into the market, (3) equivalent products, (4) bargaining power of customers, and (5) bargaining power of input suppliers.

Outline the five-step sequence in a decision making process.

The five steps in the decision process outlined in Exhibit 11-1 of the text are 1. Identify the problem and uncertainties. 2. Obtain information. 3. Make predictions about the future. 4. Make decisions by choosing among alternatives. 5. Implement the decision, evaluate performance, and learn.

What are four key perspectives in the balanced scorecard?

The four key perspectives in the balanced scorecard are (1) Financial perspective—this perspective evaluates the profitability of the strategy and the creation of shareholder value; (2) Customer perspective—this perspective identifies the targeted customer and market segments and measures the company's success in these segments; (3) Internal business process perspective—this perspective focuses on internal operations that further both the customer perspective by creating value for customers and the financial perspective by increasing shareholder value; and (4) Learning and growth perspective—this perspective identifies the capabilities at which the organization must excel to achieve superior internal processes that create value for customers and shareholders.

What is the key difference between a static budget and a flexible budget?

The key difference is the output level used to set the budget. A static budget is based on the level of output planned at the start of the budget period. A flexible budget is developed using budgeted revenues or cost amounts based on the actual output level in the budget period. The actual level of output is not known until the end of the budget period.

What are the main costs and limitations of implementing ABC systems?

The main costs and limitations of ABC are the measurements necessary to implement the systems. Even basic ABC systems require many calculations to determine costs of products and services. Activity-cost rates often need to be updated regularly. Very detailed ABC systems are costly to operate and difficult to understand. Sometimes the allocations necessary to calculate activity costs often result in activity-cost pools and quantities of cost-allocation bases being measured with error. When measurement errors are large, activity-cost information can be misleading.

Define master budget.

The master budget expresses management's operating and financial plans for a specified period (usually a fiscal year) and includes a set of budgeted financial statements. It is the initial plan of what the company intends to accomplish in the period.

Comment on the following statement made by a plant manager: "meetings with my plant accountant are frustrating. All he wants to do is pin the blame on someone for the many variances he reports."

The plant supervisor likely has good grounds for complaint if the plant accountant puts excessive emphasis on using variances to pin blame. The key value of variances is to help understand why actual results differ from budgeted amounts and then to use that knowledge to promote learning and continuous improvement.

What is the relevant range? What role does the relevant range concept play in explaining how costs behave?

The relevant range is the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question. Costs are described as variable or fixed with respect to a particular relevant range.

"The sales forecast is the cornerstone for budgeting." Why?

The sales forecast is typically the cornerstone for budgeting because production (and, hence, costs) and inventory levels generally depend on the forecasted level of sales.

How can the sales quantity variance be decomposed further?

The sales-quantity variance can be decomposed into (a) a market-size variance (which arises when the actual total market size in units is different from the budgeted market size in units) and (b) a market share variance (which arises when the actual market share of a company is different from its budgeted market share). Both variances use the budgeted average contribution margin per unit.

Describe the seven steps in job costing.

The seven steps in job costing are (1) identify the job that is the chosen cost object, (2) identify the direct costs of the job, (3) select the cost-allocation bases to use for allocating indirect costs to the job, (4) identify the indirect costs associated with each cost-allocation base, (5) compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job, (6) compute the indirect costs allocated to the job, and (7) compute the total cost of the job by adding all direct and indirect costs assigned to the job.

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The seven steps in job costing are (1) identify the job that is the chosen cost object, (2) identify the direct costs of the job, (3) select the cost-allocation bases to use for allocating indirect costs to the job, (4) identify the indirect costs associated with each cost-allocation base, (5) compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job, (6) compute the indirect costs allocated to the job, and (7) compute the total cost of the job by adding all direct and indirect costs assigned to the job. Part 1: Step 1: Calculate the indirect cost rate for both budgeted and actual (think of the numerator and denominator) Part 2: Step 1: Do normal (aka budgeted) costing method for both models: Step 1A: ID and sum direct costs Step 1B: Sum indirect costs (allocate the indirect costs over the allocation base; given) Step 1C: Sum everything to get your total costs using normal costing method Step 2: Do actual costing method for both models: Same as above but using actuals

Describe the steps in developing a flexible budget.

The steps in developing a flexible budget are: Step 1: Identify the actual quantity of output. Step 2: Calculate the flexible budget for revenues based on budgeted selling price and actual quantity of output. Step 3: Calculate the flexible budget for costs based on budgeted variable cost per output unit, actual quantity of output, and budgeted fixed costs.

Outline the steps in preparing an operating budget.

The steps in preparing an operating budget are as follows: Prepare the revenues budget. Prepare the production budget (in units). Prepare the direct material usage budget and direct material purchases budget. Prepare the direct manufacturing labor budget. Prepare the manufacturing overhead budget. Prepare the ending inventories budget. Prepare the cost of goods sold budget. Prepare the nonmanufacturing costs budget. Prepare the budgeted income statement.

Describe two generic strategies.

Two generic strategies are (1) product differentiation, an organization's ability to offer products or services perceived by its customers to be superior and unique relative to the products or services of its competitors, and (2) cost leadership, an organization's ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control.

Describe two potential problems that should be avoided in relevant cost-analysis.

Two potential problems that should be avoided in relevant cost analysis are (i) Do not assume all variable costs are relevant and all fixed costs are irrelevant. (ii) Do not use unit-cost data directly. It can mislead decision makers because a. it may include irrelevant costs, and b. comparisons of unit costs computed at different output levels lead to erroneous conclusions.

Give two reasons why most organizations use an annual period rather than a weekly or monthly period to compute budgeted indirect-cost rates.

Two reasons for using an annual budget period are a. The numerator reason--the longer the time period, the less the influence of seasonal patterns in overhead costs, and The denominator reason--the longer the time period, the less the effect of variations in output levels or quantities of the cost-allocation bases on the allocation of fixed costs.

Under a cost-based pricing system, what are the negative aspects of a master-budget denominator level? What are the positive aspects?

Under a cost-based pricing system, the choice of a master-budget level denominator will lead to high prices when demand is low (more fixed costs allocated to the individual product level), further eroding demand; conversely, it will lead to low prices when demand is high, forgoing profits. This has been referred to as the downward demand spiral—the continuing reduction in demand that occurs when the prices of competitors are not met and demand drops, resulting in even higher unit costs and even more reluctance to meet the prices of competitors. The positive aspects of the master-budget denominator level are that it is based on demand for the product and indicates the price at which all costs per unit would be recovered to enable the company to make a profit. Master-budget denominator level is also a good benchmark against which to evaluate performance.

Show how managers can gain insight into the causes of a sales volume variance by subdividing the components of this variance.

Using the levels approach introduced in Chapter 7, the sales-volume variance is a Level 2 variance. By sequencing through Level 3 (sales-mix and sales-quantity variances) and then Level 4 (market-size and market-share variances), managers can gain insight into the causes of a specific sales-volume variance caused by changes in the mix and quantity of the products sold as well as changes in market size and market share.

How does variance analysis help in continuous improvement?

Variance analysis, by providing information about actual performance relative to standards, can form the basis of continuous operational improvement. The underlying causes of unfavorable variances are identified and corrective action taken where possible. Favorable variances can also provide information if the organization can identify why a favorable variance occurred. Steps can often be taken to replicate those conditions more often. As the easier changes are made, and perhaps some standards tightened, the harder issues will be revealed for the organization to act on—this is continuous improvement.

"Budgeted performance is a better criterion than past performance for judging matters." Do you agree? Explain.

We agree that budgeted performance is a better criterion than past performance for judging managers because inefficiencies included in past results can be detected and eliminated in budgeting. Also, future conditions may be expected to differ from the past, and these can also be factored into budgets.

Explain the incentive problems that can arise when employees must perform multiple tasks as part of their jobs.

When employees have to perform multiple tasks as part of their jobs, incentive problems can arise when one task is easy to monitor and measure while the other task is more difficult to evaluate. Employers want employees to intelligently allocate time and effort among various tasks. If, however, employees are rewarded on the basis of the task that is more easily measured, they will tend to focus their efforts on that task and ignore the others.