Accounting II Exam One, Acc 202 Exam Two, UW Principles of Accounting II Exam Two, UW Principles of Accounting Final Exam

Assigning costs to cost objects Summary

1) Direct cost (can be easily traced) 2) Indirect cost (cannot be easily traced)

The Mathematics of Interest

F1 = P(1 + r) where F1 = the balance at the end of one period, P = the amount invested now, and r = the rate of interest per period.

simple profit equation in terms of the unit contribution margin (Unit CM)

Profit=UnitCM×Q−Fixed expenses -Unit CM Profit= Selling price per unit−Variable expenses per unit=P−V -Profit= (P×Q−V×Q)−Fixed expenses -Profit= (P−V)×Q−Fixed expenses

Equation Method

Profit= Unit CM×Q−Fixed expense -relies on the basic profit equation Cost-volume-profit analysis technique that uses the algebraic relationship among sales, variable costs, fixed costs, and desired net income before taxes to solve for required sales volume

When a company has only a single product CI equation

Profit=(P×Q−V×Q)−Fixed expenses -Sales expenses==Selling price per unit×Quantity sold=P×Q -Variable expenses per unit×Quantity sold=V×Q

contribution format income statement equation form

Profit=(Sales−Variable expenses)−Fixed expenses

relation between profit and the CM ratio can also be expressed using the following equation:

Profit=CMratio×Sales−Fixed expenses in terms of changes: Change in profit= CM ratio × Change in sales − Change in fixed expenses

Profit graph equation

Profit=UnitCM×Q−Fixed expenses

net present value of one project cannot be directly compared to the net present value of another project unless the initial investments are equal

Project profitability index = Net present value of the project/Investment required

Enterprise Risk Management (ERM)

a process used by a comany to identify risks and develop responses to them that anbles it to be resonalbly assured of meeting its goals -Software systems that help identify and manage operational risk across an organization.

break-even analysis, an assumption must be made concerning the sales mix

Usually the assumption is that it will not change. However, if the sales mix is expected to change, then this must be explicitly considered in any CVP computations.

Variable cost on a per unit basis

Variable cost per unit remains constant.

company has only one product, the variable expense ratio can also be computed on a per unit basis as follows:

Variable expense ratio= Variable expense per unit/Unit selling price

job-order costing a company's product cost

flow through three inventory accounts on the balance sheet and then on to cost of goods sold in the income statement. 1)Raw materials 2)Work in process 3)Finished goods

Special order

a one-time order that is not considered part of the company's normal ongoing business Managers must often evaluate whether a special order should be accepted, and if the order is accepted, the price that should be charged

Segment

a part or activity of the company that mangers want cost, revenue, or profit data -product lines, cutomer groups (age, gender, ethnicity, etc.) geographical territories, divisions, plants, and departments.

In all of these variance calculations

a positive number should be labeled as an unfavorable (U) variance and a negative number should be labeled as a favorable (F) variance

The payback method of evaluating capital budgeting projects

focuses on the payback period. The basic premise of the payback method is that the more quickly the cost of an investment can be recovered, the more desirable is the investment.

The standard cost per unit

for all three variable manufacturing costs is computed the same way. The standard quantity (or hours) per unit is multiplied by the standard price (or rate) per unit to obtain the standard cost per unit.

Idle space

has no alternative use has an opportunity cost of zero. But what if the space now being used to make shifters could be used for some other purpose? In that case, the space would have an opportunity cost equal to the segment margin that could be derived from the best alternative use of the space.

Cost-volume-profit (CVP) analysis

helps managers make many important decisions such as what products and services to offer, what prices to charge, what marketing strategy to use, and what cost structure to maintain.

improvement efforts must be focused

on the constraint. A business process, is like a chain. If you want to increase the strength of a chain This simple sequential process provides a powerful strategy for optimizing business processes.

operating budget

ordinarily cover a one-year period corresponding to the company's fiscal year. -Many companies divide their budget year into four quarters. (The first quarter is then subdivided into months, and monthly budgets are developed.) = This approach has the advantage of requiring periodic review and reappraisal of budget data throughout the year.

business context of managerial accounting

(1) What is managerial accounting? and (2) Why does managerial accounting matter to your career? six topics—ethics, strategic management, enterprise risk management, corporate social responsibility, process management, and leadership—that define the business context for applying the quantitative aspects of managerial accounting.

five types of cost classifications

(1) for assigning costs to cost objects, (2) for manufacturing companies, (3) for preparing financial statements, (4) for predicting cost behavior, (5) for making decisions

Period Cost

(or selling and administrative expenses) do not flow through inventories on the balance sheet. They are recorded as expenses on the income statement in the period incurred.

Once established the time and rate standards, compute the standard direct labor cost per statue as follows:

0.50 direct labor-hours per statue×$22.00 per direct labor-hour=$11.00 per statue

two types of non-manufacturing costs that ABC systems assign to products

1) ABC systems trace all direct non-manufacturing costs to products. -Commissions paid to salespersons, shipping costs, and warranty repair costs are examples of non-manufacturing costs that can be directly traced to individual products. 2) ABC systems allocate indirect non-manufacturing costs to products whenever the products have presumably caused the costs to be incurred. -we emphasize this point by expanding the definition of overhead to include all indirect costs—manufacturing and non-manufacturing.

major advantages of decentralization include:

1) By delegating day-to-day problem solving to lower-level managers, top-level managers can concentrate on bigger issues, such as overall strategy. 2) Empowering lower-level managers to make decisions puts the decision-making authority in the hands of those who tend to have the most detailed and up-to-date information about day-to-day operations. 3) By eliminating layers of decision making and approvals, organizations can respond more quickly to customers and to changes in the operating environment. 4) Granting decision-making authority helps train lower-level managers for higher-level positions. Empowering lower-level managers to make decisions can increase their motivation and job satisfaction.

Typical capital budgeting decisions include:

1) Cost reduction decisions. Should new equipment be purchased to reduce costs? 2) Expansion decisions. Should a new plant, warehouse, or other facility be acquired to increase capacity and sales? 3) Equipment selection decisions. Which of several available machines should be purchased? 4) Lease or buy decisions. Should new equipment be leased or purchased? 5) Equipment replacement decisions. Should old equipment be replaced now or later?

Steps for Implementing Activity-Based Costing:

1) Define activities, activity cost pools, and activity measures. 2) Assign overhead costs to activity cost pools. 3) Calculate activity rates. 4) Assign overhead costs to cost objects. 5) Prepare management reports.

Schedule 5: manufacturing overhead budget

lists all costs of production other than direct materials and direct labor.

Making decisions Summary

1) Differential cost (differs between alternatives) 2) Sunk cost (should be ignored) 3) Opportunity cost (foregone benefit)

The Limitations of Activity-Based Costing

1) Implementing an activity-based costing system is a major project that requires substantial resources. 2) And once implemented, an activity-based costing system is more costly to maintain than a traditional costing system 3) If activity-based costing is viewed as an accounting initiative that does not have the full support of top management, it is doomed to failure. 4) can easily be misinterpreted and must be used with care when used in making decisions. Costs assigned to products, customers, and other cost objects are only potentially relevant. Before making any significant decisions using activity-based costing data, managers must identify which costs are really relevant for the decision at hand

Overhead account at the end of a period must be disposed

1) It can be closed to Cost of Goods Sold. (easier) 2) It can be closed proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. (more accurate)

major disadvantages of decentralization include:

1) Lower-level managers may make decisions without fully understanding the company's overall strategy. If lower-level managers make their own decisions independently of each other, coordination may be lacking. 2) Lower-level managers may have objectives that clash with the objectives of the entire organization.2 For example, a manager may be more interested in increasing the size of his or her department, leading to more power and prestige, than in increasing the department's effectiveness. 3) Spreading innovative ideas may be difficult in a decentralized organization. Someone in one part of the organization may have a terrific idea that would benefit other parts of the organization, but without strong central direction the idea may not be shared with, and adopted by, other parts of the organization.

Accounting for costs in manufacturing companies Summary

1) Manufacturing costs -Direct materials -Direct labor -Manufacturing overhead 2) Nonmanufacturing costs -Selling costs -Administrative costs

activity-based costing differs from traditional absorption costing in three ways. In activity-based costing:

1) Non-manufacturing as well as manufacturing costs may be assigned to products, but only on a cause-and-effect basis. 2) Some manufacturing costs may be excluded from product costs. 3) Numerous overhead cost pools are used, each of which is allocated to products and other cost objects using its own unique measure of activity.

Preparing financial statements Summary

1) Product costs (inventoriable) 2) Period costs (expensed)

The improper use of standard costs can present a number of potential problems.

1) Standard cost variance reports are usually prepared on a monthly basis and often are released days or even weeks after the end of the month. -As a consequence, the information in the reports may be so outdated that it is almost useless. -Timely, frequent reports that are approximately correct are better than infrequent reports that are very precise but out of date by the time they are released. -Some companies are now reporting variances and other key operating data daily or even more frequently. 2) If managers use variances only to assign blame and punish subordinates, morale may suffer. -Furthermore, subordinates may be tempted to cover up unfavorable variances or take actions that are not in the best interests of the company to make sure the variances are favorable. 3) Labor-hour standards and efficiency variances make two important assumptions. -First, they assume that the production process is labor-paced; if labor works faster, output will go up. However, output in many companies is not determined by how fast labor works; rather, it is determined by the processing speed of machines. -Second, the computations assume that labor is a variable cost. However, direct labor can often be a fixed cost. If labor is fixed, then an undue emphasis on labor efficiency variances creates pressure to build excess inventories. 4) In some cases, a "favorable" variance can be worse than an "unfavorable" variance. -A "favorable" variance would mean that less meat was used than the standard specifies. 5) too much emphasis on meeting the standards may overshadow other important objectives such as maintaining and improving quality, on-time delivery, and customer satisfaction. -This tendency can be reduced by using supplemental performance measures that focus on these other objectives. 6) Just meeting standards is not sufficient because companies need to continually improve to remain competitive. -For this reason, some companies focus on the trends in their standard cost variances—aiming for continual improvement rather than just meeting the standards. -In other companies, engineered standards are replaced either by a rolling average of actual costs, which is expected to decline, or by very challenging target costs.

Standard cost systems have a number of advantages.

1) Standard costs are a key element in a management by exception approach as -If costs conform to the standards, managers can focus on other issues. -When costs are significantly outside the standards, managers are alerted that problems may exist that require attention. -This approach helps managers focus on important issues. 2) Standards that are viewed as reasonable by employees can promote economy and efficiency. -They provide benchmarks that individuals can use to judge their own performance. 3) Standard costs can greatly simplify bookkeeping. -Instead of recording actual costs for each job, the standard costs for direct materials, direct labor, and overhead can be charged to jobs. 4) Standard costs fit naturally in an integrated system of "responsibility accounting." -The standards establish what costs should be, who should be responsible for them, and whether actual costs are under control.

Predicting cost behavior in response to changes in activity Summary

1) Variable cost (proportional to activity) 2) Fixed cost (constant in total) 3) Mixed cost (has variable and fixed elements)

Reduce cognitive bias

1) acknowledge their own suspectibility to cognitive bias 2) ackowledge the presence in others and introduce techniques to min their consequences

There are two reasons for this practice:

1) delaying the computation of the price variance until the materials are used would result in less timely variance reports. 2) computing the price variance when the materials are purchased allows materials to be carried in the inventory accounts at their standard cost. -This greatly simplifies bookkeeping.

Flow of product cost

1) direct materials are used in production, their costs are transferred from Raw Materials to Work in Process 2) Direct labor and manufacturing overhead costs are added to Work in Process to convert direct materials into finished goods. 3) units of product are completed, their costs are transferred from Work in Process to Finished Goods 4) sells its finished goods to customers, the costs are transferred from Finished Goods to Cost of Goods Sold.

Managers may also use job cost information

1) establish plans and make decisions 2) making pricing decisions -use a predefined markup percentage

ABC infrequently used for external reports for a number of reasons

1) external reports are less detailed than internal reports prepared for decision making 2) it is often very difficult to make changes in a company's accounting system 3) does not conform to generally accepted accounting principles (GAAP) 4) auditors are likely to be uncomfortable with allocations that are based on interviews with the company's personnel. Such subjective data can be easily manipulated by management to make earnings and other key variables look more favorable.

Why do companies assign costs to their products?

1) helps them fulfill their planning, controlling, and decision-making responsibilities. 2) helps them determine the value of ending inventories and cost of goods sold for external reporting purposes. -The costs attached to products that have not been sold are included in ending inventories on the balance sheet, -the costs attached to units that have been sold are included in cost of goods sold on the income statement.

A General Model for Standard Cost Variance Analysis

1) it can be used to compute a price variance and a quantity variance for each of the three variable cost elements—direct materials, direct labor, and variable manufacturing overhead—even though the variances have different names. 2) all three columns in the exhibit are based on the actual amount of output produced during the period. Even the flexible budget column (column 3) depicts the standard cost allowed for the actual amount of output produced during the period. 3) the spending, price, and quantity variances—regardless of what they are called—are computed exactly the same way regardless of whether one is dealing with direct materials, direct labor, or variable manufacturing overhead.

Although ROI is widely used in evaluating performance, it is subject to the following criticisms:

1) just telling managers to increase ROI may not be enough. -Managers may not know how to increase ROI; they may increase ROI in a way that is inconsistent with the company's strategy; or they may take actions that increase ROI in the short run but harm the company in the long run (such as cutting back on research and development). -This is why ROI is best used as part of a balanced scorecard, as discussed later in this chapter. A balanced scorecard can provide concrete guidance to managers, making it more likely that their actions are consistent with the company's strategy and reducing the likelihood that they will boost short-run performance at the expense of long-term performance. 2) A manager who takes over a business segment typically inherits many committed costs over which the manager has no control. These committed costs may be relevant in assessing the performance of the business segment as an investment but they make it difficult to fairly assess the performance of the manager. 3) a manager who is evaluated based on ROI may reject investment opportunities that are profitable for the whole company but would have a negative impact on the manager's performance evaluation.

Closing underapplied or overapplied overhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold

1) take the total overhead cost applied to production during the period and break it into three pieces—the portion included in Work in Process at the end of the period, the portion included in Finished Goods at the end of the period, and the portion applied to Cost of Goods Sold during the period. 2)state each of these three amounts as a percent of the total overhead cost applied to production during the period. 3)derive the amounts needed for the journal entry by multiplying the percentages from step two by the amount of underapplied or overapplied overhead

Product Margins Calculation Using the Traditional Cost System

1) the sales, direct materials, and direct labor cost data are the same numbers used by the ABC team to prepare. -In other words, the traditional cost system and the ABC system treat these three pieces of revenue and cost data identically. 2) the traditional cost system uses a plantwide overhead rate to assign manufacturing overhead costs to products -Total estimated amount of manufacturing OH/ Total estimated amount of allocation base 3) POHR X actual allocation base 4) sales of each product minus its cost of goods sold equals the product margin

three essential characteristics of a successful activity-based costing implementation

1) top managers must strongly support the ABC implementation because their leadership is instrumental in properly motivating all employees to embrace the need to change. 2) top managers should ensure that ABC data is linked to how people are evaluated and rewarded. If employees continue to be evaluated and rewarded using traditional (non-ABC) cost data, they will quickly get the message that ABC is not important and they will abandon it. 3) a cross-functional team should be created to design and implement the ABC system. The team should include representatives from each area that will use ABC data, such as the marketing, production, engineering, and accounting departments. -These cross-functional employees possess intimate knowledge of many parts of an organization's operations that is necessary for designing an effective ABC system. -Furthermore, tapping the knowledge of cross-functional managers lessens their resistance to ABC because they feel included in the implementation process.

The Differences between ABC and Traditional Product Margins

1) traditional cost system allocates all manufacturing overhead costs to products. This forces both products to absorb all manufacturing overhead costs regardless of whether they actually consumed the costs that were allocated to them. 2) traditional cost system allocates all of the manufacturing overhead costs using a volume-related allocation base—machine-hours—that may or may not reflect what actually causes the costs. 3) ABC system assigns the nonmanufacturing overhead costs caused by-products to those products on a cause-and-effect basis. The traditional cost system disregards these costs because they are classified as period costs

Making ethical decisions

1)define your alternative courses of action 2)identify all of the parties that will be affected by the decision 3)define how each course of action will favorably or unfavorably impact the party 4) seek guidance from IMA statement or helpline (would I want this on the front cover of the news?)

high low method steps

1. Determine the high and low costs 2. High cost - low cost = Average cost 3. High quantity - low quantity = Average quantity 4. Average cost / Average quantity = Variable cost per unit (b) 5. Use high or low numbers and plug into formula (y (high cost) = a + bx (variable cost x high quantity) and solve for Fixed costs (a) 6. Use Fixed Costs (a) amount to solve for new costs

a master budget for a manufacturing company is designed to answer 10 key questions as follows:

1. How much sales will we earn? 2. How much cash will we collect from customers? 3. How much raw material will we need to purchase? 4. How much manufacturing cost (including direct materials, direct labor, and manufacturing overhead) will we incur? 5. How much cash will we pay to our suppliers and our direct laborers, and how much will we pay for manufacturing overhead resources? 6. What is the total cost that will be transferred from finished goods inventory to cost of goods sold? 7. How much selling and administrative expense will we incur and how much cash will we pay related to those expenses? 8. How much money will we borrow from or repay to lenders—including interest? 9. How much net operating income will we earn? 10. What will our balance sheet look like at the end of the budget period?

Self-imposed budgets have a number of advantages:

1. Individuals at all levels of the organization are recognized as members of the team whose views and judgments are valued by top management. 2. estimates prepared by front-line managers are often more accurate and reliable than estimates prepared by top managers who have less intimate knowledge of markets and day-to-day operations. 3. Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. -create commitment. 4. manager who is not able to meet a budget that has been imposed from above can always say that the budget was unrealistic and impossible to meet. -With a self-imposed budget, this claim cannot be made.

CVP Assumptions

1. Selling price is constant. The price of a product or service will not change as volume changes. 2. Costs are linear and can be accurately divided into variable and fixed components. The variable costs are constant per unit and the fixed costs are constant in total over the entire relevant range. 3. In multiproduct companies, the mix of products sold remains constant. (greatest danger lies in relying on simple CVP analysis when a manager is contemplating a large change in sales volume that lies outside the relevant range.)

The cash budget is composed of four main sections:

1. The cash receipts section. -lists all of the cash inflows, except from financing, expected during the budget period. Generally, the major source of receipts is from sales. 2. The cash disbursements section - summarizes all cash payments that are planned for the budget period. These payments include raw materials purchases, direct labor payments, manufacturing overhead costs, and so on, as contained in their respective budgets. In addition, other cash disbursements such as equipment purchases and dividends are listed. (six types) 3. The cash excess or deficiency section. 4. The financing section. -details the borrowings and principal and interest repayments projected to take place during the budget period. (details the borrowings and principal and interest repayments projected to take place during the budget period.)

Advantages of Budgeting

1. communicate management's plans throughout the organization. 2. force managers to think about and plan for the future. -In the absence of the necessity to prepare a budget, many managers would spend all of their time dealing with day-to-day emergencies. 3. process provides a means of allocating resources to those parts of the organization where they can be used most effectively. 4. process can uncover potential bottlenecks before they occur. 5. coordinate the activities of the entire organization by integrating the plans of its various parts. -helps to ensure that everyone in the organization is pulling in the same direction. 6. define goals and objectives that can serve as benchmarks for evaluating subsequent performance.

Self-imposed budgeting has two important limitations

1. lower-level managers may make suboptimal budgeting recommendations if they lack the broad strategic perspective possessed by top managers. 2. self-imposed budgeting may allow lower-level managers to create too much budgetary slack. -the manager who creates the budget will be held accountable for actual results that deviate from the budget, the manager will have a natural tendency to submit a budget that is easy to attain (i.e., the manager will build slack into the budget). -should be scrutinized by higher levels of management

break-even point in dollar sales using three methods

1. solve for the break-even point in unit sales using the equation method or formula method and then simply multiply the result by the selling price. 2. use the equation method to compute the break-even point in dollar sales. 3. use the formula method to compute the dollar sales needed to break even as shown below: Dollar sales to break even= Fixed expenses/CM ratio break-even point in dollar sales is the same under all three methods

quantifying the dollar sales needed to attain a target profit

1. solve for the unit sales needed to attain the target profit using the equation method or formula method and then simply multiply the result by the selling price. 2. use the equation method to compute the dollar sales needed to attain the target profit. 3. use the formula method to compute the dollar sales needed to attain the target profit as shown below: Dollar sales to attain the target profit= Target profit + Fixed expenses CM ratio

Once established the quantity and price standards compute the standard direct materials cost per statue as follows:

3.0 pounds per statue×$4.00 per pound=$12.00 per statue

Standard quantity allowed

=Actual output×Standard quantity per unit

sell or process further decision

A decision as to whether a joint product should be sold at the split-off point or processed further To make these decisions, managers need to follow a three step process

make or buy decision

A decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier Quite often these decisions involve whether to buy a particular part or to make it internally. Make or buy decisions also involve decisions concerning whether to outsource development tasks, after-sales service, or other activities.

Chartered Global Management Accountant (CGMA)

A designation available to qualify American Institute of Certified Public Accountants (AICPA) members that is meant to recognize the unique business and accounting skill set possessed by those CPAs who work, or have worked, in business, industry or government -bachelors degree, work experience (three years), and passage of CPA exam, and CGMA exam -multipart CPA exam which emphasizes financial accounting skills

present value concepts

A dollar received today is more valuable than a dollar received a year from now for the simple reason that if you have a dollar today, you can put it in the bank and have more than a dollar a year from now. Because dollars today are worth more than dollars in the future, cash flows that are received at different times must be valued differently.

Differential cost

A future cost that differs (increases and decreases) between any two alternatives -always relevant costs -also known as an incremental cost:An increase in cost between two alternatives. -decreases in cost should be referred to as decremental costs -either fixed or variable can be compared to economists marginal cost concept (marginal cost and marginal revenue)

differential cost

A future cost that differs between any two alternatives Differential costs are always relevant costs the terms incremental cost and avoidable cost are often used to describe differential costs

Scattergraph

A method of segregating the fixed and variable components of a mixed cost by plotting on total costs at several activity levels and drawing a regression line through the points. has a horizontal x-axis that represents production activity, a vertical y-axis that represents cost, data that are plotted as points on the graph, and a regression line that runs through the dots to represent the relationship between the variables.

least-squares regression method

A method of separating a mixed cost into its fixed and variable elements by fitting a regression line that minimizes the sum of the squared errors.

annuity

A series of identical cash flows

Changes in the sales mix can cause perplexing variations in a company's profits.

A shift in the sales mix from high-margin items to low-margin items can cause total profits to decrease even though total sales may increase. Conversely, a shift in the sales mix from low-margin items to high-margin items can cause the reverse effect—total profits may increase even though total sales decrease. It is one thing to achieve a particular sales volume; it is quite another to sell the most profitable mix of products.

Chapter 7

Activity-Based Costing

Cost Pools, Allocation Bases

Activity-based costing, thanks to advances in technology that make more complex cost systems feasible, provides an alternative to the traditional plantwide and departmental approaches to defining cost pools and selecting allocation bases. The activity-based approach has appeal in today's business environment because it uses more cost pools and unique measures of activity to better understand the costs of managing and sustaining product diversity.

Example

Actual client-visits (q1)1,100 Actual hours of operation (q2) 190 Revenue ($180.00q1)$198,000 Expenses: Wages and salaries ($65,000 + $220q2)106,800 Hairstyling supplies ($1.50q1)1,650 Client gratuities ($4.10q1)4,510 Electricity ($390 + $0.10q1 + $6.00q2)1,640 Rent ($28,500)28,500 Liability insurance ($2,800)2,800 Employee health insurance ($21,300)21,300 Miscellaneous ($1,200 + $0.20q1)1,420 Total expense 168,620 Net operating income $ 29,380

Manufacturing Overhead (a clearing account)

Actual overhead costs are charged to this account as they are incurred throughout the period. -debited to the account as they are incurred Overhead is applied to Work in Process using the predetermined overhead rate. -When jobs are completed (or at the end of an accounting period)

Overhead Equation

Actual total manufacturing OH - Total manufacturing OH applied if there is a debit balance in the Manufacturing Overhead account of X dollars, then the overhead is underapplied by X dollars. On the other hand, if there is a credit balance in the Manufacturing Overhead account of Y dollars, then the overhead is overapplied by Y dollars.

postaudit

After an investment project has been approved and implemented, a postaudit should be conducted. A postaudit involves checking whether or not expected results are actually realized. This is a key part of the capital budgeting process because it helps keep managers honest in their investment proposals. Any tendency to inflate the benefits or downplay the costs in a proposal should become evident after a few postaudits have been conducted. The postaudit also provides an opportunity to reinforce and possibly expand successful projects and to cut losses on floundering projects.

net book value drawbacks

An asset's net book value decreases over time as the accumulated depreciation increases. This decreases the denominator in the ROI calculation, thus increasing ROI. Consequently, ROI mechanically increases over time. Moreover, replacing old depreciated equipment with new equipment increases the book value of depreciable assets and decreases ROI. Hence, using net book value in the calculation of average operating assets results in a predictable pattern of increasing ROI over time as accumulated depreciation grows and discourages replacing old equipment with new, updated equipment. An alternative to using net book value is the gross cost of the asset, which ignores accumulated depreciation. Gross cost stays constant over time because depreciation is ignored; therefore, ROI does not grow automatically over time, and replacing a fully depreciated asset with a comparably priced new asset will not adversely affect ROI.

Vertical integration provides certain advantages

An integrated company is less dependent on its suppliers and may be able to ensure a smoother flow of parts and materials for production than a nonintegrated company some companies feel that they can control quality better by producing their own parts and materials, rather than by relying on the quality control standards of outside suppliers. In addition, an integrated company realizes profits from the parts and materials that it is "making" rather than "buying," as well as profits from its regular operations.

Simple rate of return

Annual incremental net operating income/Initial investment The annual incremental net operating income included in the numerator should be reduced by the depreciation charges that result from making the investment. Furthermore, the initial investment shown in the denominator should be reduced by any salvage value realized from the sale of old equipment.

Key Concept #1

Every decision involves choosing from among at least two alternatives. Therefore, the first step in decision making is to define the alternatives being considered.

Record the application of Manufacturing Overhead to Work in Process

Debit: WIP Credit: Manufacturing OH Overhead Applied in work in Process The actual overhead costs on the debit side in the Manufacturing Overhead account costs that were added to the account in entries (2)-(6). Observe that recording these actual overhead costs [entries (2)-(6)] and the application of overhead to Work in Process [entry (7)] represent two separate and entirely distinct processes.

Planning budget example

Budgeted client-visits (q)1,000 Revenue ($180.00q)$180,000 Expenses: Wages and salaries ($65,000 + $37.00 q)102,000 Hairstyling supplies ($1.50q)1,500 Client gratuities ($4.10 q)4,100 Electricity ($1,500 + $0.10q)1,600 Rent ($28,500)28,500 Liability insurance ($2,800)2,800 Employee health insurance ($21,300)21,300 Miscellaneous ($1,200 + $0.20q)1,400 Total expense163,200 Net operating income$ 16,800 -term revenue is used in the planning budget rather than sales -estimated a cost formula for each cost

The budgeted merchandise purchases are computed as follows:

Budgeted cost of goods sold ($280,000 × 45%)$126,000 Add: desired ending merchandise inventory ($290,000 × 45% × 30%) 39,150 Total needs 165,150 Less: beginning merchandise inventory 37,800 = Required purchases$127,350

capital budgeting decision

Any decision that involves a cash outlay now to obtain a future return fall into two broad categories—screening decisions and preference decisions

Setting Variable Manufacturing Overhead Standards

As with direct labor, the quantity and price standards for variable manufacturing overhead are usually expressed in terms of hours and a rate.

cash excess or deficiency section is computed as follows:

Beginning cash balance XXX Add cash receipts XXX Total cash available XXX Less cash disbursements XXX Excess (deficiency) of cash available over disbursements XXX if a cash deficiency exists during any budget period or if there is a cash excess during any budget period that is less than the minimum required cash balance, the company will need to borrow money. Conversely, if there is a cash excess during any budget period that is greater than the minimum required cash balance, the company can invest the excess funds or repay principal and interest to lenders.

unadjusted cost of goods sold

Beginning finished goods inventory + Cost of goods manufactured − Ending finished goods inventory

raw materials used in production

Beginning raw materials inventory + Purchases of raw materials − Ending raw materials inventory

advantages of using external suppliers

By pooling demand from a number of companies, a supplier may be able to enjoy economies of scale. These economies of scale can result in higher quality and lower costs than would be possible if the company were to attempt to make the parts or provide the service on its own. A company must be careful, however, to retain control over activities that are essential to maintaining its competitive position.

Elements of Return on Investment (ROI)

CGS, Selling Exp, Admin Exp ----> Sales - Expeses -----> Net Operating Income / Sale ----> Margin Cash, Ac Receivable, Inventories ----> Current Assets Plants and Equipment, Other Assets ---> Noncurrent Assets Current Assets+Noncurrrent Assets ----> Sales/ Av Operating Assets ----> Turnover Margin x Turnover = ROI

contribution margin ratio and the variable expense ratio can be mathematically related to one another:

CM ratio= Contribution margin/Sales CM ratio= Sales−Variable expenses/Sales CM ratio= 1−Variable expense ratio

company that has only one product, the CM ratio can also be computed on a per unit basis as follows:

CM ratio= Unit contribution margin/Unit selling price

Chapter 13

Capital Budgeting Decisions

Financing Activities

Cash flow activities that include (a) obtaining cash from issuing debt and repaying the amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends. Any cash flows that result in changes in the size and composition of the contributed equity capital or borrowings of the entity (i.e., bonds, stock, dividends)

Operating Activities

Cash flow activities that include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. The principal revenue-generating activities of an organization and other activities that are not investing or financing; any cash flows from current assets and current liabilities In the end, cash flows from the operating section will give the same result whether under the direct or indirect approach, however, the presentation will differ.

Operating activities Direct include

Cash received from customers, cash paid to suppliers, employee compensation, other paid operating expenses

The budgeted cash collections are computed as follows:

Cash sales ($280,000 × 35%)$98,000 September credit sales collected in October 98,000 October credit sales collected in October ($280,000 × 65% × 40%) 72,800 = Total cash collections$268,800

effect of a change in sales on the contribution margin is expressed in equation form as:

Change in contribution margin= CM ratio × Change in sales the impact on net operating income of any given dollar change in total sales can be computed by applying the CM ratio to the dollar change.

volume trade-off decisions

Companies are forced to make volume trade-off decisions when they do not have enough capacity to produce all of the products and sales volumes demanded by their customers. In these situations, companies must trade off, or sacrifice production of some products in favor of others in an effort to maximize profits. The key questions become: how should companies manage those trade-offs? Which products should they produce and sell and which sales opportunities should they intentionally bypass?

unit product cost of the job cost sheet

Cost Summary section of the job cost sheet and added together to obtain the total cost for the job. Then the total product cost is divided by the number of units to obtain the unit product cost - an average cost and should not be interpreted as the cost that would actually be incurred if another unit were produced -The incremental cost of an additional unit is something less than the average unit cost because much of the actual overhead costs would not change if another unit were produced.

Chapter Five

Cost-volume-profit (CVP) Relationships

Record Advertising and Other Selling and Admin Expense

Debit: Advertising Expense Debit: Other Selling and admin expense Credit: Accounts payable (or cash)

Record depreciation

Debit: Depreciation Expense Credit: Accumulated Depreciation Depreciation on office equipment is a period expense rather than a product cost.

Record Finished goods

Debit: Finished Goods Credit: Work In Process A transfer of costs is made within the costing system that parallels the physical transfer of goods to the finished goods warehouse - The sum of all amounts transferred between these two accounts represents the cost of goods manufactured

Record Manufacturing Overhead Cost 1

Debit: Manufactoring OH Credit: Accounts Payable (or cash) All MOH cost (Utilities, Rent, Misc.) are entered directly into the Manufacturing Overhead account as they are incurred.

Record Manufacturing Overhead Cost accrual of this depreciation:

Debit: Manufactoring OH Credit: Accumulated Depreciation depreciation on factory equipment was debited to Manufacturing Overhead and is therefore a product cost.

Record Manufacturing Overhead Cost 2

Debit: Manufactoring OH Credit: Property Taxes Payable Credit: Prepaid Insurance accrued property taxes and prepaid insurance expired on factory buildings and equipment.

Record Purchase of Raw materials

Debit: Raw Materials Credit: Accounts Payable

Record selling and administrative salary costs

Debit: Salaries Expense Credit: Salaraies and Wages Payable

Record Closing underapplied or overapplied overhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold

Debit: WIP Debit: Finished Goods Debit: CGS Credit: MOH

Record labor cost

Debit: Work in Process Debit: Manufacturing Overhead Credit: Salaries and Wages Payable summarizes costs for employee time tickets: direct and indirect labor -only DL is added to WIP account, as well as added to individual job cost sheets -Manufacturing Overhead represents the indirect labor costs of the period, such as supervision, janitorial work, and maintenance.

records issuing the materials to the production departments.

Debit:Work in Process Debit:manufacturing overhead Credit:Raw Materials materials charged to Work in Process represent direct materials for specific jobs. (these cost are also recorded to the appropriate jo cost sheet)

Adding and Dropping Product Lines and Other Segments

Decisions relating to whether product lines or other segments of a company should be dropped and new ones added are among the most difficult that a manager has to make. In such decisions, many qualitative and quantitative factors must be considered. Ultimately, however, any final decision to drop a business segment or to add a new one hinges primarily on its financial impact. To assess this impact, costs must be carefully analyzed. LO12-2

degree of operating leverage at a given level of sales is computed by the following formula:

Degree of operating leverage= Contribution margin/Net operating income The degree of operating leverage is a measure, at a given level of sales, of how a percentage change in sales volume will affect profits. The degree of operating leverage is not a constant; it is greatest at sales levels near the break-even point and decreases as sales and profits rise.

Chapter 12

Differential Analysis: The Key to Decision Making

Prime Cost

Direct Materials + Direct Labor

Conversion Cost

Direct labor + Manufacturing overhead the sum of direct labor and manufacturing overhead. -these costs are incurred to convert direct materials into finished products.

Setting Direct Labor Standards

Direct labor quantity and price standards are usually expressed in terms of labor-hours or a labor rate

Product cost

Direct materials + Direct labor + Manufacturing overhead all costs involved in acquiring or making a product. -"attach" to a unit of product as it is purchased or manufactured and stay attached to each unit as long as it remains in inventory awaiting sale. -When units are sold, their costs are released from inventory as expenses (typically called cost of goods sold) and matched against sales on the income statement.

total manufacturing costs

Direct materials + Direct labor + Manufacturing overhead applied to work in process this equation includes manufacturing overhead applied to work in process rather than actual manufacturing overhead costs

Manufactoring Cost

Direct materials + Direct labor + manufacturing overhead

Predetermined Overhead Rate

Estimated total manufacturing overhead cost / Estimated total amount of the allocation base -Manufacturing overhead is commonly assigned to products using this -computed before the period begins

Most projects also have at least three types of cash inflows

First, a project will normally increase revenues or reduce costs. Either way, the amount involved should be treated as a cash inflow for capital budgeting purposes. Notice that from a cash flow standpoint, a reduction in costs is equivalent to an increase in revenues. Second, cash inflows are also frequently realized from selling equipment for its salvage value when a project ends, although the company actually may have to pay to dispose of some low-value or hazardous items. Third, any working capital that was tied up in the project can be released for use elsewhere at the end of the project and should be treated as a cash inflow at that time. Working capital is released

Comparison of the Net Present Value and Internal Rate of Return Methods

First, both methods use the cost of capital to screen out undesirable investment projects Second, the net present value method is often simpler to use than the internal rate of return method, particularly when a project does not have identical cash flows every year. Third, the internal rate of return method makes a questionable assumption.

The simple rate of return suffers from two important limitations

First, it focuses on accounting net operating income rather than cash flows. Thus, if a project does not have constant incremental revenues and expenses over its useful life, the simple rate of return will fluctuate from year to year, thereby possibly causing the same project to appear desirable in some years and undesirable in others. Second, the simple rate of return method does not involve discounting cash flows.

olating relevant costs is desirable for at least two reasons.

First, only rarely will enough information be available to prepare a detailed income statement for both alternatives. Second, mingling irrelevant costs with relevant costs may cause confusion and distract attention from the information that is really critical. Furthermore, the danger always exists that an irrelevant piece of data may be used improperly, resulting in an incorrect decision. The best approach is to ignore irrelevant data and base the decision entirely on relevant data.

When performing net present value analysis, managers usually make two important assumptions

First, they assume that all cash flows other than the initial investment occur at the end of periods Second, managers assume that all cash flows generated by an investment project are immediately reinvested at a rate of return equal to the rate used to discount the future cash flows, also known as the discount rate

Most projects have at least three types of cash outflows

First, they often require an immediate cash outflow in the form of an initial investment in equipment, other assets, and installation costs. Any salvage value realized from the sale of old equipment can be recognized as a reduction in the initial investment or as a cash inflow. Second, some projects require a company to expand its working capital Third, many projects require periodic outlays for repairs and maintenance and additional operating costs.

1) Joint cost

First, they should always ignore all joint costs, which include all costs incurred up to the split-off point. These costs should be ignored because they remain the same under both alternatives—whether the manager chooses to sell a joint product at the split-off point or process it further.

volume trade-off decisions will proceed in three steps

First, we'll define the meaning of a constraint. Second, we'll explain how to determine the most profitable use of a constrained resource. Third, we'll discuss how to determine the value of obtaining more of a constrained resource and how to manage constraints to increase profits.

average fixed cost per unit

Fixed cost per unit decreases as the activity level rises and increases as the activity level falls. -becomes progressively smaller as the level of activity increases. -we caution against expressing fixed costs on an average per unit basis in internal reports because it creates the false impression that fixed costs are like variable costs and that total fixed costs actually change as the level of activity changes. EX) as the number of guests increase, the average fixed cost per guest drops.

Revenue formula

Fixed costs + (Price x Quantity)

total fixed costs

Fixed manufacturing overhead+Fixed selling expense+Fixed administrative expense Total fixed cost is not affected by changes in the activity level within the relevant range.

Chapter Nine

Flexible Budgets and Performance Analysis

determine the balance in an account after n periods of compounding using the following equation:

Fn = P(1 + r)^n where n = the number of periods of compounding.

Predetermined Overhead Rate Process

Four step process: 1)estimate the total amount of the allocation base (the denominator) that will be required for next period's estimated level of production. 2) estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base. 3) use the cost formula, Y = a + BX to estimate the total manufacturing overhead cost (the numerator) for the coming period -Y=The estimated total manufacturing overhead cost -a=The estimated total fixed manufacturing overhead cost -b=The estimated variable manufacturing overhead cost per unit of theallocation base -X=The estimated total amount of the allocation base 4) compute the predetermined overhead rate

Key Concept 5

Future costs and benefits that do not differ between alternatives are irrelevant to the decision-making process. it has not yet been incurred

differential revenue

Future revenue that differs between any two alternatives relevant benefit.

Differential Revenue

Future revenue that differs between any two alternatives -example of a relevant benefit

traceability

However, managers should exercise caution against reading more into this "traceability" than really exists. People have a tendency to assume that if a cost is traceable to a segment, then the cost is automatically an avoidable cost. That is not true because the costs provided by a well-designed activity-based costing system are only potentially relevant. Before making a decision, managers must still decide which of the potentially relevant costs are actually avoidable. Only those costs that are avoidable are relevant and the others should be ignored.

Manufacturing Costs

In traditional absorption costing systems, all manufacturing costs are assigned to products—even manufacturing costs that are not caused by the products In contrast, activity-based costing systems purposely do not assign two types of manufacturing overhead costs to products—organization-sustaining costs and unused capacity costs (also called idle capacity costs).

Non-manufactoring Costs

In traditional absorption costing, manufacturing costs are assigned to products and non-manufacturing costs are not assigned to products. Conversely, in activity-based costing, we recognize that many non-manufacturing costs relate to selling, distributing, and servicing specific products. -Thus, ABC includes manufacturing and non-manufacturing costs when calculating the entire cost of a product rather than just its manufacturing cost.

Tying Compensation to the Balanced Scorecard

Incentive compensation for employees, such as bonuses, can, and probably should, be tied to balanced scorecard performance measures. However, this should be done only after the organization has been successfully managed with the scorecard for some time—perhaps a year or more. -Managers must be confident that the performance measures are reliable, sensible, understood by those who are being evaluated, and not easily manipulated. -As Robert Kaplan and David Norton, the originators of the balanced scorecard concept point out, "compensation is such a powerful lever that you have to be pretty confident that you have the right measures and have good data for the measures before making the link."

Investing Activities

Includes cash transactions involving the purchase and sale of long-term assets and current investments Any cash flows from the acquisition and disposal of long-term assets and other investments not included in cash equivalents

master budget concludes with the preparation of a cash budget, income statement, and balance sheet.

Information from the sales budget, selling and administrative expense budget, and the manufacturing cost budgets all influence the preparation of the cash budget.

interest computed as follows:

Interest on the $130,000 borrowed at the beginning of the first quarter : $130,000 × 0.03 per quarter × 4 quarters* $ 15,600 Interest on the $70,000 borrowed at the beginning of the second quarter: $70,000 × 0.03 per quarter × 3 quarters*6,300 Total interest accrued to the end of the fourth quarter$ 21,900

compound interest

Interest paid on interest previously earned; credited daily, monthly, quarterly or semiannually Interest can be compounded on a semiannual, quarterly, monthly, or even more frequent basis. The more frequently compounding is done, the more rapidly the balance will grow.

rounded discount factors

It bears reemphasizing that the net present values may be calculated using the rounded discount factors from Appendix 13B.

Chapter Two

Job-Order Costing: Calculating Unit Product Costs

Chapter Three

Job-Order Costing: Cost Flows and External Reporting how companies use job-order costing to prepare a balance sheet and an income statement for external reporting purposes.

top managers often initiate the budgeting process by issuing profit targets

Lower-level managers are directed to prepare budgets that meet those targets. The difficulty is that the targets set by top managers may be unrealistically high or may allow too much slack. -If the targets are too high and employees know they are unrealistic, motivation will suffer. -If the targets allow too much slack, waste will occur.- Unfortunately, top managers often are not in a position to know whether the targets are appropriate.

manufacturing cycle efficiency (MCE).

MCE is computed by relating the value-added time to the throughput time. The goal is to increase this measure and the formula for computing it is as follows: MCE= Value-added time (Process time)/Throughput (manufacturing cycle) time helps companies to reduce non-value-added activities and thus get products into the hands of customers more quickly and at a lower cost.

Linearity Assumption

Management accountants ordinarily assume that costs are strictly linear -the relation between cost on the one hand and activity on the other can be represented by a straight line within a narrow band of activity known as the relevant range.

Chapter One

Managerial Accounting and Cost Concepts

Margin of Safety in dollars equation:

Margin of safety in dollars= Total budgeted (or actual) sales − Break‐even sales can be expressed in percentage form by dividing the margin of safety in dollars by total dollar sales: Margin of safety percentage= Margin of safety in dollars/Total budgeted (or actual) sales in dollars single-product company the margin of safety also can be expressed in terms of the number of units sold by dividing the margin of safety in dollars by the selling price per unit.

Chapter Eight

Master Budget

to calculate average operating assets

Most companies use the net book value (i.e., acquisition cost less accumulated depreciation) of depreciable assets it is consistent with their financial reporting practices of recording the net book value of assets on the balance sheet and including depreciation as an operating expense on the income statement. In this text, we will use the net book value approach unless a specific exercise or problem directs otherwise.

Operating activities Indirect include

Net Income+Depreciation Expense, Decrease in Accounts Receivable, Increase in inventory, Decrease in prepaid expense, increase in accounts payable

Key Concept 2

Once you have defined the alternatives, you need to identify the criteria for choosing among them. The key to choosing among alternatives is distinguishing between relevant and irrelevant costs and benefits

Key Concept 6

Opportunity costs also need to be considered when making decisions. An opportunity cost is the potential benefit that is given up when one alternative is selected over another. not usually found in accounting records, but they are a type of differential cost that must be explicitly considered in every decision a manager makes.

we know the future value of some amount but we do not know its present value?

P =Fn/(1 + r)^n Fn = $200 (the amount to be received in the future), r = 0.05 (the annual rate of interest), and n = 2 (the number of years in the future that the amount will be received).

formula can be used to compute the payback period:

Payback period = Investment required/Annual net cash inflow The payback period is expressed in years. When the annual net cash inflow is the same every year

the financial advantage (disadvantage) of the special order would be computed as follows:

Per Unit ; Total 100 Bike Incremental revenue (a)$558 ; $55,800 Less incremental costs: Variable costs: Direct materials 372 ; 37,200 Direct labor 90; 9,000Variable manufacturing overhead 12 ; 1,200 Special modifications 34 ; 3,400 Total variable cost $508 ; 50,800 Fixed cost: Purchase of stencils 2,400 Total incremental cost (b) 53,200 Financial advantage of accepting the order (a) − (b) $ 2,600

relation between the percentage change in sales and the percentage change in net operating income is given by the following formula:

Percentage change in net operating income= Degree of operating leverage × Percentage change in sales

Chapter 11

Performance Measurement in Decentralized Organizations

Overhead applied to a particular job

Predetermined overhead rate × Amount of the allocation base incurred by the job (Actual) put into job cost order sheet

Why are standards separated into two categories—price and quantity?

Price variances and quantity variances usually have different causes. In addition, different managers are usually responsible for buying and using inputs. Therefore, it is important to clearly distinguish between deviations from price standards and deviations from quantity standards

Importance of Relevant Range

Relevant range is important because if you make the assumption that all of your costs will remain constant, whether they are fixed or variable, you may make errors on your projections. Also, if you ignore relevant range, you may hit capacity issues where you don't realize you physically cannot make all of the goods needed because you have hit your capacity for the time period.

the company's minimum required borrowings at the beginning of the first quarter would be computed as follows:

Required Borrowings at the Beginning of the First Quarter: Desired ending cash balance $ 30,000 Plus deficiency of cash available over disbursements 94,000 Minimum required borrowings $ 124,000

many of the schedules in a master budget hinge on a variety of estimates and assumptions that managers must make when preparing those schedules.

Sales budget:What are the budgeted unit sales?What is the budgeted selling price per unit?What percentage of accounts receivable will be collected in the current and subsequent periods? Production budget:What percentage of next period's unit sales needs to be maintained in ending finished goods inventory? Direct materials budget:How many units of raw material are needed to make one unit of finished goods?What is the budgeted cost for one unit of raw material?What percentage of next period's production needs should be maintained in ending raw materials inventory?What percentage of raw material purchases will be paid in the current and subsequent periods? Direct labor budget:How many direct labor-hours are required per unit of finished goods?What is the budgeted direct labor wage rate per hour?Manufacturing overhead budget:What is the budgeted variable overhead cost per unit of the allocation base?What is the total budgeted fixed overhead cost per period?What is the budgeted depreciation expense on factory assets per period? Selling and administrative expense budget:What is the budgeted variable selling and administrative expense per unit sold?What is the total budgeted fixed selling and administrative expense per period?What is the budgeted depreciation expense on non-factory assets per period? Cash budget:What is the budgeted minimum cash balance?What are our estimated expenditures for noncurrent asset purchases and dividends?What is the estimated interest rate on borrowed funds?

The net operating income is computed as follows:

Sales$280,000 -Cost of goods sold ($280,000 × 45%) 126,000 =Gross margin 154,000 -Selling and administrative expenses ($80,000 + $3,100) 83,100 =Net operating income$70,900

Period Cost

Selling expense + Administrative expense all the costs that are not product costs. -All selling and administrative expenses are treated as period costs -expensed on the income statement in the period in which they are incurred -not included as CGS on income statement EX) sales commissions, advertising, executive salaries, public relations, and the rental costs of administrative offices

The budgeted cash disbursements for merchandise purchases are computed as follows:

September credit purchases paid in October$145,100 October credit purchases paid in October ($127,350 × 30%) 38,205 = Total cash disbursements for merchandise purchases$183,305

Corporate Social Responsibility (CSR)

a concept wherby organizations consider the needs of all stakeholders when making decisions -legal compliances and voluntary

rationing decisions, or ranking decisions

Sometimes preference decisions are called rationing decisions, or ranking decisions. Limited investment funds must be rationed among many competing alternatives. Hence, the alternatives must be ranked. Either the internal rate of return method or the net present value method can be used in making preference decisions. However, as discussed earlier, if the two methods are in conflict, it is best to use the net present value method, which is more reliable.

Chapter Ten

Standard Costs and Variances

Multiple Departmental Predetermined Overhead Rates Process

Step 1: Calculate the estimated total manufacturing overhead cost for each department.-> Y=a+bX Step 2: Calculate the predetermined overhead rate in each department.-> Estimated total manufacturing overhead cost / Estimated total amount of the allocation base Step 3: Calculate the amount of overhead applied from both departments to Job Predetermined overhead rate × Actual amount of the allocation base used by Job Step 4: Calculate the total job cost for Job Step 5: Calculate the selling price for Job using the markup percentage

Computation of the Payback Period

Step 1: Compute the annual net cash inflow. Because the annual net cash inflow is not given, it must be computed before the payback period can be determined: Net operating income $20,000 Add: Noncash deduction for depreciation 10,000 Annual net cash inflow $30,000 Step 2: Compute the payback period. Using the annual net cash inflow from above, the payback period can be determined as follows: Cost of the new equipment $80,000 Less salvage value of old equipment 5,000 Investment required $ 75,000 𝖯𝖺𝗒𝖻𝖺𝖼𝗄 𝗉𝖾𝗋𝗂𝗈𝖽 = 𝖨𝗇𝗏𝖾𝗌𝗍𝗆𝖾𝗇𝗍 𝗋𝖾𝗊𝗎𝗂𝗋𝖾𝖽 /𝖠𝗇𝗇𝗎𝖺𝗅 𝗇𝖾𝗍 𝖼𝖺𝗌𝗁 𝗂𝗇𝖿𝗅𝗈𝗐 = $𝟩𝟧,𝟢𝟢𝟢/$𝟥𝟢,𝟢𝟢𝟢 = 𝟤.𝟧 𝗒𝖾𝖺𝗋𝗌

Key concept 4

Sunk costs are always irrelevant when choosing among alternatives. A sunk cost is a cost that has already been incurred and cannot be changed regardless of what a manager decides to do. Sunk costs have no impact on future cash flows and they remain the same no matter what alternatives are being considered; therefore, they are irrelevant and should be ignored when making decisions.

Chapter 13A

The Concept of Present Value

2) The standard quantity allowed

The amount of an input that should have been used to complete the period's actual output. It is computed by multiplying the actual number of units produced by the standard quantity per unit.

Manufacturing Overhead in entry (2) represents indirect materials.

The debit side of the Manufacturing Overhead account is always used to record the actual manufacturing overhead costs, such as indirect materials, that are incurred during the period. The credit side of this account, is always used to record the manufacturing overhead applied to work in process.

A price variance

The difference between the actual amount paid for an input and the standard amount that should have been paid, multiplied by the actual amount of the input purchased

more than one cost driver

The difference is that because the cost formulas based on more than one cost driver are more accurate than the cost formulas based on just one cost driver, the variances will also be more accurate.

Schedule 4:

The direct labor budget shows the direct labor-hours required to satisfy the production budget. -By knowing in advance how much labor time will be needed throughout the budget year, the company can develop plans to adjust the labor force as the situation requires. -Companies that neglect the budgeting process run the risk of facing labor shortages or having to hire and lay off workers at awkward times. Erratic labor policies lead to insecurity, low morale, and inefficiency. many companies have employment policies or contracts that prevent them from laying off and rehiring workers as needed.

Delivery cycle time

The elapsed time from when a customer order is received until the finished goods are shipped is called delivery cycle time. The goal is to reduce this measure and the formula for computing it is as follows: Delivery cycle time= Wait time+Throughput time

Throughput (manufacturing cycle) time

The elapsed time from when production is started until finished goods are shipped to customers is called throughput time, or manufacturing cycle time. The goal is to continuously reduce this measure and the formula for computing it is as follows: Throughput (manufacturing cycle) time= Process time+Inspection time+Move time+Queue time

Why keep a product line that is showing a loss?

The explanation for this apparent inconsistency lies in part with the common fixed costs that are being allocated to the product lines. One of the great dangers in allocating common fixed costs is that such allocations can make a product line (or other business segment) look less profitable than it really is.

two methods for evaluating this aspect of an investment center's performance

The first method, covered in this section, is called return on investment (ROI). The second method, covered in the next section, is called residual income.

Step 4: Assign Overhead Costs to Cost Objects

The fourth step in the implementation of activity-based costing is called second-stage allocation.

From Strategy to Performance Measures: The Balanced Scorecard

The idea underlying these groupings (as indicated by the vertical arrows is that learning is necessary to improve internal business processes; improving business processes is necessary to improve customer satisfaction; and improving customer satisfaction is necessary to improve financial results.

Key Concept 3

The key to effective decision making is differential analysis—focusing on the future costs and benefits that differ between the alternatives. Everything else is irrelevant and should be ignored.

Profit Center

The manager of a profit center has control over both costs and revenue, but not over the use of investment funds. For example, the manager in charge of a Six Flags amusement park would be responsible for both the revenues and costs, and hence the profits, of the amusement park, but may not have control over major investments in the park. Profit center managers are often evaluated by comparing actual profit to targeted or budgeted profit.

Investment Center

The manager of an investment center has control over cost, revenue, and investments in operating assets. -responsible for earning an adequate return on investment For example, General Motors' vice president of manufacturing in North America would have a great deal of discretion over investments in manufacturing—such as investing in equipment to produce more fuel-efficient engines. Once General Motors' top-level managers and board of directors approve the vice president's investment proposals, he is held responsible for making them pay off. investment center managers are often evaluated using the return on investment (ROI) or residual income measures.

Step 5: Prepare Management Reports

The most common management reports prepared with ABC data are product and customer profitability reports. These reports help companies channel their resources to their most profitable growth opportunities while at the same time highlighting products and customers that drain profits.

split-off point

The point in a manufacturing process where joint products (such as gasoline and jet fuel) can be recognized as separate products Quite often joint products can be sold at the split-off point or they can be processed further and sold for a higher price.

Overhead application

The process of assigning overhead cost to jobs

Discounting

The process of finding the present value of a future cash flow Discounting future sums to their present value is a common practice in business, particularly in capital budgeting decisions.

Relevant Range

The range of activity within which assumptions about variable and fixed cost behavior are valid. relevant range is the range of output or production in which our assumptions are true. If you move outside the relevant range, your cost assumptions are no longer valid.

Cost structure

The relative proportion of each type of cost in an organization

Activity Variances from Comparing the Flexible Budget Based on Actual Activity to the Planning Budget example

The revenue variance is labeled favorable (unfavorable) when the revenue in the flexible budget is greater than (less than) the planning budget. The expense variances are labeled favorable (unfavorable) when the expense in the flexible budget is less than (greater than) the planning budget.

2) determine the incremental revenue

The second step is to determine the incremental revenue that is earned by further processing the joint product. This computation is performed by taking the revenue earned after further processing the joint product and subtracting the revenue that could be earned by selling the joint product at the split-off point.

Factor of the internal rate of return

The simplest and most direct approach when the net cash inflow is the same every year is to divide the investment in the project by the expected annual net cash inflow. This computation yields a factor from which the internal rate of return can be determined. The formula is as follows: Factor of the internal rate of return = Investment required/Annual net cash inflow

self-enhancement bias

The tendency to overestimate our performance and capabilities and to see ourselves in a more positive light than others see us.

3) incremental revenue from step two and subtract the incremental costs associated with processing the joint product beyond the split-off point

The third step is to take the incremental revenue from step two and subtract the incremental costs associated with processing the joint product beyond the split-off point. If the resulting answer is positive, then the joint product should be processed further and sold for a higher price. If the answer is negative, then the joint product should be sold at the split-off point without any further processing.

If the Net Present Value Is ... Zero

Then the Project Is ...Acceptable because its return is equal to the required rate of return.

If the Net Present Value Is ... Positive

Then the Project Is ...Acceptable because its return is greater than the required rate of return.

If the Net Present Value Is ... Negative

Then the Project Is ...Not acceptable because its return is less than the required rate of return.

Valid report

There should be no variance at all on fixed cost

discounting cash flows

These two methods use a technique called discounting cash flows to translate the value of future cash flows to their present value.

assuming that all costs are fixed

This is the error that is made when static planning budget costs are compared to actual costs without any adjustment for the actual level of activity Comparing actual costs to static planning budget costs only makes sense if the cost is fixed. If the cost isn't fixed, it needs to be adjusted for any change in activity that occurs during the period.

Preparing the profit graph

To plot the line, compute the profit at two different sales volumes, plot the points, and then connect them with a straight line.

cost of goods manufactured

Total manufacturing costs + Beginning work in process inventory − Ending work in process inventory

Total variable cost

Total variable cost increases and decreases in proportion to changes in the activity level.

In a single product situation, the formula for computing the unit sales to break even is:

Unit sales to break even= Fixed expenses/Unit CM

Example

Wheeling Company Balance Sheet September 30 Assets Cash$69,800 Accounts receivable 98,000 Inventory 37,800 Buildings and equipment, net of depreciation 310,000 Total assets$515,600 Liabilities and Stockholders' Equity Accounts payable$145,100 Common stock 216,000 Retained earnings 154,500 Total liabilities and stockholders' equity$515,600

underapplied overhead

When a company applies less overhead to production than it actually incurs -adjustment for underapplied overhead increases cost of goods sold and decreases net operating income

Multiple Predetermined Overhead Rates—An Activity-Based Approach

When a company creates overhead rates based on the activities that it performs, it is employing an approach called activity-based costing. -related to the activities performed within departments -results in more overhead rates than a departmental approach

vertically integrated

When a company is involved in more than one activity in the entire value chain

Overhead Application and the Income Statement

When a company uses predetermined overhead rates to apply overhead cost to jobs, it is almost a certainty that the amount of overhead applied to all jobs during a period will differ from the actual amount of overhead costs incurred during the period.

relaxing (or elevating) the constraint

When a manager increases the capacity of the bottleneck If a bottleneck machine breaks down or is ineffectively utilized, the losses to the company can be quite large

subsidiary ledger

When all of a company's job cost sheets are viewed collectively -provide an underlying set of financial records that explain what specific jobs comprise the amounts reported in Work-in-Process and Finished Goods on the balance sheet as well as Cost of Goods Sold on the income statement.

overapplied overhead

When it applies more overhead to production than it actually incurs -adjustment for overapplied overhead decreases cost of goods sold and increases net operating income

Payback and Uneven Cash Flows

When the cash flows associated with an investment project change from year to year, the simple payback formula that we outlined earlier cannot be used. Instead, the payback period can be computed as follows (assuming that cash inflows occur evenly throughout the year): Payback period = Number of years up to the year in which the investment is paid off + (Unrecovered investment at the beginning of the year in which the investment is paid off ÷ Cash inflow in the period in which the investment is paid off).

cost of capital serves as a screening device

When the cost of capital is used as the discount rate in net present value analysis, any project with a negative net present value does not cover the company's cost of capital and should be discarded as unacceptable.

Schedule 6: ending finished goods inventory budget

a budget showing the dollar amount of unsold finished goods inventory that will appear on the ending balance sheet

A self-imposed budget or participative budget

a budget that is prepared with the full cooperation and participation of managers at all levels.

customer value proposition

a cluster of benefits that an organization promises customers to satisfy their needs -the reasons for customers to choose them over their competitors Three broad categories 1)customer intimacy strategy, operational excellence, and product leadership

net present value method automatically provides for return of the original investment

Whenever the net present value of a project is positive, the project will recover the original cost of the investment plus sufficient excess cash inflows to compensate the organization for tying up funds in the project

The capacity of a bottleneck can be effectively increased in a number of ways, including:

Working overtime on the bottleneck. Subcontracting some of the processing that would ordinarily be done at the bottleneck. Investing in additional machines at the bottleneck. Shifting workers from processes that are not bottlenecks to the process that is the bottleneck. Focusing business process improvement efforts on the bottleneck. Reducing defective units. Each defective unit that is processed through the bottleneck and subsequently scrapped takes the place of a good unit that could have been sold.

Activity Cost pool

a "bucket" in which costs are accumulated that relate to a single activity measure in the ABC system

Continuous or perpetual budgets

a 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. In other words, one month (or quarter) is added to the end of the budget as each month (or quarter) comes to a close. This approach keeps managers focused at least one year ahead so that they do not become too narrowly focused on short-term results.

standard

a benchmark for measuring performance. Standards also are widely used in managerial accounting where they relate to the quantity and acquisition price of inputs used in manufacturing goods or providing services.

groupthink bias

a bias where some group members support a course of action solely because other group members do

optimism bias

a bias whereby people believe that, compared with other people, they are more likely to experience positive events and less likely to experience negative events in the future -being overly optimistic about the future

Preventive control

a control that deters undesirable events from occurring 1)authorizations: managemnt formally approves certain types of transactions 2)Segregation of duties: seperating responsibilities to authorize transactions, recording transactions, and maintaining custody of the related assets 3)Physical safeguards: using cameras, locks, and physical barriers to protect assets 4)IS security: such as pw and access logs to ensure data restrictions

Direct Cost

a cost that can be easily and conveniently traced to a specified cost object. To be traced to a cost object such as a particular product, the cost must be caused by the cost object.

avoidable cost

a cost that can be eliminated by choosing one alternative over another always relevant

Indirect Cost

a cost that cannot be easily and conveniently traced to a specified cost object.

Common Cost

a cost that is incurred to support a number of cost objects but cannot be traced to them individually. -type of indirect cost. Ex) factory managers salary is a common cost of producing various products in the factory

Fixed Cost

a cost that remains constant, in total, regardless of changes in the level of activity (unless influenced by some outside force) -can be viewed as either committed or discretionary -Manufacturing overhead: depreciation, insurance, property taxes, rent, and supervisory salaries -selling and administrative costs: administrative salaries, advertising, and depreciation of nonmanufacturing assets.

intrinsic motivation

a desire to perform a behavior effectively for its own sake -comes from within us

Budget

a detailed plan for the future that is usually expressed in formal quantitative terms. actual spending is compared to the budget to make sure the plan is being followed. Budgets are used for two distinct purposes—planning and control.

Cash Budget

a detailed plan showing how cash resources will be acquired and used.

Bill of Materials (BOM)

a document that lists the quantity of each type of direct material needed to complete a unit of product. -company's standard products (VS. custom product that is being made for the first time would not be on BOM)

materials requisition form

a document that specifies the type and quantity of materials to be drawn from the storeroom and identifies the job that will be charged for the cost of the materials. -used to control the flow of materials into production and making journal entries in the accounting records -By The Production Department (Description, Quantity, Unit Cost, Total Cost)

strategy

a game plan that enables a company to attract customers by distinguishing itself from competitors -defines how they intent to succeed in the marketplace -focal point should be the target customers -influences the plans set forth, the variables they seek to control, and the decisions they make

Lean production

a management approach that organizes resources such as people and machines around the flow of business processes and that only produces units in response to customer orders -Just-in-time production (JIT) -number of units produced tends to equal the number of units sold, resulting in min inventory -results in fewer defects, less wasted effort, and faster customer response times

Responsibility Accounting

a manager should be held responsible for those items—and only those items—that the manager can actually control to a significant extent. -Each line item (i.e., revenue or cost) in the budget is the responsibility of a manager who is held responsible for subsequent deviations between budgeted goals and actual results. -In effect, it personalizes accounting information by holding individuals responsible for revenues and costs. This concept is central to any effective planning and control system. -Someone must be held responsible for each cost or else no one will be responsible and the cost will inevitably grow out of control.

1) A price variance is called

a materials price variance in the case of direct materials, a labor rate variance in the case of direct labor, and a variable overhead rate variance in the case of variable manufacturing overhead.

1) A quantity variance is called

a materials quantity variance in the case of direct materials, a labor efficiency variance in the case of direct labor, and a variable overhead efficiency variance in the case of variable manufacturing overhead.

Operating Leverage

a measure of how sensitive net operating income is to a given percentage change in dollar sales. Operating leverage acts as a multiplier. -If operating leverage is high, a small percentage increase in sales can produce a much larger percentage increase in net operating income.

activity base

a measure of whatever causes the incurrence of a variable cost -sometimes referred to as a cost driver. -assume that the activity base under consideration is the total volume of goods and services provided by the organization. We will specify the activity base only when it is something other than total output. most common: direct labor-hours, machine-hours, units produced, and units sold other drivers: number of miles driven by salespersons, the number of pounds of laundry cleaned by a hotel, the number of calls handled by technical support staff at a software company, and the number of beds occupied in a hospital

Allocation base

a measure used to assign overhead costs to products and services. The most widely used in manufacturing are direct labor-hours, direct labor cost, machine-hours, and (where a company has only a single product) units of product.

High-Low Method

a method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity levels

value chain.

a network of value-creating activities activities, from development, to production, to after-sales service

Certified Management Accountant (CMA)

a professional accountant who has met certain educational (bachelors degree) and experience requirements (two years), passed a qualifying exam, and been certified by the Institute of Management Accountants (IMA) -CMA exam focuses on planning, controlling, and decision making skills

Business Process

a series of steps that are followed in order to carry out some task in a business -often span across departments, requiring mangers to cooperate across functional departments

least-squares regression analysis

a statistical technique that analyzes the relationship between independent (causal) and dependent (effect) variables

anchoring bias

a tendency to fixate on initial information, from which one then fails to adequately adjust for subsequent information -the anchor is the false assertion

confirmation bias

a tendency to search for information that supports our preconceptions and to ignore or distort contradictory evidence

lever

a tool for multiplying force.

Activity Measure

an allocation base in an activity-based costing system. The term cost driver is also used to refer to an activity measure because the activity measure should "drive" the cost being allocated. The two most common types of activity measures are transaction drivers and duration drivers.

Nonmanufactoring costs

divided into two categories: (1) selling costs and (2) administrative costs. sometimes called selling, general, and administrative (SG&A) costs or just selling and administrative costs.

Financial Accounting

accounting information and analyzes prepared for people outside the organization -fiancial info for stockholders, creditors, tax authorities, and regulators -emphasizes consequences of past activity -objectivity and verifiability -precision -companywide reports -Must follow GAAP/IFRS -mandatory external reports

Second-stage allocation

activity rates are used to apply overhead costs to products and customers Activity Rate X Activity = ABC Cost

Step Two: Assign Overhead Costs to Activity Cost Pools

activity-based costing system will divide the types of overhead costs among its aforementioned activity cost pools via an allocation process called first-stage allocation.

Statement of Ethical Professional Practice

adopted by IMA, an ethical code that describes in some detail the ethical responsibility of management accountants Two parts: 1) general guidelines (maintain a high level of professional competence, to treat sensitive matters with confidentiality, to maintain personal integrity, and to disclose info in a credible fashion) 2)what should be done if an individual finds evidence of ethical misconduct

Administrative Cost

all costs associated with the general management of an organization rather than with manufacturing or selling -costs involved in the overall, general administration of the organization as a whole. -can be direct or indirect EX) executive compensation, general accounting, secretarial, public relations

Asorbtion Costing

all manufacturing costs, both fixed and variable, are assigned to units of product—units are said to fully absorb manufacturing costs. Conversely, all nonmanufacturing costs are treated as period costs and they are not assigned to units of product. most countries (including the United States) require some form of absorption costing for external financial reports one system known as job-order costing

Schedule 1: Sales Budget

all of its numbers are derived from cell references to the Budgeting Assumptions tab and formulas—none of the numbers appearing in the schedule were actually keyed into their respective cells. Furthermore, it bears emphasizing that all remaining schedules in the master budget are prepared in the same fashion—they rely almost exclusively on cell references and formulas.

Cognitive Bias

all people possess a distorted thinking process that can adversely affect planning, controlling, and decision making

Plantwide overhead rate

allocate all manufacturing overhead costs to jobs based on their usage of direct-labor hours. (while direct labor-hours may indeed "drive" some of a company's manufacturing overhead costs, it is often overly simplistic and incorrect to assume that direct-labor hours is a company's only manufacturing overhead cost driver.)

Assinging Manufactoring Overhead

allocation is used to assign overhead costs to products. -accomplished by selecting an allocation base that is common to all of the company's products and services.

success of a budget program

also depends on whether top management uses the budget to pressure or blame employees.

Economic Value Added (EVA®)

an adaptation of residual income that has been adopted by many companies Under EVA, companies often modify their accounting principles in various ways. For example, funds used for research and development are often treated as investments rather than as expenses. These complications are best dealt with in a more advanced course; in this text we will not draw any distinction between residual income and EVA.

production order

an agreement has been reached with the customer concerning the quantities, prices, and shipment date for the order

Flexible budget

an estimate of what revenues and costs should have been, given the actual level of activity for the period -take into account how changes in activity affect costs -actual costs are compared to what the costs should have been for the actual level of activity during the period rather than to the static planning budget. -revenues and costs should have been given the actual level of activity

Time Ticket

an hour-by-hour summary of the employee's activities throughout the day. -computerized systems EX) Bar Codes (S, E, Time Completed, Rate, Amount, JN)

incremental cost

an increase in cost between two alternatives always relevant

Appendix 5A

analyzing mixed costs

Benchmarking

another way to leverage the information in activity rates. is a systematic approach to identifying the activities with the greatest room for improvement. It is based on comparing the performance in an organization with the performance of other, similar organizations known for their outstanding performance. -If a particular part of the organization performs far below the world-class standard, managers will be likely to target that area for improvement.

Activity

any event that causes the consumption of overhead resources

Raw materials Inventory

any materials that go into the final product. -an asset -Costs= Raw Material Purchases (product cost) When raw materials are used in production as direct materials, their costs are transferred to Work in Process inventory

Cost Object

anything for which cost data are desired—including products, customers, and organizational subunits. For purposes of assigning costs to cost objects, costs are classified as either direct or indirect. -cost may be direct or indirect, depending on the cost object Ex) department vs. particular product -Costs are assigned to cost objects for a variety of purposes including: pricing, preparing profitability studies, and controlling spending

Constraint, or bottleneck

anything that prevents you from getting more of what you want. Every individual and every organization faces at least one constraint, so it is not difficult to find examples of constraints determined by the step that limits total output because it has the smallest capacity

Normal Cost System

applies overhead costs to jobs by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the jobs. -the amount of overhead applied to a particular job is not the actual amount of overhead caused by the job

Organization-sustaining activities

are carried out regardless of which customers are served, which products are produced, how many batches are run, or how many units are made. This category includes activities such as heating the factory, cleaning executive offices, providing a computer network, arranging for loans, preparing annual reports to shareholders, and so on. For example Preparation of the shipping documents for the order., Periodic maintenance of equipment., Lighting and heating the company's production facility., Preparation of quarterly financial reports.

assume that all costs are variable

are computed by comparing actual results to the amounts in the second numerical column where all of the items in the planning budget have been inflated by 10%—the percentage by which activity increased. This is a perfectly valid adjustment to make if an item is strictly variable—like sales and hairstyling supplies. It is not a valid adjustment if the item contains any fixed element

Batch-level Activities

are performed each time a batch is handled or processed, regardless of how many units are in the batch. For example, tasks such as placing purchase orders, setting up equipment, and arranging for shipments to customers are batch-level activities. They are incurred once for each batch (or customer order). Costs at the batch level depend on the number of batches processed rather than on the number of units produced, the number of units sold, or other measures of volume. For example, the cost of setting up a machine for batch processing is the same regardless of whether the batch contains one or thousands of items.; Setting up the CD duplicating machine to make copies from a particular master CD, Loading the automatic labeling machine with labels for a particular CD.

Unit-level Activities

are performed each time a unit is produced. The costs of unit-level activities should be proportional to the number of units produced. For example, providing power to run processing equipment would be a unit-level activity because power tends to be consumed in proportion to the number of units produced.; Visually inspecting CDs and placing them by hand into protective plastic cases prior to shipping.

most common errors in preparing performance reports

are to implicitly assume that all costs are fixed or to implicitly assume that all costs are variable. These erroneous assumptions lead to inaccurate benchmarks and incorrect variances.

allocated general overhead

assume that these types of allocated common costs are irrelevant to the decision unless you are explicitly told otherwise assuming that these allocated costs are common to all items produced in the factory and would continue unchanged even if the shifters were bought from an outside supplier.

Expense Matching Principle

based on the accrual concept that costs incurred to generate a particular revenue should be recognized as expenses in the same period that the revenue is recognized -costs incurred to acquire or make something that will be sold, then the cost should be recognized as an expense only when the sale takes place (when the benfit occurs)

Overhead Concepts

beginning: predetermined overhead rate During:Total manufacturing overhead applied After: Under or overapplied overhead (properly analyze the Manufacturing Overhead T-account)

Blaming employees

breeds hostility, tension, and mistrust rather than cooperation and productivity.

Throughput time, which is a key measure in delivery performance, can be put into better perspective

by computing the manufacturing cycle efficiency (MCE).

Differential

can be qualitative or quantitative in nature. While qualitative differences between alternatives can have an important impact on decisions, and therefore, should not be ignored; our goal in this chapter is to hone your quantitative analysis skills. Therefore, our primary focus will be on analyzing quantitative differential costs and benefits—those that have readily measurable impacts on future cash flows.

activity-based costing

can be used to help identify potentially relevant costs for decision-making purposes. Activity-based costing improves the traceability of costs by focusing on the activities caused by a product or other segment

Merchandising companies

do not manufacture the products that they sell to customers buy finished products from manufacturers and then resell them to end consumers.

Degree of Operating Leverage (DOL)

can be used to quickly estimate what impact various percentage changes in sales will have on profits, without the necessity of preparing detailed contribution format income statements. the effects of operating leverage can be dramatic. -If a company is near its break-even point, then even small percentage increases in sales can yield large percentage increases in profits. (explains why management will often work very hard for only a small increase in sales volume.) EX) If the degree of operating leverage is 5, then a 6% increase in sales would translate into a 30% increase in profits.

residual income approach has one major disadvantage

can't be used to compare the performance of divisions of different sizes. Larger divisions often have more residual income than smaller divisions, not necessarily because they are better managed but simply because they are bigger.

The simple rate of return method

capital budgeting technique This method also is often referred to as the accounting rate of return or the unadjusted rate of return.

Separate companies may

carry out each of the activities in the value chain Other companies are content to integrate on a smaller scale by purchasing many of the parts and materials that go into their finished products

single company may

carry out several. control all of the activities in the value chain from producing basic raw materials right up to the final distribution of finished goods and provision of after-sales service

Cost driver

causes overhead costs -To improve job cost accuracy, the allocation base in the predetermined overhead rate should drive the overhead cost.

High-Low Method Formula

change in cost / change in activity

Financing activities include

common share dividends, payment on LT debt

Structuring Sales Commissions

companies usually compensate salespeople by paying them a commission based on sales, a salary, or a combination of the two. Commissions based on sales dollars can lead to lower profits. -the higher selling price and hence the larger commission. -from the standpoint of the company, profits will be greater if salespeople steer customers toward the cheaper model because it has the higher contribution margin.

Performance Reports

compares budgeted data to actual data in an effort to identify and learn from excellent performance and to identify and eliminate sources of unsatisfactory performances -can also be used as one of many inputs to help evaluate and reward employees

The net present value method

compares the present value of a project's cash inflows to the present value of its cash outflows

Assinging Manufactoring Overhead is complicated

complicated by three circumstances: 1) is an indirect cost: either impossible or difficult to trace these costs to a particular product or job. 2) consists of many different types of costs ranging from the -Some of these costs are variable overhead costs because they vary in direct proportion to changes in the level of production (e.g., indirect materials, supplies, and power) -Some are fixed costs because they remain constant as the level of production fluctuates (e.g., heat and light, property taxes, and insurance). 3) Many companies have large amounts of fixed manufacturing overhead. -Therefore, their total manufacturing overhead costs tend to remain relatively constant from one period to the next even though the number of units that they produce can fluctuate widely. -Consequently, the average cost per unit will vary from one period to the next.

Step Three: Calculate Activity Rates

computed by dividing the total cost for each activity by its total activity -or- rate for each activity cost pool is computed by dividing its estimated overhead cost by its expected activity. Note that these are average figures

spending variances

computed by taking the amounts in the actual results column and subtracting the amounts in the flexible budget column. cost incurred exceeds the standard cost allowed for the actual level of output, the variance is labeled unfavorable (U). Had any of the actual costs incurred been less than the standard cost allowed for the actual level of output, the corresponding variances would have been labeled favorable (F).

activity variances

computed by taking the amounts in the flexible budget column and subtracting the amounts in the planning budget column result in negative numbers and what are labeled as favorable (F) variances. The label favorable is used in these instances because the standard cost allowed for the actual output is less than the standard cost allowed for the planned output. Had the actual level of activity been greater than the planned level of activity, all of the computations would have resulted in positive numbers and unfavorable (U) activity variances.

Cost of Goods Sold

computed directly by multiplying the number of units sold by their unit cost or indirectly: Beginning merchandise inventory + Purchases − Ending merchandise inventory

Master Budget

consists of a number of separate but interdependent budgets that formally lay out the company's sales, production, and financial goals. -10 schedules contained in a master budget The master budget culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet.

Balance scorecard

consists of an integrated set of performance measures that are derived from and support a company's strategy. top management translates its strategy into performance measures that employees can understand and influence.

Mixed Cost

contains both variable and fixed cost elements. -also known as semivariable costs. intercept=total fixed cost slope=variable cost per unit of activity I / I / I/______ I__________ -the steeper the slope, the higher the variable cost per unit. EX) fees paid to the state

Exhibit 13B-2

contains the present value of $1 to be received each year over a series of years at various interest rates when computing the present value of a series of equal cash flows that begins at the end of period 1, Exhibit 13B-2 should be used. This table should be used to find the present value of a series of identical cash flows beginning at the end of the current period and continuing into the future.

The schedule of cost of goods sold

contains three elements of product costs—direct materials, direct labor, and manufacturing overhead—and it summarizes the portions of those costs that remain in ending Finished Goods inventory and that are transferred out of Finished Goods into Cost of Goods Sold, cost of goods manufactured. -relies on unadjusted cost of goods sold equation

The schedule of cost of goods manufactured

contains three elements of product costs—direct materials, direct labor, and manufacturing overhead—and it summarizes the portions of those costs that remain in ending Work in Process inventory and that are transferred out of Work in Process into Finished Goods. -three equations that are embedded within: raw materials used in production, total manufacturing costs

balanced scorecard approach

continual improvement is encouraged. If an organization does not continually improve, it will eventually lose out to competitors that do.

the contribution margin ratio (CM ratio)

contribution margin as a percentage of sales -hows how the contribution margin will be affected by a change in total sales. CM ratio =Contribution margin/Sales

Detective Controls

controls designed to discover control problems that were not prevented 1)reconciliations: relating data sets to one another to identify and resolve discrepancies 2)performance reviews: comparing actual performance to various benchmarks to identify unexpected results 3)maintaining records: maintaing written or electronical evidence to support transactions 4) IS security

Sunk cost

cost that has already been incurred and that cannot be changed by any decision made now or in the future. -cannot be changed by any decision, they are not differential costs. -sunk costs should always be ignored.

Activity-based costing (ABC)

costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore "fixed" as well as variable costs. Activity-based costing is ordinarily used as a supplement to, rather than as a replacement for, a company's usual costing system. -Most organizations that use activity-based costing have two costing systems—the official costing system that is used for preparing external financial reports and the activity-based costing system that is used for internal decision making and for managing activities

Management Accountants

creating value through values they report and analyze financial as well as nonfinancial meaures of process performances and corporate social performance. -this responsibilities are realted to profits (financial statements), processes (customer focus and satisfaction), people (employee learning and satisfaction), and the planet (environmental stewardship)

General Model of Cost Flows: Salaries and Wages payable

credited for direct labor added in WIP Credited for indirect labor added to MOH

nonfinancial performance measures

critical to success in many organizations—throughput time, delivery cycle time, and manufacturing cycle efficiency (MCE)

Working capital

current assets (e.g., cash, accounts receivable, and inventory) less current liabilities

direct materials budget

details the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories. The required purchases of raw materials are computed as follows: Required production in units of finished goods XXX + Units of raw materials needed per unit of finished goods XXX = Units of raw materials needed to meet production XXX Add desired units of ending raw materials inventory XXX = Total units of raw materials needed XXX Less units of beginning raw materials inventory XXX = Units of raw materials to be purchased XXX + Unit cost of raw materials XXX = Cost of raw materials to be purchased XXX

After completing Schedules 1-5

data he needed to compute the absorption unit product cost for the units produced during the budget year. This computation was needed for two reasons: 1. to help determine cost of goods sold on the budgeted income statement; 2. to value ending inventories on the budgeted balance sheet. The cost of unsold units is computed on the ending finished goods inventory budget.

Schedule 9: budgeted income statement

data in the beginning balance sheet and the data developed in Schedules 1- 8 one of the key schedules in the budget process. It shows the company's planned profit and serves as a benchmark against which subsequent company performance can be measured.

General Model of Cost Flows: Raw Materials

debit for the cost of materials processed credited for DM added in WIP Credited for indirect materials added to MOH

Record the sale

debit: Accounts Rec Credit: Sales Debit: CGS Credit: Finished Goods (TU X $ per unit)

Record closed to cost of goods sold

debit: CGS Credit: MOH Note that because the Manufacturing Overhead account has a debit balance, Manufacturing Overhead must be credited to close out the account.

General Model of Cost Flows: Manufacturing Overhead

debited for actual OH cost incurred underapplied credited for overhead cost applied to WIP over applied

General Model of Cost Flows: Fined Goods

debited for the CGM credited for the CGS

General Model of Cost Flows: Cost of Goods Sold

debited for the CGS

General Model of Cost Flows: Work in Process

debited for the cost of DM, DL, and MOH applied credited for the CGM

In a decentralized organization

decision-making authority is spread throughout the organization rather than being confined to a few top executives. out of necessity all large organizations are decentralized to some extent. Organizations do differ, however, in the extent to which they are decentralized. In strongly centralized organizations, decision-making authority is reluctantly delegated to lower-level managers who have little freedom to make decisions. In strongly decentralized organizations, even the lowest-level managers are empowered to make as many decisions as possible. -Most organizations fall somewhere between these two extremes.

Contributional Margin

deducting all variable expenses from sales amount remaining from sales revenues after all variable expenses have been deducted. -This amount contributes toward covering fixed expenses and then toward profits for the period. -can also be stated on a per unit basis.

The standard hours per unit

defines the amount of direct labor-hours that should be used to produce one unit of finished goods. One approach used to determine this standard is for an industrial engineer to do a time and motion study, actually clocking the time required for each task. we'll assume that "tight but attainable" labor standards are used rather than "ideal" standards that can only be attained by the most skilled and efficient employees working at peak effort 100% of the time. -Therefore, after consulting with the production manager and considering reasonable allowances for breaks, personal needs of employees, cleanup, and machine downtime, set the standard hours per unit

The standard quantity per unit

defines the amount of direct materials that should be used for each unit of finished product, including an allowance for normal inefficiencies

The standard rate per hour

defines the company's expected direct labor wage rate per hour, including employment taxes and fringe benefits.

The standard price per unit

defines the price that should be paid for each unit of direct materials and it should reflect the final, delivered cost of those materials.

activity-based costing

designed to be used for internal decision making

Tradition absorption cost system

designed to provide data for external financial reports

payback method focuses

on cash flows, it does not recognize the time value of money. In other words, it treats a dollar received today as being of equal value to a dollar received at any point in the future.

A Company's Strategy and the Balanced Scorecard

each company must decide which customers to target and what internal business processes are crucial to attracting and retaining those customers. Different companies, having different strategies, will target different customers with different kinds of products and services. If the balanced scorecard is correctly constructed, the performance measures should be linked together on a cause-and-effect basis.

An investment can be viewed in two ways

either in terms of its future value or in terms of its present value

Variance Analysis Cycle

emphasis should be on highlighting superior and unsatisfactory results, finding the root causes of these outcomes, and then replicating the sources of superior achievement and eliminating the sources of unsatisfactory performance. The variance analysis cycle should not be used to assign blame for poor performance.

contribution income statement

emphasizes the behavior of costs and therefore is extremely helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. (would not ordinarily be made available to those outside the company.)

Organizational leaders and employees

employees bring diverse needs, beliefs, and goals to the workplace, the goal is to unite these behavoirs around two common themes: 1)pursuing strategic goals 2) making optimal decisions

cost classification is diverse

enable managers to predict future costs, to compare actual costs to budgeted costs, to assign costs to segments of the business (such as product lines, geographic regions, and distribution channels), and to properly contrast the costs associated with competing alternatives. The notion of different cost classifications for different purposes is the most important unifying theme

The residual income approach

encourages managers to make investments that are profitable for the entire company but that would be rejected by managers who are evaluated using the ROI formula. Generally, a manager who is evaluated based on ROI will reject any project whose rate of return is below the division's current ROI even if the rate of return on the project is above the company's minimum required rate of return. In contrast, managers who are evaluated using residual income will pursue any project whose rate of return is above the minimum required rate of return because it will increase their residual income. Because it is in the best interests of the company as a whole to accept any project whose rate of return is above the minimum required rate of return, managers who are evaluated based on residual income will tend to make better decisions concerning investment projects than managers who are evaluated based on ROI.

The standard rate per unit that a company expects to pay for variable overhead

equals the variable portion of the predetermined overhead rate

intelligent choices

essential to consider relevant costs (and benefits) while ignoring irrelevant costs (same as current and proposed and benefits). -differential cost and revenue, sunk cost, and opportunity cost. -Any future cost or benefit that does not differ between the alternatives is irrelevant

CVP

estimate how profits are affected by the following five factors: Selling prices. Sales volume. Unit variable costs. Total fixed costs. Mix of products sold.

Target profit analysis

estimate what sales volume is needed to achieve a specific target profit. we can rely on the same two approaches, the equation method or the formula method.

The final schedule of the master budget is the balance sheet

estimates a company's assets, liabilities, and stockholders' equity at the end of a budget period.

Institute of Management Accountants (IMA)

estimates that more than 80% of professional accountants in the US work in nonpublic accounting environments -relies on finacial accounting skills to protect investors and other external parties by ensuring that companies are reporting historical financial results that comply with the rules

Purpose of Scattergraph

estimating costs to anticipate operating costs at different activity levels. result of a scattergraph analysis is a formula with the total amount of fixed cost and the variable cost per unit of activity.

Risk

every strategy, plan, and decision involves risk -use controls (used in fiancial accountaing to safeguard assets and minimize the risk of error) to reduce risk (time, budget, etc.)

financial advantage

exists if pursuing an alternative passes the cost/benefit test. In other words, it exists if the alternative's differential benefits (i.e., its future cash inflows) exceed its differential costs (i.e., its future cash outflows)

financial (disadvantage)

exists when an alternative fails the cost/benefit test—its differential benefits are less than its differential costs.

key to maximizing the total contribution margin

favor the products that provide the highest contribution margin per unit of the constrained resource unit contribution margin alone is not enough; the contribution margin must be viewed in relation to the amount of the constrained resource each product requires.

Performance measures used in balanced scorecards tend to fall into the four groups

financial, customer, internal business processes, and learning and growth

Statement of Cash Flows

highlights the major activities that impact cash flows and, hence, affect the overall cash balance. cash inflows(receipts of cash) cash outflows(payment or disbursements) shown through either the direct method or the indirect method. With either method, the investing and financing sections are identical; the only difference is in the operating section.

Cost behaivor

how a cost reacts to changes in the level of activity. -As the activity level rises and falls, a particular cost may rise and fall as well—or it may remain constant. managers must be able to anticipate which of these will occur, and if a cost can be expected to change, they must estimate how much. costs are often categorized as variable, fixed, or mixed

balanced scorecard lays out a theory

how the company can take concrete actions to attain its desired outcomes

Step One: Define activities, activity cost pools, and activity measures.

identify the activities that will form the foundation for the system. -This can be difficult and time-consuming and involves a great deal of judgment the original lengthy list of activities is usually reduced to a handful by combining similar activities -activities should be grouped together at the appropriate level. -Batch-level activities should not be combined with unit-level activities or product-level activities with batch-level activities and so on. -In general, it is best to combine only those activities that are highly correlated with each other within a level.

managers may choose to retain an unprofitable product line

if it helps sell other products, or if it serves as a "magnet" to attract customers.

a special order should be accepted

if the incremental revenue from the special order exceeds the incremental costs of the order. However, it is important to make sure that there is indeed idle capacity and that the special order does not cut into normal unit sales or undercut prices on normal sales

Margin and turnover

important concepts in understanding how a manager can affect ROI. All other things the same, margin is ordinarily improved by increasing selling prices, reducing operating expenses, or increasing unit sales. Increasing selling prices and reducing operating expenses both increase net operating income and therefore margin. Increasing unit sales also ordinarily increases the margin because of operating leverage. because of operating leverage, a given percentage increase in unit sales usually leads to an even larger percentage increase in net operating income. Therefore, an increase in unit sales ordinarily has the effect of increasing margin. Some managers tend to focus too much on margin and ignore turnover. However, turnover incorporates a crucial area of a manager's responsibility—the investment in operating assets. Excessive funds tied up in operating assets (e.g., cash, accounts receivable, inventories, plant and equipment, and other assets) depress turnover and lower ROI. In fact, excessive operating assets can be just as much of a drag on ROI as excessive operating expenses, which depress margin.

formula method

in a single product situation, we can compute the sales volume required to attain a specific target profit using the following formula: Unit sales to attain the target profit=Target profit+Fixed expensesUnit CM

unused capacity costs (also called idle capacity costs)

in a traditional absorption costing system, the cost of unused capacity is assigned to products. If the budgeted level of activity declines, the overhead rate and unit product costs rise thereby ensuring that the shrinking volume of output absorbs the increasing cost of idle capacity. In contrast, in activity-based costing, products are charged only for the cost of the capacity they use—not for the cost of the capacity they don't use. This provides more stable unit product costs and is consistent with the goal of assigning to products only the costs of the resources that they use

least-cost decisions

in decisions where revenues are not directly involved, managers should choose the alternative that has the least total cost from a present value perspective

same capital budgeting method should be used

in the postaudit as was used in the original approval process. That is, if a project was approved on the basis of a net present value analysis, then the same procedure should be used in performing the postaudit

Selling costs

include all costs that are incurred to secure customer orders and get the finished product to the customer. -sometimes called order-getting and order-filling costs. -can be direct or indirect EX) advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses

Average operating assets

include cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes. Examples of assets that are not included in operating assets (i.e., examples of nonoperating assets) include land held for future use, an investment in another company, or a building rented to someone else. -These assets are not held for operating purposes and therefore are excluded from operating assets. The operating assets base used in the formula is typically computed as the average of the operating assets between the beginning and the end of the year.

organization-sustaining costs

include costs such as the factory security guard's wages, the plant controller's salary, and the cost of supplies used by the plant manager's secretary. These types of manufacturing overhead costs are assigned to products in a traditional absorption costing system even though they are totally unaffected by which products are made during a period. In contrast, activity-based costing systems treat these types of organization-sustaining costs as period expenses rather than arbitrarily assigning them to products.

Manufactoring company product cost

include direct materials, direct labor, and manufacturing overhead -flow through 3 inventory accounts on the BS 1)Raw Materials: any materials that go into the final product 2)Work in Process: only partially complete and will require further work before they are ready for sale 3)Finished Good: completed units of product that have not yet been sold -then recorded in cost of goods sold on the income statement

Effectively managing an organization's constraints

key to increasing profits. when a constraint exists in the production process, managers can increase profits by producing the products with the highest contribution margin per unit of the constrained resource. However, they can also increase profits by increasing the capacity of the bottleneck operation.

manufactoring overhead

includes all manufacturing costs except direct materials and direct labor. -Only those indirect costs associated with operating the factory are included -Known as indirect manufacturing cost, factory overhead, and factory burden. 1)indirect materials: raw materials not easily traced 2)indirect labor: employees that play an essential role in running a manufacturing facility; however, the cost of compensating these people cannot be easily or conveniently traced to specific units of product.

Another method of decision analysis, called the total cost approach

includes all of the costs and benefits—relevant or not. When done correctly, the two methods always provide the same correct answer.

Cost of Goods Manufactured (COGM)

includes the manufacturing costs associated with units of product that were finished during the period. -The amount transferred from Work in Process to Finished Goods -As jobs are sold, their costs are transferred from Finished Goods to Cost of Goods Sold. -At this point, the various costs attached to each job are finally recorded as an expense on the income statement. (Until that point, these costs are in inventory accounts on the balance sheet.)

Net operating income

income before interest and taxes and is sometimes referred to as EBIT (earnings before interest and taxes). Net operating income is used in the formula because the base (i.e., denominator) consists of operating assets. To be consistent, we use net operating income in the numerator.

Discount rate

interest we used to find this present value

Planning

involves developing goals and preparing various budgets to achieve those goals.

Planning

involves establishing goals and specifying how to acheive them -what, when, how? -many questions need to be answered -often accompanied by budget

activity based management

involves focusing on activities to eliminate waste, decrease processing time, and reduce defects activity-based costing can also be used to identify activities that would benefit from process improvements The first step in any improvement program is to decide what to improve. -The activity rates computed in activity-based costing can provide valuable clues concerning where there is waste and opportunity for improvement

Control

involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change.

Controlling

involves gathering, evaluating, and responding to feedback to ensure that the plan is being properly executed or modified and circumstances change. -did, is? -how to improve -find out why performances exceeded or lacked -includes preparing performance reports

Decision making

involves selecting a course of action from competeing alternatives -make intelligent, data driven decisions Many decision revolve around the questions: -What should we be selling?(products and services) Who should we be serving? (customers) How should we execute?

Budget

is a detailed plan for the future that is usually expressed in formal quantitive terms

depreciation of special equipment

is an irrelevant cost because the equipment has already been purchased; thus, the cost incurred to buy the equipment is a sunk cost. If the equipment could be sold, its salvage value would be relevant. Or if the equipment could be used to make other products, this could be relevant as well.

Return on Investment (ROI)

is defined as net operating income divided by average operating assets: ROI=Net operating income/Average operating assets The higher a business segment's return on investment (ROI), the greater the profit earned per dollar invested in the segment's operating assets.

Strategy

is essentially a theory about how to achieve the organization's goals.

advantages of the balanced scorecard

it continually tests the theories underlying management's strategy. If a strategy is not working, it should become evident when some of the predicted effects (i.e., more car sales) don't occur. Without this feedback, the organization may drift on indefinitely with an ineffective strategy based on faulty assumptions.

method of decision analysis is called the differential approach

it focuses solely on the relevant costs and benefit

payback method is not a true measure of the profitability of an investment

it simply tells a manager how many years are required to recover the original investment. Unfortunately, a shorter payback period does not always mean that one investment is more desirable than another. it does not consider the time value of money.

Schedule 2: Production Budget

its the number of units that must be produced to satisfy sales needs and to provide for the desired ending finished goods inventory. Production needs can be determined as follows: Budgeted unit sales XXX Add desired units of ending finished goods inventory XXX = Total needs XXX Less units of beginning finished goods inventory XXX = Required production in units XXX production requirements are influenced by the desired level of the ending finished goods inventory

Direct Labor

labor costs that can be easily traced to individual units of product. -sometimes called touch labor because direct labor workers typically touch the product while it is being made

Schedule 7: selling and administrative expense budget

lists the budgeted expenses for areas other than manufacturing. In large organizations, this budget would be a compilation of many smaller, individual budgets submitted by department heads and other persons responsible for selling and administrative expenses.

calculate the break-even point (in unit sales and dollar sales)

managers can use either of two approaches, the equation method or the formula method.

Cost-plus pricing

managers establish a markup percentage that they believe will generate enough revenue to cover all of a job's manufacturing costs and a portion of the company's nonmanufacturing costs, while generating some residual profit. EX) MC=100, M%=50, 100 X 50 = selling price of 150 (100+50)

Managers should focus much of their attention on managing the bottleneck.

managers should emphasize products that make the most profitable use of the constrained resource. They should also make sure that products are processed smoothly through the bottleneck, with minimal lost time due to breakdowns and setups. And they should try to find ways to increase the capacity at the bottleneck.

finished goods inventory

manufactured items that are completed and ready for sale

Raw materials

materials that go into the final product -the finished product of one company can become the raw materials of another company.

Duration Drivers

measure the amount of time required to perform an activity, such as the time spent preparing individual bills for customers. In general, duration drivers are more accurate measures of resource consumption than transaction drivers, but they take more effort to record. -For that reason, transaction drivers are often used in practice.

anticipated profit or loss at any given level of sales on CVP

measured by the vertical distance between the total revenue line (sales) and the total expense line (variable expense plus fixed expense).

The standard hours per unit for variable overhead

measures the amount of the allocation base from a company's predetermined overhead rate that is required to produce one unit of finished goods

A materials price variance

measures the difference between a direct material's actual price per unit and its standard price per unit, multiplied by the actual quantity purchased. the purchasing manager has control over the price paid for materials and is therefore responsible for the materials price variance

The labor rate variance

measures the difference between the actual hourly rate and the standard hourly rate, multiplied by the actual number of hours worked during the period. The variance is labeled favorable (F) because the actual hourly rate is less than the standard hourly rate. If the actual hourly rate had been greater than the standard hourly rate, the variance would have been labeled unfavorable (U).

The labor efficiency variance

measures the difference between the actual labor-hours used and the standard hours allowed for the actual output, multiplied by the standard hourly rate.

The variable overhead efficiency variance

measures the difference between the actual level of activity and the standard activity allowed for the actual output, multiplied by the variable part of the predetermined overhead rate.

The materials quantity variance

measures the difference between the actual quantity of materials used in production and the standard quantity of materials allowed for the actual output, multiplied by the standard price per unit of materials. It is labeled as unfavorable (favorable) when the actual quantity of material used in production is greater than (less than) the quantity of material that should have been used according to the standard. The production manager is ordinarily responsible for the materials quantity variance.

The variable overhead rate variance

measures the difference between the actual variable overhead cost incurred during the period and the standard cost that should have been incurred based on the actual activity of the period.

estimate the effect of a planned increase in sales on profits

multiply the increase in units sold by the unit contribution margin. The result will be the expected increase in profits.

estimate the profit at any sales volume above the break-even point

multiply the number of units sold in excess of the break-even point by the unit contribution margin The result represents the anticipated profits for the period.

existence of fixed costs

net operating income does not change in proportion to changes in the level of activity. -There is a leverage effect. -The percentage changes in net operating income are ordinarily larger than the percentage increases in activity.

ROI can also be expressed in terms

of margin and turnover as follows: ROI=Margin×Turnover where Margin=Net operating income/Sales and Turnover=Sales/Average operating assets

Product Leadership Strategy

offer higher quality products

Bonuses

often based on meeting and exceeding budgets. -Typically, no bonus is paid unless the budget is met. -The bonus often increases when the budget target is exceeded, but the bonus is usually capped out at some level.

future cash flows

often uncertain or difficult to estimate. A number of techniques are available for handling this complication. Some of these techniques are quite technical—involving computer simulations or advanced mathematical skills—and are beyond the scope of this book. However, we can provide some very useful information to help managers deal with uncertain cash flows without getting too technical.

Committed fixed cost

organizational investments with a multiyear planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes. Ex) Investments in facilities, equipment, and basic organizational structure, real estate taxes, insurance premiums, and salaries of top management remain largely unchanged in the short term because the costs of restoring them later are likely to be far greater than any short-run savings that might be realized.

Possible causes of an unfavorable labor efficiency variance include:

poorly trained or motivated workers; poor-quality materials, requiring more labor time; faulty equipment, causing breakdowns and work interruptions; and poor supervision of workers. insufficient demand for the company's products The managers in charge of production would usually be responsible for control of the labor efficiency variance. However, the purchasing manager could be held responsible if the purchase of poor-quality materials resulted in excessive labor processing time.

credible leader

possess three attributes: 1)technical competence (that spans the value chain) 2)personal integrity (work ethic and honesty) 3)strong com skills ( oral and writing skills) to be respect you must have three others: 1)strong mentoring skills (help others realize their potential) 2)strong listening skills (to learn from coworkers and be responsive to their needs) 3) personal humility (deferring recognition to all employees who contribute to company success)

Setting Direct Materials Standards

prepare quantity and price standards for the company's only significant raw material

planning budgets

prepared before the period begins and is valid for only the planned level of activity. -A static planning budget is suitable for planning but is inappropriate for evaluating how well costs are controlled. If activity is higher than expected, variable costs should be higher than expected; and if activity is lower than expected, variable costs should be lower than expected.

Contribution format income statements

prepared for internal management purposes. -emphasis on making predictions and decisions that affect future performance. -organizes cost by their behavior -fixed and variable costs -use cost classifications for predicting costs behavior (variable and fixed costs) to better inform decisions affecting the future. 1)deducting all variable expenses from sales to obtain the contribution margin. (For a merchandising company, cost of goods sold is a variable cost that gets included in the "Variable expenses" portion of the contribution format income statement.)

Traditional income statements

prepared primarily for external reporting purposes. -emphasis on recording past performance -rely on cost classifications for preparing financial statements (product and period costs) to depict the financial consequences of past transactions. -does not distinguish between fixed and variable costs 1) organizes costs into two categories—cost of goods sold (reports the product costs attached to the merchandise sold during the period) and selling and administrative expenses. (report all period costs that have been expensed as incurred. ) 2) Sales minus cost of goods sold equals the gross margin. 3) The gross margin minus selling and administrative expenses equals net operating income.

Only one of these four activities adds value to the product

process time The other three activities—inspecting, moving, and queuing—add no value and should be eliminated as much as possible.

Product Margin

profit from a product a function of the product's sales and the direct and indirect costs that the product causes

The budgeted income statement

provides an estimate of net income for the budget period and it relies on information from the sales budget, ending finished goods inventory budget, selling and administrative expense budget, and the cash budget.

Managerial Accounting

providing info for mangers for use within the organization for: planning, controlling and decision making -emphasizes decisions affecting the future -relevance -timeliness -segment reports -does not follow GAAP/IFRS -not mandatory

time value of money

recognizes that a dollar today is worth more than a dollar a year from now if for no other reason than you could put the dollar in a bank today and have more than a dollar a year from now. Because of the time value of money, capital investments that promise earlier cash flows are preferable to those that promise later cash flows. an important capital budgeting concept

Joint products

two or more products, known as joint products, are produced from a single raw material input.

job cost sheet

records the materials, labor, and manufacturing overhead costs charged to that job. -Accounting Department's automaticaly -DM automatically are recorder - accumulates the total direct materials, direct labor, and manufacturing overhead costs assigned to a job -The requisition number from the materials requisition form appears on the job cost sheet to make it easier to identify the source document for the direct materials charge. (DM, DL, MO, Cost Summary, Units Shipped)

Investment required

refers to any cash outflows that occur at the beginning of the project, reduced by any salvage value recovered from the sale of old equipment also includes any investment in working capital that the project may need.

Direct materials

refers to raw materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product.

2) standard hours allowed

refers to the amount of an input that should have been used to manufacture the actual output of finished goods produced during the period. It is computed by multiplying the actual output by the standard quantity (or hours) per unit. The standard quantity (or hours) allowed is then multiplied by the standard price (or rate) per unit of the input to obtain the total cost according to the flexible budget.

Cost structure

refers to the relative proportion of fixed and variable costs in an organization. Managers often have some latitude in trading of between these two types of costs.

Sales mix

refers to the relative proportions in which a company's products are sold. The idea is to achieve the combination, or mix, that will yield the greatest profits. Most companies have many products, and often these products are not equally profitable. -Hence, profits will depend to some extent on the company's sales mix. -Profits will be greater if high-margin rather than low-margin items make up a relatively large proportion of total sales.

Preference decsions

relate to selecting from among several acceptable alternatives

Customer-level Activities

relate to specific customers and include activities such as sales calls, catalog mailings, and general technical support that are not tied to any specific product. For example, Sales representatives' periodic visits to customers to keep them informed about the services provided by CD Express

Product-level Activities

relate to specific products and typically must be carried out regardless of how many batches are run or units of product are produced or sold. For example, activities such as designing a product, advertising a product, and maintaining a product manager and staff are all product-level activities.; Ordering labels from the printer for a particular CD, Preparation of the shipping documents for the order.

Screening Decisions

relate to whether a proposed project is acceptable—whether it passes a preset hurdle hurdle rate- the minimum rate of return on a project or investment required

cost-volume-profit (CVP) graph

relationships among revenue, cost, profit, and volume are illustrated -highlights CVP relationships over wide ranges of activity (sometimes called a break-even chart)

A Performance Report Combining Activity and Revenue and Spending Variances

report brings together information from those two earlier exhibits in a way that makes it easier to interpret what happened during the period. -the variances appear between the amounts being compared rather than after them -provides a more valid assessment of performance

Mixed Cost equation

represented by a straight line, the following equation for a straight line can be used to express the relationship between a mixed cost and the level of activity: Y=a + bX -Y=The total mixed cost -a=The total fixed cost (the vertical intercept of the line) -b=The variable cost per unit of activity (the slope of the line) -X=The level of activity

A loss on CVP

represented by the vertical distance between the total expense and total revenue lines) gets bigger as sales decline

Investing Activities Include

sale of land, purchase of equipment

Manufacturing companies

separate their costs into two broad categories—manufacturing and nonmanufacturing costs Most manufacturing companies further separate their manufacturing costs into two direct cost categories, direct materials and direct labor, and one indirect cost category, manufacturing overhead

Formula Method

shortcut version of the equation method. -simply skips a few steps in the equation method. It centers on the idea that each unit sold provides a certain amount of contribution margin that goes toward covering fixed expenses.

postaudit analysis

should be actual observed data rather than estimated data. This gives management an opportunity to make a side-by-side comparison to see how well the project has succeeded. It also helps assure that estimated data received on future proposals will be carefully prepared because the persons submitting the data knows that their estimates will be compared to actual results in the postaudit process. Actual results that are far out of line with original estimates should be carefully reviewed.

Relevant cost and benefits

should be considered when making decisions

irrelevant cost and benefits

should be ignored when making decisions. being able to ignore irrelevant data saves decision makers tremendous amounts of time and effort. Second, bad decisions can easily result from erroneously including irrelevant costs and benefits when analyzing alternatives.

nonmanufacturing costs

should be treated as period expenses and charged directly to the income statement Nonmanufacturing costs should not go into the Manufacturing Overhead account sales commissions, depreciation on sales equipment, rent on office facilities, insurance on office facilities, and related costs.

merchandise purchases budget

showing the amount of goods to be purchased from suppliers during the period. prepares a production budget because it is a manufacturing company. If it were a merchandising company, instead it would prepare a merchandise purchases Budgeted cost of goods sold XXX Add desired ending merchandise inventory XXX = Total needs XXX Less beginning merchandise inventory XXX = Required purchases XXX usually accompanied by a schedule of expected cash disbursements for merchandise purchases.

Appendix 13B

shows the discounted present value of $1 to be received at various periods in the future at various interest rates we want to know the present value of $x rather than just $1, we need to multiply the factor in the table by $x This table should be used to find the present value of a single cash flow (such as a single payment or receipt) occurring in the future.

Cash Flow Direct Method

shows the major classes of gross cash receipts and gross cash payments

A standard cost card

shows the standard quantity (or hours) and standard price (or rate) of the inputs required to produce a unit of a specific product.

Transaction Drivers

simple counts of the number of times an activity occurs, such as the number of bills sent out to customer

profit graph

simpler form of the CVP graph a linear equation, it plots as a single straight line

Decisin Making

six key concepts that you need to understand to make intelligent decisions

Managerial Accounting in the real world

skills are usefull in just about any career, organization, or industry. you will need to know how to plan for the future, how to make progress towards these goals, and how to make intelligent decisions.

Quantity standards

specify how much of an input should be used to make a product or provide a service

Price standards

specify how much should be paid for each unit of the input

Cash Flow Indirect Method

starts with the net income and adjusts the profit/loss by the effects of the transactions

Customer Intimacy Strategy

strategy based on delivering value through superior empathy for customers and solutions tailored to specific customer needs

Inventoriable costs

synonym for product costs Because product costs are initially assigned to inventories

management by exception

system that compares actual results to a budget so that significant deviations can be flagged as exceptions and investigated further. -often paired with VAC -enables managers to focus on large variances -Another clue is the size of the variance relative to the amount of spending -should also monitor patterns of variances

3) The price variance is computed by

taking the total cost in column (1) and subtracting the total cost in column (2).

3) The spending variance is computed by

taking the total cost in column (1) and subtracting the total cost in column (3)

3) The quantity variance is computed by

taking the total cost in column (2) and subtracting the total cost in column (3)

A favorable price variance indicates

that the actual price (AP) of the input was less than the standard price per unit (SP).

An unfavorable price variance indicates

that the actual price (AP) per unit of the input was greater than the standard price (SP) per unit.

An unfavorable quantity variance indicates

that the actual quantity (AQ) of the input used was greater than the standard quantity allowed (SQ)

a favorable quantity variance indicates

that the actual quantity (AQ) of the input used was less than the standard quantity allowed (SQ).

two "big picture" of Master Budgets

that the budget is designed to answer 10 key questions and that it is based on various estimates and assumptions help to understand why and how a master budget is created.

cost of a completed job

the actual direct materials cost of the job, the actual direct labor cost of the job, and the manufacturing overhead cost applied to the job -actual overhead costs do not appear on the job cost sheet nor do they appear in the Work in Process account. -Only the applied overhead cost, based on the predetermined overhead rate, appears on the job cost sheet and in the Work in Process account.

Queue time

the amount of time a product spends waiting to be worked on, to be moved, to be inspected, or to be shipped.

Inspection time

the amount of time spent ensuring that the product is not defective

Process time

the amount of time work is actually done on the product

Contribution margin

the amount remaining from sales revenue after variable expenses have been deducted. -Thus, it is the amount available to cover fixed expenses and then to provide profits for the period. -used first to cover the fixed expenses, and then whatever remains goes toward profits. -If the contribution margin is not sufficient to cover the fixed expenses, then a loss occurs for the period.

cost of capital

the average rate of return that the company must pay to its long-term creditors and its shareholders for the use of their funds. If a project's rate of return is less than the cost of capital, the company does not earn enough to compensate its creditors and shareholders. Therefore, any project with a rate of return less than the cost of capital should be rejected.

simple rate of return method influences

the behavior of investment center managers who are evaluated and rewarded based on their return on investment (ROI).

Pressuring employees

the budget is too often used as a pressure device and excessive emphasis is placed on "meeting the budget" under all circumstances. Rather than being used as a weapon, the budget should be used as a positive instrument to assist in establishing goals, measuring operating results, and isolating areas that need attention.

operating leverage.

the choice of a cost structure better structure depends on many factors: long-run trend in sales, year-to-year fluctuations in the level of sales, and the attitude of the owners toward risk, etc. -it is not obvious which cost structure is better. Both have advantages and disadvantages.

A gain on CVP

the company earns a profit and the size of the profit (represented by the vertical distance between the total revenue and total expense lines) increases as sales increase.

if sales are zero

the company's loss would equal its fixed expenses. Each unit that is sold reduces the loss by the amount of the unit contribution margin. Once the break-even point has been reached, each additional unit sold increases the company's profit by the amount of the unit contribution margin.

Average cost per unit

the costs of the job are divided by the number of units in the job to arrive at an average cost per unit. -also referred to as the unit product cost.

A quantity variance

the difference between how much of an input was actually used and how much should have been used for the actual level of output and is stated in dollar terms using the standard price of the input.

Spending Variance

the difference between the actual amount of the cost and how much a cost should have been, given the actual level of activity. -If the actual cost is greater than what the cost should have been, the variance is labeled as unfavorable. -If the actual cost is less than what the cost should have been, the variance is labeled as favorable possible explanations including paying a higher price for inputs than should have been paid, using too many inputs for the actual level of activity, a change in technology, and so on

Activity Variance

the difference between the actual level of activity and the level of activity in the planning budget from the beginning of the period

revenue variance

the difference between the actual total revenue and what the total revenue should have been, given the actual level of activity for the period. -If actual revenue exceeds what the revenue should have been, the variance is labeled favorable. -If actual revenue is less than what the revenue should have been, the variance is labeled unfavorable the revenue variance is favorable if the average selling price is greater than expected; it is unfavorable if the average selling price is less than expected

present value

the difference between the present value of these cash flows, called the net present value, determines whether or not a project is an acceptable investment.

Variences

the differences between the actual results and what should have occurred according to the budget -Why did this variance occur? -Why is this variance larger than it was last period? significant variances are investigated so that their root causes can be either replicated or eliminated

CM ratio is particularly valuable in situations where:

the dollar sales of one product must be traded off against the dollar sales of another product. In this situation, products that yield the greatest amount of contribution margin per dollar of sales should be emphasized.

Wait time

the elapsed time from when a customer order is received until production of the order is started. This is a non-value-added activity that should be reduced or eliminated. When companies succeed in drastically reducing or eliminating wait time plus the non-value-added components of throughput time it often enables them to increase customer satisfaction and profits

margin of safety

the excess of budgeted or actual sales dollars over the break-even volume of sales dollars. It is the amount by which sales can drop before losses are incurred. The higher the margin of safety, the lower the risk of not breaking even and incurring a loss.

payback period.

the length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates. This period is sometimes referred to as "the time that it takes for an investment to pay for itself."

break even point

the level of sales at which profit is zero. will show neither profit nor loss but just cover all of its costs Once the break-even point has been reached, net operating income will increase by the amount of the unit contribution margin for each additional unit sold.

Ethical behaivor

the lubricant that keeps the economy running -without fundamental trust in the integrity of business, the economy would operate much less efficiently -foundation for managerial accounting: numbers are meaningless unless they have been compentently, objectively, honestly gathered, analyzed, and reported.

Value Chain

the major business functions that add value to a company's products and services, such as research and development, product design, manufacturing, marketing, distribution, and customer service -how an organizations functional departments interact with one another to form the business process -process execellence rather than funtionability

Cost Center

the manager of a cost center has control over costs, but not over revenue or the use of investment funds. Service departments such as accounting, finance, general administration, legal, and personnel are usually classified as cost centers. In addition, manufacturing facilities are often treated as cost centers. The managers of cost centers are expected to minimize costs while providing the level of products and services needed by other parts of the organization. For example, the manager of a manufacturing facility would be evaluated at least in part by comparing actual costs to how much costs should have been for the actual level of output during the period. Standard cost variances and flexible budget variances, such as those discussed in earlier chapters, are often used to evaluate cost center performance.

What happens if actual results do not measure up to the budgeted goals?

the manager should take the initiative to understand the sources of significant favorable or unfavorable discrepancies, should take steps to correct unfavorable discrepancies and to exploit and replicate favorable discrepancies, and should be prepared to explain discrepancies and the steps taken to correct or exploit them to higher management.

cost centers

the managers in these departments are responsible for costs, but not revenues -the exception that revenue, and consequently net operating income, will not appear on the report

Most companies use the quantity of materials purchased to compute

the materials price variance

Most companies use the quantity of materials used in production to compute

the materials quantity variance

Residual Income

the net operating income that an investment center earns above the minimum required return on its operating assets. In equation form, residual income is calculated as follows: Residual income=Net operating income-(Average operating assets×Minimum required rate of return)

When residual income or EVA is used to measure performance

the objective is to maximize the total amount of residual income or EVA, not to maximize ROI. This is an important distinction. If the objective were to maximize ROI, then every company should divest all of its products except the single product with the highest ROI.

Equation Method

the only difference between this equation and the equation used for break-even calculation is the profit figure. In the break-even scenario, the profit is $0, whereas in the target profit scenario the profit is x (ex)$40,000.)

analyzing the cash flows

the payback method, the net present value method, and internal rate of return method—all focus on analyzing the cash flows associated with capital investment projects

our methods for making capital budgeting decisions

the payback method, the net present value method, the internal rate of return method, and the simple rate of return method.

Opportunity Cost

the potential benefit that is given up when one alternative is selected over another. -not usually found in accounting records, but they are costs that must be explicitly considered in every decision a manager makes. -Virtually every alternative involves an opportunity cost.

using the internal rate of return method to rank competing investment projects

the preference rule is: The higher the internal rate of return, the more desirable the project internal rate of return is widely used to rank projects.

using the project profitability index to rank competing investments projects

the preference rule is: The higher the project profitability index, the more desirable the project.3 Applying this rule to the two investments above, investment B should be chosen over investment A.

First-stage allocation

the process of assigning functionally organized overhead costs derived from a company's general ledger to the activity cost pools. cost X The distribution of resource consumption across the activity cost pools (%)

Many factors influence materials purchase prices including:

the quantity and quality of materials purchased, the number of purchase orders placed with suppliers, how the purchased materials are delivered, and whether the materials are purchased in a rush order

Relevent Range

the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid -cost increases in discrete steps or increments of the RR

The internal rate of return

the rate of return of an investment project over its useful life. The internal rate of return is computed by finding the discount rate that equates the present value of a project's cash outflows with the present value of its cash inflows. In other words, the internal rate of return is the discount rate that results in a net present value of zero.

deviations from quantity standards

the responsibility of the production manager

deviations from price standards

the responsibility of the purchasing manager

financial measures reflect

the results of what people in the organization do, they do not measure what drives organizational performance Consequently, many organizations use a variety of nonfinancial performance measures in addition to financial measures

To eliminate such conflicts, commissions can be based on contribution margin rather than on selling price.

the salespersons will want to sell the mix of products that maximizes contribution margin. Providing that fixed costs remain constant, maximizing the contribution margin will also maximize the company's profit. by maximizing their own compensation, salespersons will also maximize the company's profit.

focuses on incremental net operating income

the simple rate of return method focuses on incremental net operating income. To better prepare you to apply the payback, net present value, and internal rate of return methods, we'd like to define the most common types of cash outflows and cash inflows that accompany capital investment projects.

Move time

the time required to move materials or partially completed products from workstation to workstation

Cost Summary section of the job cost sheet

the totals for direct materials, direct labor, and manufacturing overhead are transferred to the Cost Summary section

Operational Excellence Strategy

the value strategy designed to produce faster, more convenient, and lower costs than competitors

Present Value (PV)

the value today of a future cash flow or series of cash flows also known as the discounted value

sales budget influences

the variable portion of the selling and administrative expense budget and it feeds into the production budget, which defines how many units need to be produced during the budget period.

The break-even on PG

the volume of sales at which profit is zero and is indicated by the dashed line on the graph. -the profit steadily increases to the right of the break-even point as the sales volume increases -the loss becomes steadily worse to the left of the break-even point as the sales volume decreases.

the net present value and internal rate of return methods not only focus on cash flows

they also recognize the time value of those cash flows

how are manufacturing overhead costs assigned to Work in Process?

they are assigned by using the predetermined overhead rate—which is calculated by dividing the estimated total manufacturing overhead cost for the period by the estimated total amount of the allocation base.

incremental analysis

they consider only the costs and revenues that will change if the new program is implemented. Although in each case a new income statement could have been prepared, the incremental approach is simpler and more direct and focuses attention on the specific changes that would occur as a result of the decision.

The production budget use

to determine the direct materials, direct labor, and manufacturing overhead budgets a company has prepared these three manufacturing cost budgets, it can prepare the ending finished goods inventory budget.

The Variance Analysis Cycle process

to evaluate and improve performance. 1. Prepare standard cost performance report 2. Analyze variances 3. Identify questions 4. Receive root explanations 5. Take corrective actions 6. Conduct next period's operations

extrinsic incentive

to highlight important goals and to motivate employees to acheive them -can cause unintended consequences (produces dysfunctional results for the company) -system that fairly rewards employees for their efforts without inadvertently creating extrinsic incentives that motivate them to take actions that harm the company

point of an effective responsibility accounting system

to make sure that nothing "falls through the cracks," that the organization reacts quickly and appropriately to deviations from its plans, and that the organization learns from the feedback it gets by comparing budgeted goals to actual results. The point is not to penalize individuals for missing targets.

profit

to stand for net operating income in equations.

Product Margins Computed Using the Traditional Cost System

traditional cost system assigns only manufacturing costs to products—this includes direct materials, direct labor, and manufacturing overhead. Selling and administrative costs are not assigned to products

Preparing the CVP Graph

unit volume is represented on the = horizontal (X) axis dollars on the = vertical (Y) axis 1. Draw a line parallel to the volume axis to represent total fixed expense. 2. Choose some volume of unit sales and plot the point representing total expense (fixed and variable) at the sales volume you have selected. -After the point has been plotted, draw a line through it back to the point where the fixed expense line intersects the dollars axis. 3.choose some sales volume and plot the point representing total sales dollars at the activity level you have selected. -Draw a line to the origin

activity-based costing defines five levels of activity

unit-level, batch-level, product-level, customer-level, and organization-sustaining—that largely do not relate to the volume of units produced. The costs and corresponding activity measures for unit-level activities do relate to the volume of units produced; however, the remaining categories do not

Work in Process Inventory

units of product that are only partially complete and will require further work before they are ready for sale to the customer. -beginning balance on cost order sheet -Cost= Direct Labor, Manufacturing OH (product cost) To transform direct materials into completed jobs, direct labor cost is added to Work in Process and manufacturing overhead cost is applied to Work in Process by multiplying the predetermined overhead rate by the actual quantity of the allocation base consumed by each job

unrounded discount factors

use Microsoft Excel's NPV function to perform the calculations. The NPV function automatically calculates the net present value after specifying three parameters—the discount rate (0.18), the annual cash flows (C6:G6), and the initial cash outlay (+B6).

Responsibility Accounting

used for any part of an organization whose manager has control over and is accountable for cost, profit, or investments. The three primary types of responsibility centers are cost centers, profit centers, and investment centers.

Job order Costing

used in situations where many different products, each with individual and unique features, are produced each period -the order=job -costs are traced and allocated to jobs -diverse outputs -also used in service industries (same concept used)

Capital budgeting

used to describe how managers plan significant investments in projects that have long-term implications such as the purchase of new equipment or the introduction of new products. managers must carefully select those projects that promise the greatest future return. How well managers make these capital budgeting decisions is a critical factor in the long-run financial health of the organization

multiple predetermined overhead rates.

uses more than one overhead rate to apply overhead costs to jobs -can improve job cost accuracy -reflects differences across departments in terms of how jobs consume overhead costs

Discretionary fixed cost

usually arise from annual decisions by management to spend on certain fixed cost items. -often referred to as managed fixed costs Ex) advertising, research, public relations, management development programs, and internships for students. can be cut for short periods of time with minimal damage to the long-run goals of the organization.

managers who have such a bonus plan or whose performance is evaluated based on meeting budget targets:

usually prefer to be evaluated based on highly achievable budgets. -may help build a manager's confidence -generate greater commitment to the budget -also reducing the likelihood that a manager will engage in undesirable behavior at the end of budgetary periods to secure bonus compensation.

performance reports in nonprofit organizations

usually receive a significant amount of funding from sources other than sales This means that, like costs, the revenue in governmental and nonprofit organizations may consist of both fixed and variable elements

the variable expense ratio

variable expenses as a percentage of sales Variable expense ratio= Variable expenses/Sales

Variable Cost

varies, in total, in direct proportion to changes in the level of activity. -must be variable with respect to something (activity base) EX) cost of goods sold for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead, such as indirect materials, supplies, and power, and variable elements of selling and administrative expenses, such as commissions and shipping costs.

internal business processes

what the company does in an attempt to satisfy customers

The break-even point on CVP

where the total revenue and total expense lines cross.

first step in the budgeting process is preparing a sales budget

which is a detailed schedule showing the expected sales for the budget period. -An accurate sales budget is the key to the entire budgeting process -all other parts of the master budget depend on the sales budget. -If the sales budget is inaccurate, the rest of the budget will be inaccurate -The sales budget is based on the company's sales forecast

Job-order sorting system cons

will adversely influence the types of planning and decision-making scenarios just described -distorted job cost data may cause managers to use additional advertising dollars to pursue certain types of jobs that they believe are profitable, but in actuality are not -inaccurate job costs may cause managers to establish selling prices that are too high or too low relative to the prices established by more savvy competitors. How? indirect manufacturing costs -they often fail to accurately allocate the manufacturing overhead costs used during the production process to their respective jobs. -The root cause of the problem often relates to the choice of an allocation base (do not reflect how jobs actually use overhead resources).

with its lower fixed costs and higher variable costs

will enjoy greater profit stability and will be more protected from losses during bad years, but at the cost of lower net operating income in good years.

higher fixed costs and lower variable costs

will experience wider swings in net operating income as sales fluctuate, with greater profits in good years and greater losses in bad years.

3 major financial statements are required for external reports

Ø an income statement, Ø a balance sheet, and Ø a statement of cash flows