ACC Exam 4
a flexible budget shows:
1. what revenue should have been at the actual level of activity 2.what fixed costs should have been at the actual level of activity 3.what variable costs should have been at the actual level of activity
two points the material price variance can be computed at
1. when the raw materials are issued for use in production 2.when the raw materials are purchased
a static planning budget...
1.compares actual revenues at one level of activity with budgeted revenues at a different level of activity 2.compares actual costs at one level of activity with budgeted costs at a different level of activity
non value added throughput time
100%-manufacturing cycle efficiency
Commission expense is budgeted to be $16,000 at a planned sales level of 4,000 units. If only 2,900 units are sold, how much commission expense will appear on the flexible budget, and is the activity variance favorable or unfavorable?
11,600 and favorable
Fancy Nails has an estimated cost for supplies of $0.75 per manicure. June's budget was based on 2,400 manicures and a total cost for supplies of $1,800. June's actual activity was 2,500 manicures. Total cost of supplies in June was $2,000. Calculate the spending variance for June.
125 U
Revenue on the planning budget is expected to be $380,000 for 1,900 client visits. The revenue on the flexible budget is $410,000, showing that there were actually ______ client visits.
2050
A company's cost of supplies for when 5,000 units are sold is $7,500 of fixed costs plus $1.25 variable cost per unit. What is the increase in the total cost of supplies if 350 more units are sold than expected?
350 x 1.25 = 437.50, only fixed costs remain the same
MPV=
AQ(AP-SP)
operating leverage=
Contribution Margin / Operating Income
Choose the four groups of performance measures typically used in the balanced scorecard approach
Financial, customer, internal business processes, and learning and growth
residual income=
NOI - (average operating assets x minimum required rate of return)
residual income
Net Operating Income - (Average Operating Assets x Minimum Required Rate of Return)
ROI
Net Operating Income / Average Operating Assets
Return on investment =
Net Operating Income / Average Operating Assets
Margin
Net Operating Income / Sales
margin=
Net Operating Income / Sales
Net operating income/Average operating assets is the formula for
ROI
Which of the following statements is not a weakness of using return on investment (ROI) to evaluate performance?
ROI does not include the investment in nonoperating assets, such as land held for investment or stock in other companies.
MQV=
SP(AQ-SQ)
turnover
Sales / Average Operating Assets
turnover=
Sales / Average Operating Assets
activity variance
The difference between a revenue or cost item in the flexible budget and the same item in the static planning budget. An activity variance is due solely to the difference between the actual level of activity used in the flexible budget and the level of activity assumed in the planning budget.
materials quantity variance
The difference between the actual quantity of materials used in production and the standard quantity allowed for the actual output, multiplied by the standard price per unit of materials.
materials price variance
The difference between the actual unit price paid for an item and the standard price, multiplied by the quantity purchased.
An integrated set of performance measures that are derived from the company's strategy is
a balanced scorecard
An integrated set of performance measures that are derived from the company's strategy is:
a balanced scorecard
balanced scorecard
a combination of performance measures directed toward the company's long and short term goals and used as the basis for awarding incentive pay -financial -internal business processes -customer -learning and growth
turnover compares
a division's investment in operating assets with the ability of those assets to generate revenues
contemporary practice moving towards
a flattened hierarchy, and emphasizing teams is consistent with decentralization
responsibility center
a segment of the business whose manager is accountable for specified sets of activities
One option to generate a favorable ______ variance for net operating income is to increase the number of clients.
activity
ex of firm with low profit margin
discount stores -may rely upon a high turnover to generate profits
advantages of ROI
encourages managers to focus on generating sales and controlling costs
labor rates are largely determined by
external forces such as labor markets and union contracts
True or false: An integrated set of performance measures is known as a strategy.
false
The results of what people in the organization do are reflected in
financial performance measures
ex of firm with low turnover
fine jeweler -may rely upon high profit margins
comparing actual costs to static planning budget costs only makes sense if the costs are
fixed
Nonfinancial (operating) performance measures
help identify what drives organizational performance
Nonfinancial (operating) performance measures:
help identify what drives organizational performance
a world record is an
ideal standard
how can a commpany increase its return on investment
increase sales and reduce operating expenses
responsibility for the labor rate variance generally assigned to the
individuals who decide how labor will be used
Net operating income is income before
interest and taxes
Assembling products and handling baggage are examples of ________ processes.
internal business
What the company does in an attempt to satisfy customers falls into the ______ group of the balance scorecard.
internal business processes
Residual income is a measure used to evaluate managers of ________ centers.
investment
ROI is a method used to evaluate:
investment centers, but not cost or profit centers
residual income approach one major disadvantage
it cannot be used to compare the performance of divisions of different sizes
disadvantages of ROI
it encourages managers to focus on short run -discourages investing -management may not know how to increase ROI in the absence of the balanced score card
Choose the groups of performance measures typically used in the balanced scorecard approach
learning and growth, customer-related, financial
residual income encourages managers to
make profitable investments that would be rejected by managers using ROI
Which of the following statements is correct when evaluating divisions of different sizes?
management should focus on the percentage change in residual income from year to year rather than on absolute amounts
investment centers
manager is responsible for revenues, costs, and investments
profit center
manager responsible for both revenues and costs
cost center
manager responsible only for costs
standards used for companys such as
manufacturing, service,food, and nonprofit
Managers can improve return on investment (ROI) by improving either
margin or turnover
variable overhead rate variance
measures the aggregate effect of differences between actual variable overhead rate and the standard variable overhead rate
Variable Overhead Efficiency Variance
measures the change in the actual variable overhead cost that occurs because of efficient (or inefficient) use of direct labor
labor spending variance
measures the difference between the actual costs of labor and their budgeted costs for the actual level of activity
materials spending variance
measures the difference between the actual costs of materials and their budgeted costs for the acrual level of activity
labor efficiency variance
measures the difference between the labor hours that were actually used and the labor hours that should have been used
When managers are evaluated on residual income, rather than on return on investment (ROI), they will be (more/less) likely to pursue projects that will benefit the entire company.
more
A cost center's performance report does not include:
net operating income
EBIT is another term for:
net operating income
Which of the following ratios are part of the ROI formula?
net operating income/ sales and sales/average operating assets
does borrowing additional funds impact ROI
no
balanced scorecard relies on
non-financial measures in addition to financial measures
what drives organizational performance reflected in
nonfinancial measures
favorable variances
occur whenever AP or AQ of inputs < SP or SQ
unfavorable variances
occur whenever AP or AQ of inputs > SP or SQ
Compensation should:
only be tied to balanced scorecard measures after the organization has been successfully managed with it for some time
The performance of two different investment centers should be evaluated by comparing the ...change in residual income from year to year for the two investment centers.
percentage
ex of quantity decision
pounds of material allowed per one unit of product
your personal best is a
practical standard (currently attainable standard)
ex of pricing decision
price per pound of material
throughput time
process time + inspection time + move time + queue time
manufacturing cycle efficiency
process time / throughput time
new manufacturing cycle efficiency
process time/ throughput time
Components of throughput time include
process, queue, inspection time
use of labor is controllable by the
production manager
return on investment
profit earned per dollar of investment -most common measure of performance for an investment center -net operating income/average operating assets
Options to generate a favorable revenue and spending variance include:
protecting the selling price reduce the prices of inputs increase operating efficiency
departures of actual rates from standard rates in labor variances are
rare, variances due to unexpected overtime or the use of higher paid employees for less skilled tasks
net operating income
refers to earnings before interest and taxes
a project that lowers ROI may still be acceptable using...income
residual
managers will be more likely to choose projects that benefit the entire company when using...income
residual
Net operating income - (Average operating assets x Minimum required rate of return) =
residual income
Which of the following business segments would not be considered a cost center?
retail outlet
The difference between what the total sales should have been, given the actual level of activity for the period, and the actual total sales is a
revenue variance
In decentralized organizations, decision-making authority is:
spread throughout organization
the pricing decision
standard price per unit (the price that should be paid per unit of input
standard cost per unit=
standard price x standard quantity
planned cost calculation
standard quantitiy of input allowed for the actual output x standard price per unit (for materials SQA= SQ per unit x actual input) (for labor SHA= SQ per unit x actual output)
quantity decision
standard quantity per unit (the quantity of input allowed per unit of output)
Because companies target different customers with different kinds of products and services, performance measures should be tailored to the specific
strategy
revenue and spending variances
the difference between how much the revenue (cost) should have been, given the actual level of activity, and the actual revenue (cost) for the period
variable overhead spending variance
the difference between the actual variable overhead and the budgeted variable overhead based on actual hours used to produce the actual output.
if residual income is greater than zero
the division is earning more than minimum required rate or return
SQA (standard quantity allowed)
the maount of an input that should have been used to produce the actual output of the period
If a balanced scorecard is well constructed:
the performance measures should link together on a cause-effect basis
Which of the following is a deficiency of using a static planning budget in performance reports?
the report compares actual revenues and costs at one level of activity with budgeted reveneues and costs at a different level of activity
when is the materials usage variance calculated
the time materials are issued or used in the manufacturing process
Operations are able to respond quickly to customers and changes in the environment in a decentralized organization because:
there are fewer managers that must be consulted before a decision is made
The manufacturing cycle efficiency is computed by relating the value-added time to the
throughput time
The period from which a product begins production as raw materials and ends as a finished product is known as
throughput time
why are standard cost systems adopted
to improve panning and control (compare actual costs w budgeted costs indentifies variances) and to facilitate product costing (costs are assigned to products using quantity and price standards for all three manufacturing costs: direct materials, labor, and overhead)
True or false: A spending variance is the difference between how much a cost should have been and the actual cost given the actual level of activity.
true
True or false: In strongly decentralized organizations, even the lowest-level managers can make decisions.
true
a manager might reject a proposal using ROI that the manager would accept using residual income t/f
true
divisions may differ by
type of responsibility given to divisional manager
advantages of RI
unlike ROI, the use of residual income encourages managers to accept any project that earns above the minimum rate of return
one way to address disadvantages of ROI and RI
use both for performance evaluation
labor rate variance usually due to
using the average wage rate as the standard rate or using more skilled and higher paid laborers for less skilled tasks
Companies use the ... cycle to evaluate and improve performance.
variance analysis
delivery cycle time
wait time + throughput time
delivery cycle time=
wait time + throughput time
average operating assets
(beginning assets + ending assets) / 2
traditional organization chart
- Costumers (bottom) - Front-line People (bottom-half) - Middle Management (top-half) - Top Management (top)
reasons for decentralization
-ease of gathering and using local information -focusing of central management -training and motivating of segment managers -enhanced competition, exposing segments to market forces
disadvantages of RI
-encourage short run orientation -difficult to compare investment centers of different sizes
advantages of standard product costing
-greater control -provides readily available unit cost info -no unit cost calcualtions for each equivalent unit category in process costing -no need to distinguish between FIFO and weighted average methods of accounting for beginning inventory costs
how are standards developed
-historical experience -engineering studies -input from operating personnel
advantages of standard costs
-key element of management by exception approach -can provide benchmarks that promote economy and efficiency -can greatly simplify bookkeeping -can support responsibility accounting systems
two methods used to evaluate division performance of investment centers
-return on investment -residual income
problems with standard costs
-standard costs variance reports may be outdated -if variances are misused , morale may suffer -labor variances assume that the production process is labor-paced and that labor is a variable cost...often invalid
when the quantity of materials purchased differs from the quantity used in production
-the price variance is based on the quantity purchased and -the quantity variance is based on the quantity used in production
A manufacturing cycle efficiency of 40% means that:
-the typical order is being worked on 40% of the time -value-added activities are being performed 40% of the time
Divisions can be differentiated a number of different ways, including the following:
-types of goods or services -geographic lines -responsibility centers
most common errors when preparing performance reports are to assume that
1. all costs are fixed 2. all costs are variable
Comparing the static planning budget to actual results only makes sense when:
1. all costs are fixed 2. the actual activity level is the same as the budgeted activity level
three major types of responsibility centers
1. cost center 2. profit center 3. investment center
to determine the unit standard cost for a particular unit two decisions are made...
1. the quantity decision: standard quantity per unit 2. the pricing decision: standard price per unit
a variance occurs when
actual input differs from planned input
actual cost calculation
actual quantitiy of input used x actual price per unit
operating assets
all assets acquired to generate operating income -including cash, AR, inventories, plant and equipment, and other productive assets
margin shows
amount of each dollar of net sales that is profit
what is a static planning budget
an unchanged planning budget
common errors in preparing performance reports include
assuming all costs are fixed and assuming all costs are variable
flexible budget represents
blending of actual activities and budgeted dollar amounts
practical standards
can be achieved under efficient operating conditions -allowance is made for normal machine downtime, employee rest periods, interruptions, less than perfect skill, and so on
balanced scorecard should have measures linked together on
cause and effect basis
labor rate variance
computes the difference between what was paid to direct laborers and what should have been paid
budget standards are used to
control and evaluate managerial performance
what is a prerequisite for assigning responsibility
controllability
The manager of a(n)... center does not have control over revenue or the use of investment funds
cost
decentralization usually achieved by
creating units called divisions
Which of the following is not a characteristic of decentralization?
decentralization reduces how accountable lower level managers are for outcomes
would increasing operating assets increase or decrease ROI
decrease
The time between when an order is placed and when it is delivered is known as the
delivery cycle time
ideal standards
demand maximum efficiency and can be achieved only if everything operates perfectly (no machine breakdowns, slack, or lack of skill)
quantity variance
difference berween how much of an input was actually used and how much should have been used
price variance
difference between the actual price of an input and its standard price
