ACCY Study guide 2

prepare and use a profit variance analysis

profit variance analysis: analysis of the causes of differences between budgeted profits and the actual profits earned -actual results can be compared with both the flexible and master budget -shows additional detail about differences between budgeting profits and actual profits earned -actual results compared to flexible and master budgets

develop the use of flexible budgets

static budget: budget for a single activity level, usually the master budget, based on expected number of outputs (presents complete view of anticipated operations) -flexible budget: budget that indicates revenues, costs, and profits for different levels of activity -variable costs and revenues change with each activity, these are budgeted to be different at each activity level in flexible budget -based on actual number of outputs -difference between flexible budget and actual results is the flexible budget variance

Explain how activity-based costing and a two-stage product system are related.

- An activity based cost system is a two-stage system in which the first stage assigns costs to activities. - the first stage is using activities to decide what department or what overhead cost to allocate - costs are assigned by activities In the second stage, you allocate your costs to a single product EX: music company would allocate costs to downloads ABC: Activity: is any discrete task that an organization takes to make or deliver a product or service ABC is based on the concept that products consume activities and actives consume products Both activity based and two stage method arrive at cost of producing a product. They differ when you are finding the indirect cost on the final product. ABC: first activities that consume resources are identified then costs are assigned to those activities ex: machine set up is an activity, to set up a machine you need some consumables, labor, power, and other resources. by adding all these costs for setting up a machine the cost per machine set up is arrived at first.

understand the role of budgets in overall organization plans

- a budget is the financial plan of the revenues and resources needed to carry out activities and meet financial goals -companies use budgets for forecasting, reporting, performance evaluation help manage cash flow, etc -budgeting helps increase in compertiveness by builind plans usin strategic planning process -master budget: financial plan of an orgnanization for the coming year or other planning period made up of: organizational goals, strategic long-range profit plan, and tactical-range profit plan organization goals: companys broad objectives established by management that employees work to acheive strategic long-range plan: statement detailing steps to take to acheive a compnay's organizational goal(stated in broad terms, discuss major capital inbestments required to maintain present facilities, increase capacity diversity of products and/or process and develop paticular markets --diagram

understand the discounted cash flows method

- values a company based on cash flows and the preset value of its terminal value - finds the percent of present value of expected future cash flows using a discount rate which is used to evaluate a potential investment - you calculate DCF by DCF = CF1/(1+r)^1+ CF2/(1+2)^2...etc -DCF is used for valuing a business, project, or investment, value of a bond,value of shares in a company - adding the discounted values of the future cash flows and subtracting initial investment equals a projects NPV, which represents the economic value of a company mk Steps: 1) project out a company's financial using assumptions for revenue growth, expenses, and working capital to get FCF (free cash flow) for each year 2) discount each year's FCF based on your discount rate - usually WACC 3) after getting the FCFs, determine terminal value by using the Multiples Method or Gordon Growth Method and then also discount this to Net Present Value using WACC 4) To get Enterprise Value, you add the PV of FCFs and the PV of the Terminal Value

explain budgeting in merchandising and service organizations

-a merchadiser does not have a prodcution budget - they have ba merchadise purchases budget ( similar to direct materials purchases budget in manufacturing) -requires coordination between managers in sales and buying -critical importancee of timing and seasonability in merchandising --helps formalize ongoing pocss of cordinating buying and sellingn service org: -a master budget in service enterprises is absence of product or materials inventories' -does not need merchandise purchases inv a production budget -service orgs need to carefully coordinate sales(services provided) with necessary lbor (services provided expressed in labor hours) -staffing to meet client needs is an important part of budgeting process

allocate joint costs using the net realizable method

-allocates joint costs based on a products NRV and split-off point -NRV is the estimated sales value of each at the split off point -if the joint products can be sold at the split-off point, the market value or sales price should be used for this allocation -if the product requires further processing before marketing, u need to estimate the NRV at split-off point, this is called the estimated NRV -when a market value is available at the splitoff point, it is preferable to use that value rather than the estimated NRV method. if the market value is not available the NRV at the split off point must be estimated by taking the sales value after further processing and deducting the additional processing costs -joint values are then allocated to the prodyts in proportion to their NRV at split-off point -when there is no sales values for outputs at the split-off point the estimated NRV should be calculated by taking sales value of each product at the first point at which it can be marketed and deducting the processing costs that must be incurred afrer the split-off point an estimate of the NVR can be derived at the split off by subtracting the additional processing costs from the estimated sales value.

estimate cash flows

-cash budgeting ensures a companies solvency, maximizes interest earned on cash balances, aND DETERMINES whether the company is generating enough cash for present and future operations -preparing a cash budget requires that all rvenue, costs, and other transactions be examined in items of their effects on cash -the cash receipts are computed from collections from accounts receivables, cash sales, sales of assets, borrowing, issuing stock, and other cash-generating activities - cash disbursements are computed by counting the cash required to pay fpor materisl purchases manufacturing, ands other operations, taxe, dividends -discount if paid on time

Cost Variance analysis

-compares actual input quantities and prices with standard input quantities and prices (both actual and standard quantities are for actual output obtained) - actual costs incurred for time period are compared with standard allowed per unit times the number of goods, units of output produced (comparison provides total cost variance for cost or input) - Price variance = (AP*AQ) - (SP*AQ) -efficiency variance: (SP*AQ) - (SP*SQ) - general model is applied to each variable cost incurred - flexible production budget: standard input prices * standard quantity of input allowed for actual good output -responsibility for DM variance: assigning to purchasing department (explanation of variance to management) - DL variance: difference between actual and standard labor cost per hour - labor efficiency variance: measure of labor productivity (closely watched because production managers can usually control it) - variable production overhead price variance can occur because: actual costs were different from those expected or relationship between variable production overhead costs and allocation base is not perfect -variable overhead efficiency variance: not related to the use or efficiency of variable overhead. It is related to efficiency in using the base on which variable overhead is applied

explain why service costs are allocated.

-examples of service departments are maintenance, administration, receiving Cost are allocated to inform managers about the costs of running department that use the service of there departments. Cost allocations are required for external financial reporting and tax purposes. - The three methods to allocate costs: 1. direct method: simplest, allocates costs of each service departments to each operating department based on each departments share of the allocation base 2. step method: allocates service costs to the operating departments and other service departments in a sequential process. The sequence of allocation generally starts with the service department that has incurred the greatest costs. After this department's costs have been allocated, the service department with the next highest costs has its costs allocated, and so forth until the service department with the lowest costs has had its costs allocated. Costs are not allocated back to a department that has already had all of its costs allocated. 3. reciprocal method": most complicated and reliable. allocates services department costs to operating departments and other service departments. Under the reciprocal cost, the relationship between service departments is recognized and cost is allocated to and from each service department for services provided.

explain how cost data are used in the sell-or-process-further decision

-management must decide whether it is more prpfitable to sell the output at an intermediate stage ot to proesss it further - this should be considered: 1. the additional revuenue after fruther processing 2. the additional costs of processing furhter -total joint costs incurred prior to split-off point are not affected by the deicsion to process further after the split-off point -split at split-off if: sales value at split off > sales value after processin, less additional processing costs - Joint cost are usually irrelevant for these decisions.

develop production and cost budgets

-production budget plans the resources needed to meet current sales demand and ensure that inventory levels are sufficient for expected activity levels -production level may be computer from basic cost flow equartion: Beginning balance + transfers in - transfers out = endin balance For inv, prod, and sales : units in beginning inv + required prod (units) -budgeted sales (units) = units in ending inv required prod: required production (units) = budgeted sales (units) + units in ending inv - units in BI - After sales estimate. Derives cost of Goods sold -The production budget allows management to plan for the resources needed to meet the current sales demand and ensure that inventory levels are sufficient for future sales.

estimate sales

-sales have to be estimated just correctly, cant be too high or too low market researchers: are not bias, different perspective on the market, know a little about customers immediate needs, can predict long term trends in attitudes and effects of social and economic changes on sales, markets, and products 2. Delphi technique: members of forecasting group prepare individual forecasts and submit them anonymously, results are discussed and reconciled, then members prepare a new forecast and discussed and repeated until the forecast converge on a single best estimate for the coming years sales levels. 3. Trend analysis: can be a simple visual extrapolation of points on a graph or a high sophisticated computerized time series analysis -uses past observations of data series to be forecaster -economical because only a list of pas sales figures is needed, no other data gathered -requires long series of past data to derive a suitable solution, monthly data is required 4. Econometric models: enter past sales data into a regression model to obtain a statistical estimate of factors affecting sales. ex: predicted sales can be related to economic factors, consumer indexes, back order volume, other internal or external factors -most companies have computer software packages that allow economic use of these models -local sales person intuition is a better predictor of sales analysis

Explain how time-driven activity based costing works

-traditional systems allocate costs on volume-related bases(DLH) -abc reflect cost drivers for the activities required, abc cost drivers may be volume related but there will be some that are related to batches, or something else --ABC must be maintained and updated to reflect current activities ex: managers must be routinely interviewed or surveyed bout the allocation employees time and resources. -if not kept up to date product costs it produces might be worse than those provided by traditional systems. - continually updating is expensive, if the benefits of a cost system do not exceed the costs of the managers will not adopt the new system -modified approach to ABC is time-driven activity-based costing with TDABC managers need to determine 1. cost of the resources supplied to a department 2. the time it takes to complete the various activities of the department -this approach avoid the need to conduct surveys or interviews of multiple manger and employees meaning its not as costly to maintain as the unmodified ABC system TDABC does not ask managers to estimate what proportion of the time employees spent on each activity, instead managers estimate how much time each activity takes for a single transaction **

compute product costs using activity based costing.

1. identify the activities: determine the major activities used to produce EX: setting up, handling material, assembling, packaging and shipping 2. Identify cost drivers: determine the appropriate cost drivers ex: machine hours, set up hours, production hours, DLH, number of shipments 3. compuute the cost driver rates: need to interview suoervisors to determine how much OH is incurred for each activitiey 4. assign costs using activtity-based costing: assessment of costs of activity pools and allocation of activity costs to products noting the cost drivers for each activity -calculate the total cost of production for each product and divide the total cost by the number of units produced to arrive at the unit cost OR calculate the cost driver rate per unit of product for each of the cost drivers and then calulate the unit cost of the product directly

compare acttivity based product costing to traditional department product costing methods.

Activity based costing provides more detailer measures of costs than plantwide or departmental allocation methods - provides better info about how muhc each acivity costs, helps identify cost drivers (activities that drive costs) that were unknown -provides more info about product costs but requires more record keeping - installing abc requires teamwok between accy, prodution, marketing, management, and other nonaccoutnig employees **

Apply ABC to marketing and administrative services

Administrative involes these steps: 1. identify the activities that consume resources 2. identify cost drivers associted with each activity 3. compute a cost rate per cost driver for eahc unit or transaction 4. assign costs to marketing or admin activity by multiplying the cost driver rate y the volume of cost driver units consumer for that activity - there are costs for each activity performed - many cost drivers in an admin function will be time related but not all Examples of common cost drivers in purchase department: reviewing purchse bids, soliticing bids, evaluating bids, placing orders, preparing invoices ** Based on allocation order, the step method allocates service department cost to other service dept. and then to production departments. once an allocation is made from a service dept. no further costs are allocated back to that dept.

explain why joint costs are allocated

Based on allocation order, the step method allocates service department cost to other service dept. and then to production departments. once an allocation is made from a service dept. no further costs are allocated back to that dept. -cost allocations are used to determine departmental or division costs for evaluating executive performance - manufacturing companies must allocate joint costs to determine the inventoru value of the products that resukt from the joint process -any cost allocation method contains randomness. disputes occur in allocationm ethods thats why they must be clearly stated

allocatre the service department by uisng the step method

Based on allocation order, the step method allocates service department cost to other service dept. and then to production departments. once an allocation is made from a service dept. no further costs are allocated back to that dept. -once an allocation is made from a service department, no further allocations are made back to that department, a service department that services to and receives services from another department has only one of two relationships recognized. -information system costs are allocated to administrations only under the step method, once a service departments costs have been allocated to other departments, no coss can be allocated back to it so no admin costs are allocated to info systems -step method results in more reasonable allocations than direct method because it recognizes that some departments use other service departments, but it does not recognize reciprocal services