BEC 8 - Planning, Control and Analysis

A management accountant performs a linear regression of maintenance cost vs. production using a computer spreadsheet. The regression output shows an "intercept" value of $322,897. How should the accountant interpret this information?

Regression analysis can be used to determine which independent variable is the best predictor of the dependent variable. Y has a value of $322,897 when X equals zero.

Economic Value Added

Residual income that measures performance for both investment centered and managers. Used to assess after-tax net profits generated by an entity's allocated capital. EVA is equal to the operating profits after tax (NOPAT) less the finance charge. Can also be stated as: NOPAT - (WACC*Invested Capital)

In activity based costing system, cost reduction is accomplished by reducing and eliminating?

Storage Cost reducing non-value added activities helps to reduce product costs.

CPA would recommend implementing activity based costing system under which circumstances?

The client produces products that heterogeneously consume resources. Heterogeneous = of different, distinguishable parts or elements

competitive benchmarking

The comparison of an organization's processes with those of competing organizations. competitors unlikely to assist

Strategic planning

The identification of long-term goals and determination of how best to reach them.

Limitations of an activity-based costing system include which of the following?

They require expensive data analysis to identify and measure cost drivers and their relationship to the indirect costs incurred.

Affect for following costs would decrease if production levels were increased within the relevant range? Total Fixed Cost Fixed Cost Per Unit

Total fixed cost stays flat (its fixed) Fixed Cost Per Unit (Decreases as volume increases)

Prevention

Use high quality material and well trained employees Perform routine preventative maintenance Require supplier education/certifications Preventive costs include items such as employee and supplier training and preventative maintenance.

Box Co. uses regression analysis to estimate the functional relationship between an independent variable (cost driver) and overhead cost. Assume that the following equation is being used: Y = a + bX What is the symbol for the independent variable?

X is the independent variable Y is the dependent variable b is slope a is the y intercept

Correlation coefficient Meaning of each: >0 (greater than zero) 0 <0 (less than zero)

a statistical measure of the extent to which two factors vary together, and thus of how well either factor predicts the other Maximum -1 to 1 >0 (greater than zero) If the correlation coefficient is greater than zero, it is a positive relationship. two variables in which both variables move in tandem, in the same direction. 0 A value of zero indicates that there is no relationship between the two variables. No relationship <0 (less than zero) if the value is less than zero, it is a negative relationship. Negative correlation is a relationship between two variables in which on variable increases as the other decreases, and vice versa.

Activity Based Costing what to do with: Cost Drivers Non-Value added activity

allocation of overhead to specific jobs based on their percentage of activities Cost Drivers Factors that affect costs, such as the number of units being produced affecting the amount of raw materials used. Non-Value Added Activity Non-value-adding activities, those that do not make the product morevaluable to the customer or less expensive to provide, are identified and eliminated to reduce costs.

If a manager is only responsible for costs

called a cost center

If the manager is responsible for both revenues and costs

called a profit center

Rework costs should be regarded as a cost of quality in a manufacturing company's quality control program when they are

caused by internal failure only

Cost Center Responsibilities

center manager is responsible for controllable costs only

Internal benchmarking involves

comparing various subdivisions within one company; presumably, the head office merely could instruct each subdivision to collect and report any required information that it does not already receive. easiest to obtain data

Expected Value

considers the financial results of all reasonable feasible alternatives, weighing each result according to the probability of occurrence to determine the long term average outcome that would be achieved if such decisions were applied to numerous transactions, taking into consideration conditions of uncertainty.

External failure costs include

costs as the loss of reputation, product liability costs, and marketing to maintain or improvement of the company image. While estimated future sales form an input to determine the loss of reputation costs, it is itself an estimate. These costs are difficult to quantity.

internal business perspective

includes measuring the cost, time, and quality of producing and delivering a product or service. One example of this is the number of defects.

increase in production levels within a relevant range most likely result in

increasing the total cost

R-Squared

indicates the extent to which a change in the independent variable explains a change in the dependent variable.

Corporate governance

involves ensuring that an entity's objectives are met while the legitimate needs and concerns of all stakeholders are being addressed.

Business process management

involves the alignment of all aspects of a business with the wants and needs of its customers.

in calculating inflation in budgeting calculation, which items below are not affected when calculating final budget figures: Depreciation Expense Total Salaries Expense Interest Expense on 10 year fixed rate notes Health Cost

not affected by inflation budget calculation: Depreciation interest expense on 10 year fixed rate notes

Time series models

objectively analyze a sequence of previously observed data to predict future values, requiring relatively little reliance on judgment.

Participative Budgeting

process by which a budget is perpared with the involvement of managers and employees at all levels of the organization (bottom up approach) disadvantage = time required

Generic benchmarking

processes at all types of companies; at a minimum, this would involve researching sources of such information.

Investment Center Responsibility

responsible for controllable revenues and controllable costs. As a result, a performance report for an investment center would include controllable costs and controllable revenues.

value based management process. activities most likely difficult to trace to the economic value added to company

social responsibility as opposed to those that would have occurred without such sponsorship is difficult to determine.

Econometric models

statistical models applying economic theories. Some judgment is involved when selecting theories to apply, but the application of the theories is objective

To assist in an investment decision, Gift Co. selected the most likely sales volume from several possible outcomes. Which of the following attributes would that selected sales volume reflect? A.The midpoint of the range. B.The median. C.The greatest probability. D.The expected value.

the alternative with the highest probability is the outcome that is most likely to be achieved.

Intellectual property risk

the risk that an entity could lose control of information about the entity's products and processes. Copyright and patent regulation and enforcement is not uniform internationally.

Which of the following techniques effectively measures improvements in product quality as a result of internal failure costs?

tracking the number of products reworked.

External failure

(Most difficult to quantify) Warranty costs Product liability/lawsuits and product recall costs Lost future sales and damaged reputation (reason most difficult to quantify)

Balanced scorecard is used to set targets and measure performance from the following four perspectives:

1. Financial 2. Customer 3. Internal business process 4. Learning and Growth

Which of the following listings correctly describes the order in which the four types of budgets must be prepared?

1. Sales 2. production 3. direct materials purchases 4. cash disbursements.

Flexible Budget

A flexible budget is in the form of a formula with fixed costs remaining constant within a relevant range and variable costs increasing or decreasing depending on the level of activity. provides budgeted numbers for various activity levels.

Which of the following amounts would most likely be subject to the control of the profit center's manager? Contribution Margin: 70,000 Period Cost: Manager salary 20,000 Facility Depr. 8,000 Corporat Expense Allo. 5,000 Total Period Cost = (33,000) Profit Center Income 37,000

A manager does not have control over allocated corporate expenses, depreciation or their own salary. Consequently, the profit center manager would be responsible only for the contribution margin of $70,000.

Master Budget

A master budget is prepared on the basis of the expected level of activity.

Activity-based costing focuses on incorporating into product costs only those activities that provide value to the product Tricky example of value adding and Non value adding

Activity-based costing focuses on incorporating into product costs only those activities that provide value to the product. value adding: -Design engineering -Heat treatment -Drill press non-value adding: -Storage

The ABC Company is trying to decide between keeping an existing machine and replacing it with a new machine. The old machine was purchased just two years ago for $50,000 and had an expected life of 10 years. It now costs $1,000 a month for maintenance and repairs due to a mechanical problem. A new machine is being considered to replace it at a cost of $60,000. The new machine is more efficient and it will only cost $200 a month for maintenance and repairs. The new machine has an expected life of 10 years. In deciding to replace the old machine, which of the following factors, ignoring income taxes, should ABC not consider? A.Any estimated salvage value on the old machine. B.The original cost of the old machine. C.The estimated useful life of the new machine. D.The lower maintenance cost on the new machine.

B.The original cost of the old machine. The old item is a sunk cost

Management should consider the following when selecting a cost driver for reactivity based costing

Behavioral effects Cost of measurement Degree of correlation

Cash disbursements for purchases

COGS + (Inventory End - Inventory Beg.) - (AP End - AP Beg.)

Benchmarking

Comparing an organization's practices, processes, and products against within or outside the firm. comparing how different companies perform various value chain activities and then making cross-company comparisons of the costs of these activities compare and contrast its financial information to published information reflecting optimal amounts

controllabe revenue would be included in a performance report for: Cost Center = Yes or No? Profit Center = Yes or no? Investment Center = Yes or no?

Cost Center = No Profit Center = Yes Investment Center = Yes

Delphi Method

Delphi is a structured forecasting method based on the collective judgement of a group of experts.

Internal Failure

Disposal of scrap due to wasted material Reworking and re-inspecting defective units

learning and growth perspective

Employee advancement, training, and retention how do our employees perceive us? It assesses employees' ability to improve and perform within a firm. Employee satisfaction and retention are measured under this perspective to ensure that employees remain engaged with the firm and perform well.

Balanced Score Card: Financial

Focuses on return on investment and emphasizes the profitability of a specific strategy (ex. Revenue).

Balanced Score Card: Internal business process

Focuses on the effectiveness and efficiency of activities and processes (eg. number of defects)

Balanced Score Card: Customer

Identifies the company's targeted market segments and measures the success of its customer strategies (ex. Customer satisfaction)

Internal failure costs

Incurred during or after production of a product but before the product is actually shipped to the customer. Improvements in product quality can be measured by tracking the number of products that need reworking.

Detection/Appraisal

Inspection of raw materials, WIP finished goods Depreciation expense of testing/inspection equipment Salary/wages of testing/inspection teams

Under the balanced scorecard concept developed by Kaplan and Norton, employee satisfaction and retention are measures used under which of the following perspectives?

Learning and Growth

Mean Median Mode

Mean = average Median = Middle Mode = Most common (frequent number)

Balanced Score Card: Learning and Growth

Often called innovation. Focuses on the long term ability of key drivers of an organizations mission (ex. Employee satisfaction and advancement)

Business functions considered part of the company's value chain. What is not considered part of value chain.

Part of value chain: Customer Service Marketing Research and development NOT part of value chain: Accounting

Quality program, conformance and non-conformance. Prevention Appraisal Internal Failure External Failure

Prevention = Conformance Appraisal = conformance Internal Failure = Non-Conformance External Failure = Non-Conformance

Basic Assumption of Activity Base Costing (ABC) is that

Products or services require the performance of activities. Assigns indirect costs to activity (cost pools). The pooled costs are allocated to products or services (cost objects) using cost drivers taht are based on the activities resource consumption.