A306 FINAL EXAM

the higher the ROI...

the greater the profit earned on the dollars invested in operating assets

Management accounting

the process of analyzing business costs and operations to prepare internal financial report, records, and account to aid managers' decision making process in achieving business goals

What is the time value of money

"A dollar today is worth more than a dollar in the future" ; the idea that earlier returns are preferable to those that promise later returns

A company provides the following info:Material price variance: 800F, Material spending variance: 250FBudgeted material/unit: 1.5 ft, Budgeted material price: $6/ftActual units produced: 100, Budgeted units produced: 120 What is the material quantity variance?

$550 U SQA: 100units*1.5ft = 150ft*$6=$900Mat Spending Var = Mat Qty Var + Mat Price Var250F = X + 800FMat Qty Var = 550U

Calc NOI using UVC

(Selling price-UVC) x sales volume in units - fixed costs

Mixed cost =

(UVCxunits) + FC

Margin of safety %

(budgeted sales-breakeven sales)/budgeted sales

Cost of capital = (2)

- average return pay LT creditors & stockholders - opportunity cost of money

Planning (2)

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

Control (3)

- involves gathering feedback to ensure the plan is working - making changes as needed - verifying all parts of the organization are working together toward the goals

How is management accounting more than just numbers? (6)

-Ethics -strategy: game plan -risk management -social responsibility: balance needs of all -process management: value chain - leadership

What should the p-value be?

.05 or less to give us confidence

Operating budget

1 year budget

Calc VC %

1- CM%

Example of non financial controls (8)

1. # of days without accident 2. Employee turnover 3. Defective parts 4. Absenteeism 5. Returns 6. Delivery cycle time 7. Mfg cycle efficiency 8. Throughput (mfg) time

Internal business perspective measures: (5)

1. % of sales from new products 2. Defective output 3. Delivery delays 4. Development time for new products 5. Cost per transaction

variances provide managers with: (3)

1. A basis for strategy evaluation 2. Early warning of problems 3. A basis for performance evaluation

Rewards behavior that benefits the company (3):

1. Aligns employee and organizational goals 2. Is easy to measure 3. Is easy to understand and communicate

Allocation uses (3)

1. Allocations are pervasive in organizations 2. Used to develop product cost 3. To influence behavior: - sensitize managers tot he cost of a resource - encourage managers to conform to a corporate goal (reduce labor)

Advantages of outsourcing (5)

1. Allows companies to focus on core functions 2. Lower cost - save time - use skilled workers - economy of scale

Learning and growth perspective Objective (2)

1. Are we maintaining our ability to change and improve? 2. Identifies capabilities of the org to create value for customers

Disadvantages of hi-lo (2)

1. Assumes costs relatively stable 2. ROUGH estimate

Advantages of RI (2)

1. Avoids underinvestment problem in ROI 2. Conceptually leads to better project selection for the company

4 audited stmts in financial accounting

1. Balance sheet 2. Income statement 3. Stmt cash flows 4. Retained earnings

2 keys to building segmented income statements:

1. CM statemnet 2. Fixed costs need to be separated into traceable/common

Purposes of a budget (6)

1. Communicate plans 2. Coordinate activities 3. Define goals and objectives 4. Think about and plan for the future 5. Means of allocating resources 6. Evaluate performance and provide initiatives

Why do companies create capital budgets (3)?

1. Companies do not have unlimited funds 2. Companies have overall goals 3. To maintain efficiency and competitiveness

The make or buy decision is a question of (3)

1. Control 2. Cost 3. Social responsibility

3 types of responsibility centers:

1. Cost center 2. Profit center 3. Investment center

Relevant costs in decision making:

1. Differential costs/revenues 2. Opportunity cost 3. Sunk costs

Advantages of ROI (4)

1. Easy to calculate and understand 2. Widely used and accepted 3. Size independent 4. Can compare across divisions

How are price and quantity determined in a revenue budget (6)

1. Economic trends (general, industry) 2. Past sales levels and trends 3. Competition 4. Market research/advertising 5. New products 6. Political and legal events

Learning and growth perspective Measures (3):

1. Employee turnover 2. Employee suggestions 3. Training hour per executive

Who are the decision makers inside the company: (3)

1. Executives 2. Dept managers 3. Employees

Includes multiple performance measurements : (3)

1. Financial and non financial 2. Benchmark with others 3. Focus on a manager's effort

4 sections of balanced scorecard

1. Financial perspective 2. Customer perspective 3. Internal business perspective 4. Learning and growth perspective

Objective of internal business perspective (1)

1. Have we improved key business value processes to deliver more value to customers?

What are used to separate mixed costs out of given data

1. Hi lo analysis 2. Regression

What are the 2 ways companies primarily use to determine the fixed and variable components of a mixed cost?

1. High low regression 2. Regression analysis

3 budget final deliverables

1. Income stmts 2. Balance sheet 3. Cash budget

What can cause fixed costs spending variances? (2)

1. Increase in utilities, new equip, more security, etc. 2. New corporate office equip results in higher depreciation

Profit margin is improved by (2):

1. Increasing selling price 2. Decreasing operating expense

Examples of segments (3)

1. Individual store 2. Sales territory 3. Department

General rules when managing by exception: (3)

1. Investigate ALL significant variances - F and U 2. Examine trends - happening every period or steady increase 3. Consider the big picture - don't get lost in calculations, look at the connections between variances

Who are the decision makers outside the company (3)

1. Investors 2. Banks/lenders/creditors 3. Govt agencies/regulators

Two ways to accumulate the cost of our product/service

1. Job order costing 2. Process costing

Disadvantages of decentralized organizations (3)

1. Lack of coordination among managers 2. Lower level managers can't see big picture 3. Lower level managers objectives clash with organization

Disadvantages of outsourcing (2)

1. Lose competitive advantage 2. US economic concerns

Measures of customer perspective: (4)

1. Market share 2. Customer complaints 3. Customer retention rates 4. Sales to top 10 customers

Advantages of a balanced scorecard (4)

1. Means to implement strategy 2. Means to achieve an organizational change in strategy 3. Can be used to determine compensation & rewards (motivate managers to pursue one course of action vs another) 4. Top management is committed

Disadvantages of regression (2)

1. Needs lots of data 2. More knowledge and work

2 Approaches to evaluate projects:

1. Non discounting methods 2. Discounting methods

Disadvantages of balanced scorecard (3):

1. Non financial info is subjective 2. Must be adaptable and frequently updated 3. Costly and time consuming to implement

Disadvantages of top down (2)

1. Overlook day 2 day underperformance 2. Morale

advantages of bottom up (3):

1. Ownership 2. Team motivation 3. Accuracy

Companies are simultaneously concerned with 3 objectives:

1. Planning 2. Growth 3. Meeting financial commitments

Purpose of management accounting:

1. Planning - set goals, how to achieve 2. Control - feedback 3. Decision making

Examples of cap expenditures (5)

1. Plant expansion 2. Equip purchases 3. Lease or buy 4. Cost reduction 5. Equip replacement

What can cause a sales price variance? (3)

1. Price discounts 2. Low quality product 3. Price war with competition

How do companies measure, evaluate and reward a manager's performance?(2)

1. Primary financial measures are benchmarks and variance analysis 2. ROI and RI for investment centers

Measures of financial perspective (6)

1. ROI 2. RI 3. Sales growth 4. Net income 5. Earning per share 6. Current stock price

3 most important responsibilities of a manager:

1. Retain, drop, add segment 2. Make/buy component parts 3. Capacity issues (special orders and constrained resources)

Income stmt interim deliverables (6)

1. Revenue (sales)budget 2. Production budget 3. DM budget 4. DL budget 5. MOH budget 6. S&A budget

An effective performance evaluation system (2)

1. Rewards behavior that benefits the company 2. Includes multiple performance measurements

Capital budgeting sharing the story is 2 parts:

1. Screening 2. Preference

Disadvantages of RI (1)

1. Size sensitive ; favors larger divisions because they have larger RI)

Consider capacity decisions that involve:

1. Special orders 2. Constrained resources

Types of relevant cash flows (3)

1. Start up - initial invesment including installation costs - working capital required 2. Operations - CASH inflows - CASH outflows 3. Disposal - salvage value - working capital released

Advantages of hi-lo (3)

1. Straightforward to calculate 2. Aggregate numbers 3. Data available

Advantages of top down approach (2)

1. Time savings 2. Reduces super star syndrome

non financial controls (2):

1. Timely feedback 2. specific feedback (customer satisfaction, product quality)

2 budget approaches:

1. Top down 2. Bottom up (participative)

Advantages of decentralized organizations (3)

1. Top management can focus on overall corporate strategy 2. Empowers employees (job satisfaction) 3. Lower level managers gain decision making experience

Advantages of regression (2)

1. Uses all data available 2. Minimizes deviations

Objective of financial perspective (2)

1. What are the financial goals? 2. Evaluates profitability

Objectives of customer perspective (3)

1. What customers do we serve? 2. How do we win and retain them? 3. Measures success by # of customers and market segments

If fixed costs are $15,000 and variable costs are $4/unit, what are the break even units if each unit sells for $10?

2500 units

The material spending variance is $550 F and the material quantity variance is $600 U. The actual amount spent on materials was $37,570. What amount appears in the as-if budget.

38,720

Strategic budget

>1 year

The benefits of decentralization include all of the following except: a. It forces top levels of management to focus on individual units b. It empowers more employees at lower level of management c. It allows for better and more timely decision making d. It trains future managers

A

Amps process

A - ask the question M - master the data P- perform an analysis S- share the story

Special order

A one time request; not considered part of the company's normal ongoing business

Budgets

A plan that uses the company's resources to get from where it is to where it wants to be

This type of costing is the backbone of how most companies allocate costs.

ABC costing

If NPV is zero or positive...

ACCEPT THE PROJECT

Master vs flex

ACTIVITY VARIANCES

Who uses management accounting and analysis?

ALL business students, ALL managers

Special order decision basis

Accept if increases NOI

Why do you use actual # of units for all spending variances?

Act vs flex both use actual units so split up, they all use actual

Does the post audit use estimates or actual amounts

Actual amounts

Who is job order costing used by?

All industries

Contribution margin income stmt

Alternative income stmt format; reports cost by behavior (var/fixed); for internal reporting and decision making only

Annual inc NOI =

Ann inc revenues - Ann inc expenses - Ann depreciation expense of project)

SRR=

Annual inc NOI/initial investment

Segment

Any part of an organization or any activity in an organization that a manager seeks cost, revenue, or profit data

What can cause variable cost spending variances?

Anything that impacts variable costs!

Common fixed costs (indirect)

Arise because of the overall operation of the company; don't disappear if segment is eliminated

What should the r^2 value be?

As close to 1 as possible

Traceable =

Avoidable

During October, Diaz company's sales volume increased by 40% compared to the previous month's volume. If the selling price per unit, variable cost and total fixed cost remain the same, which of the following statements regarding October's results is false? a. The firms CM ratio was unchanged b. The firms unit CM increased c. The firms total VC increased D. the firms break even point was unchanged

B

The internal rate of return measures: a. How quickly the initial investment can be recouped b. The discount rate at which the NPV of the project is 0 c. The profitability of an investment d. The rate at which future cash flows must be invested in order to obtain profitability

B

What is the predetermined overhead rate determined?

BASED ON ESTIMATE! NOT ACTUAL NUMBERS!

Excess deficiency

BB + INFLOWS - OUTFLOWS

what is the foundational step or cornerstone in every budget?

BUDGETING REVENUE

activity based costing (ABC) systems

Backbone of how most companies allocate costs; using multiple pools

How does a company link performance measure of a responsibility center to the overall corporate strategy?

Balanced scorecard

Why are production managers usually held accountable for labor variances (4):

Because they can influence the: 1. Mix of skill levels assigned to work tasks 2. Level of employee motivation 3. Quality of production supervision 4. Quality of training provided to employees

Excess deficiency =

Beg balance+inflows-outflows

Company performance measures use...

Both financial and non financial indicators

Standard =

Budget assumption for us

Margin of safety

Budgeted Sales - Breakeven Sales

How can we isolate what part of a variable cost spending variable is due to quantity and what is due to price?

By using STANDARDS aka benchmarks

Which of the following is not affected by the production budget? a. DM budget b. MOH budget c. Sales budget d. None of the above

C

Which of the following statements is false: a. Prime costs are always direct costs b. Manufacturing costs can be direct or indirect c. Selling and admin costs are only indirect d. Direct labor is both a prime cost and a conversion cost

C

Which statement below regarding budgets is false? a. Multi year budgets are strategic plans that specify the direction in which a company desires to head b. Operating budgets are for one year c. In a centralized decision making environment, the manager delegates decision making to individuals with relevant experience and knowledge d. Firms spend considerable time and effort in preparing a revenue budget, as its accuracy is crucial in putting together a good master budget e. The purposes of budgets include planning and control

C

which correctly indicates how to calculate breakeven volume? a. Variable costs divided by unit CM b. Profit divided by sales volume c. Fixed costs divided by unit contribution margin d. Variable costs divided by fixed costs

C

Which of the following statements is false: a. Creditors would be a user of financial accounting information b. Management accounting information is used to develop budgets c. Financial accounting information emphasizes decisions for the future d. Reports based on management accounting information are created when required

C - that's managerial accounting

Working capital

CASH impacting the ability to do a project; NOT CA-CL that's for financial accounting!

When you have a constrained resource, what metric should you focus on when deciding which products to make first?

CM per scarce resource

Calc CM unit using UVC

CM per unit = (selling price-UVC)

Calc CM ratio %

CM/sales

Calc CM using UVC

CM= (selling price-UVC) x sales volume in units

How do fixed costs respond in total with activity level?

CONSTANT

How do variable costs respond per unit with activity level?

CONSTANT

Are mfg and non mfg costs only direct?

Can be direct or indirect! Depends on cost object

Traceable fixed costs (direct)

Can be tied to a specific segment; if the segment goes away, so does the fixed cost

Disadvantages of ROI

Can foster underinvestment

Disadvantage of NPV method.

Can not compare projects with different initial investments.

how to rank projects using NPV?

Cannot directly compare NPVs unless initial investment is the same so you must use profitability index

Discounting methods

Consider the time value of money

CM statement are organized by

Cost behavior

Traditional income statements are organized by

Cost function

Interchangeable terms for required rate of return

Cost of capital, discount rate

For what purpose is a flex budget used? a. To provide various possible outcomes for management to consider b. To adjust input prices so that future variances are eliminated c. To insure that profit does not drop below a predetermined level d. To identify the sources of variances

D

The company is calculating its expected cash receipts for the month of June. Which item below shouldnt' be included? a. Cash sales made during june b. Credit sales made during may c. Credit sales made during june d. Credit sales made during july

D

When a company is attempting to increase return on investment (ROI), it should work to: a. Decrease sales b. Decrease profits c. Increase costs d. Decrease operating assets

D

When making a make or buy decision, managers should consider: a. Alternative uses for Any facility currently being used to make the product b. The costs of DM included in making the product c. Qualitative factors such as whether the supplier can deliver the item on time and to the company's quality standards d. All of the above

D

Which of the following budgets is affected by the sales budget? a. Production budget B. Cash budget C. Selling and admin budget D. All of the above

D

Which of the following could be a constrained resource? a. DM b. Factory space c. Machine hours d. All of the above

D

Manufacturing costs

DL, DM, MOH

How do fixed costs respond in per unit with activity level?

Dec as activity level increases and increases while activity level falls

Decentralized organization

Decision making authority is spread throughout the organization

What does the CVP model do?

Determine how revenues, expenses, and profits will react to changes

Unfavorable variances

Didn't meet expected results; decreased profit

Net present value

Difference between present value of cash inflows and present value of cash outflows

Why is it important to decompose the VC spending variances?

Different managers may be responsible for usage and the price paid

Non discounting methods

Do NOT consider the time value of money

What is the issue with GAAP IS

Doesn't organize by cost behavior

Which best describes management accounting? A. Management accounting is mainly focused on past results b. Management accounting reports are rules based using GAAP c. The main users of mgmt acc info are outside the firm d. Management accounting reports are prepared following the National management accounting standards E. Management account is primarily used for decision making

E

Predetermined MOH rate=

Est total MOH/est total allocation base

Favorable variances

Exceeded expected results; increased profit

Which of the following statements are true? a. Opp cost is the value of the next best option b. Indirect manufacturing costs are called MOH c. All product costs are direct d. Sunk costs are relevant to a decision e. Costs on the financial income statement are organized by product and period f. A, B, AND E

F

These gaps (peaks and valleys) regarding capacity exist because capacity is ______ in the short term

FIXED

If the purchasing manager bought less expensive raw materials of lower-than-average quality, what variances would this create?

Favorable materials price variance and unfavorable materials quantity variance.

Fixed costs on master budget =

Fixed costs on flex budget

Conversion costs

Gauge efficiency of production process (DL+MOH)

Make decisions

Have a competitive advantage

Prime costs

Helps set selling price to achieve required profits (DM +DL)

When NPV is positive, will IRR be higher or lower than the cost of capital?

Higher

What does the flex budget do

Holds on variable constant to find the impact of the other (Q OR P)

Quantity variance - def and who is responsible

How efficient resources were used; production manager

Margin of safety

How much cushion does the company have before it will suffer a loss

Price variance - def and who is responsible

How well prices was controlled; purchasing manager

Screening

ID & evaluate project based on profitability

The budgeting process is...

ITERATIVE; each step goes through multiple revisions

What does the cost object determine

If a cost is direct or indirect

How do variable costs respond in total with activity level?

Inc/dec relative to activity level

Manufacturing costs include manufacturing overhead which are all...

Indirect costs BUT selling and admin can be either

Payback period =

Initial invesment/annual net cash flows

Initial invesment=

Initial investment - salvage value from sale of old equip

Payback period=

Initial investment/annual net cash flows

Which responsibility center is concerned with RI and ROI

Investment centers!

Sensitivity analysis

Is our analysis & decision sensitive to changes in our assumptions? (Best case, expected, worst case)

Why are capital budgets important

It creates accountability and measurability

What is a disadvantage of using residual income as a performance indicator?

It favors large divisions

If cost in smallest circle is indirect...

It flips to direct and will stay direct

If he cost in the smallest circle is D...

It stays direct as you get bigger

Fallback of variance analysis

It's delayed! We need the actual numbers

Production manager is usually held accountable for

Labor variances

Which perspective do businesses not look at enough?

Learning and growth perspective

Segment margin is the best gauge of...

Long term profitability

To be a prime or conversion cost, it must be a...

MANUFACTURING COST

Profit center

Manager has control over costs and revenues, but not investments

Cost center

Manager has control over costs but not over revenues or investment

Investment center

Manager has control over costs,revenues,and investment

Profit variance=

Master NOI - actual NOI

Is there an opp cost if units of idle capacity > units in special order?

NO!

Are period costs inventoriable?

NO! Only product costs are

Is SQA the master budget?

NO!!!

Is cash budget the same as stmt of cash flows?

NO!!!!

RI =

NOI - (RRR x average op assets @ NBV)

RI=

NOI - (avg op assets @ NBV x required rate of return)

ROI =

NOI/avg OP ASSETS at NBV

Profit margin =

NOI/rev

Profitability index=

NPV/investment required

Why do we need to know whether a cost is var/mix/fix

Need to know how costs will change if there are changes to production/sales levels

Is the cost traceable to a specific cost object?

No! Indirect cost

Do organization's goals always = individual goals?

No! Principal vs agent model, goals diverge

Does fixed costs on master/flex budget need to = fixed costs on actual budget?

Not necessarily but they can

Once a decision is made and a project is chosen, a ______ should be completed

POST AUDIT

Income stmt reports both:

PRODUCT (COGS) AND PERIOD COSTS (SG&A)

Balance sheets report only:

PRODUCT COSTS (inventory)

Sunk cost

Paid for in the past- no longer relevant

Non manufacturing costs =

Period costs

Managers use data to:

Plan, control, and make decisions

Master budget =

Planning budget

Responsibility for purchasing manager:

Price var: - quality of materials - cost of materials (negotiating price, buying in bulk)

Preference

Prioritize and select

What do companies use to track performance?

Process control charts track performance on real time basis

Manufacturing costs =

Product costs

ROI =

Profit margin x investment turnover

What's the first variance every good manager finds

Profit variance

Spending variance =

Quantity var +price var

Responsibility for production manager:

Quantity var: - worker/training experience - equipment issues

NOI =

REV - COSTS

Flex vs actual

REV/SPENDING VARIANCES

Interchangeable terms for cost of capital:

Required rate of return, discount rate

Managers should be held _______ for items and decisions they significantly control

Responsible

Investment turnover =

Rev/ avg op assets

An effective performance evaluation will do what?

Reward behavior that benefits the company and will include multiple performance measures

What is the special type of fixed cost?

STEP COST

Add/drop/retain segment decision basis;

Select option that increases NOI

Make or buy decision basis:

Select option with lowest cost = higher nOI

How is capacity rationed (decision basis)

Select the product with the highest CM per 1 unit of constraint

Non manufacturing costs

Selling, gen, and admin costs

To calculate this metric you have to determine an expected value for the project.

Sensitivity analysis

Names for indirect costs

Shared, allocated, common costs

Contribution margin is the best gauge of...

Short term profitability

Investment turnover...

Shows if excessive funds are tied up in operating assets

Disadvantages of bottom up:

Super star syndrome

The higher the IRR...

The BETTER!

RI

The NOI earned above the required rate of return on the operating assets of the division

Flex budget is also known as

The crystal ball budget

IRR

The discount rate that causes the NPV for the project to be zero

Capacity

The maximum volume of activity that a company can sustain with the available resources

As business grows and becomes more geographically dispersed...

The organizational structure becomes more decentralized

Capital budgeting

The set of tools companies use to evaluate large expenditures with long term impacts

Responsibility centers

The system that links decision making with outcomes to assign accountability

When should a segment be dropped?

They have a negative segment margin

What is the purpose of prime and conversion costs?

To gauge efficiency!

Purpose of post audit

To provide feedback and validate the decision

Direct labor is also known as

Touch labor

Balanced scorecard

Translates the company's strategy into performance measures that employees can understand and influence

Regression analysis

Used when there are large Amounts of data

Hi lo analysis

Used when there is small amounts of data

Performance can be benchmarked at

VARIOUS LEVELS

Opportunity cost

Value of next best alternative; always relevant

Making a budget is just an exercise UNLESS

We use it as a reference point (BENCHMARK) to evaluate actual performance

Expected value =

Weighted average

What is payback period?

When do we recoup the initial investment

What does excess (deficiency) tell you?

Whether you need to borrow and if you can make a repayment

Is there an opp cost if units of idle capacity < units in special order

YES!

Should the project be accepted if NPV is 0?

YES!

Do FC on master always = FC on flex budget?

YES!!!

Does increasing fixed costs increase business risk for a given volume?

YES!!!

Is the cost traceable to a specific cost object?

Yes! Direct cost

If you have positive NPV...

You know IRR is GRETER THAN cost of capital