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