Managerial Accounting Exam 3

Which measure of financial performance encourages managers to make investment decisions that are more in line with the company's interest- ROI or Residual Income?

residual income

How is residual income calculated?

residual income=net operating income - (average operating income x minimum required rate of return)

A labor efficiency variance resulting from the use of poor quality materials should be charged to:

the purchasing agent.

Which cost is relevant to a decision whether or not to drop a business segment?

the segment managers salary

if a manger is evaluated based on residual income, what will they consider?

they will want to make an investment that would generate additional net operating income

What are some characteristics of flexible budgets?

-may be prepared for any activity level in the relevant range -show costs that should have been incurred at the actual level of activity, enabling "apples to apples" cost comparisons -help managers control costs -improve performance evaluation

What are two types of costs that are never relevant?

1. sunk costs 2. a future cost that does not differ between the alternatives

What is the flexible budget and how are the amounts in the budget calculated?

A flexible budget is an estimate of what revenues and costs should have been, given the actual level of activity for the period.

What are some characteristics of ideal standards v. practical standards?

Should we use ideal standards that require employees to work at 100% peak efficiency? I recommend using practical standards that are currently attainable with reasonable and efficient effort.

What are the common errors made when using flexible budgets?

The most common errors when preparing performance reports are to implicitly assume that: 1. all costs are fixed 2. all costs are variable

What is a balanced scorecard?

a balanced scorecard consists of an integrate set of performance measures that are derived from an support a company's strategy

What is the difference between a cost center, a profit center, and an investment center?

a cost center is a segment whose manager has control over costs, but not over revenues or investment funds. a profit center is a segment whose manager has control over both costs and revenues, but no control over investment funds. an investment center is a segment whose manager has control over costs, revenues, and investments in operating assets.

When are revenue/spending variances favorable or unfavorable?

favorable variance occurs when actual revenue is greater then budgeted revenue. unfavorable variances occur when actual costs are greater than budgeted costs.

what are the four categories of performance measures used for the balance score card?

financial, customer, internal business processes, learning and growth

Which manufacturing process is a value added activity?

process time

Which manager is responsible for the materials quantity variance and which is responsible for the materials price variance?

The production manager is responsible for the materials quantity variance. The purchasing manager is responsible for the materials price variance.

What are revenue and spending variances and how are they calculated?

a revenue variance is the difference between what the total revenue should have been, given the actual level of activity for the period, and the actual total revenue (subtract flexible budget revenue from actual revenue). a spending variance is the difference between how much a cost should have been, given the actual level of activity, and the actual amount go the cost (subtract flexible budget cost from actual cost).

What is a sunk cost? Is it avoidable or unavoidable?

a sunk cost is a cost that has already been incurred and cannot be avoided regardless of what the manager decides to do. it is unavoidable.

What are some ways we can manage constraints?

-working overtime on the bottleneck -subcontracting some of the processing that would be done at the bottleneck -investing in additional machines -shifting workers from non-bottleneck to process at bottleneck -focus business process improvement efforts on the bottleneck -reducing defective units

when the amount of materials purchased during the period differs from the amount used in production, which is used to calculate the materials quantity variance? Which amount is used for the materials price variance?

Actual material used is used to calcualte material quantity variance. However in case of material price variance, If it is mention that ,variance is calcualted at time of purchase ,we use actual quantity purchased to calculate price variance .And if nothing is mentioned then we use actual quantity used.

What are some benefits of vertical integration? What is the main disadvantage?

advantages: -smoother flow of parts and materials -better quality control -realize profits disadvantages: -economies of scale

What is a relevant cost and a relevant benefit?

a relevant cost is a cost that differs between alternatives. a relevant benefit is a benefit that differs between alternatives.

If the labor efficiency variance is unfavorable, then

actual hours exceeded standard hours allowed for the actual output.

What are the advantages of a standard cost system and what are some potential problems?

advantages: -management by exception -simplified bookkeeping -promotes economy and efficiency -enhances responsibility in accounting disadvantages: -emphasizing standards may exclusive other important objectives -favorable variances may be misinterpreted -emphasis on negative may impact morale -standard cost reports may not be timely -continuous improvement may be more important than meeting standards -invalid assumptions about the relationship between labor cost and output

What is an avoidable cost and an unavoidable cost? which is relevant to decision making?

an avoidable cost is a cost that can be eliminated by choosing one alternative over another. avoidable costs are relevant costs. unavoidable costs are irrelevant costs.

What are activity variances and how are they calculated?

because of all of the variances on a report are solely due to the difference in the level of activity between the planning budget from the beginning of the period and the actual level of activity, they are called activity variances (subtract planning budget revenues and expenses from flexible budget revenues and expenses).

What are the benefits and disadvantages of decentralization?

benefits: -top management freed to concentrate on strategy -lower level decisions often based on better information -lower level managers can respond quickly to customers disadvantages: -lower level managers may make decisions without seeing the big picture -may be a lack of coordination among managers -may be difficult to spread innovate ideas -lower level managers objectives may not be those of the organization

Residual income is a better measure for performance evaluation of an investment center manager than return on investment because:

desirable investment decisions will not be rejected by divisions that already have a high ROI.

A general rule in relevant cost analysis is:

differential future costs and revenues are always relevant.

What assets are considered operating assets and used in the ROI calculation? What assets are not included?

included: cash accounts receivable inventories plant and equipment not included: cost of goods sold selling expense admin expense

How can a company maximize profits when they have a constrained resource?

increasing the capacity of a constrained resource should lead to increased production and sales

How do we decide whether or not a business segment should be dropped? How should be treat allocated fixed costs?

it will mainly be decided on net operating income. Drop the segment only if its profit would increase. The fixed costs will be reallocated to other product lines. Allocations can make a segment look less profitable than it really is.

In a sell or process further decision, what are joint process costs? are they relevant to the decision of whether to sell as it or process further?

joint costs are incurred up to the split-off point. they are not relevant.

How should managers decide which variances are worth investigating?

larger variances, in dollar amount or as a percentage of the standard, are investigated first

if a manager is evaluated based on ROI, what will they consider?

managers evaluated on ROI may reject profitable investment opportunities

How do you calculate a margin? How do you calculate turnover? How do we use these two items to calculate ROI?

margin=net operating income/sales turnover=sales/average operating assets ROI=margin x turnover ROI=net operating income/average operating assets

What is a standard and what two standards do we use in managerial accounting?

standards are benchmarks or "norms" for measuring performance. 1. quantity standards specify how much of an input should be used to make a product or provide a service. 2. price standards specify how much should be paid for each unit of the input

what are the calculations for throughput time, delivery cycle time, and manufacturing cycle efficiency?

throughput time=process time + inspection time + move time + queue time delivery cycle time= wait time + process time + inspection time + move time + queue time manufacturing cycle efficiency=process time/throughput time

If manufacturing overhead is applied based on direct labor hours, and the labor efficiency variance is favorable, would we expect the variable manufacturing overhead variance to be favorable or unfavorable?

unfavorable

What does the company consider when determining whether to accept a new investment?

when comparing investment centers, it is better to focus on the percentage change in residual income from year to year rather than on the absolute amount of the residual income