Details Title: Acco 31 Managerial Accounting Description: Prof. Kren Powerpoint Notes Total Flash Cards: 115 Created: 12/09/2008 14:46:01		New Users: To study from this flashcard set, or to create your own your own study flash cards, REGISTER HERE. Existing Users: CLICK HERE. Additional Accounting Flashcards
Cards in this set: Term Decentralization Definition the degree of decision making authority granted to subordinates in the firm (makes performance evals. hard) Term Control System Design Definition 1st-best solution: base compensation & promotion on actions/hard work & effort (behavior based, rarely feasible so...) 2nd best solution: rewards based on results (outcome based) Term Responsibility Centers Definition separate, identifiable segments of an organization that have decision rights/control over cost, revenue, or investment/asset decisions 3 types - cost, profit, investment centers Term Types of Responsibility Centers Definition Cost Center - managers have control over costs/input mix Profit Center - managers have control over revenues & costs Investment center - managers have control over costs, revenues, & investment decisions Term Controllable Costs Definition costs incurred directly by a level of responsibility that are controllable at that level Term Non-Controllable Costs Definition costs incurred indirectly which are allocated to a responsibility level Term Common/Indirect Costs Definition caused by activities throughout the company that don't relate to one particular segment Actions taken by a segment won't affect Total Common Cost - only the amount allocated to that segment Term Differences w/ Internal Reports & GAPP Definition 1-Cost is organized by Behavior (VC/FC); use contribution format 2-Only direct costs included (don't allocate common costs to Responsibility Centers) Term ROI Definition sales margin x asset turnover =income/sales x sales/avg. assets Term RI (residual income) Definition income - target income =income - (hurdle rate x avg. assets) Term Problems w/ financial performance measures Definition accounting manipulations short-run opportunistic behavior financial entrepreneurship Term Advantages with financial performance measures Definition innovation balanced scorecard activity based management operational measures Term Transfer Price Definition price paid for intracompany transfers of goods/services b/w segments or divisions intracompany sales are all eliminated in consolidation; therefore, the company as a whole doesn't care about the dollar amount Term Revenues include... Definition sales to outsiders at market price & sales to other segments at transfer prices Term Costs include... Definition payments to external companies at market price & to other segments at transfer price Term Transfer Price Considerations Definition interdependence, decentralization, taxes, & financial reporting (GAPP) Term Transfer Price Pricing Systems Definition 1 - cost based 2 - market based 4 - negotiated Term Transfer Price Objectives Definition 1 - goal congruence 2 - cost efficiency 3 - divisional autonomy Term When can all transfer pricing objectives be met? Definition when prices are based on opportunity cost to seller Term Market Based System at Excess Capacity Definition opportunity cost is the incremental cost of output - close to variable cost (transfer at minimum of VC b/c FC stay the same) Term Problems of Market Based System Definition Lack of an active market, biased external quotes, outside buying may be limited, & seller may have excess capacity Term Cost-Based System Definition always leads to sub-optimization (only meets 3rd objective (divisional autonomy)but it's easy to understand/calculate) Term Negotiated Based Sytem Definition meets all 3 objectives & is consistent w/ decentralization BUT sub-optimization may occur Term Should/Will they transfer??? Definition Should they? consider the effects on company profits. Will they? consider effects on segment margin. Term Incremental Analysis Definition decisions involve a choice among alternative courses of action (aka differential analysis) Term Relevant Data Definition data that vary/change in the future among alternatives Term Steps in Management's Decision Process Definition 1. Identify problem & assign responsibility 2. Determine & evaluate possible courses of action 3. Make a decision 4. Review results of decision Term Avoidable Cost Definition future cost that differ or change b/w alternatives. Any cost that can be eliminated in whole or in part as a result of choosing one course of action over another (aka differential, relevant, or incremental costs) Term Opportunity Cost Definition potential benefit that's given up when one course of action is chosen over another Term Sunk Cost Definition costs that have already been incurred & can't be changed by any decisions made now or in the future (ex: NBV & depreciation) Term Outsourcing Definition the decision to buy parts/services rather than make Term Advantages of making product internally Definition 1-reduces dependence on suppliers 2-ensures smoother flow of parts & materials for production 3-quality control may be easier 4-company can realize profits on parts & materials Term Advantages of buying from a supplier Definition 1-supplier can realize economies of scale 2-specialized supplier may be able to respond quicker & at less cost to changing future needs of the company 3-changing technology makes making one's own parts riskier than purchasing Term Joint-Products Definition multiple-end products Term Joint Costs Definition all costs incurred prior to the point at which the products are separately identifiable (aka the split-off point) Sunk Costs - they're not relevant in any sell-or-process-further decisions allocated to individual products on the basis of relative sales value Term Decision Rules for Joint-Processing Definition process further as long as the incremental revenue from such processing exceeds the incremental processing costs Joint Processing costs are sunk at split-off point & aren't relevant Term Decision Rules on eliminating unprofitable segments Definition retain the segment unless fixed costs eliminated exceed the contribution margin lost total CM - directly traceable/avoidable FC = segment margin If total CM > directly traceable & avoidable FC = keept the segment Term Constrained Resource Definition when a constraint exists, a company should select a product mix that maximizes the total CM (contribution margin) earned since fixed costs usually remain unchanged promote products that have the highest CM when there are no restraints When constraints exist, promote the product that earns the highest CM in relation to the constraining resource Term Bottleneck Definition the machine or process that is limiting overall output/the constraint Term Constraint Definition when a limited resource is limiting/restricting the company's ability to satisfy demand Term Selling Price = Definition Selling Price = [1 + Markup]x Cost Term Economist's Approach to Pricing Definition fixed costs have no variance, cost always refers to variable costs markup % is based on price elasticity of demand cost is based on variable cost Term Economist's Approach: Elasticity of Demand Definition the price elasticity of demand measures the degree to which the unit sales of a product/service is affected by a change in price Term Economist's Approach: Inelastic Demand Definition differs since change in price has little effect on # units sold Term Economist's Approach: Elastic Demand Definition dramatically changes # units sold when price changes Term Cross Elasticity Definition occurs if a change in price affects demand for other substitute products Term Profit Maximizing Price = Definition (1 + (-1 / (1+Ed) ) ) x VC per unit Term Problem with the Economist's Approach Definition if there's multiple cost-drivers you may not be able to separate into VC & FC Term Absorption Costing Approach Definition assumes that customers need the forecasted unit sales & will pay whatever price the company decides to charge careful: may not always be a valid assumption Term Markup % on absorption cost Definition [ ((required ROI x investment) + SGA expenses)) / (absorption product cost x unit sales) ] Term Target Costing Definition the process of determining the max. allowable cost for a new product & then developing a prototype that can be made for that max. target cost figure target cost = anticipated selling price - desired profit market research determines the selling price, management computer mfg. cost for an acceptable profit margin, & engineers/cost analysts design product for the allowable cost Term Capital Investment Decision Definition concerned with process of planning, setting goals & priorities, arranging financing & using certain criteria to select long-term assets Term Steps in Budgeting Process Definition 1-estimate feasibility 2-estimate benefits & cash flows 3-approval procedures 4-perform financial analysis 5-schedule & controlling implementations 6-post audit (to keep managers honest) Term Typical Cash Outflows Definition repairs, maintenance initial investment working capital (at time zero) incremental operating costs depreciation is NOT a current cash outflow Term Typical Cash Inflows Definition salvage value of old machine release of working capital (at end of project) incremental revenues recovery of initial investment reduction of costs Term Working Capital = Definition current assets - current liabilities Term Screening decisions Definition pertain to whether or not some proposed investment is acceptable Discount Methods: NPV or IRR Non-Discount Methods: Payback or Simple Rate of Return Term Preference Decisions Definition attempt to rank acceptable alternatives from most to least appealing (present value or profitability index) Term NPV = Definition PV of Cash Inflows - PF of Cash Outflows cost of capital usually is min. req. rate of return used in NPV NPV > 0 = accept <0 = reject Term NPV & IRR Assumptions Definition all cash flows other than initial investment occur at end of periods & all are generated by an investment project immediately reinvested at a rate of return equal to the discount rate Term Internal Rate of Return (IRR) Definition ROR promised by an investment project over its useful life computed by finding the discount rate that will cause the NPV of the project to be zero if annual cash flows aren't identical, a trial & error process must be used to find the internal ROR if IRR >/= Cost of Capital = Accept IRR < Cost of Capital = reject Cost of Capital acts as a Hurdle Rate a project must clear Term Profitability Index Definition PV of Cash Inflows / Investment Required or (NPV+Initial Investment) / Investment Required The higher the PI, the more desirable the project Term Payback Period Definition investment required/net annual cash inflow FYI: Payback method wants just CASH FLOWS NOT NI so don't include Depreciation! Term Simple Rate of Return Definition annual incremental NOI / (initial investment - salvage value of any sale of old equip.) or (cost savings - deprec. expense) / (initial investment - SV of sale of old equip.) SRR >/= company's cost of capital = accept Term NI = Definition Revenues - Expenses - Depreciation = NI FYI: Payback method wants just CASH FLOWS NOT NI so don't include Depreciation! Term Interest = Definition principle x interest rate x time Term Money has a time value. Table approach = PV = Definition FV = PV x FV$1factor PV = FV x PV$1factor Term Annuity requires... Definition 1. periodic payments/receipts (called RENTS) of the same amount 2. same-length interval b/w such RENTS, 3. compounding of interest once each interval Term 2 Types of Annuity Definition Ordinary Annuity: payments occur at end of each period Annuity Due: payments occur at beginning of each period Term PV of Ordinary Annuity Definition PV = Payment x PVordinary annuity factor Term Process Costing (ch. 3) Definition identical products same avg. cost per unit Term Job-Order Costing (ch. 3) Definition unique products mfg. to order allocate cost to each job Term Job Cost Sheet (ch. 3) Definition a form prepared for a job that records the materials, labor & mfg overhead costs charged to that job Term Cost Driver (ch. 3) Definition a factor that causes overhead costs (actual activity, allocation base, denominator level; always per DM, DLH, DL, or machine hours) Term Overhead Applied = (ch. 3) Definition OHD rate x actual activity Term CGS Statement (ch. 3) Definition Beg. FG Inv + CGM = CGA - End FG Inv = Unadj. CGS + underapplied OHD - overapplied OHD = adjusted CGS Term Variable Costs Definition vary in total with respect to activity changes, but stay constant on a cost/activity basis Term Fixed Costs Definition stay constant in total regardless of activity changes, but decrease on a cost/activity basis Term Mixed costs Definition increase in total w/ respect to changes in activity level & decrease on a cost/activity basis TC = FC + VC(x) Term Committed Fixed Costs Definition long-term cost decisions that can't be changed w/o seriously affecting the firm ex: purchase of land, building or equip Term Discretionary Fixed Costs Definition short-term (annual) cost decisions that can be changed for periods of time w/o affecting long-term goals of the firm ex: training or advertising Term GAPP Income Statement Definition Sales -CGS (product cost) =GP -S&A (period costs) -Admin =NI Term Contribution Method Income Statement Definition Internal Use Only - by behavior Sales -VC =CM -FC =NI/PBT Term Contribution Margin Definition the amount each unit contributes towards covering the fixed costs of the firm Term Sales Mix Definition refers to the relative proportion in which a firm's products are sold must stay constant for us to do calculations Term Cost Volume Process Definition the study of how profits respond to changes in the level of selling prices, sales volume, variable costs/unit, total fixed costs, & mix of products sold Term CM Ratio Definition unit CM / unit Sales price Term Profit Before Tax (PBT) = Definition Total Sales - Total Cost = Sales(x) - TC TC = FC + VC(x) so... Sales (x) - VC (x) - FC = PBT OR CM(x) - FC = PBT Term Breakeven Point Definition Total CM - Total FC CM(x) - FC or CM(x)-FC=0 Term Objective Desired Profit Definition CM(x) - FC = ___desired profit Term Margin of Safety Definition excess of budgeted (or actual ) dollar sales over the break-even sales level = Total Sales - Break-even Sales Term Margin of Safety Ratio Definition margin of safety/total sales Term CM ratio for predicting increase in PBT Definition Increase in Sales x CM ratio =Increase in CM - Increase in FC =Increase in PBT Term Operating Leverage Definition a measure of how sensitive net operating income is to %change in sales Degree of Operating Leverage = CM/PBT must be recalculated at every sales level Term Using Operating Leverage to find % increase in Profits Definition % increase in sales x degree of operating leverage = % increase in profits Term Point of Indifference Definition PBTold - PBTnew = CMold(x) - FC old = CMnew(x)-FCnew Term Absorption costing / Full cost method Cost of Product & Income Statement Definition all mfg. costs are product costs Cost of Product = DM + DL + VOHD + FOHD Income Statement: Sales -CGS =GP -VSGA -FSGA =NI *changes in production levels affect NI* Term Variable Costing Cost of Product & Income Statement Definition only variable mfg. costs are product costs Cost of Product = DM + DL + VOHD Income Statement: Sales (total sold x selling price) - VC (beg fg inv + cgm - end fg inv) -VSGA =CM -FOHD -FSGA =NI Term Reconciliation of Net Income Definition Variable Costing NI + FOHD deferred in EI (# units in EI x FOHD/unit) - FOHD released from BI (# units in BI x FOHD/unit) =Absorption Costing NI Term Behavioral Implications of Budgeting Definition Budgetary Slack - "padding the budget", intentionally underestimating revenue or overestimating costs in order to enhance the person's performance evaluation Self-Imposed/Participative Budgeting: people perform better & make greater attempts to achieve a goal if they have been consulted in setting the goals Term Production Budget Definition shows what must be produced to meet sales forecasts Budgeted unit sales + desired EI = Total Needs - beg inv = Required production Term Direct Materials Budget Definition details the amount of raw materials that must be acquired to support production & provide adequate inventories Req. production in units Quantity measure needed per unit = raw materials req for production + desired EI = total raw material needs - beg inv = raw materials to be purchased x cost of raw materials per qty measure = cost of raw materials to be purchased Term Cash Budget Definition Beg Cash Balance + receipts = Total Cash Available - disbursements = excess (deficiency) + financing = cash balance, ending Term Actual Cost Systems Definition charge actual DM, actual DL, & actual OHD costs to products no OHD rate rarely used Term Normal Cost Systems Definition charge actual DM & actual DL costs to products OHD rate used to apply OHD to products often used Term Standard Cost Systems Definition charge standard DM & standard DL costs to products OHD rate used to apply standard amount of OHD to products standard input allowed for actual output at standard rate often used Term DM Price Variance = Definition AQpurchased (AP vs SP) Term DM Quantity (Usage) Variance Definition SP (AQused vs. SQallowed) Term Favorable Variance = Definition standard > actual Term DL Rate Variance Definition AH (AR vs SR) Term DL Efficiency Variance Definition SR (AH vs SHallowed) Term VOHD Spending Variance Definition AH (AR vs SR) Term VOHD Efficiency Variance Definition SR (AH vs SHallowed) Term The balanced scorecard & it's performance measures Definition management translates its strategy into performance measures that employees understand & accept Performance Measures: Financial Customer Internal Business Processes Learning & Growth Term Delivery Performance Measures: Throughput = Mfg. Cycle Efficiency = Definition Order received - wait time - Production started - Process time+Inspection time+Move time+Queue time - Goods Shipped Throughput time (aka mfg cycle time or lead time)=process+inspection+move+queue Mfg Cycle Efficiency = value-added time (process time) / throughput Process time is the only value-added time