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Management Control System X
Management Control Systems
28
Accounting
Graduate
05/06/2011

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Term
Calculating Variances
Definition
  • competent operating managers adopt continuous improvement or kaizen mentality; don't assum optimal performance is being "on budget"
  • monthly analysis of differences between actual and budgeted revenues and expenses for each business unit and the whole organization
Term
Variances are an analyitical framework used to conduct vaiance analysis that incoporates
Definition
  • identify key causal factors that affect profits
  • break down overall profit variances by these key causal factors
  • try to calculate specific, impact of each causal factor by varying on that factor while holding all others constant (spin one dial at a time)
  • add complexity sequentially, one layer at a time, beginning at basic level (peel the onion)
  • stop process when added complexity is not justified by added useful insights into causal factors
Term
Revenue Variances (6)
Definition
  • selling price variance
  • mix and volume variance
  • mix variance
  • volume variance
  • other revenue analysis: market penetration and industry volume
Term
Selling price variance
Definition
multiplying the difference between actual price and standard price by the actual volume
Term
mix and volume variance
Definition
  • usually not separated
  • (actual volume - budgeted volume ) x budgeted unit contribution
  • volume variance results from selling more units than budgeted
  • mix variance results from selling a different proportion of products from that assumed in the budget
  • because producst earn different contributions per unit, sale of different proportions of products will result in a variance
Term
Mix variance
Definition
[actual volume of sales - (total actual volume of sales x Budgeted proportion) x Budgeted unit of contribution]
Term
Volume variance
Definition

[total actual volume of sales x Budgeted percentage - budgeted sales] x Budgeted Unit contribution

 

subtract mix variance from combined mix and volume variance

Term
market penetration and industry volume variance
Definition
  • separate mix and volume ariance into amount caused by differences in market share and amount caused by differences in industry volume
  • business unit manager sare responsible for market share, but aren't responsible for industry volume
  • market share variance = [actual sales - industry volume] x Budgeted market penetration x Budgeted unit contribution
  • industry volume variance = (actual industry volume - Budgeted industry volume) x Budgeted market penetration x Budgeted unit contribution
Term
Expense Variances
Definition
  • Fixed costs
  • variable costs
Term
Fixed Costs
Definition
  • variance between actual and budgeted fixed costs are obtained by subtracting since these costs are not affected by volume of sales or volume of production
Term
Variable Costs
Definition
  • vary directly and proportionately with volume
  • budgeted variable manufacturing costs may be adjusted to actual volume of production
  • volume used to adjust budgeted variable manufacturing expense is manufacturing volume not sales volume which was used in finding revenue variances.
Term
Variations in practice: time period of comparison
Definition
  • year to date
  • compare budget for whole year with current estimate of actual performance for the year
Term
Formal standards used in evaluations of reports on actual activities are three types
Definition
  • predetermined standards or budgets
  • historical standards
  • external standards
Term
Predetermined Standards or Budgets
Definition
  • if carefully prepared and coordinated, these are excellent standards
  • they are the basis against which actual performance is compared in many companies
  • if budgeted numbers are collected in a haphazard manner, they won't provide a basis for comparison
Term
Historical Standards
Definition
  • records of past actual performance
  • results from the current month may be compared with results for last month or with results from the same month a year ago
Term
two Weaknesses of Historical Standards
Definition
  • conditions may have changed between two periods in a way that invalidates the comparison
  • prior period's performance may not have been acceptable.
Term
External Standards
Definition
  • standards derived from performance of other responsibility centers or of other companies in the same industry
  • performance of one branch sales office may be compared with the performance of other branch sales
  • some companies identify the company they believe to be best managed and use numbers from that company to compare - benchmarking
Term
Limitations on Standards
Definition
  • variance between actual and standard performance is meaningful only if it is derived from a valid standard
  • although it's convenient to refer to favorable and unfavorable variances, these words imply that standard is a reliable measure of waht performance should have been
Term
Standard costs may not be an accurate estimate of what costs hsould have been under circumstances because (2)
Definition
  • standard wasn't set properly
  • although it was set properly in light of conditions existing at the time, changed conditions have made standard obsolete
Term
Full-Cost Systems
Definition
  • if a company uses a full-cost system, both variable and fixed overhead costs are included in inventor at standard cost/unit.
  • if ending inventoy is higher than beginning inventory, some of the fixed overhead costs incurred in the period remain in inventory rather than flowing through cost of sales
  • coversely if inventory balance decreased during period, more fixed overhead costs were released to cost of sales than amount actually increased in the period.
Term
Engineered and Discretionary costs
Definition
  • favorable variance in engineered costs is usually an indication of good performance; lower the cost = better the performance
  • performance of discretionary expense center is usually judged to be satisfactory if actual expenses are about equal to budgeted expenses, neither is higher or lower (if you budgeted $1M then they want you to spend $1M)
Term
Limitations of Variance Analysis
Definition
  • although variances identify where a variance occurs, it doesn't tel why the variance ocurred or what is being done about it
  • decide whether a variance is significant
  • as performance reports become more highly aggregated, offsetting variances might mislead the reader
  • as variances become more highly aggregated, managers become more dependent on accompanying explanations
  • reports show only what has happened, they don't show future effects of actions manager has taken
  • variances only measure what you set standards for (doesn't measure morale)
Term
Managmenet Action Cardinal Rule
Definition
profit report should contain no major surprises
Term
Publishing Budget
Definition
  • inreased effort
  • formal publication is more accurate than informal feedback
  • basis for analysis because informaiton from informal sources is general and imprecise
  • generate conversation for reasons for variances
  • confirm or cast doubts on information received from informal sources.
Term
Sources for Benchmarking
Definition
Business week, Forbes, Fortune 500, Standard & Poors, SEC (10-K)
Term
Profit reports are worthless unless
Definition
they lead to action
Term
goal of performance measurement system
Definition
implement strategy
Term
What type of budgeting?
Definition
capital budgeting, going in there to get more resources than the next manager out of the limited pie
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