Term
| What is the four step framework for decision making? |
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Definition
POBCD
1. specify problem
2. identify options
3. measure expected outcome of each option
4. make decision |
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Term
| What is the planning and control cycle? |
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Definition
PIERS Cycle stands for:
1. plan
2. implement
3. evaluate
4. revise |
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Term
| What is an oppertunity cost? |
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Definition
| Value of the next best option |
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Term
| What is the goal of a publicly held company? |
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Definition
| To maximize shareholder value. |
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Term
| How do you align individual and organizational goals? |
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Definition
1. Polices and Procedures
2. Monitoring to enforce polices and procedures
3. Incentive schemes and performance evaluation. |
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Term
| What are control decisions? |
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Definition
| Decisions related to motivating, monitoring, and evaluating performance. |
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Term
| What are some attributes of goals? |
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Definition
| Goals are problem specific and very accross individuals. |
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Term
| How do you make effective decisions? |
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Definition
1. Idenitfy goals clearly
2. Understand the factors that influence goals and their importance |
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Term
| What is the relationship between decisions and options? |
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Definition
| Decisions vary by the number of options that are avaliable. |
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Term
| How do managers add value to the company? |
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Definition
| Idenitfying a set of options for a decision and pruining a large set to a managable number. |
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Term
| How do you calculate Value? |
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Definition
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Term
| What is value always measured against? |
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Definition
| The status quo, or in other words, you can do nothing. |
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Term
| What is accounting's role in decision making process? |
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Definition
Identify the costs and benefits.
Measure costs and benefits. |
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Term
| How do you make the decision? |
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Definition
| Best option has highest total value and the value is greater then the oppertunity cost. |
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Term
| What are some planning decisions? |
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Definition
What products & services to offer?
How best to make and deliver them?
What resources do we need? |
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Term
| What are some Control Decisions? |
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Definition
Evaluate past planning decisions
Aim to improve future plans
Include setting performance targets |
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Term
| Where does plan, implament, evaluate, and revise fall on planing cycle? |
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Definition
Planning - Plan
Control - Evaluate
Inbetween - Revise and implement |
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Term
| Who are the two major decision makers at firm and what are there decisions? |
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Definition
External - Whether to invest in firm, lend money, calculate taxes owed
Internal - Whether to run promotion, what to purchase, who to hire? |
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Term
| What type of information needs and solutions do internal decision makers need? |
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Definition
Needs - Need specific data for the “smaller” decisions
Might need both financial and non-financial data
Solution - Decision specific data produced
No pre-set rules for how to process
Produced as needed |
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Term
| What types of information needs and solutions do external decision makers need? |
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Definition
Needs - Financial information
Solution - Financial Statements, Defined rules (GAAP), statements issued regularly |
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Term
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Definition
Cost or benefit that changes because of the decision
Measured relative to status quo |
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Term
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Definition
A controllable cost or benefit that is different for at least one decision alternative
Relevance helps focus attention on few costs and benefits |
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Term
| When does controlability equal relevance? |
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Definition
Controllability = Relevance if status quo is a choice
Status quo is not a choice in many decisions |
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Term
| When comparing controllable costs and benefits, how should you compute it? |
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Definition
Computes absolute change in profit.
Compare to status quo or doing nothing |
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Term
| What are relevant costs and benfits? |
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Definition
Compare across all options
Preserves ranking of decision options with fewer measurements |
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Term
| What time frame do controlable costs refer to? |
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Definition
Controllable costs and benefits pertain to the future
Sunk costs are costs and benefits that have been incurred in the past |
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Term
| On what occasions can sunk costs effect the future decision? |
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Definition
Purchase price => taxable gain on sale => taxes paid
Amount of past error => manager’s reputation => promotion prospects |
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Term
| When does your control over cost and benefits increase? |
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Definition
| Control over costs and benefits increases with passage of time |
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Term
| When can you change capacity? |
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Definition
Cannot change capacity level in the short-term
Can change capacity level in long-term |
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Term
| How can you classify decisions? |
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Definition
| Because all decisions measure controllable costs and benefits we can classify decisions as to whether they are short term or long term decisions |
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Term
| How are decisions interlinked? |
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Definition
Long-term decisions shape short-term contexts and short-term decisions affect long-term outcomes
Planning is required for control and control feeds into planning |
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Term
| What are the two key benefits to controllable costs and benefits? |
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Definition
Variability: Relation between cost or a benefit and some underlying activity
Traceability: Extent to which we can identify cost or benefit with decision option |
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Term
| What is the relationship between costs/benefits and volume? |
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Definition
| If we know activity volume, we can estimate cost/benefit |
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Term
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Definition
| Degree to which we can relate cost or benefit to decision option |
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Term
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Definition
The cost hierarchy broadens the principle of variability
Allows us to consider multiple activities |
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Term
| What are four types of costs? |
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Definition
Unit-level costs
Batch-level costs
Product-level costs
Facility-level costs |
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Term
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Definition
| Neither fixed nor variable |
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Term
| What is difficulty with cost hierarchy? |
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Definition
Difficult to assign many costs to hierarchy categories
Need finer data on operations
Wrong classification of levels introduces errors in cost estimation |
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Term
| What are the three types of Organizations? |
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Definition
Service
Merchandising
Manufacturing |
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Term
| What is the difference between product vs period costs? |
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Definition
| Product costs are assigned to a a product and include direct labor, direct material, and manufacturing overhead. |
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Term
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Definition
Costs related to getting a cost or service ready for sale.
Appear “above the line” for gross margin in income statements
These costs can be inventoried
They flow through the inventory account in the balance sheet
Sometime called “Inventoriable costs.” |
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Term
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Definition
Costs that are not product costs. Related to marketing and administration
Appear “below the line” for gross margin
These costs are expensed in the period they are incurred.
These costs do not flow through inventory accounts |
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Term
| What is the difference between costs verse expense? |
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Definition
| An expense is a cost recognized in the income statement |
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Term
| What does the gross margin income statement mingle? |
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Definition
Controllable & non controllable costs
Variable and fixed costs
Direct and indirect costs |
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Term
| What is the inventory equation? |
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Definition
Cost of purchase is NOT the cost of goods sold
Cost of beginning inventory
+ Cost of goods purchased during the period
– Cost of ending inventory
= Cost of goods sold (COGS) during the period |
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Term
| What is the difference between manufacturing firms and other firms? |
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Definition
Use labor and equipment to transform raw materials into finished goods
Have work-in-process
Need inventory accounts for all three kinds of stages in the production process |
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Term
| What is the difficulty with overhead costs? |
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Definition
Not traceable
Part of product cost for individual products
Need to perform a cost allocation. |
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Term
| What are the four elements of Cost Allocation? |
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Definition
Cost Pool
Denominator Volume
Cost Driver
Cost Object |
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Term
| How do you calculate the rate of cost allocation manufacturing overhead? |
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Definition
Rate = Cost in pool Denominator volume
Allocated amount = # of driver units in object rate |
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Term
| How do you calculate Raw Materials? |
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Definition
Begining material inventory
+ Purchases
- Ending Materials inventory
= Raw Materials used |
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Term
| How do you calculate COGM? |
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Definition
begining WIP
+ Materials Used
+ labor Costs
+ Manufacturing overhead
- Ending WIP
= COGM |
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Term
| How do you calculate cost of goods sold? |
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Definition
Begining FG inventory
+ COGM
- Ending FG Inventory
- COGS |
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Term
| What are the properties of cost allocation? |
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Definition
| The percent of cost allocated to a cost object is the percent of cost driver units in the cost object |
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Term
| What are the uses of cost allocation? |
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Definition
Inventory valuation, decisions, behavioral
Inventory valuation, decisions, behavioral |
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Term
| What is the danger of cost allocation? |
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Definition
| Cost is fixed in the short run, but cost allocation makes it look like it is variable. |
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Term
| In the short run, what costs are controllable? |
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Definition
| variable costs are usually controllable in the short run and fixed costs are not |
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Term
| Define contribution margin? |
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Definition
Revenues less variable costs
Include both manufacturing and marketing costs |
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Term
| Define unit contribution margin? |
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Definition
| The contribution margin from one unit |
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Term
| How do you construct a CMStatement? |
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Definition
| Form model of data. Estimate based on historical data. Use model to project future cost. Depends on Tracebility and relevant range. |
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Term
| Name one type of account classification? |
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Definition
Evaluation.
Benefits
Accurate if done well
Allows for entire cost hierarchy
Costs
Time consuming and subjective
Based on expertise of person doing the task |
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Term
| What is the high low method? |
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Definition
| Take the high costs minus the low cost and divide by the high volume - low volume. |
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Term
| What are the costs and benefits of the high low method? |
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Definition
Advantages
Simple, easy to implement
Can easily try out alternate drivers
Drawbacks
Assumes simple cost structure
Ignores information in other data
Caveats
Be sure to plot. Identify outliers, unusual patterns
Use high and low activity (to maximize relevant range) and not the high and low cost |
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Term
| What are the advantages of each type of Cm method? |
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Definition
Account classification is best when historical patterns may not continue
High-low may be preferred for quick and simple estimates
Regression might be called for when cost patterns are complex and we expect historical relations to continue |
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Term
| Name other types of contirbution margins? |
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Definition
Segment contribution
Product contribution
Can extend to customer groupings, if needed
Do not allocate fixed costs to segments |
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Term
| When can labor costs decrease? |
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Definition
People learn and become more efficient over time
The reduction is predictable |
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Term
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Definition
| Profit = (Price - VC) * Quantatiy - FC |
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Term
| What do firms use CVP relation for? |
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Definition
To Plan
To evaluate options
Change short term prices,
Change Mix of fixed and variable costs
Change product mix |
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Term
| Name two main uses of CVP? |
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Definition
Estimare profit at various sales levels and effects on taxes
Calculate volume required for target profit (breakeven) |
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Term
| What is the breakeven analysis equation? |
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Definition
| Fixed Costs / Unit Contribution Margin |
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Term
| How can you calculate breakeven from a revenue and not a volume perspective? |
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Definition
| Profit = contribution margin ratio * revenue - Fixed Costs |
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Term
| How do you calculate profits after tax? |
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Definition
| Profit after tax = (1-tax rate) x profit before tax |
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Term
| How can CVO model help in operations planning? |
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Definition
Profit could be limited by demand for product or supply of product.
Planning operations involves making short term decisions that identify the factor limiting profit and seek to relax that constraint |
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Term
| What options do you have if demand is the constrant to increase profits? |
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Definition
| Increase prices, expand product line |
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Term
| What options do you have if capacity is the contraints? |
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Definition
| Change pricing or add capacity. |
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Term
| How do you calculate margin of safety? |
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Definition
| (Current Sales- Breakeven Sales)/current Sales |
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Term
| How do you change cost structures? |
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Definition
Automation substitutes FC for VC
Outsourcing substitutes VC for FC |
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Term
| What is operating leverage? |
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Definition
Increasing the amount of fixed cost increases business risk, for given volume
Operating Leverage = Fixed Cost / Total Cost |
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Term
| What are some of the key points of operating leverage? |
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Definition
As demand increases, OL decreases
For given demand, decisions that increase FC and lower VC increase OL
Profit is more sensitive to volume changes when OL is high
At lower demand levels, a cost structure with lower OL is typically preferred to a cost structure with higher OL |
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Term
| What is the two product CVP model equation? |
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Definition
Profit = (P1-VC1)*Q + (P2-VC2)*Q - FC
No appealing way to allocate joint cost and revenue |
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Term
| What are the limitations of CVP Analysis? |
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Definition
Linearity of revenue
Linearity of variable cost
Fixed costs cannot be changed
No uncertainty
Single period analysis
Valid only for given product mix
Profit maximization is not the criterion
Used to answer “what if” questions
Assumes that capacity is always available |
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Term
| What is the difference in making decisions in the long run verse the short run? |
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Definition
Not possible to change capacity levels in the short term
In long-term, we pick capacity level based on pattern of expected demand |
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Term
| How do firms manage the change in demand over the long run and short run? |
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Definition
Increase controllability of some costs by changing cost structure (e.g., outsourcing)
Manage demand volatility (e.g., seasonal pricing, adding off-cycle products)
“Move” capacity across period (e.g., store inventory) |
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Term
| Name the two approaches for short term decision making? |
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Definition
Incremental or differential approach: Using one option as benchmark, add incremental costs and benefits to determine incremental value
Totals or Gross approach: Add costs and benefits for every option to determine total value. |
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Term
| When you have multiple competing demands, what is the oppertunity cost? |
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Definition
| Opportunity cost of capacity is the contribution from the demand not filled |
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Term
| What types of issues may arise unless you consider qualitative issues? |
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Definition
Quality
Business development
Technological capability |
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Term
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Definition
a plan of action that
Taking a set of assumptions
Formulates targets
For a specific period |
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Term
| What are the various roles for budgets? |
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Definition
Planning
Strategic, Business, and Tactical (Operating)
Coordination
Decentralization
Performance evaluation & feedback
Benchmark
Tension between planning and control roles |
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Term
| What is the best way to develop a revenue budget? |
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Definition
Triangulate using
Local knowledge
Macro trends
Market research |
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Term
| How do you develop a production budget? |
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Definition
What we had
+ what we put in
- Whater we took out
= What is left |
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Term
| What is the equation for cost of goods manufactured? |
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Definition
Begining work in process inventory
+ Cost of materials used
+ Direct Labor
+ manufacturing overhead
- cost of ending work in process inventory
= COGM |
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Term
| What are the three component of a cash budget? |
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Definition
| Inflows, outflows, and special items. |
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Term
| What is the CVP equation? |
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Definition
Pre-tax profit
= Revenue – cost
= Revenue – variable cost – fixed cost
= Contribution margin – fixed cost
= Unit contribution margin × sales volume – fixed cost
As a formula: Profit = ( P – VC ) x Q - FC |
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