Pro- Chapter 8 BUS 215

Controlling

Gathers feedback to ensure that plants are being followed

Decision Making

decision making involves making a selection among competing alternatives

Planning

Establish goals, Specify how goals will be achieved, develop budgets

Primary purpose of managerial accounting

to teach measurement skills that managers use to support planning, controlling, and decision making activities

what measurement skills helps?

helps managers answer important questions that enable your company to succeed

Ethics Perspective

the lubricant that keeps the economy running

Why have ethical standards?

are essential for a smooth functioning economy,

Without ethical standards in business

economy and all of us who depend on it for jobs, goods, and services would suffer

abandoning ethical standards in business

would lead to a lower quality of life with less desirable goods and services at higher prices.

four standards of ethic perspective

competence, confidentiality, integrity, and credibility

What is the first step in resolving an ethical conflict according to IMA guidelines?

discuss the conflict with your immediate supervisor or the next highest uninvolved managerial level.

What should you do if your immediate supervisor is the CEO?

consider discussing the conflict with the board of directors or the audit committee

What does the IMA suggest if the regular chain of command does not resolve the ethical conflict?

escalate the issue to higher, uninvolved levels of management, such as the board of directors or audit committee

Strategic management perspective

A strategy is a game plan that enables a company to attract customers by distinguishing itself from competitors

The focal point of a company’s strategy should be its target customers

Customer intimacy strategy

understand and respond to individual customer needs

operational excellence

deliver products and services faster, more conveniently, and at lower prices

product leadership

offer higher quality products

Enterprise risk management

a process used by a company to proactively identify and manage risk

What is the most common risk management tactic after identifying risks

reducing risks by implementing specific controls

what is the purpose of implementing controls in ERM?

to reduce the likelihood or impact of identified risks

Corporate Social responsibility perspective

a concept whereby organizations consider the needs of all stakeholders when making decisions

Who are considered stakeholders in CSR

customers, employees, communities, suppliers, stockholders, environmental and human rights advocates

Process management perspective

a business process is a series of steps that are followed in order to carry out some task in a business

What are the business functions that make up the value chain

research and development, design, manufacturing, marketing, distribution, customer service

Leadership perspective

organizational leaders unite the behavior of employees around two common themes- pursuing strategic goals and making optimal decisions

two factors the influence behavior

intrinsic motivation, and extrinsic incentives

Direct costs

cost that can be easily and conveniently traced to a unit of product or other cost object

indirect costs

cannot be easily and conveniently traced to a unit of product or other cost object

Common costs

indirect costs incurred to support a number of cost objects, these costs cannot be traced to any individual cost object

Direct materials

raw materials that become an integral part of the product and that can be conveniently traced directly to it

Direct labor

labor costs that can be easily traced to individual units of product

manufacturing overhead

cannot be easily traced directly to specific units produced

indirect materials

materials used to support the production process

examples: lubricants and cleaning supplies used in the automobile assembly plants

indirect labor

wages paid to employees who are not directly involved in production work

examples: maintenance workers, janitors, and security guards

factory overhead

other indirect expenses related to production work that cannot be traced to an individual product

ex: utilities, depreciation on production equipment

Selling costs

secure the order and deliver the product

administrative costs

all executive, organizational, and clerical costs

nonmanufacturing costs

selling and administrative costs

Product costs

include direct mateials, direct labor, and manufacturing overhead

Period costs

include all selling costs and administrative costs

Prime cost

direct material and direct labor

conversion cost

direct labor and manufacturing overhead

what are the three most common cost behavior classifications

variable, fixed, and mixed costs

variable cost

level of activity increase, it will remain constant per unit and increase in total

variable cost per unit

cost that changes in direct proportion to the level of activity, but remains constant per unit

Activity base

a measure of who causes the incurrence of a variable cost

what are common examples of activity bases?

units produced, miles drive, machine hours, labor hours

why is identifying the correct activity base important

it ensures accurate cost prediction, budgeting and performance evaluation

fixed cost

a cost that remains constant in total, regardless of changes in the level of activity

Does a fixed cost change with activity level

no, total fixed cost stays the same even if the activity level increase or decreases

what happens to fixed cost per unit as activity increases

fixed cost per unit decreases as more units are produced or more activity occurs

What happens to fixed cost per unit as activity decreases?

average fixed cost per unit increase as fewer units are produced

what are committed fixed costs

long term, cannot be significantly reduced in the short term

What are discretionary fixed costs

may be altered in the short term by current managerial decisions

mixed costs

contains both variable and fixed elements

y

total mixed cost

a

total fixed costs (vertical intercept of the line)

b

variable cost per unit of activity (slope of the line)

x

level of activity

differential revenue

the difference in revenue between two alternatives

what is differential cost

difference in cost between two alternative

opportunity cost

potential benefit that is given up when one alternative is selected over anothe r

sunk costs

have already been incurred and cannot be changed now or in the future. these costs should be ignored when making decisions

When is a job order costing system used

when many different products are produced each period and are manufactured to order

why does job order costing require seprate cost records for each job

bc each job is unique, costs must be traced or allocated to each specific job

what types of companies typically use job order costing

any business producing customized or distinct products

job order costing systems are used when

many different products are produced each period

products are manufactured to order

unique nature of each order requires tracing or allocating costs to each job and maintaining cost records for each job

Predetermined overhead rates are often used bc

actual overhead for the period is not know until the end of the period, gives the ability to estimate jobs costs during the period

actual overhead costs can fluctuate seasonally thus misleading decision makers

why use an allocation base?

it is impossible or difficult to trace overhead costs to particular jobs

manufacturing overhead consists of many different items ranging from grease used in machines to the production manager’s salary

many types of manufacturing overhead costs are fixed even though output fluctuates during the period

when is the predetermined overhead rate calculated

before the period begins

plantwide overhead rate

assumed that there is a single predetermined overhead rate

who might use multiple predetermined overhead rates

large companies, because it reflects differences across departments

raw materials

any materials that go into the final product

work in process

consists of units of production that are only partially complete and will require further work before they are ready for sale to customers

finished goods

consist of completed units of product that have not been sold to customers

cost of goods sold

completed units of product that have sold to customers

manufacturing overhead

consists of indirect materials, indirect labor, and factory overhead

what is the purpose of the schedule of cost og goods manufactured

to calculate the total manufacturing costs of goods that were finished during the period

what does the schedule calculate regarding raw materials and labor

cost of raw materials used in production

direct labor costs applied to production

manufacturing overhead applied

what is the final outcome of cost of goods manufactured

the total cost of goods completed (manufactured) during the accounting period

How does cost of good manufactured relate to the income statement

cost of goods manufactured is used to help calculate the cost of goods sold on the income statement

Schedule of cost of goods sold

calculates the manufacturing costs that remain in finished goods inventory and costs transferred to cogs

underapplied overhead

amount of overhead applied to jobs during the period using the predetermined overhead rate is less than the total amount of overhead actually incurred during the period

overapplied overhead

predetermined overhead rate is greater than the total amount of overhead actually incurred during the period

what is the assumption about the selling price in CVP analysis

selling price constant, regardless of volume

how are costs assumed to behave in CVP analysis

costs are linear and can be accurately split into:

• variable costs

• fixed costs

what assumption is made about sales mix in multiproduct companies

sales mix reamains constant throughout the analysis period

what is assumed about inventory levels in manufacturing companies

inventories do not change- units produced equal units sold

why are these assumptions important in CVP analysis

they simplify the model, allowing managers to focus on the relationships between costs, volume, and profit

segment

is any part or activity of an organization about which a manager seeks cost, revenue, or profit data

two keys to building segmented income statements

a contribution format should be used

traceable fixed costs should be separated from common fixed costs

traceable fixed costs arise

bc of the existence of a particular segment and would disappear over time if the segment itself disappeared

common fixed costs arise

overall operation of the company and would not disappear if any particular segment were eliminated

what is a traceable fixed cost

a fixed cost that can be directly attributed to a specific segment of the business

what is a common fixed cost

a fixed cost that supports more than one segment and cannot be traced to any single segment

can a traceable fixed cost for one segment be common fixed cost for another

yes, a cost traceable to one segment may be common to another, depending on the structure of the organization

once a company prepares contribution format segmented income statements

it can use those statements to make decisions and perform CVP analysis

Should common fixed costs be arbitrarily allocated to business segments

no, arbitrary allocation can distort the accuracy of segment performance

Why is one risk of allocating common costs to segments

it can make a profitable segment appear unprofitable, misleading decision-makers

why should managers not be held accountable for common fixed costs

because they are not controllable at the segment level and can lead to unfair performance evaluations