ACC 303 exam 2

What are examples of direct costs

direct labor

direct materials

What is the problem with using planning budgets for performance evaluaction

• planning budgets are prepared for a single level of activity

• performance evaluation is difficult when actual activity differs from planned activity

What is a flexible budget

• A budget prepared for actual level of activity, not planned level

• Show revenues and costs that should have been incurred at the actual level of activity.

• Allows for better performance evaluation.

Static budget vs flexible budget

Static:

• activity level: planned

• purpose: planning and goal setting

Flexible:

• activity level: actual

• purpose: performance evaluation

to flex a budget we need to know that

• Total variable costs change in direct proportion to changes in activity

• Total fixed costs remain unchanged within the relevant range.

What are variances

Differences between budgeted and actual amounts

Favorable sales

Actual sales > Expected sales = Favorable (F)

Unfavorable sales

Actual sales < Expected sales = Unfavorable (U)

Unfavorable cosrs

Actual costs > Expected costs = Unfavorable (U)

Favorable costs

Actual costs < Expected costs = Favorable (F

What are activity variances

the differences betwen the static and flexible budgets amts

what are revenue and spending variances

• Compare actual results to flexible budget

• • “apples to apples” because both are considering the same level of activity

What is the difference between actual revenue and flexible budget reveneu

revenue variance

what is the difference between actual cost and flexible budget cost

spending variance

Characterisitcs of a decentralized organization

• operates across multiple product categories

• Organized into major business segments (e.g., Home Care, Grooming, Baby Care)

• Brand managers responsible for pricing, marketing, and performance

• Decisions made closer to customers and markets

Benefits of decentralization

• lower-level decisions often based on better information

• top managers freed to concentrate on strategy

• lower level managers can respond quickly to customers

• lower level managers gain experience in decision making

• decision-making authority leads to job satisfaction

Disadvantages of decentralization

• lower level managers may make decisions without seeing the big picture

• may be a lack of coordination among autonomous managers

• lower-level managers’ objectives may not be those of the organization

• may be difficult to spread innovative ideas in the organization

Responsibility accounting

• Links performance to areas of control

• Supports decentralized organizations

• Important for fair evaluation of managers

What are controllable items

influenced by managers

what are noncontrollable items

• outside manager’s control

Types of responsibility centers

• Cost center – responsible for controlling costs

• Profit center – responsible for both revenues and costs

• Investment center – responsible for revenues, costs, and the effective use of assets to maximize returns

Return on investment (ROI)

• measures return as a percentage

• way to evaluate perfomance for an investment center

• focuses on efficiency

• Net operating income/ average operating assets

Residual income

• way to evaluate perfomance for an investment center

• measures value created above required return

• focuses on value creation

• Net operating income - (avg operating assets *minimum required rate of return)

How to find ROI using division

1. Find net operating income (income before interest and taxes (EBIT)

2. Find Average Operating assets (Cash, A/R, inventory, plant and equipment, and other productive assets)

3. Net operating income / Average operating assets

How to find ROI using margin and turnover

1. Find margin

   1. Net operating income / sales

2. Find turnover

   1. Sales / Average operating assets

3. Margin * Turnover

Managers can improve ROI by

• Increasing profit margin

• Increasing asset turnover

• Or both

Standard costs

Budgeted or expected costs of inputs

Standard costs purpose in managerial accounting

used to measure performance and control operations

Price standards

specify how much should be paid for each unit of the input

Quantity standards

specify how much of an input should be used to make a product or provide a service

Why use standard costs?

• planning and budgeting

• perfomance monitoring

• cost control

• motivating efficiency

When does actual cost not equal standard cost

• price-related causes

• Quantity-related causes

Standard cost equation

Standard cost = Standard quantity * standard price

What are the two philosiphies for standard setting

• Ideal Standards

  • Attainable only under perfect conditions

  • No interruptions or downtime

  • 100% efficiency at all times

• Practical Standards

  • Tight but attainable

  • Allow for normal downtime and breaks •

  • Require efficient, realistic performance

What is a variance

difference btween standard and actual performance

Price variance

difference between actual price and standard price

quantity variance

difference between actual quantity and standard quantity

Direct Materials Price Variance Formula

(Actual price - standard price) * actual quantity

Direct materials quantity variance formula

(Actual quantity - standard quantity) * actual price

Who is responsible for the materials price variance

the purchasing manager

who is responsible for the materials quantity variance

the production manager

Direct labor Rate variance equation

(Actual rate - standard rate) * Actual Hours

Direct labor efficiency variance

(Actual time - Standard time) * Standard rate

Variable OH Rate Variance equation

(actual rate - standard rate) * actual hours

Variable Overhead Efficiency Variance equation

(actual hours - standard hours) * standard rateHow

How are the DL efficiency and variable moh efficiency variance related

• Both are based on actual vs. standard DLHs

• DL tells us the labor hour efficiency

• MOH tells us the efficiency in using the allocation base (DLHs)

When Variable MOH is allocated using DLHs….

the two efficicency variances move together

Variable MOH efficiency does not equal

efficient use of overhead resources

Variance analysis cycle

1. Prepare performance cycle

2. analyze variances

3. raise questions

4. identify root causes

5. take actions

6. conduct next period’s operations

Relevant cost

cost that differs between decisions alternatives

avoidable cost

cost that can be eliminated, in whole or in part, by choosing one alternative over another

Avoidable costs are ___

• relevant costs

Unavoidable costs are ___

irrelevant costs

What categories of costs are never relevant in any decisions

• Sunk costs

• Future costs that do not differ between the alternatives

What are sunk costs

• costs that are already incurred and cannot be recovered or changed

How to identify relevant costs

1. Eliminate Irrelevant Costs

   1. Ignore costs that do not differ between alternatives, including: • Sunk costs (already incurred) • Future costs that are the same for all options

2. Focus on differential (avoidable) costs

   1. Use only the costs and benefits that vary between alternatives to guide your decision.

What is a special order

• a one-time order that is not considered part of the company’s normal ongoing business.

• • Often offered at a reduced price

• • The key question: Will accepting the special order increase the company’s profit

Key considerations for special orders

• Is there idle capacity? •

• Will the order affect regular sales?

• What are the relevant costs?

• Are any new costs introduced?

• Does the order cover variable costs and contribute toward fixed costs or profit?

Relevant costs for special orders

• Direct Materials •

• Direct Labor

• Variable Overhead

• Any additional costs (e.g., special packaging or shipping)

Irrelevant costs

• fixed costs if they don’t change whether or not the special order is accepted

• sunk costs

Segment elimination decisions

• Should we keep or drop a business segment?

  • Will eliminating this segment improve or hurt the company’s overall net operating income (ONI)?

  • Focus on relevant revenues and avoidable costs.

  • Allocated fixed costs that won't go away if the segment is dropped are not relevant.

  • Don’t drop a segment just because it’s showing a loss…

Outsourcing decisions “Make or Buy”

A decision about whether to:

• Make a product or service internally

• Buy it from an external supplier

Decision rule: cost to buy < relevant cost to make

BUY

Decision rule: Cost to buy > relevant cost to make

MAKE

Volume tradeoff decisions

• Occur when a company faces a binding constraint

• A limited resource must be allocated across competing products

• Goal: Maximize total contribution margin

• Contribution margin per unit of the constrained resource

Constraint

a limited resource that restricts output

What is a bottleneck

• The resource or process that limits total output

• Determines the company’s maximum capacity

Sources of constraints

• Internal capacity limits (machines, labor)

• Supplier limitations

• Material shortages

• Regulatory limits

• Logistics or transportation delays

Decision rule when it comes to contraints

The decision rule is the same: Prioritize products that generate the highest contribution margin per unit of the constrained resource

Contribution Margin Per Unit of the Constrained Resource

• When a constraint exists:

• • Rank products by their contribution margin per unit of the constrained resource (Higher CM is better)

equation: CM per unit (selling price per unit - variable cost per unit) / units of constraint required per product

Joint products

Two or more products produced simultaneously from a common input through a shared production process.

Split-off point

The stage in production where joint products become separately identifiable. At this point, products can be:

• sold as-is

• processed further for potential additional profit.

• The sell-or-process decisions occurs after the split-off point and focuses on incremental profitability

The decision rule - when evaluating whether to process further

Ignore

• Joint costs

• any cost that does not change with the decision

Focus on

• Incremental revenue from further processing

• incremental processing costs

Process further if: Incremental revenue from further processing is greater than the incremental processing costs. Otherwise, sell at split-off