Accounting 2- Exam 3

ROI formula

Operating Income/Total Assets

Sales Margin formula

operating income/sales

Capital turnover formula

Sales/Total Assets

Residual income formula

Operating income - (target rate of return x Total assets)

Payback period formula

investment cost/annual net cash flow

Accounting rate of return formula

(avg. annual net cash flows-annual depreciation expense)/initial investment

Net present value formula

PV of cash inflows - PV of cash outflows

Profitability index

Net Present Value / Investment Required

Current ration formula

current assets divided by current liabilities

Acid Test Ratio

(Current Assets - Inventory) / Current Liabilities

Inventory turnover ratio

cost of goods sold/average inventory

Components of an operating budget

sales budget, production budget, direct material budget, direct labor budget, manufacturing budget, operating expense budget, budgeted income statement

Advantages of Decentralization

-Knowledge of local requirements
-Local sourcing
-Less bureaucracy

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 manager's objectives may not be those of the organization
-may be difficult to spread innovative ideas in the organization

What are the different types of responsibility centers?

Cost , Revenue, Profit, Investment

cost center

A segment whose manager has control over costs, but not over revenues or investment funds.

Revenue center

a responsibility center whose manager is only responsible for generating revenue

Profit center

a business segment whose manager has control over cost and revenue but has no control over investments in operating assets

Investment center

a business segment whose manager has control over cost, revenue, and investments in operating assets

Segment margin

A segment's contribution margin less its traceable fixed costs. It represents the margin available after a segment has covered all of its own traceable costs.

Balanced scoreboard

a combination of performance measures directed toward the company's long and short term goals and used as the basis for awarding incentive pay

Time value of money

the principle that a dollar received today is worth more than a dollar received in the future

Annuity

a series of equal regular deposits

Capital rationing

the situation that exists if a firm has positive NPV projects but cannot find the necessary financing

Management of exception

managers focus attention on the most significant differences between actual costs and standard costs and give less attention to areas where performance is reasonably close to standard.