Studied by 14 people
we need nonfinancial measures to evaluate:
quality assessment
employee statistics
customer relationships
supplier relationships
benefits of nonfinancial performance measures
relate to true drivers of business profitability
limitless potential to measure different aspects of the business, especially with big data, and not constrained by GAAP
facilitate business experiments where companies can get a broad view of the effect of business initiatives
less prone to management manipulation due to broad use throughout the organization
consistently creating long-term organizational value requires that stakeholder issues be:
identified and understood clearly
measured qualitatively and quantitatively
communicated internally and externally
balanced scorecards
multi-level performance strategy
used for detailing strategy and aligning everyone with the details
typical categories of balanced scorecards:
financial perspective
customer perspective
internal operations perspective
learning and growth
“enterprise business processes” are;
customer service driven model for value creation
for a manufacturer, distributor, or seller of tangible products, common processes include:
inbound logistics (procuring inputs)
operations (inputs→ products)
marketing and sales (selling products)
outbound logistics (products→ customers)
service (keeping customers happy after the sale)
financial management
human resource management
technology and information management
non-process organizations: geographic regions, product divisions, etc.
process owner
has end-to-end responsibility for each process (i.e., manages the process)
process owners vs unit owners
process owners manages the process, monitors performance of the process and motivates the frontline workers who perform the process
unit owners (regional mangers, vps, etc.) continue to manage their own workforces who perform the process
most employees will be happy with change; unit owners will not
critically important to manage unit owners properly
what’s it going to take?
leadership and teamwork
“buy in,” communication skills, shared workspace
performance measurement
with processes to measure and how to measure them, tie measures to strategic objectives
links to compensation
share measures with employees to reinforce process culture, reward/punish employees based on measures
training
employees must understand entire process and how their individual actions contribute to (or detract from) its success
potential benefits on focusing on business processes
enhanced flexibility, efficiency and customer focus
decreased product launch time
improved customer service
increased cost savings
potential costs on focusing on business processes
being different from other companies could hurt attractiveness to employees and investors, or attract regulatory scrutiny
internal resistance to change
blurred/changing lines of authority or accountability
what must you think carefully about when dealing with the cost from focusing on business processes and there are blurry lines of authority or accountability?
which measure(s) will capture success or failure of our core business processes
how to capture such measures
to whom we should communicate such measures
motivating each employee with such measures
financial perspective- balanced scorecard
describes the economic consequences of actions taken in the other three perspectives
the customer perspective- balanced scorecard
defines the customer and market segments in which the business unit will compete
the internal business process perspective
describes the internal processes needed to provide value for customer owners
learning and growth (infrastructure) perspective
defines the capabilities that an organization needs to create long-term growth and improvement
strategy
specifies management’s desired relationships among the four perspectives
strategy translation means
specifying objects, measures, targets, and initiatives for each perspective
performance measures are derived from
a company’s vision, strategy, and objectives
these performance measures must be balanced between the following measures:
performance driver measures and outcome measures
objective and subjective measures
external and internal measures
financial and nonfinancial measures
the framework needed for internal (process) perspective
process value chain
process value chain is made up of these three processes:
the innovation process anticipates the emerging and potential needs of customers and creates new produces and services to satisfy those needs
the operations process produces and delivers existing products and services to customers. it begins with a customer order and ends with the delivery of the product or service
the post-sales service process provides critical and responsive services to customers after the product or service has been delivered
learning and growth perspective has three major objectives:
increase employee capabilities- have the requisite knowledge, skills, and abilities
increase motivation, empowerment, and alignment- have the freedom, motivation, and initiative to use skills effectively
increase information systems capabilities- so that employees can improve processes and effectively execute new processes
cost
the amount of cash or cash equivalent scarified for goods and/or services that bring a current or future benefit to the organization
expired costs
aka expenses- as costs are used up in the production of revenues, they are said to expire
cost object
any item such as a product, customer, department, project, geographic region or plant, for which costs are measured and assigned
______ is the way that a cost is linked to some cost object
assigning costs
direct costs
costs that can be easily and accurately traced a cost object
indirect costs
costs that cannot be easily and accurately traced to a cost object
allocation
means that an indirect cost is assigned to a cost object by using a reasonable and convenient method
variable cost
one that increases in total as output decreases
fixed cost
cost that does not increase in total as output increases and does not decrease in total as output decreases
opportunity cost
the benefit given up or sacrificed when one alternative is chosen over another
products
goods produced by converting raw materials through the use of labor and indirect manufacturing resources, such as the manufacturing plant, land, and machinery
services
tasks or activities performed for a customer or an activity performed using an organization’s products or facilities
services differ from from products in many ways
services are intangible
services are perishable
services require direct contact between providers and buyers
product costs
both direct and indirect, of producing or acquiring a product and preparing it for sale--only costs in the production section of the value chain are included in product costs, inventoried
period costs
everything that is not product cost, not carried in inventory
product costs have three components
direct materials
direct labor
overhead
direct material
materials that are a part of the final product and can be directly traced to the goods being produced
direct labor
the labor that can be directly traced to the goods being produced
manufacturing overhead
all product costs other than direct materials and direct labor, also known as factory burden, support, or indirect manufacturing costs
per unit product cost=
total product cost/ number of units produced
prime cost=
dm+dl
conversion cost=
dl+moh
period costs are expensed
in the period in which they are incurred
common period costs
selling costs
administrative costs
non-production pp&e
selling costs
those costs necessary to market, distribute, and service a product or service
administrative costs
include research, development, and general administration of the organization and cannot be assigned to either selling or production
enon-production pp
delivery trucks, corporate headquarters- depreciated over estimated useful life
uses of cost information
cost volume profit analysis
responsibility accounting (cost management)
pricing decisions
evaluating alternative choice decisions
litigating or defending cost-related legal issues
cost behavior
describes whether a cost changes when the level of output changes, it is the foundation upon which managerial accounting is built
fixed cost
a cost that does not change in total as output changes
variable cost
increases/decreases in total with an increase/decrease in output
mixed cost
has both fixed and variable components (ex. renting a car with a flat fee and a rate per mile)
cost driver
a causal factor that measures the output of the activity that leads (or causes) costs to change. identifying and managing drivers helps mangers better predict and control costs
relevant range
range of output over which the assumed cost relationship is valid for the normal operations of a firm
two types of fixed costs
discretionary fixed costs
committed fixed costs
discretionary fixed costs
fixed costs that can be changed or avoided relatively easily in the short run at management discretion (ex. advertising)
committed fixed costs
fixed costs that cannot be easily changed (ex. lease)
semi-variable costs
variable costs that increase/decrease with output, but not at a constant/linear rate
step costs
discontinuous cost functions, display a constant level of total cost for a range of output and then jump to a higher level (or step) of total cost at some point, where they remain for a similar range of output before jumping/stepping again
purpose of a cost formula
provide a quantitative estimate of both total fcs and the vc per unit of the cost driver(s), with the cost formula, managers can predict total costs at variable levels of output
the three commonly used methods of separating a mixed cost into its fixed and variable components
the high low method
the scatter graph method (eyeballing)
the method of least squares (regression)
the simplifying assumption of a linear cost relationship
total cost= total fixed cost + (variable rate x units of output)
high low method
method of separating mixed costs into fixed and variable components by using just the high and low data points, provides managers with a quick way to estimate cost behavior
high low method equation for variable rate
variable rate= (high point cost- low point cost)/ (high point output- low point output)
calculation to find the fixed cost using the variable rate found with the high low equation
fixed cost= total cost at high point- (variable rate x output at high point) (essentially y=mx+b reframed to b=y-mx)
what does the goodness of fit test tell us
how well the independent variable (s) predict(s) the dependent variable on a 0.00- 1.00 scale
the percentage of variability in the dependent variable explained by an independent variable is called the
coefficient of determination (R squared)
what does a high R squared suggest?
your independent variable is a strong cost driver
what does a low R squared suggest?
your independent variable is not strongly associated with the costs you are trying to predict
the method of least squares (regression)
a statistical way to find the best-fitting line through a set of data points
what is managerial judgement used for
determining cost behavior and is by far the most widely used method in practice
absorption costing
required by gaap
assigns all manufacturing costs to the product
dm, dl, vmoh & fmoh define the cost of a product
fixed overhead is viewed as a product cost, assigned to the product, and not expensed until the product is sold- inventoriable
variable costing
assigns only variable manufacturing costs to the product; these costs include dm, dl, & vmoh
rationale that fmoh is a cost of capacity, seen as expiring that period, charged in total against the revenues of the period
main difference between variable & absorption costing
treatment of fixed factory overhead
if production > sales
absorption income > variable income
production < sales
absorption income < variable income
if production = sales
absorption income = variable income
cost-volume-profit (cvp) analysis
estimates how changes in the following three factors affect a company’s profit:
costs (both variable and fixed)
sales volume
price
what do companies use cvp for?
to help them calculate and reach important benchmarks, such as breakeven point
breakeven point
where total rev= total costs (the pt of 0 profit), level of sales at which cm just covers fixed costs so net income is 0
contribution margin
the difference between sales and variable expense, the amt of sales revenue left over after all the variable expenses are covered that can be used to contribute to fixed expense and op income
two options for calculating break even point in units:
op income= (price # of units sold) - (variable cost per unit number of units sold) - total fixed cost
break even units= fixed costs/ unit cm
to find breakeven revenue
multiply breakeven units by selling price (because price * units sold is sales rev)
OR
break even sales= total fixed expenses/ cm ratio
variable cost ratio
variable cost per unit/ selling price per unit
cm ratio
total contribution margin/ total sales
OR
cm per unit/ selling price per unit
why would we want to solve for break even point in sales dollars?
sales are typically recorded immediately, so the manager does not have to wait to have an income statement prepared in order to see how close the company is to breaking even
to find target income
same equations as breakeven, but we add the target income to the numerator (+ fixed costs)
what are the benefits of graphing cvp
helps managers clearly see the difference between vc and revenue
also helps them to understand quickly what impact an increase or decrease in sales will have on the breakeven point/ profit
cvp analysis assumptions
linear revenue and cost functions remain constant over the relevant range
selling prices and costs are known with certainty
all units produced are sold; there are not finished goods inventories
sales mix is known with certainty for multiple product break even settings
sales mix
the relative combination of products being sold by a firm
break-even packages =
total fc/ package cm
cvp analysis is a tool that managers use to handle:
risk and uncertainty
sensitivity analysis
a “what-if” technique that examines the impact of changes in underlying assumptions on an answer
margin of safety
the units sold or revenue earned above the break-even volume aka sales- break even units
operating leverage
the use of fixed costs to extract higher percentage changes in profits as sales activity changes, the measure of the proportion of fixed costs in a company’s cost structure, used as an indicator of how sensitive profit changes in sales volume
degree of operating leverage=
total cm/ op income
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Flashcard (97)