acc final

what are budgets useful for?

planning and controlling operations

budgetary control

the use of budgets in controlling operations

where does budget control take place?

by means of budget reports that compare actual results with planned objectives

what does the budget reports provide?

management with feedback on operations

budgetary control activities

• developing budgets

• analyzing the differences between actual and budgeted results

• taking corrective action

• modifying future plans if necessary

what should the reporting system do?

• identify the name of the budget report such as the sales budget or the manufacturing overhead budget

• state the frequency of the report such as weekly, or monthly

• specify the purpose of the report

• indicate the primary recipients of the report

what is a static budget report?

a projection of budget data at one level of activity, data for different levels of activity are ignored

when is a static budget appropriate in evaluating a manager's effectiveness in controlling costs?

• the actual level of activity closely approximates the master budget activity level, and/or

• the behavior of the costs in response to changes in activity is fixed

flexible budget report

• projects budget data for various levels of activity

• is a series of static budgets at different levels of activity

• recognizes that the budgetary process is more useful if it is adaptable to changes in operating conditions

• can be prepared for each of the types of budgets included in the master budget

what are unit variable costs?

used to determine the total variable costs allowed at an activity level that differs with the static budget

what are the steps to developing a flexible budget?

• Identify the activity index and the relevant range of activity

• identify the variable costs, and determine the budgeted unit variable cost of activity for each cost

• identify the fixed costs, and determine the budgeted amount for each cost

• prepare the budget for selected increments of activity within the relevant range

total budgeted costs equation

fixed costs + variable costs

flexible budget reports

consists of two sections

• production data for a selected activity index

• cost data for variable and fixed costs

what are flexible budget reports used for?

to evaluate a manager's performance in production control and cost control

when are flexible overhead budget reports reliable?

• both actual and budget costs are based on the activity level worked

what is the concept of responsibility accounting?

• involved accumulating and reporting relevant costs and revenues

• accumulated on the basis of the manager who has the authority to make the day to day decisions about the items

• a manager's performance is evaluated on the matters directly under the manager's control

responsibility accounting can be used at every level of management in which the following conditions exists:

• costs and revenues can be directly associated with the specific level of management responsibility

• the costs and revenues can be controlled by employees at the level of responsibility with which they are associated

• budget data can be developed for evaluating the manager's effectiveness in controlling the costs and revenues

responsibility accounting

• gives managers responsibility for controllable costs at each level of authority

• may extend from the lowest level of control to the top levels of management

responsibility accounting company process:

• measure and report the effectiveness of the individual's performance for the specified activity

• report that measure upward throughout the organization

responsibility accounting in a decentralized company

• responsibility accounting is especially valuable in a decentralized company

• decentralization means that the control of operations is delegated to many managers throughout the organization

• a segment is an identified area of responsibility in decentralized operations

differences between responsibility accounting and budgetary control

responsibility accounting:

• marks a distinction between controllable and noncontrollable items

• performance reports include only items controllable by an individual manager

a controllable cost

is controllable by a manager at the level of responsibility with which it is associated

allocated costs to a responsibility level:

are considered to be non controllable at that level

what is controllable by top management?

all costs, because of the broad range of its authority

principles of performance evaluation

• a management function that compares actual results with budget goals

• performance evaluation includes both behavioral and reporting principles

management by exception:

• occurs when management investigates all significant differences

• enables top management to focus on problem areas

• is based upon guidelines for identifying an exception

what is the criteria for management by exception?

• materiality, with differences either over or under budget by specified percentage investigated

• controllability, with the focus on items for which managers are able to control

behavioral principles of performance evaluation should include:

• Managers of responsibility centers should have direct input into the process of establishing budget goals for their area of responsibility

• The evaluation of performance should be based entirely on matters that are controllable by the manager being evaluated.

• Top management should support the evaluation process.

• The evaluation process must allow managers to respond to their evaluations.

• The evaluation should identify both good and poor performance

performance reports should:

• Contain only data that are controllable by the manager of the responsibility center

• Provide accurate and reliable budget data to measure performance

• Highlight significant differences between actual results and budget goals

• Be tailor-made for the intended evaluation by ensuring only controllable costs are included

• Be prepared at reasonable time intervals

responsibility reporting system

• involves the preparation of report for each level of responsibility in the company's organization chart

• permits management by exception at each level of responsibility

types of responsibility centers

• a cost center incurs cost (and expenses) but does not directly generate revenues

• a profit center incurs costs (and expenses) and also generates revenues

• an investment center incurs costs (and expenses), generates revenues, and has control over investment funds available for use

examples of responsibility centers

cost center, profit center, investment center

cost center

usually a production center such as one that manufactures components, or service departments such as a company's maintenance department

profit center

individual departments of retail stores and branch offices of banks

investment center

companies such as Olive Garden, Longhorn Steakhouse, and Bahama Breeze, which are subsidiaries of Darden, the parent company

responsibility accounting for cost centers

evaluation of a manager's performance for cost center (based on his or her ability to meet budget goals for controllable costs)

responsibility reports for cost centers

• compare actual controllable costs with flexible budget data

• include only controllable costs

responsibility accounting for profit centers

• the operating revenues and variable expenses are controllable by the profit center, manager

direct fixed costs or traceable costs

are costs that relate specifically to a responsibility center and are incurred for the sole benefit of the center

indirect fixed costs

pertain to a company's overall operating activities and are incurred for the benefit of more than one profit center

Responsibility report for a profit center

• shows budgeted and actual controllable revenues and costs

• the report is prepared using the cost volume profit income statement format

Responsibility report for a profit center format

• controllable fixed costs are deducted from contribution margin

• the excess of contribution margin over controllable fixed costs is identified as controllable margin

• controllable margin is considered to be the best measure of the manager's performance in controlling revenues and costs

• noncontrollable fixed costs are not reported

important characteristics of an investment center

managers can control or significantly influences the investment funds available for use

return on investment (ROI)

• primary basis for evaluating the performance of an investment center manager

• shows the effectiveness of the manager in utilizing his or her controllable assets

ROI equation

controllable margin / average operating assets

ROI and its components

• operating assets consist of current assets and plant assets used in operations by the center and controlled by the manager.

• Non Operating assets such as idle plant assets and land held for future use are excluded.

• Average operating assets are usually based on the cost or book value of the assets at the beginning and end of the year.

improving ROI

• increasing controllable margin and/or

• reducing average operating assets

residual income

• the income that remains after subtracting from the controllable margin the minimum rate of return on a company's average operating assets

• used to evaluate performance using the minimum rate of return

what is minimum rate of return?

the rate at which a company can cover its costs and earn a profit

performance based on ROI

• can be misleading

• can cause managers to reject projects that would increase income

residual income weaknesses

ignores the fact that one division might use substantially fewer assets to attain the same level of residual income as another division

in managerial accounting, standards are?

• a predetermined unit cost

• used as measures of performance

• often incorporated into a cost accounting system

standards compared to budgeted amounts

• both are predetermined costs

• both contribute to management planning and control

• a standard is a unit amount, whereas a budget is a total amount

advantages of standard costs

• Facilitate management planning

• Prompt greater economy by making employees more "cost-conscious"

• Useful in setting selling prices

• Contribute to management control by providing basis for evaluation of cost control

• Useful in highlighting variances in management by exception

• Simplify costing of inventories and reduce clerical costs

setting standard costs

requires input from all persons who have responsibility for costs and quantities

standards may be set at one of two levels:

• ideal standards represent optimum levels of performance under perfect operating conditions

• normal standards represent efficient levels of performance that are attainable under expected operating conditions

sources of standard costs of direct materials and direct labor

multiple sources of information are needed to set manufacturing cost standards

• standard cost of direct materials

• standard cost of direct labor

• other standards

standard cost of direct materials

purchasing agents, product managers, quality control engineers, and production supervisors

standard cost of direct labor

• pay rate data from the payroll department

• labor time requirements from industrial engineers

other standards

historical cost data and knowledge of how costs respond to changes in activity levels from managerial accountant

direct materials quantity standard

is the quantity of direct materials that should be used per unit of finished goods

• expressed as a physical measure, pounds, barrels

• should include allowances for unavoidable waste and normal spoilage

manufacturing overhead standards

based on a standard predetermined overhead rate

how is overhead rate determined?

determined by dividing budgeted overhead costs by an expected standard activity index

how to get the standard manufacturing overhead rate per unit?

the predetermined overhead rate x activity index quantity standard

how to calculate total standard cost per unit?

standard costs of direct materials + standard costs of direct labor + standard cost of manufacturing overhead

variances

are the differences between total actual costs and total standard costs

favorable variances

• exist when actual costs are less than standard costs

• increase profit

• indicate efficiencies in incurring costs and in using resources

unfavorable variances

• exist when actual costs exceed standard costs

• decrease profit

• suggest that too much was paid or that there were inefficiencies in using resources

how to calculate total variance

actual costs - standard costs

analyzing variances

begins by determining the cost components that comprise the variance

materials price variance

• quantity is constant at the actual quantity

• price varies

materials quantity variance

• price is constant at the standard price

• quantity varies

when is a matrix for direct materials used

• to compute the amounts using the equations for each cost component first, and then to determine the variances

• because it shows a convenient structure for determining the variances

causes of materials price variances

Purchasing department is responsible

• For availability of quantity and cash discounts, the quality of the materials requested, and the delivery method used

May be beyond the control of the purchasing department due to

• Unexpected price increases

• Actions by groups over which the company has no control

causes of materials quantity variances

Production department is responsible

• For inexperienced workers, faulty machinery, or carelessness

Purchasing department is responsible

• If materials obtained by the purchasing department are of inferior quality

labor price and labor quantity variances

• help managers to determine if they have met their labor price and quantity objectives

• are determined using the same process as direct materials variances

what is total labor variance

the difference between the amount actually paid for labor and the amount that should have been paid

how to calculate total labor variance

(actual hours x actual rate) - (standard hours x standard rate) = total labor variance

labor price variance

• quantity is constant at the actual quantity

• price varies

labor quantity variance

• price per hour is constant at the standard rate

• quantity of hours varies

causes of labor price variances

Result from paying different wages than expected

• Responsibility rests with the manager who authorized the wage change

Result from a misallocation of workers

• Responsibility of the production department

causes of labor quantity variances

Relate to the efficiency of workers

Responsibility of the production department

• May be poor training, worker fatigue, faulty machinery, or carelessness

• May cause workers to use excess time due to inferior materials

• May be due to workers that are exceptionally efficient

total overhead variance

the actual overhead costs less overhead costs applied based on standard hours allowed at normal capacity for the amount of goods produced

causes of manufacturing overhead variances

• over or under spending on overhead items

• inefficient use of overhead

over or under spending on overhead items

• higher or lower than expected use of indirect materials, indirect labor, or factory supplies

• increases or decreases in indirect manufacturing costs

• generally responsibility rests with the production department

inefficient use of overhead

• inefficient use of direct labor or machine breakdowns, production department responsibility

• lack of sales orders, responsibilities rest outside production department

where should variances be reported?

all should be reported to appropriate levels of management as soon as possible so that corrective action can be taken

what is the income statement presentation of variances

under a standard cost accounting system, cost of goods is stated at standard cost and the variances are disclosed separately

unfavorable variances:

increase cost of goods sold; this decreases income

favorable variances:

decrease cost of goods sold; this increases income

balanced scorecard

incorporates financial and non-financial measures in an integrated system that links performance measurement with a company's strategic goals

balanced scorecard evaluation perspectives

the balanced scorecard evaluates company performance from a series of perspectives

the four most commonly used perspectives?

financial, customer, internal process, learning and growth

financial perspective

the most traditional view of the company, it employs the financial measures of performance used by most firms (ex: return on assets, net income, credit rating, share prices, profit per employee)

customer perspective

• evaluates how well the company is performing from the viewpoint of those people who buy and use its products or services

• measures how well the company compares to competitors in terms of price, quality, product innovation, customer service, and other dimensions

internal process perspective

• Evaluates all internal operating processes and critical aspects of the value chain critical to success

• Includes product development, production, delivery and after-sale service

• Aims to ensure effective and efficient operations of a company

(ex: stockouts, waste reduction, labor utilization rates)

learning and growth perspective

• Evaluates how well the company develops and retains its employees

• Includes an evaluation of such things as employee skills, employee satisfaction, training programs, and information dissemination

(ex: training hours, ethics violations, reportable accidents)

linked process across balanced scorecard perspectives

• objectives are linked across perspectives

• ties performance measurement to company goals

linked process

• financial objectives set first

• objectives set in the other perspectives in order to accomplish the financial objectives

balanced scorecard does the following:

• Employs both financial and nonfinancial measures

• Creates linkages so that high-level corporate goals can be communicated all the way down to the shop floor

• Provides measurable objectives for such nonfinancial measures as product quality, rather than vague statements such as "we would like to improve quality"

• Integrates all of the company's goals into a single performance measurement system, so that an inappropriate amount of weight will not be placed on any single goal