Chapter 8-11 Review

Flashcards about Pricing, Budgeting, Responsibility Accounting, and Balanced Scorecard.

What is the basic definition of pricing?

The money charged for a product or service, representing what a customer gives up to acquire it.

What are some factors to consider when setting prices?

Cost to make the product/service, target profit, customer willingness to pay, and whether the company is a price taker or price setter.

What is 'target costing'?

A cost management technique where the market determines a product's price, and the company focuses on controlling costs to achieve a desired profit.

Differentiate between price takers and price setters.

Price takers operate where products lack uniqueness and face heavy competition, emphasizing target costing. Price setters have more unique and branded products with less competition, using cost-plus pricing.

Describe the basic formula for calculating a target cost.

Market Price - Desired Profit = Target Cost

How to calculate markup percentage?

Markup (desired ROI per unit) / total unit cost = markup percentage

What strategies can a company employ if actual costs exceed target costs?

Reduce fixed and variable costs, enhance branding, differentiate products, or accept a lower profit margin.

What is 'cost-plus pricing'?

Setting a price by establishing a cost base and adding a markup to determine a target selling price.

What is a disadvantage of cost plus?

Doesn't factors in demand. Also, unit fixed costs change with change in sales volume

What is variable cost pricing?

Adding a markup to variable costs to set a price, avoiding the uncertainty of fixed-cost-per-unit calculations.

What is Time and material pricing system?

An approach using two pricing rates: one for labor (including direct labor and employee costs) and one for materials (including direct parts, materials, and a material loading charge).

How to calculate material loading percentage?

Material loading price / total invoice cost, parts and material = material loading percentage

Name three common transfer pricing methods

Market based, cost based, and negotiated

What are the minimum and maximum transfer prices set by?

The minimum transfer price is established by the selling division, and the maximum by the purchasing division.

What is the minimum transfer price when there is no excess capacity?

Variable cost per unit plus lost contribution margin per unit (opportunity cost).

Describe the effect of globalization.

Increases transfers between divisions located in different countries due to international trade.

What is a budget?

A formal written statement of management's plans for a specified future time period, expressed in financial terms.

What are some of the benefits of budgeting?

Helps management plan ahead and provides definite objectives for evaluating performance.

What is top-down budgeting?

An authorization approach with little or no input from lower-level management.

What is participative budgeting?

An interactive, collaborative approach involving lower-level managers in the budgeting process.

What is budgetary slack?

Intentionally lowering budget estimates to create a buffer for easier target achievement.

Name the two classes of budgets in the master budget?

Operating budgets and financial budgets.

What is the sales budget?

The first budget prepared, derived from the sales forecast.

Why is production budget derived from sales budget?

Shows units that must be produced to meet anticipated sales and desired ending finished goods inventory.

Differentiate between direct material units required for production and direct materials units to be purchased.

Direct materials units required for production + Desired ending direct materials units - beginning direct materials units = direct materials units to be purchased

What is the direct labor budget?

Shows quantity of hours and cost of direct labor necessary to meet production requirements.

What does the selling and admin expense budget project?

Anticipated operating expenses, distinguishing between fixed and variable costs.

What is the cash budget?

Shows anticipated cash flows, prepared in sequence, with three sections: cash receipts, cash disbursements, and financing.

What is the merchandise purchases formula?

Budgeted costs of Goods sold + Desired ending merchandise inventory - beginning merchandise inventory = required merchandise purchases

What is the difference between merchandising and manufacturing budgets?

Merchandisers use a purchase budget instead of a production budget and do not use manufacturing budgets (DM, DL, MOH).

What is critical to budgeting?

Coordinating professional staff needs with anticipated services.

How to Not for profit organizations budget?

Basis of cash flows (expenditures and receipts), starting with expenditures, not receipts. Management finds receipts needed to support planned expenditures.

What is budgetary control?

Use of budgets in controlling operations, with budget reports providing feedback on operations.

Static budget vs flexible budget

STATIC BUDGET: a projection of budget data at a single level of activity and does not change. FLEXIBLE BUDGET: Able to make room for activity

What is responsibility accounting?

Evaluating a manager's performance on matters directly under their control, assigning responsibilities for controllable costs.

What is a responsibility center?

A part of a business where managers are responsible for certain activities.

What are the 3 centers of responsibility?

Cost center, profit center, investment center

Distinguish Controllable vs uncontrollable costs.

A cost over which a manager has the power to influence is called a controllable cost. Costs incurred indirectly and allocated to a responsibility level are noncontrollable costs

What is a cost center?

Incur costs, does not directly generate revenues. Usually, a production or service department (manufacturing plant)

What is a profit center?

Incur costs but also generates revenues such as individual departments of a retail store or branch bank offices

What is an investment center?

Incurs costs, generates revenues, and has investment funds available for use, often a subsidiary company or a product line

What is a responsibility report for a cost center?

Results in responsibility reports which compare actual controllable costs with flexible budget data and Include only controllable costs in reports with no distinction

Controllable margin formula=?

Sales - vc - cfc (controllable fixed costs)

What is controllable margin?

excess of Controllable margin fc = sales - vc

What is a Residual income?

Determines whether the division has created any excess income above and beyond management expectations

What is the formula for a residual income?

Controllable margin - (minimum rate x average operating assets) = residual income

Define standard costs

Predetermined unit costs used as measures of performance.

What are standard costs also used for?

To estimate future cost

Contrast standards vs budgets

Standard is a unit amount; a budget is a total amount.

What two levels can companies set standards at?

Ideal standards and normal standards

In standard quantities, what do service companies use?

Standard costs too

What do variances measure?

The differences between total actual costs and total standard costs

When are variances favorable?

When actual costs < standard costs

When are variances unfavorable?

When actual costs > standard costs

Price variance formula

Actual quantity (actual price - standard price) [AQ (AP - SP)

Quantity variance formula

Standard price (Actual quantity - standard quantity) [ SP (AQ - SQ)

Total material variance formula

(AP x AQ) - (SP x SQ) or pv + qv

Direct Labor rate variances formula

AH x (AR - SR)

Direct Labor quantity variance formula

SR x (AH -SH)

What does a balanced scorecard measure?

N/A