Final exam review

Introduction to Variances

• Definition of Variances
    - Unfavorable Variances: Negative deviations from expected outcomes.
    - Favorable Variances: Positive deviations from expected outcomes.

• Example:
    - Labor costs increased: Unfavorable variance.
    - Revenue decreased: Unfavorable variance.
    - Revenue increase: Favorable variance, which is beneficial for the company.

Interpretation of Variances

• Importance of caution when interpreting variances.
    - Favorable does not always imply a good outcome and vice versa.
    - Avoid making absolute statements; variances can be context-dependent.

Flexible Budget Variances

• Insight into management's efficiency.

• Cost variances require careful analysis to understand their causes.

• Example of a favorable materials variance:
    - Purchasing agents obtaining goods at lower prices or buying inferior materials to reduce costs, potentially sacrificing quality.

Standards in Budgeting

• Definition of Standards: Benchmarks for performance evaluation.
    - Importance in preparing static and flexible budgets.

• Standard costs are compared to actual performance.
    - Management by Exception: Focuses on significant deviations from standard costs.

• Example:
    - A company slogan: "We exceed the standard."

Generally Accepted Accounting Principles (GAAP)

• Standards in the U.S. for accounting practices.

• Performance reports highlight differences between actual and standard costs for management attention.

• Materiality Concept:
    - Immaterial: Non-financially impactful deviations.
    - Material: Significant enough to influence decision-making.

Asset Types and Their Treatment

• Tangible vs. Intangible Assets:
    - Tangible assets: Subject to depreciation.
    - Intangible assets: Subject to amortization.
    - Natural resources: Subject to depletion.

Managerial Evaluation

• Managers evaluated based on performance relative to specific goals and objectives.
    - Responsibility centers include cost centers, investment centers, etc.

Return on Investment (ROI)

• Definition:
    - ROI is the ratio of wealth generated to the amount of invested operating assets.
    - Formula: $ROI = rac{ ext{Operating Income}}{ ext{Operating Assets}}$

• Application:
    - Different divisions can have their own calculated ROI.
    - Example Scenario: Calculating ROI from a high yield savings account.
      - Investment: $100,000
      - Income: $3,000
      - ROI Calculation: ROI = rac{3,000}{100,000} = 0.03 ext{ or } 3 ext{%}

Qualitative vs. Quantitative Considerations

• Importance of qualitative considerations alongside quantitative ones in decision-making.

• Example:
    - Using operating income and operating assets instead of net income and total assets for more accurate performance measurement.

Sub-Optimization and Residual Income

• Definition of Sub-Optimization: Managers make decisions that benefit themselves but are not optimal for the company.

• Residual Income Formula: $ext{Residual Income} = ext{Operating Income} - ( ext{Operating Assets} imes ext{Desired ROI})$

• Note on Calculating Percentages: Use decimal form (e.g., 18% = 0.18).

Aggregated vs. Disaggregated Information

• Aggregated Information: Information compiled for the entire company.

• Disaggregated Information: Detailed information segmented for specific areas.

Balanced Scorecard

• Definition: A managerial performance evaluation method that includes both financial and non-financial measures.

• Examples of Measures:
    - Quantitative: Standard costs, income measures, ROI, residual income.
    - Qualitative: Defect rates, cycle time, on-time deliveries, customer satisfaction, safety measures.

Managerial Practices

• Importance of both quantitative and qualitative measures in decision-making.

• Recognition that everything has limitations, including internal controls, budgets, audits, and financial statements.

Accounting Structures and Terms

• Understanding the structure of income statements for manufacturers and retailers:
    - Manufacturer: Direct materials, direct labor, manufacturing overhead.
    - Retailer: Sales revenue, various expenses.

• Terms:
    - Net Income, Bottom Line, Profit, Earnings, Retained Earnings, and Unearned Revenue (liability).

Key Accounting Concepts

• Accrual Accounting: Revenue must match expenses regardless of cash receipts.
    - Example of accounts receivable and its impact on total assets.

• Importance of understanding the difference between revenues earned versus cash received.

Conclusion

• Review of chapters covered, including internal controls, the importance of accounting principles, and ethical implications of financial data interpretation.

• Reminder of class responsibility assignments.

• Engage in discussions about entity disadvantages (e.g., double taxation and government regulation disadvantages of corporations).

• Importance of real-world application versus textbook theory.