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Acco 31 Managerial Accounting
Prof. Kren Powerpoint Notes
115
Accounting
Undergraduate 3
12/09/2008

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Term
Decentralization
Definition
the degree of decision making authority granted to subordinates in the firm (makes performance evals. hard)
Term
Control System Design
Definition
1st-best solution: base compensation & promotion on actions/hard work & effort (behavior based, rarely feasible so...) 2nd best solution: rewards based on results (outcome based)
Term
Responsibility Centers
Definition
separate, identifiable segments of an organization that have decision rights/control over cost, revenue, or investment/asset decisions

3 types - cost, profit, investment centers
Term
Types of Responsibility Centers
Definition
Cost Center - managers have control over costs/input mix

Profit Center - managers have control over revenues & costs

Investment center - managers have control over costs, revenues, & investment decisions
Term
Controllable Costs
Definition
costs incurred directly by a level of responsibility that are controllable at that level
Term
Non-Controllable Costs
Definition
costs incurred indirectly which are allocated to a responsibility level
Term
Common/Indirect Costs
Definition
caused by activities throughout the company that don't relate to one particular segment

Actions taken by a segment won't affect Total Common Cost - only the amount allocated to that segment
Term
Differences w/ Internal Reports & GAPP
Definition
1-Cost is organized by Behavior (VC/FC); use contribution format

2-Only direct costs included (don't allocate common costs to Responsibility Centers)
Term
ROI
Definition
sales margin x asset turnover

=income/sales x sales/avg. assets
Term
RI (residual income)
Definition
income - target income
=income - (hurdle rate x avg. assets)
Term
Problems w/ financial performance measures
Definition
accounting manipulations

short-run opportunistic behavior

financial entrepreneurship
Term
Advantages with financial performance measures
Definition
innovation

balanced scorecard

activity based management

operational measures
Term
Transfer Price
Definition
price paid for intracompany transfers of goods/services b/w segments or divisions

intracompany sales are all eliminated in consolidation; therefore, the company as a whole doesn't care about the dollar amount
Term
Revenues include...
Definition
sales to outsiders at market price & sales to other segments at transfer prices
Term
Costs include...
Definition
payments to external companies at market price & to other segments at transfer price
Term
Transfer Price Considerations
Definition
interdependence, decentralization, taxes, & financial reporting (GAPP)
Term
Transfer Price Pricing Systems
Definition
1 - cost based
2 - market based
4 - negotiated
Term
Transfer Price Objectives
Definition
1 - goal congruence
2 - cost efficiency
3 - divisional autonomy
Term
When can all transfer pricing objectives be met?
Definition
when prices are based on opportunity cost to seller
Term
Market Based System at Excess Capacity
Definition
opportunity cost is the incremental cost of output - close to variable cost (transfer at minimum of VC b/c FC stay the same)
Term
Problems of Market Based System
Definition
Lack of an active market, biased external quotes, outside buying may be limited, & seller may have excess capacity
Term
Cost-Based System
Definition
always leads to sub-optimization
(only meets 3rd objective (divisional autonomy)but it's easy to understand/calculate)
Term
Negotiated Based Sytem
Definition
meets all 3 objectives & is consistent w/ decentralization

BUT sub-optimization may occur
Term
Should/Will they transfer???
Definition
Should they? consider the effects on company profits.

Will they? consider effects on segment margin.
Term
Incremental Analysis
Definition
decisions involve a choice among alternative courses of action (aka differential analysis)
Term
Relevant Data
Definition
data that vary/change in the future among alternatives
Term
Steps in Management's Decision Process
Definition
1. Identify problem & assign responsibility
2. Determine & evaluate possible courses of action
3. Make a decision
4. Review results of decision
Term
Avoidable Cost
Definition
future cost that differ or change b/w alternatives. Any cost that can be eliminated in whole or in part as a result of choosing one course of action over another (aka differential, relevant, or incremental costs)
Term
Opportunity Cost
Definition
potential benefit that's given up when one course of action is chosen over another
Term
Sunk Cost
Definition
costs that have already been incurred & can't be changed by any decisions made now or in the future (ex: NBV & depreciation)
Term
Outsourcing
Definition
the decision to buy parts/services rather than make
Term
Advantages of making product internally
Definition
1-reduces dependence on suppliers
2-ensures smoother flow of parts & materials for production
3-quality control may be easier
4-company can realize profits on parts & materials
Term
Advantages of buying from a supplier
Definition
1-supplier can realize economies of scale
2-specialized supplier may be able to respond quicker & at less cost to changing future needs of the company
3-changing technology makes making one's own parts riskier than purchasing
Term
Joint-Products
Definition
multiple-end products
Term
Joint Costs
Definition
all costs incurred prior to the point at which the products are separately identifiable (aka the split-off point)

Sunk Costs - they're not relevant in any sell-or-process-further decisions

allocated to individual products on the basis of relative sales value
Term
Decision Rules for Joint-Processing
Definition
process further as long as the incremental revenue from such processing exceeds the incremental processing costs

Joint Processing costs are sunk at split-off point & aren't relevant
Term
Decision Rules on eliminating unprofitable segments
Definition
retain the segment unless fixed costs eliminated exceed the contribution margin lost

total CM - directly traceable/avoidable FC = segment margin

If total CM > directly traceable & avoidable FC = keept the segment
Term
Constrained Resource
Definition
when a constraint exists, a company should select a product mix that maximizes the total CM (contribution margin) earned since fixed costs usually remain unchanged

promote products that have the highest CM when there are no restraints

When constraints exist, promote the product that earns the highest CM in relation to the constraining resource
Term
Bottleneck
Definition
the machine or process that is limiting overall output/the constraint
Term
Constraint
Definition
when a limited resource is limiting/restricting the company's ability to satisfy demand
Term
Selling Price =
Definition
Selling Price = [1 + Markup]x Cost
Term
Economist's Approach to Pricing
Definition
fixed costs have no variance, cost always refers to variable costs

markup % is based on price elasticity of demand

cost is based on variable cost
Term
Economist's Approach: Elasticity of Demand
Definition
the price elasticity of demand measures the degree to which the unit sales of a product/service is affected by a change in price
Term
Economist's Approach: Inelastic Demand
Definition
differs since change in price has little effect on # units sold
Term
Economist's Approach: Elastic Demand
Definition
dramatically changes # units sold when price changes
Term
Cross Elasticity
Definition
occurs if a change in price affects demand for other substitute products
Term
Profit Maximizing Price =
Definition
(1 + (-1 / (1+Ed) ) ) x VC per unit
Term
Problem with the Economist's Approach
Definition
if there's multiple cost-drivers you may not be able to separate into VC & FC
Term
Absorption Costing Approach
Definition
assumes that customers need the forecasted unit sales & will pay whatever price the company decides to charge

careful: may not always be a valid assumption
Term
Markup % on absorption cost
Definition
[ ((required ROI x investment) + SGA expenses)) / (absorption product cost x unit sales) ]
Term
Target Costing
Definition
the process of determining the max. allowable cost for a new product & then developing a prototype that can be made for that max. target cost figure

target cost = anticipated selling price - desired profit

market research determines the selling price, management computer mfg. cost for an acceptable profit margin, & engineers/cost analysts design product for the allowable cost
Term
Capital Investment Decision
Definition
concerned with process of planning, setting goals & priorities, arranging financing & using certain criteria to select long-term assets
Term
Steps in Budgeting Process
Definition
1-estimate feasibility
2-estimate benefits & cash flows
3-approval procedures
4-perform financial analysis
5-schedule & controlling implementations
6-post audit (to keep managers honest)
Term
Typical Cash Outflows
Definition
repairs, maintenance
initial investment
working capital (at time zero)
incremental operating costs

depreciation is NOT a current cash outflow
Term
Typical Cash Inflows
Definition
salvage value of old machine
release of working capital (at end of project)
incremental revenues
recovery of initial investment
reduction of costs
Term
Working Capital =
Definition
current assets - current liabilities
Term
Screening decisions
Definition
pertain to whether or not some proposed investment is acceptable

Discount Methods: NPV or IRR
Non-Discount Methods: Payback or Simple Rate of Return
Term
Preference Decisions
Definition
attempt to rank acceptable alternatives from most to least appealing (present value or profitability index)
Term
NPV =
Definition
PV of Cash Inflows - PF of Cash Outflows

cost of capital usually is min. req. rate of return used in NPV

NPV > 0 = accept
<0 = reject
Term
NPV & IRR Assumptions
Definition
all cash flows other than initial investment occur at end of periods & all are generated by an investment project immediately reinvested at a rate of return equal to the discount rate
Term
Internal Rate of Return (IRR)
Definition
ROR promised by an investment project over its useful life

computed by finding the discount rate that will cause the NPV of the project to be zero

if annual cash flows aren't identical, a trial & error process must be used to find the internal ROR

if IRR >/= Cost of Capital = Accept
IRR < Cost of Capital = reject

Cost of Capital acts as a Hurdle Rate a project must clear
Term
Profitability Index
Definition
PV of Cash Inflows / Investment Required

or

(NPV+Initial Investment) / Investment Required

The higher the PI, the more desirable the project
Term
Payback Period
Definition
investment required/net annual cash inflow

FYI: Payback method wants just CASH FLOWS NOT NI so don't include Depreciation!
Term
Simple Rate of Return
Definition
annual incremental NOI / (initial investment - salvage value of any sale of old equip.)

or

(cost savings - deprec. expense) / (initial investment - SV of sale of old equip.)

SRR >/= company's cost of capital = accept
Term
NI =
Definition
Revenues - Expenses - Depreciation = NI

FYI: Payback method wants just CASH FLOWS NOT NI so don't include Depreciation!
Term
Interest =
Definition
principle x interest rate x time
Term
Money has a time value.
Table approach =
PV =
Definition
FV = PV x FV$1factor
PV = FV x PV$1factor
Term
Annuity requires...
Definition
1. periodic payments/receipts (called RENTS) of the same amount
2. same-length interval b/w such RENTS,
3. compounding of interest once each interval
Term
2 Types of Annuity
Definition
Ordinary Annuity: payments occur at end of each period

Annuity Due: payments occur at beginning of each period
Term
PV of Ordinary Annuity
Definition
PV = Payment x PVordinary annuity factor
Term
Process Costing (ch. 3)
Definition
identical products
same avg. cost per unit
Term
Job-Order Costing (ch. 3)
Definition
unique products
mfg. to order
allocate cost to each job
Term
Job Cost Sheet (ch. 3)
Definition
a form prepared for a job that records the materials, labor & mfg overhead costs charged to that job
Term
Cost Driver (ch. 3)
Definition
a factor that causes overhead costs
(actual activity, allocation base, denominator level; always per DM, DLH, DL, or machine hours)
Term
Overhead Applied =
(ch. 3)
Definition
OHD rate x actual activity
Term
CGS Statement (ch. 3)
Definition
Beg. FG Inv
+ CGM
= CGA
- End FG Inv
= Unadj. CGS
+ underapplied OHD
- overapplied OHD
= adjusted CGS
Term
Variable Costs
Definition
vary in total with respect to activity changes, but stay constant on a cost/activity basis
Term
Fixed Costs
Definition
stay constant in total regardless of activity changes, but decrease on a cost/activity basis
Term
Mixed costs
Definition
increase in total w/ respect to changes in activity level & decrease on a cost/activity basis

TC = FC + VC(x)
Term
Committed Fixed Costs
Definition
long-term cost decisions that can't be changed w/o seriously affecting the firm

ex: purchase of land, building or equip
Term
Discretionary Fixed Costs
Definition
short-term (annual) cost decisions that can be changed for periods of time w/o affecting long-term goals of the firm

ex: training or advertising
Term
GAPP Income Statement
Definition
Sales
-CGS (product cost)
=GP
-S&A (period costs)
-Admin
=NI
Term
Contribution Method Income Statement
Definition
Internal Use Only - by behavior
Sales
-VC
=CM
-FC
=NI/PBT
Term
Contribution Margin
Definition
the amount each unit contributes towards covering the fixed costs of the firm
Term
Sales Mix
Definition
refers to the relative proportion in which a firm's products are sold

must stay constant for us to do calculations
Term
Cost Volume Process
Definition
the study of how profits respond to changes in the level of selling prices, sales volume, variable costs/unit, total fixed costs, & mix of products sold
Term
CM Ratio
Definition
unit CM / unit Sales price
Term
Profit Before Tax (PBT) =
Definition
Total Sales - Total Cost
= Sales(x) - TC

TC = FC + VC(x) so...

Sales (x) - VC (x) - FC = PBT
OR
CM(x) - FC = PBT
Term
Breakeven Point
Definition
Total CM - Total FC
CM(x) - FC

or CM(x)-FC=0
Term
Objective Desired Profit
Definition
CM(x) - FC = ___desired profit
Term
Margin of Safety
Definition
excess of budgeted (or actual ) dollar sales over the break-even sales level

= Total Sales - Break-even Sales
Term
Margin of Safety Ratio
Definition
margin of safety/total sales
Term
CM ratio for predicting increase in PBT
Definition
Increase in Sales
x CM ratio
=Increase in CM
- Increase in FC
=Increase in PBT
Term
Operating Leverage
Definition
a measure of how sensitive net operating income is to %change in sales

Degree of Operating Leverage = CM/PBT
must be recalculated at every sales level
Term
Using Operating Leverage to find % increase in Profits
Definition
% increase in sales
x degree of operating leverage
= % increase in profits
Term
Point of Indifference
Definition
PBTold - PBTnew = CMold(x) - FC old = CMnew(x)-FCnew
Term
Absorption costing / Full cost method

Cost of Product & Income Statement
Definition
all mfg. costs are product costs

Cost of Product = DM + DL + VOHD + FOHD

Income Statement:
Sales
-CGS
=GP
-VSGA
-FSGA
=NI

*changes in production levels affect NI*
Term
Variable Costing

Cost of Product & Income Statement
Definition
only variable mfg. costs are product costs

Cost of Product = DM + DL + VOHD

Income Statement:
Sales (total sold x selling price)
- VC (beg fg inv + cgm - end fg inv)
-VSGA
=CM
-FOHD
-FSGA
=NI
Term
Reconciliation of Net Income
Definition
Variable Costing NI
+ FOHD deferred in EI (# units in EI x FOHD/unit)
- FOHD released from BI (# units in BI x FOHD/unit)
=Absorption Costing NI
Term
Behavioral Implications of Budgeting
Definition
Budgetary Slack - "padding the budget", intentionally underestimating revenue or overestimating costs in order to enhance the person's performance evaluation

Self-Imposed/Participative Budgeting: people perform better & make greater attempts to achieve a goal if they have been consulted in setting the goals
Term
Production Budget
Definition
shows what must be produced to meet sales forecasts

Budgeted unit sales
+ desired EI
= Total Needs
- beg inv
= Required production
Term
Direct Materials Budget
Definition
details the amount of raw materials that must be acquired to support production & provide adequate inventories

Req. production in units
Quantity measure needed per unit
= raw materials req for production
+ desired EI
= total raw material needs
- beg inv
= raw materials to be purchased
x cost of raw materials per qty measure
= cost of raw materials to be purchased
Term
Cash Budget
Definition
Beg Cash Balance
+ receipts
= Total Cash Available
- disbursements
= excess (deficiency)
+ financing
= cash balance, ending
Term
Actual Cost Systems
Definition
charge actual DM, actual DL, & actual OHD costs to products

no OHD rate

rarely used
Term
Normal Cost Systems
Definition
charge actual DM & actual DL costs to products

OHD rate used to apply OHD to products

often used
Term
Standard Cost Systems
Definition
charge standard DM & standard DL costs to products

OHD rate used to apply standard amount of OHD to products

standard input allowed for actual output at standard rate

often used
Term
DM Price Variance =
Definition
AQpurchased (AP vs SP)
Term
DM Quantity (Usage) Variance
Definition
SP (AQused vs. SQallowed)
Term
Favorable Variance =
Definition
standard > actual
Term
DL Rate Variance
Definition
AH (AR vs SR)
Term
DL Efficiency Variance
Definition
SR (AH vs SHallowed)
Term
VOHD Spending Variance
Definition
AH (AR vs SR)
Term
VOHD Efficiency Variance
Definition
SR (AH vs SHallowed)
Term
The balanced scorecard & it's performance measures
Definition
management translates its strategy into performance measures that employees understand & accept

Performance Measures:
Financial
Customer
Internal Business Processes
Learning & Growth
Term
Delivery Performance Measures:
Throughput =
Mfg. Cycle Efficiency =
Definition
Order received - wait time - Production started - Process time+Inspection time+Move time+Queue time - Goods Shipped

Throughput time (aka mfg cycle time or lead time)=process+inspection+move+queue

Mfg Cycle Efficiency = value-added time (process time) / throughput

Process time is the only value-added time
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