ACCT 2020 1nd Edition Exam 4 Study Guide Chapters 11 12 8 Chapter 11 Standard Costs and Variances I Direct materials quantity and price variances Many companies use a standard cost system COVERED IN THE APENDIX Determine in advance what the standard cost should be for any product they make Apply costs to inventory to determine costs Instead of tracking direct hours or materials companies just use the standards to apply the cost How do we come up for the standard costs Standard Cost of Material per unit of finished good FG o Standard quantity SQ per unit of FG x Standard Price SP per unit of Raw Material Ex Feet of wood per table x Cost of wood per foot Variances 1 Material Price Variance Actual Quantity purchases x Actual Price AQ x SP Same as AQ AP SP 2 Material Quantity Variance II Actual Quantity Used x SP Standard Quantity x SP Same as SP Actual Quantity Standard Quantity Negative Favorable Variance Positive Unfavorable Variance Direct labor efficiency and rate variances Standard Cost of Labor per unit of FG o Standard Hours SH of Direct Labor per FG x Standard Rate SR per hour Variances 1 Labor Efficiency Variance AH x SR SH x SR SR AH SH Negative Favorable Variance Positive Unfavorable Variance 2 Labor Rate Variance Actual hours x Actual Rate AH x SR Same as AH AR SR III Variable manufacturing overhead efficiency and rate variances Variable Manufacturing Overhead M OH per unit of FG o SH or DLH or MHrs x Variable portion of the Predetermined OH Rate POHR Whatever the allocation base is used in the POHR that is multiplied by the variable portion of the M OH POHR Total Est Vari M OH Total Est Fixed M OH Total Estimated Activity in allocation base Variances 1 Variable Manufacturing Overhead Rate Variance AH x AR AH x SR Same as AH AR SR AH x AR given usually as actual variable Manufacturing overhead 2 Variable MOH Efficiency Variance IV AH or DLH or MHrs x SR SH or DLH or MHrs x SR Same as SR AH SH Negative Favorable Variance Positive Unfavorable Variance Fixed overhead volume and budget variances 1 Budget Variance Actual fixed M OH Budgeted Fixed M OH Positive Unfavorable 2 Volume Variance Budgeted Fixed M OH Fixed M OH applied to Work in Progress Simply take the fixed component of the Fixed M OH rate fixed OH hour and multiply by the denominator hours MHrs DLH etc standard hours allowed for actual output Positive Outcome Unfavorable If we actually worked less Direct Labor than we could have worked more hours Volume variance helps us understand if we fully utilized that fixed overhead If you end up with denominator hours being greater than the hours should have worked than it will be unfavorable Chapter 12 Performance Measurement in Decentralized Organizations I Cost Profit Investment Centers Cost Center o A segment whose manager has control over cots but not over revenues or investment funds They only have control on costs because they are not bringing in any revenue Law team administration etc Profit Center o A segment whose manager has control over both costs and revenues but not control over investment funds An example would be the cafeteria in a corporate building revenue from the lunches and cost associated Investment Center o A segment whose manger has control over costs revenues and investments in operating assets This manager could be responsible for all 3 of these responsibilities II Return on investment ROI Formulas o ROI Net operating income Average operating assets o Margin Net operating income x Turnover Sales Sales Average operating assets o So ROI MARGIN x TURNOVER Criticisms o Managers often inherit many committed costs over which they have no control o Managers evaluated n ROI may reject profitable investment opportunities V Residual Income VI Formula o RI Net Operating Income Average operating assets x Min rate of return o If net operating income is greater than the part in parentheses we WILL have residual income ROI measures net operating income in percentages while Residual income provides a dollar amount Benefits o Residual Income is preferred over ROI sometimes as it might encourage investment that at least meets their minimum required return Disadvantages o Residual income is just a dollar amount while ROI is just a percentage It s hard to evaluate departments of different sizes The best systems take several financial evaluations in mind when evaluating managers Delivery cycle time throughput time and manufacturing cycle efficiency MCE Delivery cycle time is the whole time when the goods are ordered till the goods are shipped Throughput Time includes process time inspection time move time and queue time o Process time is the only value added time Only time increasing the value for the customer the company should try to decrease all wait times to improve efficiency Manufacturing cycle Efficiency Value Added Time process time Manufacturing cycle time throughput time VII Balanced scorecard Management translates its strategy into performance measures that employees understand and influenced Financial has about financial performance improved Performance measures Internal business processes have we improved key business processes so that we can deliver more value to the customers Customer do customers recognize that we are delivering more value Learning and Growth Are we maintaining our ability to change and improve The balances scorecard relies on non financial measures in addition to financial measures o Financial measures are lag indicators that summarize the results of past actions Non financial measures are leading indicators of future financial performance They can be misleading due to the lack of customer satisfaction measurements o Top managers are ordinarily responsible for financial performance measures NOT lower level managers Non financial measures are more likely to be understood and controlled by lower level managers For example customer service repetitive have little control over ROI so can evaluate on different terms Balanced scored should have measures that have a cause and effect link If we improve one measure than another should improve Incentive compensation should be linked to balanced scorecard performance measures Chapter 8 Capital Budgeting Decisions I Acceptability of an investment project using the net present value method Time Value of Money o A dollar today is worth more than a dollar a year from now 100 now 100 in a year I would rather have that 100 now to earn interest through investment of my own Therefore projects that