ACCT 2102 1st Edition Final Study Guide Lectures 28 35 Here is the outline of the test Chapter 10 2 conceptual and 5 calculation Chapter 11 2 conceptual and 6 calculation Chapter 13 2 conceptual and 3 calculation No extra credit question on test Below are conceptual and mathematical ideas which may or may not be on the test Farmer says nothing outside of the notes we did in class will be on the test therefore a book is not required unless needed for own personal reference Again nothing in Chapters 10 11 or 13 that were not in the notes will be on the test Chapter 10 Lecture 28 November 4 Lecture 29 November 6 Lecture 30 November 8 and Lecture 31 November 11 Decentralized Operations Everyone is involved in the decision making similar to participative budgeting Companies that decentralize split their operations into different operating segments Advantages Frees top management focus on bigger problems Encourages the use of expert knowledge Improves customer relations respond to customers quicker Provides training train lower level employees Improves motivation and retention Disadvantages Duplicates costs Problems achieving goal congruence employees and company have same goal Performance evaluation systems should Clearly communicate expectations Provide benchmarks for operations Motivate segment managers Ways to decentralize Geography Among product lines Customer base ex one target market may be individuals and another may be companies Responsibility what you are in charge of Performance Evaluation Systems Responsibility Accounting You can t be more than one type these are mutually exclusive Responsibility centers Cost only responsible for controlling cost Compare actual costs to budgeted costs using performance reports Ex purchasing dept distribution dept for magazine company Revenue only responsible for generating revenue Compare actual revenue to budgeted revenue using performance reports Profit held responsible for generating revenue and controlling costs Compare actual revenues expenses and profits to the budget using performance reports and segmented income statements Ex A store for a clothing company Investment the company itself is always an investment center Determine if assets were used efficiently to generate profit using Return on Investment and Residual Income Performance Reports BVA Reports Budget vs Actual Compares actual revenue and expenses against budgeted revenue and expenses to calculate a variance Favorable variance F Cost actual budget Revenue actual budget Unfavorable variance U Cost actual budget Revenue actual budget Analyze using management by exception Used to determine which variances need an explanation Calculate materiality threshold given on test o Use this number to determine when variances are material and therefore large enough to investigate Favorable is not always good and unfavorable is not always bad If you have an occurrence that falls within an acceptable range of outcome it is immaterial ignore it If you have an occurrence that happens outside an acceptable range of outcomes it is material needs explanation Variance Variance Budget Should only unfavorable variances be investigated No we investigate both if they are material meaning they fall outside the threshold Could a fixed cost such as depreciation have a variance Yes FC not changing in total is only from a planning perceptive not actual Example Sold a piece of equipment you didn t expect to sell Static Budget a budget prepared for a single level of activity Also called Master Budget Managers can gain better insight when evaluating performance by using a Flexible Budget a budget prepared for a different level of volume than what was originally anticipated o The budget that managers would have prepared if they could have anticipated the exact sales volume for the period Master budget variance o Difference between the master budget and actual results Flexible budget variance o Difference between flexible budget and actual results o Price rate variance o Quantity Efficiency variance Volume variance o Difference between master budget and flexible budget o It is the difference that exists because you sold more or less than expected Interpreting a Flexible Budget Performance Report Flexible Budget SR and Variable Expenses in a table o Master Budget SR Master Budget Output x Actual Output o Master Budget Variable Expenses Master Budget Output x Actual Ouput o Flexible Budget FC remains the same Master Budget Output gives you the number of units of output the company anticipated selling Flexible Budget Output is what we sold The flexible budget is populated for your actual activity level Determine the budgeted unit Sales Price and budgeted unit Variable Cost o SP Master Budget SR Master Budget Output o VC Master Budget Variable Expenses Master Budget Output Why are the Fixed Expenses the same in the Flexible Budget and Master Budget columns FC in total do not change between budgets from a planning perspective Cost contains performance report Variance Budget Actual Revenue rarely see Profit responsible for revenues and expenses costs Investment responsible for investing assets Flexible budget variance flexible actual Master budget variance master actual Volume Variance flexible master Volume variance output 1 sold one more than expected Volume variance for FC will always be 0 Profit Centers Segmented Income Statement Judge a segment based on segment margin Sales Revenue Variable Costs CM Traceable FC Segment Margin Traceable avoidable direct FC directly traces back to part of company you re talking about Does not include common FC Recall CM and VC o CM CM SR Judge segment on traceable fixed cost Judge manager by controllable fixed cost On test Find operating income Total Segment Margin 125 000 10 000 115 000 Total Common FC 150 000 Operating income 35 000 Know how to interpret the numbers Return on Investment ROI measures the amount of income an investment center earns relative to the size of its assets Used to determine how to investment excess funds Used to compare a division s performance across periods ROI sales margin x capital investment turnover o Op y op y SR Capital SR capital Capital could also be called assets net assets o y y SR assets SR assets Increase margin or increase turnover to increase ROI Residual Income RI determines whether the division has created any excess income above and beyond management s expectations Leads to better goal congruence Specifically tells companies