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ECU ACCT 2521 - Exam 4 Study Guide
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Acct 2521 1st Edition Exam #4 Study GuideChapter 10 Smaller companies can use centralized decision making because of the smaller scope of the organization. Larger companies decentralize because it is impossible for a single person to manage the entire organization. ● Split their operations into different operating segments ● Choose which decentralization that best suits the company’s strategy- Geographic area- Product line- Distribution channel- Customer base- Business functionAdvantages● Frees top managements time● Encourages use of expert knowledge● Improves customer relations● Provides training● Improves motivation and retentionDisadvantages● Potential duplication of costs● Potential problems achieving goal congruence - Goal congruence: occurs when the goals of the segment managers align with thegoals of top management Performance evaluation systems provide upper management with the feedback it needsto maintain control over the entire organization, even though it has delegated responsibility and decision-making authority to segment managers. To be effective, performance evaluation systems should:● clearly communicate expectations● provide benchmarks that promote goal congruence and coordination between segments● motivatesegment managersResponsibility center: a part of an organization whose manager is accountable for planning and controlling certain activitiesResponsibility accounting: a system for evaluating the performance of each responsibility center and its manager Types of Responsibility Centers 1. Cost center: managers are responsible for costs only 2. Revenue center: managers are accountable primarily for revenues3. Profit center: managers are accountable for both revenue and costs4. Investment center: managers are responsible for generating revenues, controlling costs, and efficiently managing the division’s assets● CEO oversees each of the divisions (investment center)● Managers of each division oversees all of the product lines (profit center)● Manager of each product line is responsible for evaluating lower-level managers of cost centers (manufacturing plants)● Sales territories (revenue center)Performance report: compares actual revenues and expenses against budgeted figuresVariance: difference between the actual and budget ● Will depend on the type of responsibility center being evaluatedFavorable variance: causes operating income to be higher than budgetedActual revenues > budgeted revenuesActual expenses < budgeted expensesUnfavorable variance: causes operating income to be lower than budgetedActual revenues < budgeted revenuesActual expenses > budgeted expenses Management by exception: managers will only investigate budget variances that are relatively large Segment margin: operating income generated by a profit or investment center before subtracting common fixed costs that have been allocated to the centerProfit CenterActual Budgeted Variance Variance %Sales revenue 4,314 4,300 14 F .3% F- V. expenses V. COGS 1,728 1,720 8 U .5% U V. Op Ex. 508 515 7 F 1.4% FCM 2,078 2,065 13 F .6% F- Direct F.CFixed MOH 1,228 1,215 13 U 1.1% UFixed Op. Ex 405 415 10 F 2.4% F Segment margin 445 435 10 F 2.3% F- Common F.C allocated to the profit center36 35 1 U 2.9% UOp. Income 409 400 9 F 2.3% FDirect fixed expenses: fixed expenses that can be traced to the profit centerEx: advertisementsCommon fixed expenses: fixed expenses that cannot be traced to the profit center ● Manager has little to no control over the allocation of the common fixed costs, so he or she should not be held responsible for them● Manager is typically held responsible for the center’s segment margin, not its operating income Flexible budget: budget prepared for a different level of volume that that which was originally anticipatedMaster budget variance: difference between the actual revenues and expenses and the master budget Creating a Flexible Budget Performance Report Use the actual volume achieved and the original budget assumptionsChapter 11To gain a better understanding of the mast budget variance, managers created a flexiblebudget to separate the master budget variance into two components:1. volume variance2. flexible budget varianceStandard cost: a budget for a single unit of productEx: one case of tortilla chips for Tucson Tortilla companyVariance in cost could be due to DM, DL, MOH, or any combination of the threeIdeal standards: standards based on perfect or ideal conditions (perfect standards)● Do not allow for any poor quality raw materials, waste in the production process, machine breakdown, or other inefficiencies● Lean productionPractical (attainable) standards: based on currently attainable conditions● Allow for normal amounts of waste and inefficiencyInformation Used to Develop Standards1. Managers consider the amount of material and labor used on each unit producedin the past2. They also consider the current costs of inputs (negotiated rates and raw materials prices)3. Estimate how future changes in the economy or in the manufacturing process might affect the standards being developed 4. Engineering studies help determine that amount of time and quantity of material that should be needed to produce each unit Updating StandardsOnce developed, standards need to be kept up to date and should be reviewed at least once a year. They should be adjusted whenever a long-term change in costs or inputs isanticipatedStandards should be adjusted when:● A new labor contract is negotiated with union workers● A non-temporary change in raw material costs occurs● A part of the production process is reengineeredStandard Cost of DMStandard Qty of DM x Standard Price of DM = Standard Cost of DM per UnitEx: Tucson Torilla requires 5 pounds of flour per case They can purchase the flour for $1.50 per pound5 lbs x $1.50/lb = $7.50Standard Cost of DLStandard Qty of DL x Standard Price of DL = Standard Cost of DL per UnitEx: Requires .05 hours of DL Pay is $22/hour.05 DL hours x $22/hour = $1.10DM Price Variance = AQP(AP-SP)DM Quantity Variance = SP(AQU-SQA)DL Rate Variance = AH(AR-SR)DL Efficiency Variance = SR(AH-SHA)Variable MOH Rate Variance = AH(AR-SR)Variable MOH Efficiency Rate =


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ECU ACCT 2521 - Exam 4 Study Guide

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