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DecentralizationSplitting operations into different operating segmentsPerformance evaluation systemsProvide upper management with feedbackClearly communicate expectationsMotivate segment managersResponsibility AccountingResponsibility Center-part of an organization whose manager is accountable for planning and controlling activitiesResponsibility accountingSystem for evaluating performance of each responsibility center and its managerTypes of responsibility centersCost centerCosts onlyRevenue CenterPrimarily revenues, could be responsible for costs of their own sales operationProfit centerBoth revenues and costsLocal dominos, Hampton InnInvestment centerInvestments, revenues and costsTreated almost as if they were stand alone companiesStandard CostA budget for a single unit of productBenchmark for evaluating actual costsTypes of standardsIdealDo not allow for inefficienciesPracticalAllow for normal amounts of waste and inefficiencyDMEstimated usage, waste, rejectsThis is being practical is you think about that stuffDLWage rate per hour, p/r taxes and benefitsInformation used to develop and update standardsPast usage of materials and laborCurrent cost of inputsFuture changesComputing standard costsCompute for:Direct materialDirect laborMohStandard Cost CalculationsREMEMBERDM- estimated usage, waste, rejectsDl- wage rate hourStandard calculations continuedStandard cost of producing One Unit of Productthe total is the cost of producing one unitE11-15A pg 689Direct Material VariancesPrice and quantityCompromisedDirect materials price varianceDirect materials quantity varianceDM price varianceHow muc total variance is due to paying a higher/lower price then expected for the DM purchasedFormulaAQP- actual quantity purchasedDM quantity VarianceHow much of the total variance is due to using a larger/smaller quantity of DM than expectedImpacted by a worker dropping raw materials and they must be discardedStandard cost of inputQuantity standard * Price standardE11-16A pg 689Compare actual and standardSince you spent less money that will increase operating income which is favorablethis will decrease operating income so it is unfavorablethis can result in waste of production processDirect Labor VariancesComprised ofDirect labor rate varianceDirect labor efficiency varianceDL rate varianceE11-18a pg 689pay more for better works but there is more efficiencySummary of DM and Dl VariancesAdvantages of standard costingCost benchmarksUsefulness in budgetingMotivationSimplify bookkeepingDisadvantagesOutdated of inaccurate standardsUpdated regularlyAt least yearlyLack of timeliness(variances)Lean thinking ( current standards are not good enough)Decrease in DLUnintended behavioral consequencesVariable Overhead VariancesVariable overhead rate varianceVariable overhead spending varianceAH * (AR-SR)Ah- actual hours AR- actual rate SR- standard rateVariable overhead efficiency varianceSR * (AH-SHA)SHA standard hours allowedFixed overhead varianceActual fixed overhead- budgeted fixed overheadFixed overhead volume VarianceBudgeted fixed overhead-(SHA * SR)E11-24ANeed these two first ^^^capital budgetingacquisition of assets used for a long period of time and which require large sums of moneysmuckers buying smulgersFour popular methods of capital budgeting analysisCash Basis vs accrual basisCapital budgeting focuses on cash flowsCash flowsFuture cash revenueAny future savings in ongoing cash operating costsFuture residual value of assetInvestment cash inflowsCapital budgeting processIdentify potential investmentsProject the net cash inflowsAnalyze the investmentsOne or more of the four materialsCapital rationingDon’t have unlimited fundsPost auditCrucialWhat went wrongPayback periodLength of time it take to recover the cost investmentE12-17A pg 761payback does not supportEqual Net Cash Flowsthis is not the greatest method (payback period)Unequal Net Cash Inflowsfind where 240,000 fallsE12-18A 761Payback MethodFocuses only on time, not profitabilityTime value of money ignoredShortest payback period is best only when all other factors are the sameFormula for period payback can be used only with EQUAL inflowAccounting Rate of ReturnFocuses on the operating income not net cash inflowUnequalonly difference is that you need to average out the cash flowsAccountings rate of returnE12-19A pg 761Time Value of Money FactorsPrincipalSingle lump sumCompound interestInterest is calculated on the principal and on all interest earned to dateWhich Table to useTable A: PV of 1 741 pgSingle payment or cash inflowTable B:PV of annuity 742 pgTwo or more payments- equal ammountsIgnore future valuesWhich Table to useYou will be getting 200,000 dollars five years from. Interest rate you could ear is 6 percentTable A PV of $1E12-50B pg 769 Capital Rationing DecisionInternal rate of returnRate of return a company can expect to earn by investing in a projectThe higher the IRR, the more desirable the projectThe interest rate that will cause the present value to equal zeroE12-27A pg 763now you have to look at the 4.375 in the table at 8Objective 5it ignores everything after the pay back!Accounting Rate of Returnlook at this formula EXTENDEDNet present value methodcompare discounted cash inflows to their capital outlay required by the investmentdiscount ratehurdle rate or required rate of returnrequired minimum rate of return given riskiness of investmentChapter 10 04/29/2014Decentralization- Splitting operations into different operating segmentsPerformance evaluation systems- Provide upper management with feedbacko Clearly communicate expectationso Motivate segment managersResponsibility Accounting- Responsibility Center-o part of an organization whose manager is accountable for planning and controlling activities- Responsibility accountingo System for evaluating performance of each responsibility center and its managerTypes of responsibility centers- Cost centero Costs only- Revenue Centero Primarily revenues, could be responsible for costs of their ownsales operation- Profit centero Both revenues and costso Local dominos, Hampton Inn- Investment centero Investments, revenues and costso Treated almost as if they were stand alone companiesChapter 11 standard costing 04/29/2014Standard Cost- A budget for a single unit of product- Benchmark for evaluating actual costsTypes of standards- Ideal o Do not allow for inefficiencies - Practicalo Allow for normal amounts of waste and inefficiency- DMo Estimated usage, waste, rejectso This


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KSU ACCT 23021 - Chapter 10

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