ACCOUNTING 2101 FINAL EXAM STUDY GUIDE Chapter 9 Definitions Standard usually relates to a unit amount Ideal Standard represents optimum levels of achievable performance under perfect operating conditions Normal attainable Standard efficient levels of performance that are achievable under expected operating conditions S b rigorous or tight but attainable Standards the amount of inputs and the price for those inputs that should be required to make a perfect unit of product outcome Static Budgets a budget based on a single level of activity not good to use if actual activity is very different from planned Based estimate of volume sales Flexible Budgets changes the costs and revenues for different levels of activities to compare to actual Variances differences between total actual costs and total standards Volume Variance represents the difference between actual and expected levels of activity Production Manager typically responsible for the direct materials quantity variance AND direct labor efficiency variance The variable overhead rate variance is FAVORABLE when the actual variable overhead rate is less than the standard variable overhead rate Unfavorable variances appear as DEBIT entries Favorable variances appear as CREDIT entries Using less direct materials than expected result in a FAVORABLE variance Fixed Overhead Volume sometimes called the denominator variance When recording journal entries the actual cost is a CREDIT and the standard cost is a DEBIT Equations Direct Materials price Standard Cost unit of DM that should be incurred Direct Labor price rate Standard Price hour that should be paid Overhead Standards Budgeted OH Expected activity DM Variances o Price Actual Price Standard Price x Actual Quantity purchased o Quantity Actual Quantity used Standard Quantity Allowed x Standard Price o Spending DM Price Variance DM Quantity Variance DL Variances o Rate Actual Rate Standard Rate x Actual Hours worked o Efficiency Actual hours worked Standard hours Allowed x Standard labor rate Chapter 10 Definitions Responsibility Accounting involves accumulating and reporting costs and revenues on the basis of the manager who has the authority to make the day to day decisions about the items Used as a performance evaluation tool Decentralization means that the control and authority of operations is delegated to many managers throughout the organization Recognize knowledge at lower levels Fosters development of mangers Keeps day to day running at lower levels closest to process o Advantages o Disadvantages Sometimes duplication of effort Could lead to manger decision making autonomy Centralized decision making authority is kept at the very top of the organization Responsibility Reporting System Based on a concept called the controllability principle managers should be responsible for what they can control Information can be broken down in to levels Types of Responsibility Centers o Cost Center incurs costs and expenses but does not directly generate revenues Usually some type of production or service department o Revenue Center Responsible for generating revenue through targets and quotas Usually a sales department car sales o Profit Center incurs costs and also generates revenues Managers are judged on the profitability of their centers Segment Margin controllability direct verses common fixed costs o Investment Center authority to make decisions about how and where to invest the company s assets and Residual income Mangers of an Investment center are evaluated based on measures such as ROI Balanced Scorecard system that incorporates financial and non financial measures in an integrated system that links performance measurement and a company s strategic goals The measures reflect past performance lagging indicators as well as future performance leading indicators o Four Commonly Employed Perspectives Financial What value do we provide for our shareholders employs financial measures like Net Income Return on Assets Credit Rating etc Customer What value do we provide to our customers evaluates performance from the customer s viewpoint and compares to competitors Measures used are customer retention brand recognition customer recommendation etc Internal Process What internal processes are required to meet the needs of our customers employees and shareholders evaluates the internal operating process and assesses value chain for effectiveness and efficiency Areas looked at are of defect free products Stock outs waste reduction etc Such as on time delivery and quality Learning and Growth How will we sustain our ability to change and improve development of the company and employee retention Examples are Employee attrition Cross trained employees Training hour Ethnic violations etc Contains leading indicators which are measures that reflect future performance Return on Investment ROI shows the effectiveness of the manager utilizing the assets at his disposal Residual Income the income that remains after subtracting from the controllable margin the minimum rate of return on a company s average operating assets o A positive Residual income RI results when managers invest in projects that earn more than the hurdle rate Transfer Price related party transactions o Internal Sales goods are exchanged between departments or divisions at a transfer o Market based transfer Price Based on existing market prices of competing goods and price services ceiling Not always a well defined market for the good or service being transferred o Negotiated Transfer Price determined through agreement of division managers o Cost based transfer Price based on Variable costs alone or Variable Costs plus Fixed Costs plus a markup amount floor Leads to loss of profitability for the company and unfair evaluations Controllability principle states that managers should be held responsible only for what they can control Economic value added measures the economic wealth that is created when a company s after tax operating income exceeds its cost of capital The maximum transfer price is the External Market Price Goal Incongruence results when there is conflict between a manager and the organization as a whole Equations Net Operating Income Average Invested Assets Return on Investment ROI Beginning Total Assets Ending Total Assets 2 Average Invested Assets Net Operating Income Minimum Rate of Return hurdle rate x Invested Assets Residual Income ROI Profit margin x Investment turnover Profit Margin Return on Investment