ACCT 2102 1nd Edition Exam 2 Study Guide Lectures 15 19 Lectures 15 and 16 Chapter 10 What is Decentralized Operations what we want to operate what our managers are responsible for When do we use Decentralized Operations When we have operations in different placed or when we divide the company Advantages 1 frees top management by helping management look at the future and set goals 2 encourages the use of expert knowledge 3 provides training 4 improves motivation and retention Disadvantages 1 duplicates costs 2 problems with goal congruence the goals of the company equaling the goals of management are not equal What are Performance Evaluation Systems Systems that clearly communicate expectations provide benchmarks or results for operations motivate segment managers try to achieve goal congruence and minimize duplication costs What are the four different types of systems 1 The Cost Responsibility Center compares actual costs to budgeted costs using a performance report or budget versus actual report 2 The Revenue Responsibility Center is rarely used but it compares actual revenue to budgeted revenue using performance reports 3 The Profit Responsibility Center compares actual revenues expenses and profits to the budget using performance reports and segmented income statements 4 Investment Responsibility Center which determines if assets were used efficiently to generate profit using Return on Investment and Residual Income What are Performance Reports Reports that compare actual revenue and expenses against budgeted revenue and expenses to calculate a variance difference A favorable variance is when actual revenue is greater than budgeted revenue A favorable variance can also appear when actual expenses are less than budgeted expenses Unfavorable variances appear when actual revenue is less than budgeted revenue or when actual expenses are greater than budgeted expenses What is the ROI Return on Investment measures the amount of income an investment center earns relative to the size of its assets It s used to determine how to invest excess funds and to compare a division s performance across periods The formula for ROI is equal to the sales margin multiplied by the capital investment turnover Basically income divided by assets is equal to income divided by sales revenue times sales revenue divided by assets The first portion of the formula income divided by assets shows the amount for every dollar spent that you will receive in operating income The second portion income divided by sales revenue shows the amount for every dollar in sales revenue that you will receive in income The last portion sales revenue divided by assets shows that for every dollar spent you re going to receive in sales revenue What are Flexible Budgets A budget that is prepared by a different level of volume than what was originally anticipated It is prepared for multiple activities and involves the actual volume A flexible budget variance is the difference between the flexible budget and the actual results Lectures 17 and 18 Chapter 11 What is the Standard Price Rate A budget for a single unit of product They are used at the beginning of the period to help with the budgeting process They are also used at the end of the period to evaluate performance and help control future costs A direct material standard cost is equal to the standard quantity of DM output times the standard price of DM Overall this is trying to show how much we expect to use A direct labor standard rate is equal to the standard quantity of DL output times the standard rate of DL What are the formulas for Direct Material Variances A Direct Material Price Variance is what we paid versus what we expected to pap and happens at the point of production Its formula is the quantity purchased times the actual price plus the quantity purchased plus the standard price A DM Quality Variance represents what we used versus what we expected to use and also happens at the point of production Its formula is the standard price times the quantity used and the quantity allowed Keep in mind that quantity allowed has its own formula and can be found by multiplying actual output times the input ratio Total DM variance has two formulas The first is simply adding the DM Price Variance to the DM Quality Variance but this can only be done is the quantity purchased equals the quantity used If not then you have to take quantity used times actual price plus quantity allowed times standard price What are the formulas for Direct Labor Variances A Direct Labor Rate Variance is where we compare actual rate to an expected standard rate It appears at the point of production Its formula is the hours logged times the actual rate plus the hours logged plus the standard rate The first half of the formula hrs logged times actual rate can also be represented as the Direct Labor Cost A Direct Labor Efficiency Variance compares the actual hours and the expected amount of hours Its formula is the standard rate times the hours logged and the hours allowed Keep in mind that hours allowed has its own formula and can be found by multiplying actual output times the input ratio Total DL variance has two formulas The first is simply adding the DL Rate Variance to the DL Efficiency Variance The other formula is hours logged times the actual rate plus hours allowed times the standard rate Either formula can be used Lecture 19 Chapter 13 What are the three sections of the Statement of Cash Flows Operating The operating section of the statement of cash flows is prepared using the direct or indirect method For this class we will be using the direct method To do this method we need to calculate an Income Statement using the cash basis It reports transactions that affect net income current assets and current liabilities Cash receipts and one transaction recorded In this section These receipts are from customers and analyze sales revenue from the income statement and accounts receivable from the balance sheet Cash payments are also recorded These payments are to supplies for inventory These payments analyze Cost of Goods sold from the income statement and inventory and accounts payable from the balance sheet Investing The investing section of the Statement of Cash Flows reports transactions that affect long term assets These sources selling and uses purchases of cash are both recorded The typical transactions for investments are purchases of equipment Financing The financing section reports