ACC 211: Exam 2 Study Guide
121 Cards in this Set
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Budgeting
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-a plan for a specific period of time
-helps management determine how to use resources
-used to estimate future costs and revenues
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Rolling (or continuous) budget
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a budget that is continuously updated so that the next 12 months of operations are always budgeted
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Participative Budgeting
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-involves many levels of management
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Starting Point for Developing the Budgets
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1. prior year's budgeted figures or actual results
OR
2. zero-based budgeting
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Benefits of Budgeting
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-forces managers to plan
-promotes coordination and communication
-provides a benchmark
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Master Budget
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-comprehensive planning document for entire organization
-consists of all supporting budgets
-single level of activity
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Sales Budget
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-plan for sales revenues in future periods
-number of units to be sold x sales price per unit = total sales revenue
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Production Budget
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Units needed for sales + desired ending inventory = total units needed... then minus units in beginning inventory = units to produce
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Direct Materials Budget
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quantity of DM needed for production + desired DM ending inventory = total quantity of DM needed... then minus DM beginning inventory = quantity of DM to purchase
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Direct Labor Budget
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units to be produced x DLH per unit = total DLH needed.. then x cost per DLH = total direct labor cost
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Financial Budget Components
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-capital expenditures budget
-cash collections budget
-cash payments budget
-combined cash budget
-budgeted balance sheet
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Sensitivity Analysis
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a what if technique that asks what a result will be if a predicted amount is not achieved or if an underlying assumption changes
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Sustainability and Budgeting
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-goals for sustainability reflected in a company's budget
-long-term sustainability goals affect short-term budgets
-benchmark for judging performance
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Service Companies
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-no merchandise inventory
-operating budgets
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Merchandising Companies include:
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-sales budget
-COGS, Inventory, and purchases budget
-operating expenses budget
-budgeted income statement
-the financial budgets are the same
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COGS Inventory, and Purchases budget:
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COGS + desired ending inventory = total inventory needed.. then minus the beginning inventory = purchases of inventory
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Implications of Credit Cards
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-credit card companies and their issuing banks charge merchants a transaction fee for each purchase made using plastic
-merchant receives entire amount of purchase less transaction fee
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Benefits of Credit Cards and Debit Cards
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-lost sales if didn't allow customers to use credit or debit cards
-decreases the cost associated with bounced checks, misappropriation of cash, and the activities associated with preparing and transporting cash deposits
-receive cash quickly, improves cash flow
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Store Credit Cards
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-no transaction fee incurred (merchants assumes risk of collection)
-must wait for customers to make payments (months, years, never)
-cash collections budget, operating expenses budget, budget interest income
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Cash collections Budget
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Aging of receivables
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Operating Expenses Budget
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Bad debts
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Decentralization
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splitting operations into different operating sections
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Advantages of Decentralization
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-frees top management's time
-uses of expert knowledge
-improves customer relations
-provides training
-improves motivation and retention
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Disadvantages of Decentralization
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-duplication of costs
-potential problems achieving goal congruence
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Performance Evaluation System
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-provides upper management with feedback
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To have a successful performance evaluation system, you should:
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-clearly communicate expectations
-provide benchmarks that promote goal congruence and coordination between segments
-motivate segment managers
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Responsibility Center
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part of an organization whose manager is accountable for planning and controlling activites
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Responsibility Accounting
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system for evaluating performance of each responsibility center and its manager
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Types of Responsibility Centers
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-cost center
-revenue center
-profit center
-investment center
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Performance Report
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compares actual revenues and expenses to budgeted figures
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Variance
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difference between actual and budget
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Favorable Variance
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causes operating income to be higher than budgeted
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Unfavorable Variance
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causes operating income to be lower than budgeted
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Segment Margin
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the operating income generated by a profit or investment center before subtracting common fixed costs that have been allocated to the center
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Organization-Wide Performance Reports
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-performance reports for each level of management flow up
-controllable vs. uncontrollable costs
-management allows some uncontrollable costs
-make sure you have some controllable costs
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Evaluation of Investment Centers
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-duties of Investment center manager similar to CEO
-to assess performance:
1. return on investment (ROI)
2. Residual Income (RI)
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Return on Investment
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-measures the amount of income an investment center earns relative to the size of its assets
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Return on Investment Formula
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ROI= Operating income / total assets
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Sales Margin and Capital Turnover Formula
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ROI= Sales Margin x Capital Turnover
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Sales Margin Formula
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Operating Income / Sales
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Capital Turnover Formula
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Sales / Total Assets
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Residual Income
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-determines whether the division has created any excess (residual) income above
-incorporates target rate of return
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Residual Income Formula
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RI= Operating Income --- (Target Rate of Return x Total Assets)
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Goal Congruence
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residual income enhances goal congruence, whereas ROI may or may not
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Limitations of Financial Performance Evaluation
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-short-term focus
-potential remedy
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Potential Remedy
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-management can measure financial performance using a longer time horizon
-incentivizes segment managers to think long term rather than short term
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Transfer Pricing
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-the price charged for the internal sale between two different divisions of the same company
-encourage transfer only if the company would benefit by the exchange
-vertical integration
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Flexible Budget
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a budget prepared for a different level of volume than that which was originally anticipated
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Master Budget Variance
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-difference between the actual revenues and expenses and the master budget
-apples-to-oranges comparison (if we compare these numbers then we are looking at amounts at different levels)
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Activity Variance
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-the difference between the master budget and the flexible budget
-arises only because the actual volume differs from the volume originally anticipated in the master budget
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Flexible Budget Variance
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the difference between the flexible budget and the actual results
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Flexible budget is always based on
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the actual results
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Underlying causes of the Variances
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-management by exception
-use performance reports to see how operational decisions affected companies finances
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Nonfinancial Performance Measurement
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-lag indicators
-lead indicators
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Lag indicators
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reveal the results of past actions and decisions
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Lead indicators
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predict future performance
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The Balanced Scorecard
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-management must consider both financial and operational performance measures
-major shift: financial indicators are no longer the sole measure of performance
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Four Perspectives of the Balanced Scorecard
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-financial
-customer
-internal business
-learning and growth
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Key Performance Indicator (KPI)
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-summary performance metric; assesses how well the company is achieving its goals
-continually measured
-reported on performance scorecard or performance dashboard
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Financial Perspective
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"How do we look to shareholders?"
-must continually attempt to increase profits by increasing revenues, controlling costs, and increasing productivity
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Customer Perspective
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"How do customers see us?"
-Customers concerned with four product/service attributes: price, quality, sales service, and delivery time
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Internal Business Perspective
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"At what business processes must we excel to satisfy customer and financial objectives?"
-three factors: innovation, operations, and post-sales support
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Learning and Growth Perspective
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"Can we continue to improve and create value?"
-three factors: employee capabilities, information system capabilities, company's "climate for action"
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Sustainability and Performance Evaluation
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-sustainability-related KPIS
-fifth perspective-"Sustainability"
-sixth perspective-"Community"
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Standard Costs
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-budget for a single unit of product
-benchmark for evaluating costs
-based on a per unit basis
-used to develop flexible budgets
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Ideal (perfection) standards
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do not allow for any inefficiences
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Practical (attainable) standards
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allow for normal amounts of waste and inefficieny
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Information used to develop or update standards
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-past usage of material and labor
-current costs of inputs
-future changes
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Standard Cost Calculation of Direct Materials
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Standard Quantity of DM x Standard Price of DM = Standard Cost of DM
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Standard Cost Calculation of Direct Labor
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Standard Quantity of DL x Standard Price of DL = Standard Cost of DL
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Direct Material Variance
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when the amount of materials purchased is the same as the amount used can split the flexible budget
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Negative outcome is
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favorable
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Positive Outcome is
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unfavorable
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Actual Cost Formula
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Actual Quantity x Actual Price
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Actual Quantity of Standard Price Formula
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Actual Quantity x Standard Price
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Standard Cost Allowed Formula
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Standard Quantity allowed x Standard Price
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DM Price Variance Formula
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AQ(AP - SP)
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DM Quantity Variance Formula
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SP(AQ - SQA)
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Standard Quantity Allowed
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the standard quantity allowed for the ACTUAL OUTPUT attained (not budgeted)
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DM Price Variance Formula (if DM purchased differs from Quantity DM used)
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AQP x (AP - SP)
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DM Quantity Variance Formula (if DM purchased differs from Quantity DM used)
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SP x (AQU - SQA)
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DL Rate Variance Formula
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AH x (AR - SR)
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DL Efficiency Variance Formula
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SR x (AH-SHA)
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Advantages of standard costs
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-cost benchmarks
-usefulness in budgeting
-motivation
-simplify bookkeeping
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Disadvantages of standard costs
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-outdated of inaccurate standards
-lack of timeliness
-focus on operational performance measures visual management
-lean thinking
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Variable Overhead Rate Variance Formula
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AH x (AR-SR)
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Variable Overhead Efficiency Variance Formula
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SR x (AH-SHA)
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If you apply variable overhead on the basis of DL hours, then
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the variable overhead efficiency variance will always have the same sign as the variable overhead rate
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Fixed Overhead Budget Variance Formula
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Actual Fixed Overhead-Budgeted Fixed Overhead
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Fixed Overhead Volume Variance Formula
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Budgeted Fixed Overhead-(SHAxSR)
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If production volume is greater than anticipated then fixed overhead has been ____________ and the fixed overhead volume variance is ____________
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overallocated; favorable
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If production volume is less than anticipated then fixed overhead has been _____________ and the fixed overhead volume variance is __________________
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underallocated; unfavorable
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Standard Costing
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-recording inventory-related costs at standard cost rather than actual cost
-saves on bookkeeping costs
-isolate price and efficiency variances as soon as they occur
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Benefits of Participative Budgeting
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-lower level managers closer for action
-managers are more likely to accept
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Disadvantages of Participative Budgeting
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-more complex
-time consuming
-managers can build slack in the budget
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Starting Point
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prior years budget
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Zero-based budgeting
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all managers begin with a budget of 0 and must justify every dollar they put in the budget
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Variance
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the difference between actual and budgeted figures
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Operating Budgets
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budgets needed to run the daily operations of a company
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Financial Budgets
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project the collection and payment of cash, as well as forecast the company's budgeted balance sheet
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COD "Collect on Delivery" collection terms if:
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-customer is new
-customer has poor credit rating
-customer has not paid in the past
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Safety Stock
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inventory kept on hand in case demand is higher than predicted or the problems in the factory slow production
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Manufacturing Overhead Budget
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-highly dependent on cost behavior
-some overhead costs such as indirect materials, are variable
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Operating Expenses Budget
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-all costs incurred in every area of the value chain, except production, must be expensed as operating expenses in the period they were incurred
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Capital Expenditure Budget
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shows the company's intentions to invest in new property, plant, or equipment (capital investments)
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Cash Collections Budget
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all about timing
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Cash payments
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all about timing
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Combined Cash Budget
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simply merges the budgeted cash collections and cash payments to project the company's ending cash position
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Flexible Budgets
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budgets prepared for different volumes of activity
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Goal Congruence
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occurs when the goals of the segment managers align
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Cost Center
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-managers are accountable for costs only
-ex: Campbell's Chicken Noodle Soup Manufacturing Plant
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Revenue Center
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-managers are accountable primarily for revenues
-sale territories, such as Campbell's Soup Midwest
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Profit Center
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managers are accountable for BOTH revenues and costs
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Investment Center
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-managers are responsible for: (1) generating revenues (2) controlling costs (3) efficientally managing the divisions assets
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Performance Report
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-compares actual revenue and expenses against budgeted figures
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Direct Fixed Expenses
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include those fixed expenses that can be traced to the profit center
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Common Fixed Expenses
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-include those fixed expenses that cannot be traced to the profit center
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Measurement Issues
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-Which balance sheet should we use?
-Should we include all assets?
-Should we use gross book value or net book value of the assets?
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Vertical Integration
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practicing of purchasing other companies within one's supply chain, is predicted by the notion that a company's profits can be maximized by owning one's supplier
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Master Budget Variance
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the difference between the actual revenues and expenses and the master budget
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Performance Scorecard
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a report that allowed managers to visually monitor and focus on managing the company's key activities and strategies as well as business risks
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ACC 211: Final Study Guide