ACCT-Test3-Bucheit
Terms
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- performance report
- compares budgeted costs with actual costs
- Static budget
- A budget for a specific level of activity
- Flexible budget
- enables a firm to compute expected costs for a range of activity levels
- Before-the-Fact (budget)
- A flexible budget that helps managers deal with uncertainty by allowing them to see the expected outcomes for a range of activity levels. It can be used to generate financial results for a number of plausible scenarios.
- After-the-fact (budget)
- Flexible budget for the actual level of activity. This type of budget is used to compute what costs should have been for the actual level of activity. Those expected costs then are compared with the actual costs in order to assess performance.
- What is another name for flexible budget?
- Variable budgets
- Flexible budget variance
- the difference between the actual cost amount and the flexible budget cost amount
- To measure whether or not a manager accomplishes his or her goals, which budget is used?
- Static
- variable overhead spending variance
- Measures the aggregate effect of differences between the actual variable overhead rate (AVOR) and the standard variable overhead rate (SVOR)
- How do you calculate variable overhead spending variance?
- (AVOR-SVOR)AH
- Variable overhead efficiency variance
- measures the change in variable overhead consumption that occurs because of efficient (or inefficient) use of direct labor.
- How is variable overhead efficiency variance calculated?
- (AH-SH)SVOR
- How do you calculate standard fixed overhead rate?
- SFOR= Budgeted fixed overhead costs/Practical capacity
- How do you calculate Budgeted Fixed Overhead?
- BFOH = SFOR*SH
- How do you calculate total fixed overhead variance?
- A(P)FOH = SFOR*SH
- What is total fixed overhead variance?
- Actual fixed overhead - Applied fixed overhead
- A performance report compares
- actual costs with budgeted costs
- Because fixed overhead is made up of many things, what would provide more information?
- A line by line comparison of budgeted costs with actual costs
- The two variances for variable overhead are
- spending and efficiency variances
- In a standard cost system, variable overhead is applied
- using standard direct labor hours
- A static budget is best used to
- measure whether or not a manager accomplishes his or her goals
- A performance report using activity flexible budgeting compares
- budgeted costs for actual activity-usage levels with the actual activity costs.
- The total fixed overhead variance is
- AFOH-ApFOH and the sum of the spending and volume variances
- Activity flexible budgeting allows what 3 things?
- the prediction of activity costs as activity output changes, enhances the ability to manage activities, and improves the ability to plan and monitor activity improvements.
- If an organization has implemented an ABC or ABC system, they will already have
- identified the activities within an organization.
- Responsibility for the variable overhead spending variance is usually assigned to
- the production department
- The formula for the fixed overhead spending variance is
- AFOH - BFOH
- To create a meaningful performance report
- actual costs are compared with the expected costs at the same level of activity.
- A responsibility center in which a manager is responsible for both revenues and costs is a
- – profit center.
- A price charged for a component by the selling division to the buying division of the same company is called a
- – transfer price.
- A responsibility center in which a manager is responsible only for costs is a
- – cost center.
- The performance measure that uses after-tax operating income and the actual cost of capital employed is
- – economic value added.
- What are the reasons for decentralization?
- Ease of gathering and using local information, focusing of central management, training and motivating segment managers, and exposing segments to market forces.
- Return on investment (ROI) is calculated as follows
- – operating income/average operating assets
- Decentralization is frequently chosen by companies because it
- – allows for training and motivation of local managers.
- The Balanced Scorecard perspective that defines the customer and market segments in which the business unit will compete is the
- –customer perspective.
- The calculation of Economic Value added is
- – operating income minus taxes, and minus the total annual cost of capital.
- Economic Value Added is residual income with the cost of capital equal to the firms
- – actual cost of capital.
- Which of the following is a disadvantage of a focus on return on investment?
- – It can produce a narrow focus on divisional profitability at the expense of the overall firm.
- If there is a competitive outside market for the transferred product, then the best transfer price is the
- – market price.
- Which of the following types of costs does not appear on a variable costing income statement?
- Variable selling expense
- Fixed costs that are jointly caused by two or more segments are
- – common fixed costs.
- The Balanced Scorecard perspective that describes the internal processes needed to provide value for customers and owners is the
- – internal business process perspective.
- The inventory cost that can include lost sales, cost of expediting, and cost of interrupted production is called
- stockout cost
- The solution of the product mix problem in the presence of multiple constraints requires the use of
- linear programming
- Resources that can be purchased in the amount needed and at the time of use are
- flexible resources
- The method of determining the cost of a product or service based on the price that customers are willing to pay is called
- target costing
- When managers are considering the optimal product mix, they are most concerned with
- maximizing profit
- What is the earning of interest on interest?
- Compounding of interest
- One disadvantage of the payback period is that
- managers may choose investments with quick payback periods to maximize short term criteria on which their own bonuses, etc. may be based
- Assumes that all future cash inflows earn the minimum rate of return
- Net present value
- Can be used as a rough measure of risk and liquidity
- Payback period
- can be used to determine whether or not an investment will negatively affect key financial ratios
- Accounting rate of return
- The best method discounting model to use for mutually exclusive competing projects
- Net present value
- Assumes that all future cash inflows earn the same rate of return as the project itself
- Internal rate of return
- Interest rate used to discount future cash flows
- discout rate
- A series of future cash flows
- annuity
- comparison of actual benefits and costs of a project with the expected benefits and costs
- post audit
- What are 4 truths regarding the internal rate of return for a project?
-
1.If the internal rate of return is less than the required rate of return, the project will be rejected
2.If the internal rate of return is equal to the required rate of return, the net present value of the project is zero
3.If the internal rate of return is more than the required rate of return, the project will be accepted
4.Many managers may believe that the internal rate of return is the compounded rate of return earned by the initial investment. - If net present value is negative, it means that the return on the investment is
- less than the discount rate
- Decentralization is
- the practice of delegating decision-making authority to the lower levels of management in a company.
- What are the 4 reasons to decentralize?
-
1.ease of gathering and using local information
2.Focusing of central management
3.Training and motivating of segment managers
4.Enhanced competition, exposing segments to market forces - Cost center
- a responsibility center in which a manager is responsible only for costs
- Revenue center
- A responsibility center in which a manager is responsible only for sales
- Profit center
- A responsibility center in which a manager is responsible for both revenues and costs
- Investment center
- A responsibility center in which a manager is responsible for revenues, costs, and investments.
- What is variable costing?
- Assigning only variable manufacturing costs to the product, these include direct materials, direct labor, and variable overhead.
- Absorption costing
- assigns all manufacturing costs to the product. Direct materials, direct labor, variable costing, fixed overhead.
- How is fixed overhead treated in variable costing?
- It is a period expense and excluded from the product cost
- Segment
- a subunit of a company of sufficient importance to warrant the production of performance reports
- Direct fixed expenses
- are fixed expenses that are directly traceable to a segment
- Avoidable fixed expense, or traceable fixed expenses
- Another name for direct fixed expenses because they vanish if the segment is eliminated
- In segmented income statements, how are expenses broken down?
- Two categories: direct fixed expenses and common fixed expenses.
- How do you calculate Return on investment?
- ROI = operating income/average operating assets
- What is operating income?
- earnings before interest and taxes
- Operating assets
- all assets acquired to generate operating income, including cash, receivables, inventories, land , building, and equipment.
- How do you calculate average operating assets?
- (Beginning assets + Ending assets)/2
- How do you calculate ROI using margin and turnover?
-
ROI = Operating income/Sales
Times
Sales/average operating assets - What are 2 disadvantages to ROI?
-
1.It can produce a narrow focus on divisional profitability at the expense of profitability for the overall firm
2.In encourages managers to focus on the short run at the expense of the long run - How do you calculate ROI?
-
Residual income =
operating income - (Minimum rate of return x avg operating assets) - Economic value added
- is net income (operating income minus taxes) minus the total annual cost of capital.
- How do you calculate economic value added?
- EVA = After tax operating income - (actual percentage cost of capital x total capital employed)
- Balanced Scorecard
- a strategic management system tat defines a strategic-based responsibility accounting system
- What are the 4 perspectives of a balanced scorecard?
- Financial, customer, internal business process, and learning and growth (infrastructure)
- financial perspective
- describes the economic consequences of actions taken in the other 3 perspectives
- Customer perspective
- defines the customer and market segments in which the business unit will compete
- Internal business process perspective
- describes the internal processes needed to provide value for customers and owners
- Learning and growth (infrastructure) perspective
- defines the capabilities that an organization needs to create long-term growth and improvement.
- decision model
- a specific set of procedures that produces a decisio
- What are the 6 steps to a decision making model?
-
1.Define the problem
2.Identify the alternatives
3.Identify the costs and benefits associated with each feasible alternative
4.total the relevant costs and benefits for each feasible alternative
5.Assess the qualitative factors - relevant costs
- future costs that differ across alternatives
- make-or-buy decsions
- decisions that involve a choice between internal and external production
- keep-or-drop decisions
- relevant costing analyses that focus on keeping or dropping a segment in a business