Acctg 231 Final

Front 1

Static Budgets

Back 1

Sales budgets, production budgets, cash budgets. Static in the sense that they represent costs at a single level of activity-the originally budgeted level of activity

Front 2

Flexible budget

Back 2

Geared to a range of activity, rather than a single level of activity

Front 3

When choosing an activity base for a flexible budget, 3 criteria must be considered:

Back 3

1. The flexible budget assumes the variable costs change in proportion to changes in activity base
2. Activity base should not be represented in dollars
3. Activity base should be simple/easy to understand

Front 4

Flexible budget performance report

Back 4

To evaluate how well costs were controlled.
1. Amount for each variable cost= Cost per unit x actual level of activity
2. If the actual activity is within relevant range, fixed cost amounts can be copied from static budget
3. If the actual cost exceeds the flexible budget cost for the actual level of activity, the variance is unfavorable

Front 5

Fixed costs can have variances because actual fixed costs can differ from budgeted fixed costs

Back 5

-A cost is fixed if it does not depend on the level of activity. However, that does not mean a fixed cost cannot change for other reasons or that it cannot be controlled
-Heating and lighting of office example: its a fixed cost, but cost changes with seasonal factors

Front 6

"variable overhead efficiency variance"

Back 6

Is a misnomer. This variance has nothing to do with how efficiently or inefficiently variable overhead resources were used. For example, if direct labor-hours are used as the activity base, an unfavorable variable overhead efficiency variance will occur whenever the actual direct labor-hours exceeds the standard # of direct labor-hours allowed for the actual input

Front 7

The flexible budget can serve as the basis for computing predetermined overhead rates for product costing purposes.
Predetermined overhead rate (formula)=

Back 7

Overhead from the flexible budget at the denominator level of activity/Denominator level of activity

Front 8

Budget variance (formula)=

Back 8

Actual fixed overhead cost - budgeted fixed overhead cost

Front 9

Fixed overhead volume variance (formula)=

Back 9

volume variance= fixed overhead rate x (Denominator hours - standard hours allowed)

If the denominator activity is greater than the standard hours allowed for the output of the period, the volume variance is unfavorable

Front 10

The sum of the overhead variances determines over/underapplied

Back 10

Variable overhead spending variance
+variable overhead efficiency variance
+fixed overhead budget variance
+fixed overhead volume variance
=Overhead underapplied or overapplied

Front 11

Relevant cost

Back 11

a cost or benefit that differs between alternatives.

Front 12

Two broad classifications of costs are irrelevant in decisions:

Back 12

1. Sunk costs
2. Future costs that differ between alternatives

Front 13

To make a decision, you should:

Back 13

1. Eliminate the costs and benefits that do not differ between alternatives (sunk costs, future costs that do not differ...)
2. Make a decision based on the remaining costs and benefits-those that differ between alternatives

Front 14

You should disregard irrelevant costs and benefits in decisions for three reasons:

Back 14

1. In any situation, the irrelevant costs greatly outnumber the relevant costs
2. Intermingling irrelevant with relevant costs may draw attention away from the really critical data
3. Including irrelevant costs often leads to mistakes

Front 15

When adding or dropping a segment such as a product line, if the contribution margin lost by dropping a segment is greater than the fixed costs that can be avoided

Back 15

then the segment should be retained (kept, not dropped)

Front 16

Make or buy decision

Back 16

A decision to produce a part (or sevice) internally rather than to buy it from a supplier. The relevant costs in such a decision, as always, are the costs that differ between the alternatives

Front 17

Opportunity cost may be a key factor in a make or buy decision as well as in other decisions:

Back 17

1. If the resources that are currently being used to make a part or a product all have excess capacity, then the opportunity cost is zero
2. On the other hand, if there is no excess capacity, then there is an opportunity cost. This opportunity cost is the incremental profit that could be obtained from the best alternative use of the capacity. The opportunity cost should be included in the analysis.

Front 18

Special orders

Back 18

One time orders that don't affect regular sales. Such an order should be accepted if the incremental revenue from the special order exceeds the incremental (avoidable) costs of the order. Any opportunity costs should be taken into account

Front 19

Constraint

Back 19

Anything that limits the organizations capability to further its goals. For example, when a profit making company is unable to satisfy the demand for its products with its existing capacity, it has a production constraint. When the constraint is a machine or workstation, it is called a bottleneck.

Front 20

The key to the efficient utilization of a scarce resource:

Back 20

Is the contribution margin per unit of the constrained resource. The products with the greatest CM per unit are the most profitable, and should be emphasized over products with a lower CM per unit

Front 21

Elevating the constraint

Back 21

Increasing the amount of the constrained resource. Ex: working overtime on the bottleneck, buying another machine, subcontracting work

Front 22

Capital budgeting

Back 22

The process of planning significant investments in projects that have long-term implications such as the purchase of new equipment or the introduction of a new product

Front 23

Capital budgeting--> screening decisions:

Back 23

Potential projects are categorized as acceptable or unacceptable

Front 24

Capital budgeting-->Preference decisions:

Back 24

After screening out all of the unacceptable projects, more projects may remain than can be funded. Consequently, projects must be ranked in order of preference.

Front 25

Discounted cash flow methods

Back 25

Give full recognition to the time value of money (a dollar in the future is worth less than a dollar today)

Front 26

The net present value method basic steps:

Back 26

1. Determine the required investment
2. Determine the future cash inflows and outflows resulting from the investment
3. Use the present value tables to find the appropriate present value factors
4. Multiply each cash flow by the appropriate PV factor and then sum results. The end result (which is net of the initial investment) is called the net present value of the project.
5. In a screening decision, if the net PV is positive, the investment is acceptable. If the net PV is negative, the investment should be rejected

Front 27

Present value tables:

Back 27

a. The values (or factors) in the present value tables depend on the discount rate and the number of periods (usually years)
b. The discount rate in present value analysis is the company's required rate of return, which is often the company's cost of capital. The cost of capital is the average rate of return the company must pay its long term creditors and shareholders for the use of their funds

Front 28

Typical cash flows associated with an investment-->outflows:

Back 28

Include initial investment, installation costs, increased working capital needs, repairs and maintenance, and incremental operating costs

Front 29

Typical cash flows associated with an investment-->Inflows:

Back 29

include incremental revenues, reductions in costs, salvage value, and release of working capital at the end of the project

Front 30

Internal rate of return method

Back 30

Is another discounted cash flow method used in capital budgeting decisions. It is the rate of return promised by an investment project over its useful life; it is the discount rate for which the net present value of a project is zero.

Front 31

The total cost approach (to compare projects)

Back 31

It the most flexible method.

Front 32

The incremental-cost approach (to compare projects)

Back 32

Is a simpler and more direct route to a decision since it ignores all cash flows that are the same under both alternatives

Front 33

Preference decisions

Back 33

Involve ranking investment projects. Such a ranking is necessary whenever funds available for investment are limited. Sometimes called rationing rationing decisions because they ration limited investment funds among competing investment opportunities

Front 34

To make a valid comparison between projects that require different investments, the project profitability index is computed:

Back 34

Net present value of the object/ Investment required

-The index is basically the same idea as the contribution margin per unit of the constrained resource in ch. 11. In this case, the constrained resource is investment funds.

The higher the profitability index, the more desirable the project

Front 35

Payback period

Back 35

Is the number of years required for an investment project to recover its cost out of the cash receipts it generates

When the cash inflows from the project are the same every year, the following formula can be used to compute the payback period:

Investment required/ Net annual cash inflows

Front 36

Simple rate of return method

Back 36

Another capital budgeting method that does not involve discounted cash flows. Focuses on accounting net operating income, rather than on cash flows:

Annual incremental net operating income/Initial investment

If new equipment is replacing old equipment, then the "initial investment" in the new equipment is the cost of the new equipment reduced by any salvage value obtained from the old equipment