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97 Cards in this Set
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Define Decentralization. |
Definition: the decision making authority that is spread throughout the organization, rather than being confined to a few top executives. Chapter. 11: Performance Management in Decentralized Organizations |
Not confined to just the top. First subject of chapter eleven. |
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What are the advantages of Decentralization? |
1) Top management freed to concentrate on strategy 2) Lower-level managers to gain decision-making experience 3) Lower- level decisions based on better info 4) Lower level managers can respond faster to customers 5) Decision-making authority leads to job satisfaction Chapter 11: Performance Management in Decentralized Organizations |
keywords: Feedom, experience, better, faster, satisfaction. 5 advantages. |
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What are the disadvantages of Decentralization? |
1) May be a lack of coordination among autonomous managers 2) Different objectives: Lower-level managers objectives may not be same with organization 3) Lower-level managers may take decisions without out seeing the "big pictures" 4) May be difficult to spread innovative ideas in the organization Chapter 11: Performance Management in Decentralized Organizations |
keywords: lack, objectives, picture, difficult. 4 disadvantages. |
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Why do decentralized organizations need responsibility accounting systems? |
Decentralized organizations need responsibility accounting systems because they link lower-level managers' decision-making authority to accountability for the outcomes of those decisions. Chapter 11: Performance Management in Decentralized Organizations |
keyword: link |
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What is a Responsibility Center used for? |
A Responsibility Center is used in any part of an organization whose manager has control over, and is accountable, for cost, profit, or investments. Chapter 11: Performance Management in Decentralized Organizations |
keywords: "any part", "control". 3 parts. |
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What are the three parts of a Responsibility Center? |
1) Cost Center 2) Profit Center 3) Investment Center Chapter 11: Performance Management in Decentralized Organizations |
1) $ 2) $ plus 3) V.C. |
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What are the responsibilities of a Cost Center? |
Manager ONLY controls COST. Chapter 11: Performance Management in Decentralized Organizations |
$$$ |
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What are the responsibilities of a Profit Center? |
Manager has control over BOTH COSTS and REVENUE.
Chapter 11: Performance Management in Decentralized Organizations |
$$, and $ plus |
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What are the responsibilities of an Investment Center? |
Manager controls ALL THREE account-abilities: COST, REVENUE, and INVESTMENTS.
Chapter 11: Performance Management in Decentralized Organizations |
$$, $+, VC |
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What is the purpose of calculating Return On Investments? |
The higher a business segments' R.O.I., the greater the profit earned per dollar invested in the segment's operating assets.
Chapter 11: Performance Management in Decentralized Organizations |
"the higher a, blank, the greater the, blank, per dollar invested in the, blank." |
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What is the main formula for R.O.I.? |
N.O.I., divided by Average Operating Assets.
Chapter 11: Performance Management in Decentralized Organizations |
Division. |
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What is the formula for the margin percentage? |
N.O.I., divided by Sales. Chapter 11: Performance Management in Decentralized Organizations |
"Blank, by Sales." |
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What is the formula for Turnover? |
Sales divided by Average Operating Income Chapter 11: Performance Management in Decentralized Organizations |
"Blank, by Operating, blank." |
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What are the two formulas for R.O.I.? |
1) N.O.I., divided by Average Operating Assets, and 2) Margin Percentage, multiplied by Turnover.
Chapter 11: Performance Management in Decentralized Organizations |
1) division 2) multiplication |
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What are the criticisms of R.O.I.? |
1) Without balance card, management may not know how to increase R.O.I. 2) Managers often commit to uncontrollable costs 3) Managers evaluated per R.O.I may reject profitable investments Ch. 11: Performance Management in Decentralized Organizations |
Balance card? Commit. Rejection. |
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What is Residual Income? |
Residual Income is the net operating income, also known as N.O.I., that an investment center earns above the minimum required return on its operating assets. Chapter 11: Performance Management in Decentralized Organizations |
"Above the minimum" |
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What is the formula of Residual Income? |
N.O.I., minus (average operating assets, multiplied minimum required rate of return). Chapter 11: Performance Management in Decentralized Organizations |
Blank, Parentheses. |
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What is the formula for Minimum Required Return? |
Operation Assets multiplied by Required Rate of Return Chapter 11: Performance Management in Decentralized Organizations |
Multiplied |
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Why do we use Residual Income? |
We use Residual Income because it encourages managers to make profitable investments that would be rejected by managers using R.O.I. Chapter 11: Performance Management in Decentralized Organizations |
R.I. versus R.O.I. |
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What is the disadvantage of Residual Income? |
The disadvantage of using Residual Income it that it cannot compute the comparison of performance between divisions of different sizes.
Chapter 11: Performance Management in Decentralized Organizations |
Comparing, blank. |
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What are Operating Performance Measures? |
The non-financial measurements of actions, especially in regards to time, that drive sales.
Chapter 11: Performance Management in Decentralized Organizations |
Not $ |
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What is the formula for Throughput Time? |
The sum of all organization actions except TIME: The sum of Process + Inspection + Move + Queue Chapter 11: Performance Management in Decentralized Organizations |
"...Except..." |
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What is the formula for Manufacturing Cycle Efficiency? |
M.C.E. is Value-Added Time (also known as "Process Time"), divided by Manufacturing Cycle Time (also known as "Throughput Time.") Chapter 11: Performance Management in Decentralized Organizations |
P.T., divided by T.T. |
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What is the formula for Delivery Cycle Time? |
D.C.T. is the sum of ALL organizational action times: Wait, Inspection, Process, Move, and Queue. Chapter 11: Performance Management in Decentralized Organizations |
All |
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What is a Balance Scorecard? |
A Balance Scorecard is an integrated set of performance measures that are derived from and support a company's strategy. Chapter 11: Performance Management in Decentralized Organizations |
Performance |
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What are the performance measures of a company's vision and strategy? |
1) Financial 2) Customer 3) Internal Business Process Learning & Growth Chapter 11: Performance Management in Decentralized Organizations |
Four. |
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How do financial and non-financial measures affect a balanced scorecard? |
Financial measures indicate and summarize the results of past actions, whereas non-financial measures are lead indicators of future financial performance. Chapter 11: Performance Management in Decentralized Organizations |
Past and future |
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What do Relevant Costs and Relevant Benefits have in common? |
Both Relevant costs and relevant benefits differ between alternatives. Chapter 12: Differential Analysis: The Key to Decision making |
Alternatives |
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What is an Avoidable Cost? |
An avoidable cost is a cost that can be eliminated, in whole or in part, by choosing one alternative over another. Chapter 12: Differential Analysis: The Key to Decision making |
Choice |
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What is an Irrelevant Cost, and what are the categories of irrelevant costs? |
An irrelevant cost is an unavoidable cost. If you cannot get rid of the cost, then it's irrelevant! Two categories that are always irrelevant are sunk costs and a future cost that doesn't change between alternatives.
Chapter 12: Differential Analysis: The Key to Decision making |
Futile |
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What are the two steps for Decision Making? |
1) Eliminate costs and benefits that do not differ between alternatives. And, 2) Use the remaining costs and benefits that differ between alternatives in making the decision (also known as the relevant costs and benefits). The costs that remain are differential or avoidable costs.
Chapter 12: Differential Analysis: The Key to Decision making |
Eliminate what, and use what? |
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In the decision making process, the costs and benefits that remain are also known as, what? |
Relevant Costs and Benefits. The cost and benefits that are differential between alternatives, or are avoidable in cost. Chapter 12: Differential Analysis: The Key to Decision making |
Alternatives |
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True or False: Costs that are relevant in one decision situation may not be relevant in another context. |
Answer: True.
Chapter 12: Differential Analysis: The Key to Decision making |
Does one cost matter throughout all decision making phases? |
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True or False: In each decision process, managers examining the same costs is not necessary. |
False: Managers must examine the data at hand and isolate the relevant costs, because costs that are relevant in one decision situation, may not be relevant in another context. Chapter 12: Differential Analysis: The Key to Decision making |
Is the same cost repeated needed in every decision needed? |
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What is the Differential Approach per making decisions? |
The Differential Approach is when you calculate the net operating income for your current situation, then you calculate the N.O.I. for your current situation with the new variable. You then take the difference between your current situation and the variable situation at the expense, profit, and N.O.I. difference. Chapter 12: Differential Analysis: The Key to Decision making |
Three columns. |
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Why is the Differential Approach desirable? |
The Differential Approach is desirable because: 1) Rarely will a fully detailed income statement will be available for both alternatives 2) Mingling irrelevant costs with relevant may cause confusion and may distract from the critical data. Chapter 12: Differential Analysis: The Key to Decision making |
Two reasons: Rare situations and confusion. |
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What is the Contribution Approach? |
The contribution approach is when the contribution margin of two or products is divided by sales. With two C.M. ratios, you then compare the different products, and choose the product with the highest ratio to focus on production. Chapter 12: Differential Analysis: The Key to Decision making |
C.M. divided by S. |
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What is the Comparative Income Approach? |
1) Calculate N.O.I. with product 2) Calculate N.O.I. without product 3) Calculate expenses keeping in mind relevant and irrelevant costs 4) Compare difference (Did you experience a Net Loss or a Net Gain through the expense allocations?) Chapter 12: Differential Analysis: The Key to Decision making |
Similar to differential. |
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If you are experiencing a loss of revenue per a segment, why should you still consider keeping that segment? |
You should still consider keeping this segment because it depends on how you distribute the resources or duties once that segment is gone. Allocation can make a segment look less profitable than it really is. Also, keep in mind to not include unavoidable common fixed costs, because they make a product line appear unprofitable. Chapter 12: Differential Analysis: The Key to Decision making |
Unavoidable allocation. |
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What is the Make or Buy Decision Analysis? |
The Make or Buy Decision is a decision to carry out one of the activities in the value chain internally, rather than by externally from a supplier.
Chapter 12: Differential Analysis: The Key to Decision making |
In-house everything? |
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What is Vertical Integration? |
Vertical Integration is when a company is involved in more than one activity in the entire value chain. Chapter 12: Differential Analysis: The Key to Decision making |
So many products! |
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What are some advantages of being vertically integrated? |
1) Independent from supplies leads to smoother flow of parts and materials 2) Better quality control, and 3) Realizing profits made between "making," "buying," and regular operations.
Chapter 12: Differential Analysis: The Key to Decision making |
Three. |
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What is a disadvantage of being vertically integrated? |
A disadvantage of being vertically integrated is not taking advantage of a suppliers economies of scale, thus reducing possible input costs. Chapter 12: Differential Analysis: The Key to Decision making |
Bigger and less. |
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What is a Special Order? |
A Special Order is a one-time order that is not considered part of the company's normal ongoing business. Chapter 12: Differential Analysis: The Key to Decision making |
Blank, Not considered.
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True or False: Manufacturing Overhead costs would be affected by Special Orders. |
False: Special orders are not considered as part of a businesses ongoing production. So M.O.H. would not be affected. Chapter 12: Differential Analysis: The Key to Decision making |
Manufacturing Overhead costs are apart of a businesses ongoing production. |
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True or False: per Special Orders, only incremental costs and benefits are relevant. |
Answer: True!
Chapter 12: Differential Analysis: The Key to Decision making |
What do special orders affect? |
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What is the order of operations when calculating a profit or loss for a Special Order? |
Multiply customer Requested number of units by the suggested price per unit. Also multiply requested number of units per variable cost per unit. Add together, with the sum resulting as a net loss or gain. Chapter 12: Differential Analysis: The Key to Decision making |
Multiply, multiply, add. |
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What is the order of operations when calculating the bare minimum price before losing profit on a Special Order? |
1) Multiply variable cost with number of units 2) Add Fixed Costs if any 3) Total Relevant Costs divided by number of units 4) Sum equals bare minimum price! Chapter 12: Differential Analysis: The Key to Decision making |
Three steps: multiply, maybe add, Divide, and Sum! |
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What is a Constraint? |
A Constraint is when a limited resource of some type restricts the company's ability to satisfy demand. Chapter 12: Differential Analysis: The Key to Decision making |
Can the company?
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What is Bottleneck? |
Bottleneck: the machine or process that is limiting overall output (i.e. the constraint). Chapter 12: Differential Analysis: The Key to Decision making |
Constraint. |
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What should you keep in mind when utilizing constrained resources? |
1) Fixed costs are not affected by constraints, so select the C.M.'s that maximizes profit. 2) Company's should not promote high C.M. products. 3) Total C.M.'s will be maximized by promoting products, or accepting orders that create highest C.M. Chapter 12: Differential Analysis: The Key to Decision making |
Contribution Margins. |
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What is the order of operations when considering between constrained resources? |
When calculating two different products, you must: 2) Multiply the process time per C.M. margin 3) Choose the highest, A.K.A. most profitable product
Chapter 12: Differential Analysis: The Key to Decision making |
Per the time given, which product produces the most profit? |
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What is the order of operations when allotting the constrained resources? |
When allotting between resources: 1) Chose the demand of the product with the most profitable C.M. 2) Multiply that product's demand by the product time required per each unit 3) This equals to the time needed to make product 1 4) Subtract product 1's time from the total time available. This will be the time for the second most profitable product. 5) Divide the remaining time per time required for the last product. 6) Sum is the number of units that can be produced for remaining product. Chapter 12: Differential Analysis: The Key to Decision making |
Product Demands. |
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How do you calculate the total contribution margin revenue? |
With the highest C.M. product demand, and the calculated allotted demand for the second C.M. product, you multiply them against their respectable C.M. margin per unit price. With these two products, you add them together, resulting in total contribution margin revenue.
Chapter 12: Differential Analysis: The Key to Decision making |
Demands, C.M. per unit, Add. |
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True or False: increasing the capacity of a constrained resource should lead to increased production and sales? |
True! Chapter 12: Differential Analysis: The Key to Decision making |
What happens when you keep turning the faucet on narrow hose? |
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How do you calculate if a suppliers quota will be enough for your demand? |
With your two different products: 1) Multiply the Required supply per unit by the Demand 2) Add the results to both products together 3) Is this total less, equal, or more to the amount the supplier can give?
Chapter 12: Differential Analysis: The Key to Decision making |
Calculate your processes for your products. |
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How do you select the best plan of action when calculating maximum profits per constrained resources? |
1) Calculate C.M. Margins per products 2) Divide C.M.'s by supply per unit 3) Select the Highest C.M. Product, and then multiply that productsSupply per unit by it's demand 4) Subtract that total from the given supplier amount 5) The remaining supplies, divide by the second products required supply amount per unit 6) This sum is the remaining maximized amount. Chapter 12: Differential Analysis: The Key to Decision making |
C.M.'s, divide supply, highest, .... |
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Should a company experience a constraint with one of it's products, how should management decide how much they are willing to pay above the usual price to obtain more supplies? |
When considering the need for supplies, note that those supplies are to help the product with the lowest contribution margin. Divide the item with the low C.M. Margin by the supply per unit. That amount is how much you should be willing to pay. Chapter 12: Differential Analysis: The Key to Decision making |
Lowest C.M. (blank), divide by (blank). |
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What is relaxing, or elevating, a constraint. |
When elevating or relaxing a constraint, a manager increases the supply capacity of a bottleneck. Chapter 12: Differential Analysis: The Key to Decision making |
Turning the faucet. |
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What are the six ways of relaxing a constraint? |
1) Working overtime on the bottleneck 2) subcontracting processes of the bottleneck 3) Investing additional machines to bottleneck 4) Shifting non-bottle neck employees to bottleneck 5) Focusing business process improvements toward bottleneck 6) Reducing defective units processed by bottleneck Chapter 12: Differential Analysis: The Key to Decision making |
OT, Contractor, Additional, Shift, Improve, and Reduce. |
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True or False: in some industries, a number of end products are produced from single raw material inputs. |
Answer: True!
Chapter 12: Differential Analysis: The Key to Decision making |
Tree Diagram |
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What is a joint product? |
A joint product is when two or more products are produced from a common input. Chapter 12: Differential Analysis: The Key to Decision making |
Oil is to gas, chemicals... |
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What is a split-off point? |
A split-off point is when the point in manufacturing process where each joint product can be recognized as a separate product. Chapter 12: Differential Analysis: The Key to Decision making |
After the refinery. |
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What are the pitfalls of allocation? |
Joint costs are usually allocated among different products at the split-off point and the typical approach is to allocate join costs according to relative sales value of the end products, but this is very dangerous for decision making! Chapter 12: Differential Analysis: The Key to Decision making |
Nitpicking. |
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True or False: Joint costs are relevant in decisions per products split-off actions. |
Answer: False! Joint costs are irrelevant in decisions. Chapter 12: Differential Analysis: The Key to Decision making |
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True or False: Joint costs should not be allocated to end products for decision making processes. |
Answer: True! Chapter 12: Differential Analysis: The Key to Decision making |
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When is it profitable to continue processing a joint product after split-off? |
It is profitable to continue processing a joint product ONLY IF: The incremental revenue from such a processing is greater than the incremental processing costs incurred after the split off.
Chapter 12: Differential Analysis: The Key to Decision making |
Incremental revenue and costs.
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How do you calculate the decision of selling a product at split-off or after processing? |
1) Sales value after the further process, minus the sales value at split off. 2) Total is the incremental value. Subtract cost of further process. 3) If the net amount is positive, choose to sell the product after processing. If negative, sell at split-off.
Chapter 12: Differential Analysis: The Key to Decision making |
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Why should you be cautious about identifying activity-based costing (Also known as A.B.C.)? |
You should be cautious because although helpful: 1) Managers could read too deep into "trace-ability" 2) People assume that if you can trace it, you can avoid it 3) Before making a decision, managers must judge between relevant costs and if they are avoidable or not. Chapter 12: Differential Analysis: The Key to Decision making |
Reading into things too much is bad. |
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True or False: Per relevant and irrelevant costs, if you find a cost and if you can trace it, you can automatically avoid it. |
False! People assume that if you can trace it, you can avoid it. No, you must use your best judgement and decide. Chapter 12: Differential Analysis: The Key to Decision making |
Looking at numbers for too long will play with your mind. |
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What are the two broad categories regarding capital budgets? |
Screening Decisions and Preference Decisions Chapter 13: Capital Budget Decisions |
Meet Standards, and Selecting Competitive Budgets |
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What are the three Cash Flow Methods? |
Payback Method, Net Present Value, and Internal Rate of Return. Chapter 13: Capital Budget Decisions |
P.M., N.P.V., and I.R.R. |
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What method is linked to the Operating Income Method? |
Simple Rate of Return (also known as S.R.R.) because it deals with incremental net operating income. Chapter 13: Capital Budget Decisions |
Incrementals |
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Repairs & Maintenance and Initial Investments are examples of... |
Typical Cash flows. Chapter 13: Capital Budget Decisions |
Negative impact. |
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Reduction of Costs and Release of Working Capital are examples of... |
Typical Cash Inflows Chapter 13: Capital Budget Decisions |
Positive impact (Saves money). |
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Incremental Revenues and Salvage Values are examples of.... |
Typical Cash Inflows Chapter 13: Capital Budget Decisions |
Positive impact (Saves money). |
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Working capital and incremental operating costs are examples of... |
Typical Cash flows. Chapter 13: Capital Budget Decisions |
Negative impact. |
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Time Value of Money best fits what type of Method: Cash Flow or Operating Income? |
Answer: Cash Flow. Particularly DISCOUNTED Cash Flow. Chapter 13: Capital Budget Decisions |
The one with the most methods. |
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The Payback Method is the length of time it takes for a project to recoup it's initial costs out of cash receipts. It's not cash flow based, does not consider time based, and must be used if annual cash flow is the same each year. What is the formula?
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To calculate Payback Period in years: Divide Investment Required by Annual Net Cash Inflow. Chapter 13: Capital Budget Decisions |
Proposal divided by the result.
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True or False: a strength of the payback method is that it proves a shorter payback period means a more desirable investment. |
Answer: False! A shorter payback period does not always mean a more desirable investment. Chapter 13: Capital Budget Decisions |
Other strengths of payback is that identifies investments and products that recoup initial cash and investments quickly. |
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What does Net Present Value calculate? |
N.P.V. calculates the difference between the present value (a.k.a. the P.V.) of a project's cash inflows, with the present value of it's cash outflows. Chapter 13: Capital Budget Decisions |
Inflow versus Outflow |
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What is the order of operations when calculating N.P.V.?
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1) Calculate Annual Net Cash Inflow (Revenue minus Costs, Salary, etc) 2) Table: Less Current Investments & Needs 3) Add Annual Net Cash Flow per Period (black bar) 4) Less Period Costs per Periods (Clear sheet) 5) Sum equals Net Present Value! Chapter 13: Capital Budget Decisions |
Revenue, Table, Black Bar, Clear Bar, then sum. |
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If N.P.V. produces a negative answer, why is the project not acceptable?
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If N.P.V. is negative, then the project is unacceptable because it promises a return that is less than the required rate of return. Chapter 13: Capital Budget Decisions |
Return rate. |
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True or False: Net Present Value automatically provides for Return of the Original Investment.
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Answer: True! Chapter 13: Capital Budget Decisions |
N.P.V. helps.
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This method is used when computing the discount rate that will cause N.P.V. of a project to be zero. |
Answer: Internal Rate of Return Method Chapter 13: Capital Budget Decisions |
P.V. equals (Investment Required divided by Annual Net Cash Flows)
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What is the formula for I.R.R.?
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Internal Rate of Return is when P.V. equals (Investment Required divided by Annual Net Cash Flows.) This will result into a decimal, in which you will use the black bar sheet to look up the period, then percentage. Chapter 13: Capital Budget Decisions |
This method is used when computing the discount rate that will cause N.P.V. of a project to be zero. |
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Why is the I.R.R. method questionable? |
The I.R.R. method is questionable because it assumes that cash inflows are reinvested into I.R.R. If I.R.R. is high, this amount will be unrealistic. It's more realistic to assume cash flow can be reinvested at the discount rate. Chapter 13: Capital Budget Decisions |
I.R.R. versus Discount
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What is the Total Cost Method?
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The Total Cost Method is calculating the N.P.V. for two or more alternatives, finding the difference between them, and then selecting the higher N.P.V. The difference calculated will be in favor of the larger N.P.V. Chapter 13: Capital Budget Decisions |
Two or more then compare and support. |
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What is the Least Cost Method?
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The Least Cost Method is when revenues are not directly involved with decisions and when managers should choose the alternative that has the least total cost from a P.V. perspective. Chapter 13: Capital Budget Decisions |
Same as Total Cost, but select whichever will save you the most money. |
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What is Uncertain Cash Flows and what is the order of operations?
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Uncertain Cash Flows is when parts of cash flow have not been calculated or estimated: 1) Set table up with (investment) 2) Add Annual Cash Inflow (Period, find rate, multiply by amount) 3) Sum equals N.P.V. 4) N.P.V. divided by Present Val. percentage Chapter 13: Capital Budget Decisions |
N.P.V. divided by uncertain period
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When ranking investment projects, do you use Preference or Screening based decisions?
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Answer: Preference Chapter 13: Capital Budget Decisions |
One determines if investments are acceptable, whereas the other determines between appeal.
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True or False: when using I.R.R. the lower the I.R.R., the more desirable the project. |
Answer: False! When using I.R.R. you will want the higher interest to get more on return. Chapter 13: Capital Budget Decisions |
Preference Rule
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True or False: N.P.V. of one project cannot be directly compared to another project N.P.V. unless investments are equal.
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Answer: True! Chapter 13: Capital Budget Decisions |
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What is the formula for Project Profitability Index? |
N.P.V. of Project divided by Investment Required.
Chapter 13: Capital Budget Decisions |
A, B, A divided by B. |
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What is the Simple Rate of Return Method formula? |
S.R.R. Method is Annual Incremental N.O.I. divided by Initial Investment.
Chapter 13: Capital Budget Decisions |
P.S. Initial Investment should be reduced by any salvage from the sale of the old equipment |
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What is the order of operations for S.R.R.? |
1) Calculate N.O.I. by combining Incrementals (Incremental Revenue minus Incremental costs or depreciation) 2) Divide Annual Incremental N.O.I. by Requested Investment Chapter 13: Capital Budget Decisions |
Revenue plus depreciation, divide by by request |
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What are some shortcomings of S.R.R.? |
Simple Rate of Return: 1) Ignores the value of money 2) Value outcomes will be inconsistent in desirability 3) Behavioral implications - if investment managers operate base on R.O.I. they may bypass investment opportunities.
Chapter 13: Capital Budget Decisions |
Time Value, Inconsistencies, Manager Behavior. |
