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176 Cards in this Set
- Front
- Back
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In a centralized company, all major planning and operating decisions are made by... |
Top management |
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A one-person, owner-manager-operated company is... |
Centralized, because all plans and decisions are made by one person. |
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Centralization may be desirable when? |
When the business is small, and operated by the owner; because the business owner's close supervision ensures that the business will be operated in the way he wants. |
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A company where managers of separate divisions or units are delegated operating responsibility is called... |
A decentralized company |
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In a decentralized company, the division (unit) managers are responsible for... |
Planning and controlling the operations of their divisions. |
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Divisions are often structured around what? |
Products, customers, or regions. |
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The proper amount of decentralization for a company depensd on the company's... |
Unique circumstances |
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For large companies, it is difficult for top management to do two things: |
1. Maintain daily contact with all operations 2. Maintain operating expertise in all product lines and services. |
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T/F: Division managers in large companies often anticipate and react to operating data more quickly than could top management. |
True |
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T/F: Decentralized operations provide excellent training for managers. |
True |
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Why are managers of decentralized operations often more creative in suggesting operating and product improvements? |
They work closely with the customers. |
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5 Advantages of Decentralization |
1. Allows managers closest to the opreations to make decisions 2. Provides excellent training for managers 3. Allows managers to become experts in their area 4. Helps retain managers 5. Improves creativity and customer relations. |
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2 Disads of Decentralization: |
1. Decisions made by managers may negatively affect profits of the company. 2. Duplicates assets and expenses. |
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In a decentralized business, accounting assists managers in... |
Evaluating and controlling their areas of responsibility. |
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An accountant's area of responsibility is called... |
Responsibility centers |
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The process of measuring and reporting operating data by responsibility center is called... |
Responsibility Accounting |
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Three types of responsibility centers: |
1. Cost centers 2. Profit centers 3. Investment centers |
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Cost centers have responsibility over... |
Costs |
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Profit centers have responsibility over... |
Revenues and costs |
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Investment centers have responsibility over... |
Revenues, costs, and investment in assets. |
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T/F: A cost center manager makes decisions concerning sales and the amount of fixed assets invested in the center. |
False. The cost center manager has only responsibility for the costs. |
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T/F: Cost centers may exist within other cost centers. |
True |
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Responsibility accounting for cost centers focuses on what? |
Controlling and reporting of costs. |
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T/F: Budget performance reports that report budgeted and actual costs are normally prepared for each cost center. |
True |
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A profit center manager has the responsibility and authority for... |
Making decisions that affect revenues and costs, and thus profits. |
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t/F: Profit centers may be divisions, departments, or products. |
True |
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T/F: The manager of a profit center makes decisions concerning the fixed assets invested in the center. |
False. The manager of a profit center doesn't make decisions concerning the fixed assets invested in the center. |
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T/F: Profit centers are an excellent training assignment for new managers. |
True |
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Responsibility accounting for profit centers focuses on... |
Reporting revenues, expenses, and income from operations. |
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Responsibility accounting reports for profit centers take the form of what? |
Income statements |
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The profit center income statement should include only... |
Revenues and expenses that are controlled by the manager. |
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Revenues earned by the profit center are called... |
Controllable revenues |
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Costs that can be influenced by the decisions of profit center managers are called... |
Controllable expenses |
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The controllable expenses of profit centers include direct operating expenses such as... |
Sales salaries and utility expenses. |
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A profit center may incur expenses provided by... |
Internal centralized service departments. |
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Examples of internal centralized service include: |
Research and development, legal, telecommunications, information and computer systems, facilities management, purchasing, publications and graphics, payroll accounting, transportation, and personnel administration. |
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Are service department charges direct or indirect expenses to a profit center? |
indirect. |
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T/F: Service department charges are similar to the expenses that would be incurred if the profit center purchased the services from outside the company. |
True |
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A profit center manager has control over service department expenses if... |
The manager is free to choose how much service is used. |
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In the cases where the manager is free to choose how much service is used, what's allocated to profit centers based on the usage of the service by each profit center? |
Service department charges |
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T/F: The operating expenses consist of direct expenses, such as the wages and salaries of a division's employees. |
True |
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The rates at which services are charged to each division are called... |
Service department charge rates. |
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Service Department Charge Rate Formula |
Service Dept. Expense —————————— Total Service Dept. Usage |
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Service Department Charge Formula |
Service Usage x Service Dept. Charge Rate |
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In evaluating the profit center manager, should the income from operations be compared over time to a budget? |
Absolutely
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in evaluating the profit center manager, should the income from operations be compared across profit centers? |
No, because the profit centers are usually different in terms of size, products, and customers. |
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An investment center manager has the responsibility and authority to... |
Make decisions that affect not only costs and revenues but also the assets invested in the center. |
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Investment centers are often used where? |
In diversified companies organized by divisions. |
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When investment centers are used in diversified companies organized by divisions, the divisional manager has authority similar to that of what? |
A chief operating officer or president of a company. |
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Is income from operations a part of investment center reporting? |
Yes |
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What two additional measures of performance are used for investment centers? |
1. Rate of return on investment 2. Residual Income |
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Does income from operations reflect the amount of assets invested in each center? |
no, it doesn't |
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Rate of return on investment formula: |
Income from Op. ————————— Invested Assets |
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Why is the rate of return on investment useful? |
Because the three factors subject to control by divisional managers (revenues, expenses, and invested assets) are considered. |
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The higher the rate of return on investment... |
The better the division is using its assets to generate income. |
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In effect, the rate of return on investment measures what? |
The income on each dollar invested. |
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T/F: The rate of return on investment can be used as a common basis for comparing divisions with each other. |
True |
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To analyze the differences in the rate of return on investment across divisions, what formula is used? |
The DuPont formula. |
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The DuPont formula views the rate of return on investment as the product of what two factors? |
1. Profit margin 2. Investment turnover |
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The profit margin is... |
The ratio of income from operations to sales. |
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The investment turnover is... |
The ratio of sales to invested assets. |
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DuPont Rate of Return on INvestment = |
Income from Op. Sales
———————— x ———— Sales Invested Assets |
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Why is the DuPont formula useful in evaluating divisions? |
Because the profit margin and investment turnover reflect... 2. Operating efficiency |
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The rate of profit earned on each sales dollar is... |
Operating profitability |
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The number of sales dollars generated by each dollar of invested assets is... |
Operating efficiency |
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Is the rate of return on investment useful in deciding where to invest additional assets or expand operations? |
Yes |
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What is the disadvantage of using rate of return on investment as a performance measure? |
It may lead divisional managers to reject new investments that could be profitable for the company as a whole. |
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Residual income is useful how? |
It's useful in overcoming some of the disadvantages of the rate of return on investment. |
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The excess of income from operations over a minimum acceptable income from operations is... |
Residual income. |
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The minimum acceptable income from operations is computed by... |
Multiplying the company minimum rate of return by the invested assets. |
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Who sets the minimum rate? |
Top management, based on factors such as the cost of financing |
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The major advantage of residual income as a performance measure is that it... |
Considers both the minimum acceptable rate of return, invested assets, and the income from operations for each division. |
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Does residual income discourage division managers to maximize income from operations in excess of the minimum? |
No, it encourages division managers to maximize income from operations in excess of the minimum. |
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A set of multiple performance measures for a company is called... |
A balanced scorecard |
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A balanced scorecard normally includes performance measures for... |
Customer services, innovation and learning, and internal processes. |
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Performance measures for learning and innovation often revolve around... |
A company's research and development efforts. |
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A balanced scorecard attempts to.. |
Identify the underlying nonfinancial drivers of financial performance related to innovation and learning, customer service, and internal processes. |
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When divisions transfer products or render services to each other, what is used to charge for the products or services? |
A transfer price. |
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Why is setting a transfer price a sensitive matter for the managers of both the selling and buying divisions? |
Transfer prices will affect a division's financial performance. |
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Three common approaches to setting transfer prices: |
1. Market price approach 2. Negotiated price approach 3. Cost approach |
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T/F: Transfer prices may be used for cost, profit, but not investment centers. |
False. Transfer prices may be used for cost, profit, and investment centers. |
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The objective of setting a transfer price is to... |
Motivate managers to behave in a manner that will increase the overall company income. |
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Transfer prices can be set as low as the... |
Variable cost per unit. |
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Transfer prices can be set as high as... |
The market price |
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Using the market price, the transfer price is... |
The price at which the product or service transferred could be sold to outside buyers. |
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If an outside market exists for the product or service transferred, would the current market price be a proper transfer price? |
It may be, yes. |
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If unused or excess capacity exists in the supplying division, and the transfer price is equal to the market price, would total company profit be maximized from the market price? |
No, because the manager of the receiving division will be indifferent toward purchasing from the supplier and outside suppliers. |
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What approach allows the managers to agree among themselves on a transfer price? |
Negotiated price approach. |
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What is the constraint on the negotiated price approach? |
More than variable cost per unit, but less than the market price. |
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Increase in the Supplying Division's Income from Operations from Transferring Product with Negotiated Price Formula: |
(Transfer Price - Variable Cost per Unit) x Units Transferred |
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Increase in purchasing division's income from operations from Transferring Product with Negotiated Price Formula: |
(Market price - Transfer Price ) x Units Transferred |
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The negotiated approach only applies when... |
The supplying division has excess capacity. |
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Under the Cost Price approach... |
Costs are used to transfer prices. |
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Two of the costs that can be used in the cost price approach include: |
1. Total product cost per unit 2. Variable cost per unit. |
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if total product cost per unit is used, what is included in the transfer price? |
DM, DL, & F/O |
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If variable product cost per unit is used, then what is excluded in transfer price? |
Fixed Factory Overhead |
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T/F: Actual costs or standard (budgeted) costs may be used in applying the cost price approach. |
True |
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If actual costs are used in applying the cost price approach, then what is transferred to the purchasing division? |
The inefficiencies of the producing division. Thus, there is little incentive for the producing division to control costs. |
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The cost price approach is most often used when... |
The responsibility centers are organized as cost centers. Not profit or investment centers. |
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5 steps of managerial decision-making process: |
1. Identify objective 2. Identify alternative courses of action 3. Gather information and perform differential analysis 4. Make a decision 5. Review, analyze, and assess results of the decision. |
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Differential analysis is also called... |
Incremental analysis |
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What analyzes differential revenues and costs in order to determine the differential impact on income of two alternative courses of action? |
Differential analysis. |
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The amount of increase or decrease in revenue that is expected from a course of action compared to an alternative is called... |
Differential revenue |
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The amount of increase or decrease in cost that is expected from a course of action as compared to an alternative is called... |
Differential cost. |
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The difference between differential revenue and differential costs is the... |
Differential income |
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Leasing or Selling Column: |
Revenues Costs Income (loss) |
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Why is the book value of equipment not considered in the differential analysis? |
Because it's a sunk cost. |
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Costs that have been incurred in the past, cannot be recouped, and are not relevant to future decisions are called... |
Sunk costs |
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T/F: Discontinuing the product or segment usually eliminates all of the product's or segment's variable costs. |
True |
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T/F: It is possible for total company income to decrease rather than increase if the unprofitable product or segment is discontinued. |
True. Fixed costs still remain. |
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Differential Analysis columns on continuing or discontinuing: |
Revenues Costs: —Variable —Fixed —Total Income (loss) |
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Differential analysis columns on making or buying panels involves: |
Unit costs, and a list of the differences between the two. |
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Differential analysis for whether to continue with old machine ore replace the old machine includes: |
Revenues Costs Income (loss) |
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The revenue that is forgone from an alternative use of an asset, such as cash, is called... |
Opportunity cost |
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Process or Sell Differential Analysis Columns: |
Revenues Costs Income (loss) |
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T/F: THe differential costs of accepting additional business depend on whether the company is operating at full capacity. |
True |
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If the company is operating at full capacity, any additional production increases... |
Fixed and variable manufacturing costs. Selling and administrative expenses may also increase because of the additional business. |
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If the company is operating below full capacity, any additional production increases... |
Not much, except maybe selling and administrative expenses. It won't increase fixed manufacturing costs. The differential costs of the additional production are mostly variable costs. |
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Differential analysis columns to reject or accept order: |
Revenues Costs Income (loss) |
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The Robinson-Patman Act. |
Prohibits price discrimination in the U.S. unless price differences can be justified by different costs. |
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The target selling price to be achieved in the long term is the... |
Normal selling price. |
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The normal selling price must be set high enough to... |
Cover all costs and expenses and provide reasonable profit. |
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n deciding whether to accept additional business at a special price, only what costs are considered? |
Differential costs |
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Any price above the differential costs will _______ profits in the short term. |
Increase |
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In the long term, products are sold at... |
Normal prices, rather than special prices. |
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Managers can use one of two basic categories of methods to determine selling price: |
1. Market Methods 2. Cost-plus methods |
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What are the Market Methods? |
1. Demand-based concept 2. Competition-based concept |
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What concept sets the price according to the demand for the product? |
THe demand-based method. |
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If there is high demand for the product, then under the demand-based method, the price is set... |
high |
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The competition-based concept sets the price according to... |
The price offered by competitors. |
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Three cost-plus methods: |
1. Product cost concept 2. Total cost concept 3. Variable cost concept |
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Cost-plus methods determine the normal selling price by... |
Estimating a cost amount per unit and adding markup. |
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Management determines the markup in a cost-plus method based on... |
The desired profit for hte product.
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The markup should be sufficient to... |
Earn the desired profit plus cover any costs and expenses that are not included in the cost amount. |
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The costs of manufacturing the product are... |
Product costs |
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Only the product costs are included in the cost amount per unit to which the markup is added in what concept? |
Product cost concept |
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What is generally included in the markup? |
Estimated selling expenses, administrative expenses, and desired profit |
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The markup per unit under product-cost concept is computed and then added to what to determine the normal selling price? |
Product cost per unit |
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6 steps of applying product cost concept: |
1. Estimate total product costs 2. Estimate total S&A expenses 3. Divide total product cost by number of units expected to be produced and sold to determine total product cost per unit. 4. Compute markup percentage by adding desired profit to Total S&A and dividing that by Total Product Cost 5. Determine markup per unit by multiplying the markup percentage by the product cost per unit. 6. Determine the normal selling price by adding the markup per unit to the product cost per unit. |
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Step 1: Describe how to estimate total product costs: |
DM + DL + F/O |
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Step 3: Calculate Product Cost Per Unit |
Total Product Cost ————————— Estimated Units Produced and Sold |
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Step 4: Calculate markup percentage |
Desired Profit + Total S&A ————————————— Total Product Cost |
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Markup Per Unit is calculated by: |
Markup Percentage x Product Cost per Unit |
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Normal selling price is calculated with: |
Product cost per unit + Markup per unit = Normal selling price per unit |
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Can product cost estimates, rather than actual costs, be used in computing the markup? |
Sure. Management should be careful, however, when using estimated or standard costs. Specifically, estimates should be based on normal operating levels and not theoretical levels of performance. |
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The method of setting prices that combines market-based pricing with cost reduction emphasis is called: |
Target costing |
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Under target costing, a future selling price is... |
Anticipated, using hte demand-based or the competition-based concepts. |
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The target cost is determined by... |
Subtracting a desired profit from the expected selling price. |
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Is the target cost normally less than the current cost? |
Yes
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The planned cost reduction is sometimes referred to as... |
the cost "drift" |
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Costs can be reduced in a variety of ways, such as: |
1. Simplifying design 2. Reducing DM Cost 3. Reducing DL Cost 4. Eliminating waste |
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Is target costing especially useful in highly competitive markets? |
Yes |
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What do companies in highly competitive markets require in order to remain competitive? |
Continual product cost reductions |
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A point in the manufacturing process where the demand for the company's product exceeds the ability to produce the product is called a... |
Production bottleneck |
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Another word for production bottleneck is... |
Production constraint |
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The manufacturing strategy that focuses on reducing the influence of bottlenecks on production process is called... |
Theory of constraints |
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When a company has a production bottleneck in its production process, it should... |
Attempt to maximize its profits, subject to the production bottleneck. |
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When attempting to maximize products, what of each product is used? |
Unit contribution margin |
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Unit Contribution Margin is calculated how? |
Unit selling price - Unit variable cost |
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UCM Rate = |
Unit Contribution Margin ——————————— Activity Base |
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Predetermined factory overhead rate = |
Est. Total Factory Overhead Costs ——————————————— Estimated Activity Base |
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Why might the use of a single, predetermined factory overhead rate allocate F/O inaccurately? |
Different products may use different types of factory overhead in different ways. |
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What costing method identifies and traces costs and expenses to activities and then to specific products? |
Activity-based costing or ABC |
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The activity-based costing method is an alternative approach for... |
Allocating factory overhead when there are diverse products and processes. |
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ABC uses multiple F/O rates based on what? |
Activities |
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The types of work, or actions, involved in a manufacturing process or service activity are called... |
Activities. Example: assembly, inspection, and engineering design are all activities. |
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ABC initially assigns estimated F/O costs to... |
Activities. |
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5 overhead activities in example: |
1. Fabrication (cutting metal to shape product) 2. Assembly (manually assembling machined pieces into final product) 3. Setup (changing tooling in machines in preparation for making a new product) 4. Quality-control inspections 5/ Engineering changes (processing changes in design) |
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A document that initiates changing a product or process is called an... |
Engineering Change Order |
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The estimated activity costs are allocated to products using an... |
Activity Rate |
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Activity Rate = |
Estimated Activity Cost ——————————— Estimated Activity-Base Usage |
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A measure of physical activity for each activity is called an.. |
Activity base
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By multiplying activity-base usage for each product by the activity rate, you get... |
Total factory overhead cost for each product. |
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Total factory overhead cost for each product is divided by the total number of units produced to determine... |
Factory overhead cost per unit |
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Deos the allocation of factory overhead affect the accuracy of product costs? |
Yes |
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Can using an inappropriate factory overhead allocation method lead to distorted product costs? |
Yes |
