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67 Cards in this Set
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Information System |
System includes multiple formal and informal records and systems |
Files of info |
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Internal Accounting System |
Serves 2 purposes-provide information/ knowledge for decision-makingand to motivate/ monitor people for control purposes. -Owners of an organization want to maximize value/ profits whereas IND /MNG wish to maximizetheir self interest. -the key to allign the two (org and managers) by providing incentives |
Allign owners goal with managers and organizations goalsmanagerial decision |
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Managerial decision making |
Stratigic planning, cost reduction, financial management |
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Control systems |
Performance measures and incentives, promotions demotions, terminations, security guards, and cameras, internal auditors, and the internal accounting system. |
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Design and use of cost system |
Accountants are charged with designing, improving, and operating theorganization's accounting system *Accountants develop both internal and external financial reports * The internal accounting system provides reports/data for day to day decision making *The internal accounting system also provides reports/data for external reporting on a quarterly and /or annual basis *Most organizations use a single accounting system for internal and external financial reporting but managers often need additional reports/data for day-to-day decision-making and therefore create additional systems |
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Economic Darwinism |
If the current practices are working, then there is no need to fix them- Organizations will often utilize best practices |
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Benchmarking |
A process of continuously comparing and measuring an organizations business results against other organizations within the same industry |
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Chief Financial Officer (CFO) |
Oversees financial and managerial accounting functions (includes controllers hip,treasury, and internal audit) |
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Controller |
Oversees tax, financial reporting, and managerial/ cost accounting * Each operating division will generally have its own Controller reporting to a operating Division VP or to the Corporate Controller. |
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Treasury |
Involves financing, banking, credit, collections, investments, insurance, and capital budgeting |
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Managerial/ Cost accountants |
Report to a Controller |
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Regulations |
Organizations must comply with government regulations * Managerial accountants assist by providing data for compliance with government regulations |
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Sarbanes-Oxley Act of 2002 (SOX)the nature of costs |
Generally deals with financial statement fraud and code of ethics/ corporate governance |
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Step costs |
This is a type of cost behavior where costs/ expenditures are fixed over a range of output/ production and may increase when output/ production hits a certain level |
Example- Another employee may need to be added to operate another machine when production output hits a certain level: the cost of an extra employee = additional costs |
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Mixed or semi-variable costscost |
When a cost incurred is not 100% fixed costor 100% variable cost. Electricity may be a mixed or semi variable cost |
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Cost driver |
Cost drivers are measurements of physical activities that are highly associated with variations in cost. |
Example- the number of times a machine mold is changed by engineering folks for production changes is a cost driver. Or, the amount of paint used on a production part. |
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Cost volume profit analysis |
Once costs are classified into fixed cost and variable cost categories, managers can then perform a cost volume profit analysis |
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Break even point |
When the fixed costs are divided by the contribution margin. |
Break even happens when total revenue equals total cost (fixed and variable) |
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Operating Leverage |
Measures the sensitivity of profits to changes in sales. The higher the organization's fixed costs, the higher it's operating leverage. The higher the operating leaverage, the greater the organization's risk. Organizations with high operating leverage have greater variability in cash flows and hence greater risk than firms with a lower ratio of fixed costs to total costs. |
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Product cost |
Includes all accounting costs incurred to manufacture a product |
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Period cost |
Are those costs that are expenses in the period in which they are incurred. Period costs include non-manufacturimg accounting costs incurred to sell the product or service. Direct costs are usually variable costs. Include direct labor and direct material costs to produce a product. |
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Overhead or indirect cost |
Includes indirect labor and indirect material costs as well as other general manufacturing costs that cannot be directly traced to units being produced. Overhead or indirect cost are allocated to units of production. Common allocation methods includedirect labor hours, direct material, machine hours, and direct labor dollars. |
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Opportunity costs |
Decisions result in costs. Therefore the cost of doing anything consists of benefits/receipts that could have been obtained of that particular decision had not been taken. Cost of sacrifice of resource. |
Estimated |
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Opportunity set |
Multiple alternative actions make up the opportunity set * Managers must always consider other opportunities and their costs- therefore managers focus on available alternative courses of action. |
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Opportunity costs are forward looking |
They are therefore an estimate of lost benefits from actions that could, but will not, be undertaken |
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Historical costs |
Financial accounting is generally based on historical costs or actual coats and not on estimated costs |
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Sunk costs |
Are expenditures in the past that cannot be recovered and are not opportunity coats |
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Fixed costs |
Costs of initiating production with does not vary with number of units produced. Fixed costs include administration costs and when a plant is idle including property taxes on the plant, plant management labor costs, insurance on the plant, etc. |
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Marginal cost |
Cost of producing just one more unit - therefore marginal cost varies with the level of units being produced * At normal production rates the marginal cost of making additional units is relatively low * At high levels of production rates, the marginal cost may increase significantly due to constraints on space, machines, and number of employees etc |
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Average cost |
Is calculated by dividing the total cost by the number of units produced. Average cost per unit only increases as output/ production nears its highest capacity |
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Variable costsstep |
Are the additional costs incurred when output/ production is expanded. Costs vary with the number of units produced |
Total cost= Fixed costs + Variable Costs |
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Self interested behaviortea |
Employees often evaluate opportunities to maximize their own interests and these interest may not align with the interests of the organization. |
Look out for you boo |
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Markets and organizations |
For an organization to survive in the market, they must be able to provide a complete product or service at a more favorable price than the consumer could obtain the product or services separately in the market. |
Example- buying a computer with installed software may be less expensive than buying the computer and software separately |
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Influence costs |
When employee engage in activities to influence decisions of managers that may be in conflict with the best interests of the organization. |
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Organizational Architecture |
To align employee and organizational goals, organizations must design administrative tools to: Measure performance: financial (internal accounting systems data), and non financial measures Rewards or punishes performance:pay increases, bonuses, or even firing or demoting employees Assigning decision rights: the more confidence the managers have in an employee, the more decision rights (authority) is conferred |
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Decision rights |
Consist of Decision Management and Decision Control—these two concepts are often not conferred jointly on a single employee. Decision management is where a manager initiates or implements a decision and decision control is where managers ratify or monitor the decisions. |
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Decision process |
Results in a separation of decision management from decision control: Initiation: Decision Management Ratification: Decision Control Implementation: Decision Management Monitoring: Decision Control |
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Accounting’s Role in Organizational Architecture |
Internal accounting systems assist in monitoring and ratifying performance as part of Decision Control. Performance measure often are tied to financial targets such as meeting budgeted revenues and expenses, stock price, net income, but could also be tied to non financial means such as productivity, customer satisfaction, new products entering the market, market share, etc |
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Executive CompensationResponsi |
How might a President /CEO’s bonus/ compensation package fit into the Steps of the Decision-Making process as it relates to a board of directors and also—same question regarding VPs of the organization: Initiation Ratification Implementation Monitoring |
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Responsibility and transfer pricing |
Deals mainly with two concepts— responsibility accounting and transfer pricing |
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Responsibility Accounting |
Is where an organization assigns Decision Rights to various departments within an organization. Decision rights are assigned to subunits often referred to as cost centers, profit centers, and /or investment centers. |
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Cost centersprofit centers |
Basically is a center that produces a product or service at the basic level. Managers of a cost center have their own budget and make decisions based on goals / objectives—generally production goals. Objectives could be to minimize production/service costs or maximize production /service output. However, the level of quality can be lowered given either scenario and therefore must be monitored. |
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Team production |
Productivity of the group is affected by the productivity of all individual members |
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Profit Centersinvestment centers |
Are comprised of several cost centers in producing a product or service and are evaluated on the difference between actual and budgeted accounting profits. Profit center managers often are engaged in determining how to price the transfer of goods and services between business units within the organization. |
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Investment centers |
Are comprised of several profit centers. Are similar to profit centers however, they have additional decision rights for capital expenditures and often are measured on a return on investment. (ROI) net income, and /or residual income. |
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Net income (NI) |
Revenue less expenses = net income. However, NI does not take into account all of the investment used to generate NI in the investment center. Includes debt interest but not the principal on the financing payments. |
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Return on Investment (ROI) |
ROI is a ratio where net income is divided by total assets invested in the investment center—measures the return (NI) on that investment in assets. This ratio does not take into account intangible costs. ROI examines the return on the principal/equity investment dollars. |
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Residual Income (RI) |
Measures performance by subtracting opportunity costs of capital employed from investment center profits. Opportunity cost of capital is measured using the firms cost of equity and cost of debt. Could the center have earned a greater return by pursuing other opportunities? Would cutting certain costs in one year create less profit in later years? |
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Economic value added (EVA) |
Many large companies use this performance measure—similar to residual income except it takes into account amortized research and development costs as part of its cost of capital. |
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Controllability principle |
Responsibility accounting identifies goals or objectives and then develops performance measures to monitors/report on those goals /objectives. The controllability principle requires that managers be held responsible for decisions for which they have authority: Controllable costs Two issues with controllability pronciple |
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Controllable Costs |
All costs affected by a managers decisions. A shipping manager would have control, responsibility, and be measured only for costs related to shipping. |
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Two issues with controllability principal |
Use of multiple measures must be used in conjunction with each other as a single measure may be misleading on its own and performance measures do not work perfectly as employees will always try to game the system in their favor |
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Transfer pricing |
When goods or services are transferred from one profit center to another, an internal transfer price is assigned to the product or service transferred. Similar to cost allocations between department/profit centers |
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Agency Costs |
Decline in the firm value that results from employees or agents of the organization pursuing their own interests to the detriment of the organization. The general agency problem is how to motivate and thereby influence individual behavior. |
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Internal taxation transfer pricingperformance |
Transfer of goods produced in one country to be used in another country within the same organization. Transfer prices often have an allowable range for pricing. The objective is to price the transfer of that product within the organization between the two countries in order to minimize taxes. Shift profit to lowest tax rate jurisdiction / country. Often it determines how fixed costs are allocated to the transferred cost of goods. |
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Performance measurement of profit and investment centers |
When products produced in one responsibility center and then transferred and used in another responsibility center, a transfer price must be determined. Managers will make decisions based on the transfer price which can affect that centers profit. |
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Market-based transfer prices |
The internal transfer price should equal what it can be obtained for in the market place. However, if the product cannot be created at a lower cost internally than the cost in the market, then it probably should not be producing the product. |
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Variable—cost transfer prices |
No external market exists, then the variable production costs ( direct materials and labor) should be the transfer price. However, fixed cost are generally not recovered using this method |
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Full-cost transfer prices |
Full price includes fixed (overhead) and variable costs (direct materials and labor) however full cost method does not create incentives to be efficient in producing products at cheaper prices for transfer to other centers. |
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Negotiated transfer prices |
Negotiated transfer prices by managers—a common method used as it benefits both centers (producing and receiving product) however, problems can arise when managers don’t have the same negotiating skills and / or certain elements of the agreement are not agreed to in advance such as quantity. |
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Free rider problem |
When one team member shirks their responsibility to the detriment of the team—teams often try to overcome these issues by creating team loyalty, peer pressure and through monitoring employee production/ contributions/behavior |
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Horizon problem |
When an employee expects to leave an organization and doesn’t fully engage in fulfilling their responsibilities and looks only to be minimally productive in the short-term |
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Theft |
Employees stealing from the organization—could be money, time, productivity, behavior |
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Reducing agency costs |
Organizations will incur costs to minimize free-riders, horizon problems, and theft through hiring security guards, monitoring cameras, hiring supervisors, installing accounting systems, measuring output of employees,etc |
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Goal Incongruence |
Is when employees have different goals than the organization. Organizations cannot change individual preferences but they can reduce the agency problem by structuring employee’s incentives so that their goals/actions align with the goals of the organization |
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Decision Rights |
Employees are often assigned authority to make decisions and are held accountable for those decisions. |
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Employee empowerment |
A means of assigning decision rights to an employee |
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