chapter 11+12 managerial accounting

decentralized organization

decision-making authority is spread throughout the organization rather than being confined to a few top executives

3 primary types of responsibility centers

1 cost centers
2 profit centers
3 investment centers

profit center

control over both costs and revenue, but NOT over use of investment funds

investment center

control over cost, revenue, and investments in operating assets

net operating income

income before interest and taxes

NOI is sometimes referred to as

EBIT (earnings before interest and taxes)

operating assets

cash, AR, inventory, PPE

examples of assets not included in operating assets

-land held for future use
-investment in another company
-building rented to someone else
(all not held for operating purposes!)

margin

net operating income/sales

turnover

sales/avg. operating assets

ROI

margin x turnover

ROI forumula

NOI/avg. operating assets

net book value

acquisition costs less acc. dep'n

most companies use net book value of...

depreciable assets to calculate average operating assets

problems with companies using net book value of depreciable assets to calculate avg. operating assets

asset's net book value decreases over time as acc dep'n increases
-this decreases the denominator in the ROI calculation, thus increasing ROI
-consequently, ROI mechanically increases over time

replacing old depreciated equipment w/ new equipment increases

book value of depreciable assets and decreases ROI

margin is ordinarily improved by increasing _____, reducing ________, or increasing _____

-selling prices
-reducing operating expenses
-increasing unit sales

excessive funds tied up in operating assets depress ______, and lower ______

-turnover
-ROI

residual income definition

net operating income that an investment center earns above the minimum required return on its operating assets

residual income equation

net operating income - (avg. operating assets X minimum required rate of return)

Economic Value Added (EVA)

adaptation of residual income adopted by many companies
-many huge companies use EVA

when residual income or EVA is used to measure performance, the objective is to maximize

the total amount of residual income or EVA, NOT to maximize ROI
-important distinction! (otherwise companies would divest all of its products except the single product with the highest ROI

residual income approach's major disadvantage

can't be used to compare the performances of divisions of different sizes
-larger divisions often have more residual income than smaller divisions (simply because bigger)

delivery cycle time

amount of time from when customer order is received to when the completed order is shipped

throughput (manufacturing) cycle

amount of time required to turn raw materials into completed products (aka manufacturing cycle)

value-added time

process time

non-value added time

wait time
inspection time
move time
queue time

throughput (manufacturing cycle) time variables

process time
inspection time
move time
queue time

manufacturing cycle efficiency (MCE) equation

value-added time (process time) / throughput (manufacturing cycle) time

throughput time is considered a key measure in

delivery performance

any non-value-added time results in an MCE of less than...

1

an MCE of .5 means...

half of the total production time consists of inspection, moving, and similar non-value-added activities

in many manufacturing companies, MCE is less than...

.1 (10%)
-means 90% of the time a unit is in process is spent on activities that DON'T add value to the product

5s audit

sort
straighten
shine
standardize
sustain

balanced scorecard may contain

financial measures (such as ROI, residual income, and operating measures)

balanced scorecard definition

consists of an integrated set of performance measures that are derived from and support a company's strategy

4 different categories on balanced scorecard

financial
customer
internal business processes
learning and growth

transfer price

price charged when one segment of a company provides goods or services to another segment of the same company

suboptimization

occurs when managers don't act in best interests of overall company or even their own division

seller's perspective of transfer price

transfer price must be (> or =) variable cost per unit + total contribution on lost sales/number of units transferred

purchaser's perspective of transfer price (if outside supplier exists)

< or = cost of buying from outside supplier

purchaser's perspective of transfer price (if no outside supplier)

< or = to profit to be earned per unit sold (not including the transfer price)

relevant costs

costs that differ between alternatives

relevant benefits

benefits that differ between alternatives

avoidable cost

cost that can be eliminated by choosing one alternative over another

relevant costs are often called

avoidable costs

vertical integration

when a company is involved in more than one activity in the entire value chain

bottleneck

a constraint
-ex: a machine or process limiting overall output

joint products

2 or more products produced from a common input

split-off point

point in the manufacturing process where the joint products can be recognized as separate products

joint cost

describes the costs incurred up to the split-off point

capital budgeting

term used to describe how managers plan significant investments in projects that have long-term implications

screening decisions

relate to whether a proposed project is acceptable--whether it passes preset hurdle
ex: company may have policy of accepting prjects only if they provide a return of at least 20% on the investment

preference decisions

relate to selecting among several acceptable alternatives
ex: a choice of which machine to purchase

the 2 approaches to making capital budgeting decisions using discounted cash flows

-net present value method
-internal rate of return method

annual cost savings - initial investment = ...

net present value

working capital

cash, AR, inventory less current liabilities

out-of-pocket costs

actual cash outlays for salaries, advertising, and other operating expenses

internal rate of return

rate of return of an investment project over its useful life

internal rate of return calculated by

finding the discount rate that equates the present value of a project's cash outflows with the present value of its cash inflows
-in other words, IRR is discount rate that results in a net present value of zero

factor of the internal rate of return equation

investment required/annual net cash flow

net present value method has several important advantages over the internal rate of return method

NPV method is simpler

project profitability index equation

net present value of the project / investment required

payback period equation

investment required / annual net cash inflow

simple rate of return equation

annual incremental net operating income / initial investment

postaudit

checking whether or not expected results are actually realized