Management Accounting Final

activity

an event that causes the consumption of overhead resources

activity cost pool

a cost "bucket" in which costs related to a single activity measure
similar to BOH

activity measure

an allocation base in ABC
similar to BAB
a cost driver

how does ABC differ from traditional cost accounting?

uses many overhead cost pools
each ABC cos pool has its own unique measure of activity, not DHL or MH

transaction drivers

simple count of the number of times an activity occurs

duration driver

a measure of the amount of time needed for an activity

traditional cost systems rely exclusively on allocation bases the are driven by...

volume of production

five levels of ABC activity

batch-level
unit-level
product-level
organizing-sustaining
customer level

how to assign costs to cost pools using first stage allocation

1. multiply the different overhead costs by the percentages
2. organize into cost pools into columns
3. organize cost rivers into rows
4. total up each cost pool at the end of each column
ex. indirect factory mages � 30% customer orders

how to compute activity rates for cost pools

1. organize cost pools into rows
2. organize total cost, total activity, and activity rate into columns
3. activity rate is the total cost/ total activity rate
ex. total customer orders/ number of orders

how to assign costs to a cost object using a second-stage allocation base

1. organize cost pools into rows
2. organize activity rate, activity, and ABC cost into columns
3. total ABC cost at the bottom
4. multiply the second stage allocation base by the activity rate
ex. 4,000 customer orders � $454 per order

how to use ABC to compute product margins

1. gather each product sales and direct cost data
2. incorporate previously computed ABC assignments pertaining to each product
3. total up to find the total cost + product margin
4. total each product's product margins and deduct costs not assigned to pr

how yo compute customer margins

1. gather sales and direct cost data
2. incorporate ABC assignments
3. compute customer margin of sales by deducting all of its direct and indirect costs from sales

difference between ABC and traditional (MOH assignments)

traditional allocates all MOH to products
ABC only assigns MOH consumed by productions

difference between ABC and traditional (volume)

traditional costing allocates all MOH using a volume related allocation base
ABC uses non-volume related allocation base

difference between ABC and traditional (selling + admin)

traditional disregards selling + admin expenses because they are period expenses
ABC directly traces selling + admin costs caused by the products

characteristics of strong and successful ABC implementation

Strong top management support
Linked to how people are evaluated and rewarded
Cross-sectional teams should be created

activity based management

used in conjunction with ABC to identify areas that would benefit from process improvements by focusing on efficiency

benchmarking

used to compare activity cost info with standards of performance achieved by organizations

five limitations of ABC

Subsequential resources are required
Resistance to unfamiliar numbers + reports
Desire to fully allocate all costs to products
Potential misinterpretation of unfamiliar numbers
Does not conform to GAAP

budget

a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period

budgetary control

the use of budgets to control an organization's activities

advantages of budgets

communicate plans
define goals and objectives
think about and plan for the future
coordinate activities
means of allocating resources
uncover potential bottlenecks

responsibility accounting

managers should be held responsible for items that only they can control

participative budget

a self-imposed budget, prepared with the full cooperation and participation of managers at all levels

advantages of a participative budget

Individuals at all levels of the organization feel like they are a part of a team
Budget estimates are more accurate
Motivation is higher
More attainable goals + budgets

disadvantage of budgets

budgetary slack

prepare a sales budget

1. break down into quarters/months
2. rows of expected unit sales and sales price
3. multiply budgeted sales by sales price to get total sales

prepare a cash collections budget

1. begin with accounts receivable from previous month
2. calculate expected cash collections using the percentage for the month of sale
3. calculate the expected cash collection for the following month
4. repeat for the rest of the months
5. total each co

prepare a production budget

1. begin with budgeted sales in units
2. calculate each month's desired ending inventory
3. add both together to get total needs
4. subtract beginning inventory
(desired EI from previous month)
5. end with required production

prepare a direct materials budget

1. begin with production budgets in units
2. multiply by amount of materials per unit to get total production needs
3. add desired ending inventory of DM (a percentage of next months production needs)
4. subtract beginning inventory (previous month's desi

prepare an expected cash disbursements budget

1. begin with accounts receivable
2. multiply amount of materials by percent to be purchased during that month
3. add percent to be purchased in the following month to that month
4. total up columns at the end

prepare a direct labor budget

1. begin with units of production for each month
2. multiply by DL time per unit to get labor hours required
3. multiply by hourly wage rate

prepare a manufacturing overhead budget

1. begin with budgeted direct labor hours (from direct labor budget)
2. multiply by variable POR to get variable MOH
3. add fixed MOH
4. subtract non cash costs

prepare an ending finished goods inventory budget

1. multiply direct materials per unit by cost per DM
2. multiply direct labor per unit by cost per DL
3. multiply MOH per unit by cost per MOH
4. add all three together to get total cost per unit
5. multiply the ending finished goods inventory in units to

prepare a selling + admin expense budget

1. begin with budgeted sales and multiply by variable S+A rate
2. add fixed expenses
3. subtract non-cash expenses

characteristics of a planning budget

prepared for a single, planned level of activity

flexible budget

prepared for any activity level in the relevant range
shows costs that should have been incurred at the actual level of activity

how to prepare a planning budget

for each revenue/expense pool, multiply the cost formula by the planned activity

favorable variance

larger revenue
larger amounts of units produced
less actual expenses

unfavorable variance

less revenue
less units actually produced
more actual expenses

how do we find if variances are due to changes in activity or poor cost decisions?

you need to flex the budget

how to flex a budget

1. multiply the standard costs my the actual amount of activity
2. variable costs change in direct proportions to changes in activity
3. fixed costs remain the same in the relevant range

activity variance

due to variances from the planning budget
arises solely due to a difference in the level of activity and the planning budget activity level

revenue + spending variance

variances compared to actual results and the flexible budget

revenue variance

flexible budget revenue

spending variance

flexible budget costs

how to prepare a performance report

1. have rows of units/activity, revenue, all of the expenses, total expenses, and NOI
2. have columns of revenue/cost formulas, actual results, R+S variances, flexible budget, activity variances, and planning budget

how to have a flexible budget with more than one cost driver

use a cost formula with more than one variable
ex. $5,000 + $29Q +$25H

standards

benchmarks or "norms" for measuring performance

price standard

specifics how much should be paid for each unit of input

quantity standard

specifies how much of an input should be used to make a product or provide a service

actual costing

uses actual DM, DL, and MOH

normal costing

uses actual DM, DL, and estimated MOH

standard costing

uses estimated DM, DL, and MOH

the _______ manager is responsible for raw materials purchase prices

purchasing

the _______ manager is responsible for the quantity of raw material used

production

materials price variance equation

MPV = AQ(AP -SP)

materials quantity variance equation

MQV = SP(AQ - SQ)

labor rate variance equation

AH(AR - SR)

labor efficiency variance equation

SR(AH - SH)

VOH rate variance equation

AH(AR - SH)

VOH efficiency variance equation

SR(AH -SH)

advantages of standard costs

Standard costs are a key element of management of the exception approach
Can provide benchmarks that promote economic + efficiency
Can simplify book keeping
Support and responsibility accounting systems

potential problems with standard costs

Excessive emphasis on meeting the standards may overshadow other important objectives
Standard cost variance reports are usually prepared on a monthly basis and may contain information that is out dated

decentralization

benefits of decentralization

top management freed to concentrate on strategy
lower-level decisions are based on better info
lower-level managers can respond quickly to customers + gain experience in decision making

disadvantages of decentralization

communication + coordination issues
lower-level managers may have other objectives in mind

cost centers

manager has control of costs, not revenues or investment funds

profit centers

has control over costs and revenues, but not investments

investment center

has control over costs, revenues, and investments

ROI equation

margin equation

NOI/sales

turnover equation

sales/ AOA

criticisms of ROI

In the absence of a balanced scorecard, managers may not know how to increase ROI
Managers may often inherit many committed costs over which they have no control
Managers that are evaluated on ROI may reject profitable investment opportunities that decrea

residual income equation

net operating income - (AOA � minimum rate of return)

return on investment

measures NOI earned relative to the investment

residual income

measures NOI earned minus the required return on average operating assets

disadvantage of RI

cannot compare RI's of different sizes

operating assets

cash
accounts receivable
inventory
plant + equipment

average operating assets

beg. (Operating assets + ending operating assets)/2

delivery cycle time

wait + process + inspection + move + queue

throughout time

Process + inspection + move + queue

value-added time

process time

manufacturing cycle efficiency

value-added time/ manufacturing cycle time

balanced score card

four types of performance measures

Financial
Internal business processes
Customers
Learning + growth

lag indicators

Financial measures are lag indicators that summarize past action

leading indicators

Non-financial measures are leading indicators that are indicators of future performance
Non-financial measures are likely to be understood and controlled by lower-level managers

differential cost

a future cost that differs between any two alternatives

incremental cost

an increase in cost between two alternatives

avoidable cost

a cost that can be eliminated by choosing one alternative over another

examples of relevant costs

DM, DL, VMOH, Vselling

examples of irrelevant costs

sunk costs
FMOH
Rent

Add or drop analysis

1. Compare contribution margin that would be lost if the segment would drop to the avoided fixed expenses if the line was discontinued
2. the contribution margin gained if another segment sales increase

vertical integration

a company that is involved in more than one activity

make or buy decision analysis

compare total cost of buying from an outside source to the total revenant costs of making it yourself

traceable fixed costs that can be avoided are measured at...

the cost at the total level of utilization

special order

a one time order that is not considered part of the company's normal ongoing business

relevant info for special orders

Only the incremental costs + benefits are relevant

special order analysis

compare incremental revenue to the incremental costs to find the financial disadvantage/advantage

constrained resource analysis

1. find CM per unit of constrained resource
2. find amount of resource it takes to make all of the prioritized product
3. fond out how many units the remaining resources can make

find total contribution margin for company

1. multiply amount of units for each product by its CM per unit
2. add them together

CM per constrained resource equation

CM/ unit of CR

units of constrained resource used up equation

demand � materials per unit

How much more would you pay to get more materials?

No more than the less profitable CM per CR

joint costs

two or more products are produced from a single, raw material input

split off point

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

sell or process decision

Should continue processing if the incremental revenue exceeds the incremental processing costs

sell or process analysis

1. find the incremental revenue if further processed
2. subtract cost of further processing to find financial advantage/disadvantage