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MGMT 201: Exam 4 Notes

by: Zach Weinkauf

MGMT 201: Exam 4 Notes MGMT 201

Zach Weinkauf

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About this Document

These notes cover conceptual and computational questions for Exam 4.
Managerial accounting
David Scott
Study Guide
Accounting, Management
50 ?




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This 4 page Study Guide was uploaded by Zach Weinkauf on Saturday April 30, 2016. The Study Guide belongs to MGMT 201 at Purdue University taught by David Scott in Spring 2016. Since its upload, it has received 143 views. For similar materials see Managerial accounting in Business, management at Purdue University.

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Date Created: 04/30/16
Chapter 13: Investment Centers and Transfer Pricing Investment Centers – the largest subunits within a big organization.  One type of “Responsibility Center”  Managers are held accountable for: o The investment center’s profit o The capital invested to earn that profit  Invested Capital – assets, such as buildings and equipment, used in a subunit’s operations.  Decentralization – decision-making is pushed down o Advantages:  Allows organizations to respond more quickly to events.  Uses specialized knowledge and skills of managers.  Frees top management from day-to-day operating activities. o Challenge:  Goal Congruence – getting managers of subunits to make decisions that achieve top management goals (instead of their own).  Investment Center Evaluation o Return on Investment (ROI) = Income/Invested Capital  ROI = Sales Margin x Capital Turnover  Sales Margin = Income/Sales Revenue  How much of each sales dollar becomes profit.  Capital Turnover = Sales Revenue/Invested Capital  Dollars of sales revenue generated by each dollar of capital invested in the division’s assets.  Ways to Improve ROI:  Increase Sales Price  Decrease Expenses  Lower Invested Capital o Residual Income (RI) = Investment Center Profit – Investment Charge  Investment Charge = Investment Capital x Imputed interest rate  Imputed Interest Rate = Investment Center’s minimum required rate of return  Advantages:  Residual Income encourages managers to make profitable investments that would be rejected by managers using ROI. o Economic Value Added (EVA) = After-tax Operating Income – Investment Charge  Investment Charge = (Investment Center’s Total Assets – Current Liabilities) x Weighted Average Cost of Capital  Weighted Average Cost of Capital = ((After-tax Cost of Debt x Market Value of Debt) + (Cost of Equity Capital x Market Value of Equity))/(Market Value of Debt + Market Value of Equity)  Tells us how much shareholder wealth is being created  Ex. From Powerpoint:  1 - Weighted Average Cost of Capital = 1. (9% x (1 - 30%) x $40,000,000) +(12% x $60,000,000) = Answer 2. Answer/($40,000,000 + $60,000,000) = 0.0972  2nd- Investment Charge = ($45,000,000 - $600,000) x 0.0972 = $4,315,680 rd  3 – Economic Value Added = ($6,750,000 x (1 – 30%)) - $4,315,680 = $409,320  Transfer Pricing – the amount charged when one division sells goods/services to another division. o This price affects the profit measurement for both the selling division and the buying division. o A high transfer price results in high profit for the selling division and low profit for the buying division o A low transfer price has the opposite effect o Consequently, the transfer-pricing can affect the incentives of autonomous division managers as they decide whether to make the transfer. o Goal Congruence – the ideal transfer price allows each division manager to make decisions that maximize the company’s profit, while attempting to maximize his/her own division’s profit. o General Transfer Pricing Rule –  Transfer Price = Additional Outlay cost per unit incurred because goods are transferred + Opportunity cost per unit to the organization because of the transfer.  Scenario 1:  No Excess Capacity General Rule – When the selling division is operating at capacity, the transfer price should be set at the market price.  Scenario 2:  Excess Capacity General Rule – when the selling division is operating below capacity, the minimum transfer price is the variable cost per unit.  Conflicts may be resolved by:  Direct intervention by top management.  Centrally established transfer price policies.  Negotiated transfer prices. Chapter 14: Decision Making: Relevant Costs and Benefits  Decision making is a fundamental part of management.  Decision Making: 1. Clarify the Decision Problem 2. Specify the Criterion 3. Identify the Alternatives 4. Develop a Decision Model 5. Collect the Data - Primarily the responsibility of the managerial accountant. - Info should be: 1. Relevant – Pertinent to a decision problem – It Matters. 2. Accurate – Information must be precise – It’s Correct. 3. Timely – Available in time for a decision – It’s now. 6. Make a Decision 7. Evaluate Decision Effectiveness  Relevant Information o Information is relevant to a decision problem when:  It has a bearing on the future.  It differs among competitive alterations. o Sunk Costs – costs that have already been occurred.  They do not affect any future cost and cannot be changed by any current or future action.  Sunk costs are irrelevant to decisions.  Accept or Reject a Special Order o With Excess Capacity – Relevant costs will usually be the variable costs associated with the special order. o Without Excess Capacity – variable costs + the opportunity cost of using the firm’s facilities for the special order are also relevant.  Unavoidable vs. Avoidable Expenses o Unavoidable expenses – expenses that will continue to be incurred even if a subunit or activity is eliminated. o Avoidable expenses – expenses that will no longer be incurred if a particular action is taken.  Variable Expenses are always avoidable.  Split-Off Point – the point in the production where the joint products are identifiable as separate products. Ex. 14-31 Sales Revenue -Cost of Food Gross Profit Expenses: Wages +Paper +Depreciation of Counter Gross Profit – Expenses = Net Ex 14-36 Sell Now = $7,000 Process Further Sales Profit -Cost Modifying What you get for Processing Further Ex 14-38 Sales Price -$ Given Up by Processing -Processing Costs -Selling Costs CM


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