Exam 2 Study Guide
Exam 2 Study Guide BUS-A 202/207
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This 9 page Study Guide was uploaded by Kaitlyn West on Sunday April 5, 2015. The Study Guide belongs to BUS-A 202/207 at Indiana University taught by Geoffrey Sprinkle in Winter2015. Since its upload, it has received 185 views.
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Date Created: 04/05/15
Exam 2 Study Guide Chapter 6 Decision Making in the Short Term Characteristics of Short Term Decisions 1 Temporary gaps between the demand and supply of available capacity A Fixed Supply of Capacity 1 Capacity is the maximum volume of activity that a company can sustain with available resources B Demand Changes Frequently 1 There are unavoidable temporary imbalances between the demand and supply or organizational resources a Excess Demand or Excess CapacitySupply C Closing the Gap Between Demand and Supply 1 Decisions that deal with excess supply a Reducing prices running promotions special orders 2 Decisions that deal with excess demand a Increasing prices outsourcing production altering the product mix ll Evaluating Options A Opportunity cost of excess supply is zero because there is no other pro table use for available capacity With excess demand it becomes necessary to forego some pro table uses of available capacity Relevant Cost Analysis focusing on relevant costs When the status quo is a feasible option all controllable costs and bene ts for the other options become relevant IncrementalDifferential Analysis AKA relevant cost analysis F Total or Gross Approach including some or all of the costs and revenues in their calculations even though some of them are not controllable and do not differ across op ons 1 Considers gross revenues and costs 2 Results in same ranking order lll Determining the Best Use of a Scarce Resource A In some cases the number of available options can be very large P 0 l39 B When demand is high and a resource is in short supply we should rank products by the contribution margin per unit of the resource anol not by the contribution margin per unit of the product C To maximize pro t when capacity is in short supply maximize the contribution margin per unit of capacity IV Qualitative Considerations A Why are we ignoring potentially relevantlongterm costs and bene ts 1 We want to keep the decision problem as simple as possible B Managers use the term real options to denote the exibility associated with different options Chapter 7 Operating BudgetsBridging Planning and CL EI Ol I What is a Budget 1 Budget a plan for using limited resources a Specify the goals for a period and how to achieve them b A budget is the outcome of a decision process A Why do rms use budgets 1 Planning a Operating budgets bridge shortterm decisions and longterm plans i Help companies reach long term goals b Financial Budgets quantify the outcomes of operating budgets in summary nancial statements c Master Budget a plan that presents the expected revenues costs and pro t corresponding to the expected sale volume as of the beginning of the period 2 Coordination a Centralized Decision Making an environment in which one leader the owner is able to make all of the rm s decisions b Decentralized Decision Making an environment in which one leader delegates decision making to individuals with relevant expertise and knowledge 3 Control Performance Evaluation anol Feedback a Budgets provide a basis or benchmark for evaluating actual performance b A company cannot evaluate whether it made the right decision or identify problems if it does not have a benchmark Preparing a Master Budget A Revenue Budget 1 The natural starting point for the master budget B Production Budget 1 Combines the demand information provided by the revenue budget and the company s inventory policy regarding nished goods to determine production levels in the coming period C Direct Materials Usage Budget 1 Use the output targets from the production budgets to derive the budgets for materials labor and overhead a Usage budgets are used to estimate xed and variable costs D Direct Labor Budget 1 Depending on a company s production technology different grades of labor may be necessary forjobs requiring different skills and expertise E Manufacturing Overhead Cost Budget 1 Consists of both variable and xed costs F Variable Cost of Goods Manufactured Budget 1 Calculate the total variable manufacturing budget using direct materials direct labor and variable manufacturing overhead G Variable Cost of Goods Sold Budget 1 COGS Beg COGS Inventory COGM Ending COGS Inventory H Marketing and Administrative Costs Budget 1 Some costs relate to the volume of sales activity I Iterative Nature of the Budgeting Process 1 Most companies rework their budget numerous times Cash Budget A Cash Budget allows companies to determine whether they will have enough money on hand to sustain projected operations 1 Manage cash shortfalls by accelerating revenues deferring payments altering timing of cash in ows or borrowing B Cash In ows from Operations 1 Proceeds from sales are primary cash in ows from operations C Cash Out ows from Operations 1 Purchases of Direct Materials a The company expects credit from its suppliers 2 Labor Costs a Cash out ow for labor depends on production volume and not on sales volume 3 Manufacturing Overhead a Depreciation is a substantial part of Fixed Manufacturing Overhead but is not a cash out ow 4 Nonmanufacturing Costs a Adjust this expense for noncash related items D Net Cash Flow from Operations 1 If the expected cash ow is negative the company must have a reserve of cash at the beginning of the year or in ows from special items to account for the cash out ow IV Factors In uencing the Budgeting Process A Organizational Structure 1 Responsibility Accounting concepts surrounding decentralization 2 Responsibility Center each organization subunit a Cost Center organizational units that have control over the costs incurred in offering products or services b Pro t Centers organizational units that have control over both revenue and costs c Investment Centers organizational units that have control over revenue costs and longterm investment decisions B Management Styles 1 TopDown Budgeting re ects an authoritarian style of management a Senior managers nalize the budget with limited input from lower organizational levels 2 BottomUp Budgeting encourages organization wide input a Relies on having good forecasts 3 Most rms implement a combination of the two methods 4 Budget Goals a The best target are quottight but attainablequot Chapter 8 Budgetary Control and Variance Analysis A Variance Analysis a technique rms use to determine Why actual revenues costs and pro t differ from the budgeted amounts 1 Helps organizations determine whether their employees and processes are performing as expected I Budgets as the Basis for Control A A good plan lays the foundation for effective control B Master Budget a plan that represents the expected revenues costs and pro t corresponding to the expected sales volume as of the beginning of that period How to Calculate Variances 1 Variance the difference between an actual result and a budgeted amount a Favorable F variance performance exceeded expectations i Denoted by positive numbers b Unfavorable U variance performance fell short of expectations i Denoted by negative numbers 2 Total Pro t Variance Actual Pro t Master Budget Pro t A Flexible Budget 1 Flexing the master budget changes total budgeted revenues and costs to correspond to the actual sales level 2 Flexible Budget the budget at the actual sales vmume a Any pro t difference between the master and exible budgets is due solely to the difference between budgeted and actual sales 3 Sales Volume Variance the difference in pro t between the master and exible budgets a Sales Volume Variance Flexible Budget Pro t Master Budget Pro t b Individual revenue and cost components of the sales volume variance are neither favorable nor unfavorable 4 Flexible Budget Variance difference in pro t between actual and exible budget results a Flexible Budget Variance Actual Pro t Flexible Budget Pro t B Components of the Flexible Budget Variance 1 Sales Price Variance Actual Revenue Flexible Budget Revenue C Input Quantity and Price Variances 1 Flexible Budget Cost Budgeted InputUnit Actual Sales QuantityBudgeted Cost per Unit of the Input 2 To separate the effects of input quantity vs input price we introduce an quotas ifquot budget a Actual input quantities with prices in the master budget 3 Input Price Variance difference between the quotas ifquot budget and actual results a If Actual Input Price gt Budgeted Input Price Unf 4 Input Quantity Variance difference between amounts in the exible budget and the quotas ifquot budget a If Actual Quantity gt Flexible Budget Quantity Unf 0 b AKA the quotInput Efficiency Variancequot ll Interpreting and Using Variances 1 Budget Reconciliation Report provides management with a summary that bridges actual and expected performance a Helps pinpoint which areas to investigate to take corrective action and highlights success stories A General Rules for Analyzing Variances 1 Investigate All Large Variances a Large variances could signal a permanent change in the operating environment 2 Trends in Variance a Trends often point to inherent problems 3 Linking Variances Consider the Big Picture a Step back and see how the variances are connected to each other b variances sometimes have the same underlying cause B Making Control Decisions in Response to Variables 1 Firms should use all of the variances to investigate the validity of underlying budget assumptions and targets a Then they should collect additional information to choose among explanations so they can decide on corrective actions C Non nancial Controls a Limitations of variance analysis pertain to timeliness and speci city 1 Non nancial Measures and Process Control a Provide immediate and speci c feedback to employees about the status of the environment and outcomes of their decisions 2 Non nancial Measures and Aligning Goals a Provide ongoing feedback to employers and evaluate them ll Appendixes A Purchase Price Variance Budgeted lnput Price Actual lnput Price x Actual Quantity Purchased B Market Size or Market Share Variance 1 An unfavorable sales volume variance could arise from a change in the market size as a whole or the firm s market share 2 Sales Volume Variance a Actual Sales Quantity Budgeted Sales Quantity x Budgeted Unit Contribution Margin b Actual Market Size x Actual Market Share Budgeted Market Size x Budgeted Market Share x Budgeted Unit Contribution Margin 3 Market Share Variance holds market size constant while examining the change in market share a Actual Market Size x Actual Market Share Budgeted Market Share x Budgeted Unit Contribution Margin 4 Market Size Variance holds market share constant while examining the changes in market size a Actual Market Size Budgeted Market Size x Budgeted Market Share x Budgeted Unit Contribution Margin C Sales Variances in a Multiproduct Firm 1 Sales Mix Variance captures the profit effect of changes in the sales mix from the budgeted level a Actual Total Sales x WUCM exible WUCMmaster 2 Sales Quantity Variance the effect of the aggregate change in sales quantity holding the sales mix at budgeted level a Actual Total Sales Budgeted Total Sales x WUCMmaster Chapter 9 Cost Allocations Theory and Applications l LongTerm Decisions and Cost Allocations a Because capacity costs are controlable over the long term we need to consider them in our decision making process 1 Pro t Margin equals contribution margin less allocated capacity costs thus it takes into account the change in capacity costs a While contribution margin is the appropriate measure of value for shortterm decisions pro t margin is the appropriate measure for longterm decisions A Direct Estimation B Cost Allocations 1 Distribution a common cost or bene t among two or more objects a Calculate the allocation rate by dividing the costs in the cost pool by the denominator vmume i AKA the overhead rate because capacity costs are also termed overhead costs ii AKA the burden because they charge or burden each product with this amount b For each product multiply the cost driver units by the allocation rate C Re ning the Allocation 1 Using MultipleCost Pool and Cost Drivers a For each resource or class of resources we use a separate cost pool i Use an allocation basis that best captures the consumption of the resources in each of these pools b Plantwide Rate rms that use a single rate use a plantwide rate c Departmental Rates rms that develop one rate per department ll Cost Allocations for Reporting Income A Absorption Costing separates product costs from period costs for external reporting purposes 1 We advocate xed manufacturing costs to individual products so that we can comply with GAAP and account for overhead as a product cost B Direct costingVariable costing because it groups variable costs and xed costs separately 1 Inventory values only re ect variable manufacturing costs 2 Accounting rules do not permit the use of variable costing for external reporting 3 The reported value of a unit of a product includes all product costs both direct and indirect Ill Variable and Absorption Costing 1 Absorption Costing a AKA Full costing accounting convention terms a product s inventoriable cost as its full cost b To comply with GAAP a company allocates xed manufacturing costs to units produced A Absorption Costing and the Matching Principle 1 The matching principle a fundamental tenet of GAAP requires rms to recognize costs in the same period in which the associated revenue occurs 2 Incentives to Overproduce under Absorption Costing a A common criticism of absorption costing is that it provides incentives to produce more than what is necessary to satisfy demand i A rm can report a higher income merely by increasing production B Reconciling Variable and Absorption Costing lncome lncome reported under variable costing Fixed manufacturing costs in ending inventory Fixed manufacturing costs in beginning inventory lncome reported under absorption costing
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