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KSU / Accounting / ACCT 23021 / managers may intentionally build slack into the budget

managers may intentionally build slack into the budget

managers may intentionally build slack into the budget

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School: Kent State University
Department: Accounting
Course: Introduction to Managerial Accounting
Professor: John rose
Term: Fall 2016
Tags: Budgeting - Operating Budgets - Financial Budgets - Budgets for Merchandisers - Responsibility Centers - Performance Reports - Return on Investment, Sales Margin, and Capital Turnover - Transfer Pricing - Flexible Budget Performance Reports - Balanced Scorecards and Identifying KPIS - Standard Costs - Direct Material Variances - Direct Labor Variances - Advantages and Disadvantages of using Standard Costs - Variabl, budgeting, Operating, financial, budgets, performance, reports, return, Investments, sales, margin, capital, turnover, transfer, Pricing, Flexible, budget, balanced, scorecards, standard, costs, direct, materials, Labor, variances, variable, overhead, time, value, Money, Accounting, rate, methods, discounted, cash, flow, Models, internal, Kent, state, 2016, Fall, Managerial, exam, 3, study, guide, and notes
Cost: 50
Name: Exam 3 Study Guide - Managerial Accounting
Description: Comprehensive study guide covering: - Budgeting - Operating Budgets - Financial Budgets - Budgets for Merchandisers - Responsibility Centers - Performance Reports - Return on Investment, Sales Margin, and Capital Turnover - Transfer Pricing - Flexible Budget Performance Reports - Balanced Scorecards and Identifying KPIS - Standard Costs - Direct Material Variances - Direct Labor Varian
Uploaded: 12/01/2016
16 Pages 349 Views 2 Unlocks
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“how do customers see us?




“how do we look to shareholders?




Original budgets ???? What if…?



Introduction to Managerial Accounting [Acct-23021] Exam 1 Study Guide Kent State University Fall 2016 Chapter 9 – The Master Budget I. Budgeting a. Budget – A plan that covers a specific period of time in order to best use  resources b. Rolling Budget – A budget that is continuously updated so that the next 12  months of operations are always budgeted c. Participative BIf you want to learn more check out thomas sy ucr
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udgeting i. Involves many level of budgeting ii. Benefits 1. Lower level managers are closer to the action, and should  have a more detailed knowledge for creating realistic budgets 2. Managers are more likely to accept and be motivated by  budgets they helped to create iii. Disadvantages 1. Process can become much more complex and time consuming  as more people participate in the process 2. Managers may intentionally build slack into the budget for  their area of operation by overbudgeting expenses and/or  underbudgeting revenues d. Starting point for developing the budgets i. Prior year’s budgeted figures or actual results ii. Zero-based budgeting 1. All managers begin with a budget of zero and must justify  every dollar they put in the budget 2. Approach is very time consuming and labor intensive 3. Companies may have use from time to time in order to keep  their expenses in check  e. Benefits of Budgeting i. Planning ii. Communication iii. Benchmarking f. Master Budgeti. Set of budgeted financial statements and supporting schedules for  the entire organization g. Operational Budget II. Prepare the Operating Budgets a. Sales Budget i. Plan for sales revenues in future periods ii. # of unit sales x sales price/unit = total sales revenue b. Production Budgetc. Direct Materials Budget d. Direct Labor Budget  III. Prepare the Financial Budgets a. Financial Budget Components i. Capital expenditure budgets ???? (new property, plant, equipment,  etc.) ii. Cash collections budget iii. Cash payments budget iv. Combined cash budget v. Budgeted balance sheet b. Sensitivity Analysis i. A what if technique that asks what a result will be if a predicted  amount is not achieved or if an underlying assumption changes ii. Original budgets ???? What if…? ???? Modified assumption ???? Revised  Budgets IV. Prepare budgets for a merchandiser a. Merchandising Companies i. Sales budget ii. Costs of goods sold, inventory, and purchase budget iii. Operating expenses budget iv. Budgeted income statement  v. The financial budgets are the same b. Service Companies i. No merchandise inventory  ii. Operating Budget 1. Sales budget 2. Operating expenses budget 3. Budgeted income statement  4. Financial budgets are the same c. Impact of Credit and Debit Card Sales on Budgeting i. Implications1. Credit card companies and their issuing banks charge  merchants a transaction fee for each purchase made using  plastic 2. Merchant receives entire amount of purchase LESS  transaction fee ii. Benefits 1. Lost sales if didn’t allow customers to use credit or debit cards 2. Decreases the cost associated with bounced checks,  misappropriation of each, and the activities associated with  preparing and transporting cash deposits 3. Receive cash quickly, improves cash flow iii. Store Credit Cards 1. No transaction fee incurred a. Merchant assumes risk of collection 2. Must wait for customers to make payments a. Months, years, never 3. Cash collections budget – Aging of receivables 4. Operating Expense Budget – Bad debts 5. Budget interest income and late fees Chapter 10 – Performance Evaluation I. Responsibility Centers a. Decentralization i. Splitting operations into different operating segments  ii. Advantages 1. Frees top management’s time 2. Use of expert knowledge 3. Improves customer relations 4. Provides training  5. Improves motivation and retention iii. Disadvantages 1. Duplication of costs  2. Potential problems achieving goal congruence b. Performance Evaluation Systems i. Provide upper management with feedback ii. To be effective, performance evaluation system should: 1. Clearly communicate expectations2. Provide benchmarks that promote goal congruence and  coordination between segments 3. Motivate segment managers c. Responsibility Accounting  i. Responsibility Center – Part of an organization whose manager is  accountable for planning and controlling certain activities ii. Responsibility Accounting – A system for evaluating the performance  of each responsibility center and its manager d. Types of Responsibility Centers i. Cost center 1. Costs only ii. Revenue centers 1. Primarily revenues could be responsible for costs of their own  sales operation iii. Profit center 1. Both revenues and costs iv. Investment center 1. Investments, revenues, and costs 2. Treated almost as if they were stand-alone companies II. Develop Performance Reports a. Responsibility Center Performance Reports i. Performance Report – Compares actual revenues and expenses  against budgeted figures ii. Variance 1. Difference between actual and budget  2. Favorable variance ???? Operating income > budgeted amount 3. Unfavorable variance ???? operating income < budgeted  amount b. Segment Margin i. The operating income generated by a profit or investment center  BEFORE subtracting coming fixed costs that have been allocated to  the center c. Organization-wide Performance Reports i. Performance reports for each level of management flow up III. Calculate ROI, Sales Margin, and Capital Turnover a. Evaluation of Investment Centers i. Duties of investment center manage is similar to the CEO ii. To assess:1. Return on Investment (ROI) 2. Residual Income (RI) b. Return on Investment (ROI) i. Measures the amount of income an investment center earns relative  to the size of the asset c. Sales Margin and Capital Income d. Residual Income (RI) i. Determines whether the division has created any excess (residual)  income above management’s expectations ii. Incorporates target rate of returne. Goal Congruence i. Residual income enhances goal congruence whereas ROI may or may  not  f. Measurement Issues i. Which balance sheet to use? ii. Include all assets? iii. Use gross books value or net book value of the asset? iv. Make other adjustments to income or assets? g. Limitations of Financial Performance Evaluation i. Short-term focus ii. Potential Remedy: Management can measure financial performance  using a longer time horizon IV. Determining a Transfer Price a. Transfer Price i. The price charged for the internal sale between two different  divisions of the same company ii. Encourage transfer only if the company would benefit by the  exchange iii. Vertical integration b. Global considerations i. Do the divisions operate under different taxing authorities such that  income tax rates are higher for one division? ii. Would the amount paid to customs and duties be impacted by the  transfer price used? V. Flexible Budget Performance Reports a. Flexible Budget  i. A budget prepared for a different level of volume than that which  was originally anticipated ii. Master Budget Variance – Difference between the actual revenues  and expenses and the master budget  1. “apples to oranges” comparison iii. Flexible budget allows managers to compare actual revenues and  expenses with what they would have expected them to be given the  actual volume b. Volume Variance i. The difference between the master budget and the flexible budget 1. Arises only because the actual volume differs from the volume  originally anticipated in the master budgetc. Flexible Budget Variance i. The difference between the flexible budget and the actual results d. Underlying Causes of the Variances i. Management by exception ii. Use performance reports to see how operational decisions affected  company’s finances  VI. Balanced Scorecards and Identify KPIs a. Nonfinancial Performance Measurement  i. Lag Indicators – Revel the results of past actions and decisions ii. Lead Indicators – Predict future performance  b. The balanced scorecards i. Management must consider both financial and operational  performance measures ii. Major shift ???? Financia indicators are no longer the sole measure of  performance  c. Four perspectives of the balanced scorecards i. Financial ii. Customer iii. Internal business iv. Learning and growth d. Key Performance Indicator (KPI) i. Summary performance metric; assesses how well the company is  achieving its goals  ii. Continually measured iii. Reported on performance scorecard or performance dashboard 1. A report that allows managers to visually monitor and focus  on managing the company’s key activities and strategies as  well as business risks e. Financial Perspectives i. “how do we look to shareholders?” ii. Must continually attempt to increase profits  1. Increase revenues 2. Control costs 3. Increase productivity iii. KPIs: Sales revenue growth, sales margin, gross margin%, capital  T/O, RI, Eps f. Customer Perspective  i. “how do customers see us?”ii. Customers concerned with four product/service attributes: 1. Price 2. Quality 3. Sales service 4. Delivery time iii. KPIs: Average customer satisfaction rating, % of market shares,  increase in the # of new customers, # of repeat customers, rate of on time deliveries g. Internal Business Perspectives i. “At what business processes must we excel to satisfy customer and  financial objectives?” ii. Three factors: 1. Innovation 2. Operations 3. Post-sales support 4. KPIs: # of new products developed, new product development  time, defeat rate manufacturing lead time, yield rate h. Learning and Growth Perspectives i. “Can we continue to improve and create value?” ii. Three factors: 1. Employee capabilities 2. Information system capabilities 3. Company’s climate for action iii. KPIs: Hours of employee training, employee implemented, % of  employees involved in problem solving teams, employee rating of  communication and corporate culture Chapter 11 – Standard Costs and Variances I. Standard Costs a. Standard Costs i. A budget for a single unit of product ii. Benchmark for evaluating actual costs b. Types of standards i. Ideal (perfection) standards 1. Do not allow for any inefficiencies ii. Practical (attainable) standards 1. Allow for normal amounts of waste and inefficiency c. Information used to develop and update standardsi. Past usage of material and labor ii. Current cost of inputs iii. Future changes d. Computing Standard Costs i. Compute for: 1. Direct material (DM) 2. Direct labor (DL) 3. Manufacturing Overhead (MOH) e. Standard Cost Calculations i. Direct Materials (DM) 1. (Standard Quantity of DM) x (Standard Price of DM) ii. Direct Labor (DL) 1. (Standard Quantity of DL) x (Standard Price of DL) iii. Manufacturing Overhead (MOH) 1. Variable MOH Rate a. (Total estimated variables MOH) / (Total estimated  amount of the allocation base) 2. Standard Variable MOH per unit a. (Standard quality of allocation base) x (Variable MOH  Rate) 3. Fixed MOH Rate a. (Total estimated fixed MOH) / (Total estimated  amount of the allocation base) 4. Standard Fixed MOH per unit a. (Standard quality of allocation base) x (Fixed MOH  Rate) f. Sustainability and Standard Costs i. Many companies reengineering their products and packaging 1. Advances environmental sustainability 2. Saves money ii. Rethink DM quantity and price standards  iii. Standards for the amount of waste from the production process 1. Air pollution 2. Scrap  3. Waste water iv. Government Regulation II. Direct Materials Variances a. DM Variancei. When the amount of materials purchased is the same as the amount  used, one can split the flexible budget ii. Comprised of: 1. Direct Materials price variance 2. DM quantity variance iii. DM price variance 1. How much of total variance is due to paying a higher/lower  price than expected for the DM purchased 2. Formula  a. AQ(AP-SP) iv. DM Quantity Variance 1. How much of the total variance is due to using a  larger/smaller quantity of DM than expected  2. Formula a. SP(AQU-SQA) b. SQA: Standard quantity of materials allowed  i. (# of units actually produced) x (the standard  quantity of material allowed per unit) III. Direct Labor Variances a. Direct Labor rate variances i. How much of the total labor variance is due to paying a higher/lower  wage rate than anticipatedii. Formula 1. AH(AR-SR) b. Direct labor efficiency variance i. How much of the total labor variance is due to using a greater/lesser  amount of time than anticipated  ii. Formula 1. SR(AH-SHA) 2. SHA: Standard Hours Allowed a. (actual units produced) x (standard amount of time  allowed per unit) IV. Advantages and Disadvantages of Using Standard Costs and Variances a. Advantages i. Cost benchmarks ii. Usefulness in budgeting iii. Motivation iv. Standard costing systems simplify bookkeeping b. Disadvantages i. Outdated of inaccurate standards ii. Lack of timeliness iii. Focus on operational performance measures and visual  management iv. Lean thinking v. Increase in automation and decrease in DL vi. Unintended behavioral consequences V. Variable Overhead Variances a. Variable Overhead Variances i. Variable Overhead Rate Variance 1. Also called: Variable overhead spending variance 2. Tells whether more/less was spent on variable overhead than  expected for the hours worked 3. Formula a. AH(AR-SR) b. (Actual Hours) x (Actual Rate – Standard Rate) ii. Variable Overhead Efficiency Variance 1. Tells how much of the total variable MOH variance is due to  using more/fewer hours of the allocation base than  anticipated for the actual volume of output 2. Formulaa. SR(AH-SHA) VI. Fixed Overhead Variances a. Fixed Overhead Variance i. Fixed Overhead Budget Variances 1. Also called: Fixed overhead spending variance 2. Measures the difference between actual fixed overhead costs  incurred and budgeted fixed overhead costs 3. Formula a. (actual fixed overhead) – (budgeted fixed overhead) ii. Fixed Overhead Volume Variance 1. Formula a. (Budgeted fixed overhead) – (Standard overhead cost  allocated to production) Chapter 12 – Capital Investment Decisions and the Time Value of  Money I. Capital Investments and Capital Budgeting a. Capital budgeting – The process of making capital investment decisions b. Four popular methods i. Payback period 1. Quick and easy to calculate, used for shorter life span  investments ii. Accounting Rate of Return (ARR) 1. Quick and easy to calculate, used for shorter life span  investments iii. Net Present Value (NPV) 1. More difficult to calculate, used for longer life span  investments, considers time value of money iv. Internal Rate of Return (IRR) 1. More difficult to calculate, used for longer life span  investments, considers time value of money c. Cash Basis vs. Accrual Basis i. Accrual basis require by GAAP ii. Capital budgeting focuses on cash flows iii. Only ARR method uses accrual-based accounting income d. Cash Inflows Include i. Future cash revenue ii. Any future savings in ongoing cash operating costsiii. Any future residual value of the asset e. Capital Budgeting Process i. Identify potential capital investments ii. Estimate future net cash inflows iii. Analyze potential investments 1. Screen out undesirable investments using payback and/or  ARR 2. Further analyze investments using NPV and/or IRR iv. Engage in capital rationing, if necessary, to choose among alternative  investments v. Perform post-audits after making capital investments II. Payback and Accounting Rate of Return Methods a. Payback Period i. Payback – Length of time it takes to recover the cost of investment ii. Payback Period = (amount invested) / (Expected annual net cash  inflows) b. Criticism of Payback Method i. Time value of money is ignored ii. Considers only those cash flows that occur during payback period c. Accounting Rate of Return (ARR) i. Measures the average annual rate of return over the asset’s life ii. Focuses on the operating income, not the net cash inflow, that an  asset generates III. Time Value of Money a. Time Value of Money i. Invested money earns income over time ii. Cash received sooner preferred over being received later b. Time Value of Money Factors i. Principal amount (p) 1. Single lump sum 2. Annuity ii. # of periods (n)iii. Interest rate (i) IV. Discounted Cash Flow Models a. Discounted Cash Flow Models i. Recognize time value of money ii. Two Methods 1. Net Present Value (NPV) 2. Internal Rate of Return (IRR) b. Net Present Value (NPV) i. Compare discounted cash inflows to their capital outlay required by  the investment ii. Discount rate 1. Hurdle rate or required rate of return 2. Required minimum rate of return given riskiness of  investment iii. Proposal is acceptable when NPV is > or equal to zero iv. NPV for unequal cash inflows  1. When annual cash inflows are unequal, you must use the  present value applied to each annual cash inflow individually c. Profitability Index i. Useful to compare projects of different sizes ii. Is the number of dollars returned for every dollar invested d. Internal Rate of Return (IRR) i. Rate of return a company can expect to earn by investing in a project ii. The interest rate that will cause the present value to equal zero iii. The higher the IRR, the more desirable the project iv. Find the discount rate that makes the cost of the investment equal to  the PV of the investment’s net cash inflows v. Annuity PV Factor = (Investment) / (Annual net cash inflows) V. Compare and Contrast the Four Capital Budgeting Methods a. Payback Period i. Advantages 1. Simple to compute 2. Focus is the time it takes to recover cash investment 3. Highlights risk of investments with longer cash recovery  periods ii. Disadvantages 1. Ignores cash flows after payback period 2. Ignores time value of moneyb. Accounting Rate of Return (ARR) i. Only method that uses accrual accounting ii. Advantages 1. Shows how investment will affect operating income 2. Measures profitability of asset over its entire life iii. Disadvantages 1. Ignores time value of money  c. Net Present Value (NPV) i. Advantages 1. Incorporates time value of money 2. Indicates if asset will earn minimum required rate of return 3. Shows excess (deficiency) of present value of cash inflow over  cost 4. Profitability index can be computed for capital rationing  decisions d. Internal Rate of Return (IRR) i. Advantages 1. Incorporates time value of money and net cash inflows 2. Computes unique rate of return  3. No additional steps needed for capital rationing decisions

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