Study Guide for test 4
Study Guide for test 4 Acct 3323
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This 0 page Study Guide was uploaded by Laura Notetaker on Thursday November 26, 2015. The Study Guide belongs to Acct 3323 at University of Texas at El Paso taught by Marjorie A Marinovic in Fall 2015. Since its upload, it has received 19 views. For similar materials see Cost Accounting in Accounting at University of Texas at El Paso.
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Date Created: 11/26/15
Study Guide Test 4 Chapter 10 L0 3 understand the various methods of cost estimation 1 Industrial Engineering Method Also called workmeasurement method Estimates cost functions by analyzing the relationship between inputs and outputs in physical terms It is a very thorough and detailed when there is physical relationship between inputs and outputs but it can be costly and time consuming Time and motion studies analyze the time required to perform the various operations to produce something 2 Conference method Estimated the cost function on the basis of analysis and opinion about costs and their drivers gathered from various departments of a company It pools expert knowledge increasing credibility Reliance opinions makes this method subjective but is faster and less expensive 3 Accounting analysis method Estimates the cost functions by classifying various cost accounts as variable xed or mixed with respect to the identi ed level of activity Managers use qualitative rather than quantitative analysis when making these costclassi cation decisions It is widely used because it is accurate costeffective and easy to use but it is subjective 4 Quantitative analysis method Use formal mathematical method to t cost functions to past data observations The results from it can be objective It is a rigorous approach to estimate costs It requires more detailed information about costs cost drivers and cost functions and is time consuming LO 4 Outline the six steps in estimating a cost function using quantitative analysis 1 Choose the dependent variable 2 Identify the independent variable 3 Collect data on the dependent variable and the cost driver Study Guide Test 4 4 Plot the data to observe the general relationship 5 Estimate the cost function using two common forms of quantitative analysis the highlow method or regression analysis 6 Evaluate the cost driver of the estimated cost function LO 5 Describe three criteria used to evaluate and choose cost drivers 1 Economic plausibility 2 Goodness of t 3 Signi cance of the independent variable Chapter 11 L0 3 Explain the concept of opportunity cost and why managers should consider it when making insourcing versus outsourcing decisions LO 4 Opportunity costs are the contribution to operating income forgone by not using a limited resource in its nextbest alternative use Opportunity costs are not recorded in nancial accounting systems because historical record keeping is limited to transactions involving alternatives that managers actuay selected rather than alternatives that they rejected One type of opportunity cost is the carrying cost of inventory operating income forgone by tying up money in inventory and not investing it elsewhere Know how to choose which products to produce when there are capacity constraints Product mix decisions are decisions managers make about which products to sell and in what quantities Decisions rue Choose the product that produces the highest contribution margin per unit of the constraining resource not the highest contribution margin per unit of the product Chapter 21 L0 2 Use and evaluate the two main discounted cash ow DCF methods the net present value method and the internal rate of return method Discounted cash ow methods measure all expected future cash in ows and out ows of a project discounted back to the present point in time The key feature of DCF methods is that the time value of money which is that a dollar received today is worth more than a dollar received at any future time Study Guide Test 4 The time value of money is the opportunity cost from not having the money today DCF methods use the required rate of return RRR which is the minimum acceptable annual rate of return on an investment RRR is internally set usually by upper management and typically represents the return that an organization could expect to receive elsewhere for an investment of comparable risk RRR is also called the discount rate hurdle rate cost of capital or opportunity cost of capital Net present value method The NPV method calculates the expected monetary gain or loss from a project by discounting a expected future cash in ows and out ows back to the present point in time using the RRR Based on nancial factors alone ony projects with a zero or positive NPV are acceptable Internal rate of return The IRR Method calculates the discount rate at which an investment s present value of all expected cash in ows equals the present value of its expected cash out ows We are looking here for the rate of return that makes NPV 0 A project is accepted only if the IRR equals or exceeds the RRR LO 3 Use and evaluate the payback and discounted payback methods The Payback method measures the time it will take to recoup in the form of expected future cash ows the net initial investment in a project Like the NPV and IRR methods the payback method does not distinguish among the sources of cash ows Shorter payback period are preferable Organizations choose an acceptable project payback period Generally the greater the risk the shorter the payback period should be The payback method is easy to understand LO 4 Use and evaluate the accrual accounting method rate of return method Study Guide Test 4 The AARR method divides the average annual accrual accounting income of a project by a measure of the investment in it That quotmeasure of the investmentquot in the project can vary company by company Also called the accounting rate of return The AARR method is similar to the IRR method in that both calculate a rate ofreturn percentage however the IRR method is generally regarded as better than the AARR LO 5 Identify relevant cash in ows and out ows for capital budgeting decisions One of the biggest challenges in capital budgeting particularly DCF analysis is determining which cash ows are relevant in making an investment selection Relevant cash ows are the differences in expected future cash ows as a result of making the investment A capital investment project typically has three categories of cash ows 1 Net initial investment 2 Aftertax cash ow from operations 3 Aftertax cash ow from terminal disposal of an asset and recovery of working capital Three components of netinitial investment cash ows 1 Initial machine investment 2 Initial working capital investment 3 Aftertax cash ow from current disposal of old machine Two components of cash ow from operations 1 Annual aftertax cash ow from operations excluding the depreciation effect 2 Income tax cash savings from annual depreciation deductions The disposal of an investment generally increases cash in ow of a project at its termination Two components of Terminal Disposal of Investment Study Guide Test 4 1 Aftertax cash ow from terminal disposal of asset investment 2 Aftertax cash ow from recovery of working capital liquidating receivables and inventory that was needed to support the project
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