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Managerial Accountin

Exam Review

DefinitionTerm
Planning & Control Uses for budgets
Forces managers to plan Provides information to improve decision-making Sets benchmarks for performance evaluation Improves communication and coordination Benefits of budgeting:
Top-down, Bottom-up, Incremental, Zero-based Budget strategies
Expected sales + Desired EI = Units Needed Units Needed – Est. BI = Units to produce Preparing a production budget
(DM/unit x Units) + Desired EI = DM Needed DM Needed – Estimated BI = DM to Purchase DM to Purchase × Cost/Unit = Total DM Cost Preparing a direct materials budget
gross profit = its contribution margin because it is a merchandising firm
Prepared before period starts At expected level of activity Master budget
Same as master budget But after period has ended Static budget
Static budget recomputed at a different level of activity Uses: “What if” analysis before period starts Comparison with actual results after period ends Flexible
Characteristics of good budgeting Frequent feedback on performance, Monetary and non-monetary incentives, Participative budgeting, Realistic standards, Controllability of costs, Multiple measures of performance
focus on use of assets and profits Investment centers
Lets top management focus on strategy, Supports use of expert knowledge, Improves customer relations, Provides training for future managers, Improves motivation and retention Advantages of decentralization
Duplication of costs Agency problems Disadvantages of decentralization
Evaluate revenue centers based on: Ability to generate revenues Flexible budget variances
Evaluate cost centers based on: Ability to control costs Flexible budget cost variances
Evaluate profit centers based on: Ability to generate profits Flexible budget variances
Ability to generate profits Efficient use of assets Evaluate investment centers based on:
Income from operations / Invested assets ROI
Operating Income / Sales Profit Margin Ratio
Sales / Invested Assets Asset Turnover Ratio
Allows managers to assess both profitability and efficiency in using assets, Can compare divisions of unequal size & Gives managers data to make decisions on where to invest additional funds Advantages of ROI:
Managers evaluated based on ROI Will not invest in any project that would lower the division's ROI Even if the project would increase the firm’s overall profitability Disadvantages of ROI
Residual Income (RI) Amount that operating income exceeds a minimum acceptable income
Operating income – (Invested assets × RRR) RI
“Seller” recognizes transfer price when its goods are transferred to another division
Without a transfer price, Division A is a cost center
With a transfer price, Division A is a profit center
Product is not unique and industry is competitive Price-takers
Revenue (set by market) - Desired profit Target cost
Product is unique with little industry competition Price-setters
Full product cost + Desired profit Selling price
Final sales value – Sales value at split-off
Costs incurred after split-off point separable costs
Created by: normh80
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