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Managerial Accountin
Exam Review
| Definition | Term |
|---|---|
| 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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