Accounting II Final Exam Study Guide PDF

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Accounting Final Exam Study Guide Ch. 11, 11A, 11B, & 12 Ch. 11 - Performance Measurement in Decentralized Organizations (34 pts. - 10 T/F, 24 MC): Responsibility Centers: - decentralized organizations have different responsibility centers - decentralized organization → decision-making authority is spread throughout the organization - benefits of decentralization 1. top management can focus on bigger issues 2. decisions in hands of lower-level managers who have the most detailed and up-to-date info on day-to-day operations 3. can respond more quickly to customers 4. helps train lower-level managers for higher-level positions 5. increase motivation and job satisfaction of lower-level managers 1. cost center → a business segment in which the manager has control over costs but no control over revenue or investments in operating assets - managers are expected to minimize costs while providing the level of products and services demanded by other parts of the organization - ex. service departments (accounting, legal, manufacturing) 2. profit center → a business segment in which the manager has control over both costs and revenue but not over the use of investment funds 3. investment center → a business segment in which the manager has control over costs, revenue, and investments in operating assets - managers are often evaluated using ROI or residual income measures Return on Investment: - commonly, 2 criteria are used to evaluate the performance of an investment center 1. return on investment (ROI) 2. residual income - ROI = net operating income / average operating assets - net operating income = income before interest and taxes - also called EBIT (earnings before interest and taxes) - NOI = sales - expenses - expenses = cost of goods sold, selling expenses, administrative expenses - average operating assets - operating assets = current assets (cash, accounts receivable, inventory) and non-current assets (plant and equipment) - = (beg. NBV of operating assets + ending NBV of operating assets) / 2 - use the net book value of depreciable assets to calculate average operating assets - = acquisition costs - accumulated depreciation - ONLY operating assets

Elements of ROI: - expressed as the product of margin and turnover - ROI = margin x turnover - margin can be improved by increasing selling prices or by reducing operating expenses - doing BOTH increases NOI, margin, and ROI - excessive operating expenses can reduce NOI, margin, and ROI - turnover incorporates investment in operating assets - increase in average operating assets, decreases turnover and ROI Residual Income: - objective is to maximize the total residual income ROI vs. Residual Income: - residual income approach encourages managers to make investments that are profitable for the entire company but that would be rejected by managers who are evaluated using the ROI formula - using ROI may reject projects that help company as a whole Drawbacks of Using Residual Income: - cannot be used to compare performances of divisions or different sizes - better to focus on percentage change than absolute amount Throughput Time: - throughput time → the amount of time required to turn raw materials into completed products - includes process time, inspection time, move time, and queue time - process time → the amount of time taken to actually work on the product - inspection time → the amount of time spent ensuring that the product is not defective - move time → the amount of time required to move materials or partially completed products from workstation to workstation - queue time → the amount of time a product spends waiting to be worked on, to be moved, to be inspected, or to be shipped - out of the 4 activities, only the process time adds value - other 3 activities are non-value-added activities and should be reduced as much as possible - reducing these activities also reduces delivery time - reduction in delivery time = quicker delivery to customers at lower costs Delivery Cycle Time: - delivery cycle time → the time period between the receipt of a customer order and the shipment of the final product

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important concern to the management because reducing the delivery time means the company satisfies the customers’ orders quickly delivery cycle time = wait time + throughput time

Manufacturing Cycle Efficiency (MCE): - MCE = % of total manufacturing cycle time used in non-value-added activities - MCE of less than 1 = production process includes non-value-added time Balanced Scorecards: - a company’s vision and strategy determine its financial goals, the customers that the company wants to serve, and the internal business processes to provide value to customers - to create a balanced scorecard based on these goals the company decides on four sets of performance measures: 1. financial 2. customer 3. internal business processes 4. learning and growth - a company’s balanced scorecard includes the set of performance measures that are derived from and support a company’s vision and strategy - financial performance measures are integrated with non-financial measures - main emphasis is on continuous improvement - predicated on the belief that learning is necessary to improve internal business processes, improving business processes is necessary to improve customer satisfaction, and improving customer satisfaction is necessary to improve financial results - balanced scorecard should be derived from and support its strategy - different companies have different strategies - if internal business processes improve but financial outcomes do not, theory may be flawed and strategy should be changed Common Characteristics of a Balanced Scorecard: - financial measures are lag indicators which report past results whereas nonfinancial measures are lead indicators - top-level managers are normally responsible for financial performance - lower-level managers can be held responsible for nonfinancial measures Ch. 11A - Transfer Pricing (36 pts. - 3 T/F, 33 MC): Transfer Pricing: - transfer price → the price charged when one segment of a company provides goods or services to another segment of the same company - does not affect the overall profit of the company - allocates the profit on the transaction between the two parties within the organization

Negotiated Transfer Prices: 1. managers involved in the transfer negotiate the transfer price 2. managers set transfer prices at cost using either variable cost or absorption cost 3. setting transfer prices at the market price - motivates managers to act in the best interests of the overall company - lower and upper limits determine the range of acceptable transfer prices within which the profits of both divisions participating in a transfer would increase Selling Division with Idle Capacity: - buying division would be unwilling to pay more than the cost of purchasing the part from an outside supplier - selling division will be interested in the transfer only if it is able to obtain at least the variable cost per unit Ch. 11B - Service Department Charges (12 pts. - 3 T/F, 9 MC): Operating and Service Departments: - operating departments carry out the main activities of the organization - service departments provide service or assistance to the operating departments Charging Costs by Behavior: - service department costs should be separated into variable and fixed costs, and they are charged to operating departments - when costs are charged separately, it provides more useful data for planning and controlling departmental operations - lump-sum amounts are based on budgeted fixed costs not actual fixed costs - fixed costs of service departments should be charged in lump-sums to each operating department in proportion to their peak-period needs or long-run average needs Ch. 12 - Differential Analysis (68 pts. - 11 T/F, 57 MC): Decision Making: Six Key Concepts: - business decision making involves six key concepts 1. define the alternatives 2. distinguish between relevant and irrelevant costs and benefits 3. perform differential analysis 4. identify sunk costs 5. identify future costs and benefits that do not differ between alternatives 6. identify opportunity costs - decision making covers concepts such as keep or drop decisions, make or buy decisions, special order decisions, and sell or process further decisions - choosing among alternatives is based on their differential costs and benefits - the financial advantage exists if the differential benefits (future cash inflows) exceed its differential costs (its future cash outflows)

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financial disadvantage exists when an alternative fails the cost/benefit test (differential benefits < differential costs)

Relevant Costs and Benefits: - managers make decisions by identifying and focusing on the future costs and benefits that differ from one alternative to another (differential analysis) - differential cost (relevant cost) → a future cost that differs between any two alternatives - differential revenue (relevant benefits) → future revenue that differs between any two alternatives - avoidable costs → costs that can be avoided by choosing one alternative over the other - sunk cost → a cost that has already been incurred and cannot be avoided regardless of the alternative chosen - irrelevant costs - opportunity cost → the potential benefit that is given up when one alternative is selected over another - different costs are relevant for different purposes - variable costs are relevant IF they differ in total between the alternatives in consideration - allocation of common fixed costs can make a product appear to be unprofitable when it may actually be profitable Reasons to Isolate Relevant Costs: 1. enough information rarely available to prepare income statement 2. mixing irrelevant costs with relevant costs might cause confusion and distract attention from critical information Adding and Dropping Product Lines: - decision to add or drop a product line is largely based on its impact on the net operating income Make or Buy - Strategic Aspects: - value chain → the various steps that are necessary to develop and sell a product or service - conceptualization - research and development - production - distribution - after-sales service - companies that are involved in more than one activity of the value chain are said to be vertically integrated - make or buy decision → the decision to carry out one of the activities internally rather than to buy from an external supplier - advantages of vertical integration

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a production process that is less dependent on external agents and a higher degree of quality control advantages of outsourcing - higher quality and lower costs resulting from economies of scale

Make or Buy - Opportunity Costs: - opportunity costs represent economic benefits that are forgone as a result of pursuing some course of action - do not represent actual dollar outlays Special Order Decisions: - special orders → one-time orders and are not considered a part of the normal ongoing operations - in general, special orders can be accepted if the incremental revenues exceed the incremental costs - incremental revenues → increases in revenues from the special orders - incremental costs → increases in costs specifically because of the special order Profitability of Constrained Resources: - limited resources restrict the company’s capability to satisfy demand - known as constraints or bottlenecks - managers need to decide how to best utilize these constrained resources to generate the highest profit - WRONG = favor units with the highest contribution margin per unit - CORRECT = favor products with the highest contribution margin per unit of the constrained resource Managing Constraints: - constraint → when a limited resource restricts a company’s ability to satisfy demand - focus on products with a higher contribution margin per unit of the constrained resource - managers can increase profits by increasing the capacity of the bottleneck operation - ways to increase capacity 1. working overtime at the bottleneck 2. subcontracting the processing done at the bottleneck 3. investing additionally to improve capacity of the bottleneck - ways to relax the bottleneck 1. shifting workers from other processes to the bottleneck 2. putting additional efforts to improve the business process in the bottleneck 3. reducing the number of defective units processed through the bottleneck Sell or Process Further: - joint products → products that are produced from a common input

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split-off point → the manufacturing stage at which joint products can be identified as separate products joint costs → costs incurred up until split-off point - sunk costs; not considered for decision making it is profitable to continue processing a joint product after the split-off point as long as the incremental revenue from such processing exceeds the incremental processing cost incurred after the split-off point...