Assignment 2071: Exam Study Guide

ACG 2071 Exam 2 Review
Ch. 5: 7Q, 2 C, 9 T
Ch. 6: 2Q, 2C, 4T
Ch. 7: 5Q, 2C, 7T
Ch. 8: 6Q, 4C, 10T
Chapter 5: Planning and Forecasting
I. Planning and Budgeting Process
Types of planning
1. Strategic planning – identifying the overall focus of the organization
2. Tactical planning – developing concrete actions that help to achieve the strategic plan. Tactical planning includes the budgeting process.
3. Budget – an operating plan that is expressed primarily in financial terms.
Benefits of budgeting
i. Forces mangers to plan for the future ii. Facilitates communication between different divisions of the company. iii. Serves as a benchmark to evaluate performance.
Approaches to Implementing the Budget
Pyramid structure: CEO at
top → Middle Management → Operational Management at bottom
From top to bottom: top-down budgeting
From bottom to top: bottom-up budgeting
Behavioral Effects of Budget
i. Level of difficulty in obtaining goals and objectives (“budgeting slack” or “budgeting padding”) ii. Level of commitment towards budget
Starting Points
i. Incremental approach vs. zero-based budgeting ii. Annual budget vs. rolling budget
II. Performance Standards
Standards represent a set of expectations
i. Ideal Standard – achievable only under perfect conditions ii. Practical Standard – achievable with reasonable effort iii. Easily Attainable Standard – achievable with little effort
Product Standards:
i. Standard Quantity – the amount (quantity) of input (i.e. pounds of DM, hours of DL, etc.) that should be used to make a unit of output (product). ii. Standard Price – the amount (price) that should be paid for a unit of input
Building the Master Budget
The master budget is a collection of smaller budgets that lead to pro-forma (budgeted) financial statements.
i. Operational Budget – the portion of the master budget that provides a plan for operations during the budget period.
Sales Budget → S&A Expense Budget → Production Budget →DM Purchase Budget Ending Inv. →Direct Labor Budget →and COGS budg →Manufacturing OH Budget and Cash b
a. The Sales Budget
The starting point of the master budget because often times the components of the master budget are based on the estimated volume of sales.
Continues to budgeted income statement
b. The Selling & Administrative budget
Include expenses required for selling the product and managing the business, such as advertising, insurance, accounting, legal services, etc.
Flows to budgeted income statement. Bad-debt expense and depreciation are non-cash expenses so they will not flow through to cash budget.
c. Production Budget
Calculates the volume of goods that needs to be produced each month
EQ: Budgeted Sales + Budgeted EI – Budgeted BI = Budgeted Production
d. Direct Materials Purchase Budget
Once the monthly production is budgeted, the amount of direct materials that needs to be purchased can be budgeted
EQ: Production Needs + Budgeted EI – Budgeted BI = Budgeted Purchases
e. Direct Labor Budget
Budgeted amount of direct labor cost depends on the budgeted number of hours required to produce each unit and the budgeted hourly rate
f. Manufacturing Overhead Budget
All other manufacturing cost (other than direct materials and direct labor) fall into the manufacturing overhead category.
g. Ending Inventory and COGS budget
Once all of the detailed manufacturing costs are determined, the budgeted costs of goods sold for the quarter are calculated ii. Cash Budget – the portion of the master budget that summarizes all budgeted cash receipts and cash disbursements for the period.
→ Cash Budget
a. Cash Budget
Allows companies to predict what the cash flows are expected to be each quarter/month. Projected cash inflows and outflows are determined based on collection and payment terms and provide managers with insight into any financing needs for the company.
EQ: Cash Avail – Cash disbursements = cash excess (or deficit) + short-term financing = ending cash balance
Cash Available to Spend is made up of the beginning cash balance plus any cash received from customers during the period.
Many businesses offer customers some form of credit, so cash receipts from customers may occur over time.
Cash Disbursements
Made for each of the various expenses identified in the operating budget (direct materials, direct labor, overhead, and S&A expenses).
Most cash disbursements are assumed to be pain in the period in which they are incurred, with the exception of direct material purchases. (Everything except for raw materials are going to be paid)
Payments for other expenses can vary depending on arrangements with suppliers and payment terms.
It’s important that only cash payments show up on the cash budget. Non-cash expenses, such as depreciation expense, do not result in a cash payment and therefore do not affect the cash budget.
Cash Excess (Deficit)
Once the monthly cash available and cash payments are budgeted, the cash excess (or deficit) can be calculated:
EQ: Cash avil – Cash disbursements – Min cash balance = cash excess or deficit
If a shortage of cash exists, short-term financing will be needed.
Ending Cash balance
After the cash available, cash disbursements, and financing needs are determined, and ending cash balance can be determined.
EQ: Tot cash avail – Tot cash disburs. + Tot short-term financing = Ending cash bal iii. Pro-forma Financial Statements – the portion of the master budget that predicts the organization’s financial position if all components of the master budget are achieved as planned.
→budgeted Income Statement and Budgeted Balance Sheet

Chapter 6: Performance Evaluation – Variance Analysis
I. Variances
Variance – the difference between actual results and budgeted (or expected) results.
Variances are either favorable (F) or unfavorable (U), depending on their impact on income.
If actual sales > budgeted sales , then (F)
If actual costs > budgeted costs , then (U)
II. Actual Results
EQ: Actual Results = Actual Units* Actual cost or price per unit
III. Master Budget – often referred to as a static budget because it is based on one volume of sales (or output).
EQ: Master Budget = Budgeted unit* Budgeted price or cost per unit
IV. Flexible Budgets
Identical to the master (static) budget, but can be adjusted for the sales volume that was actually achieved.
Master (static) budget → budgeted based on planned volume and output
Flexible budget → budget based on actual volume of output
EQ: Flexible budget = Actual units* Budgeted price or cost per unit
There are two reasons for the differences between the master (static) budget and the actual results:
1. The quantity produced and sold was different than budgeted
2. The costs incurred for “inputs” were different than budgeted
Can be used to break down the static budget variance into it two components:
1. Flexible Budget Variance
a. Difference in cost per unit
b. EQ: Flexible Budget – actual results
c. Also known as the sales price variance
2. Sale Volume Variance+
a. Difference in units sold
b. EQ: Flexible budget – master/static budget
V. Management by Exception – only those variances that are considered important are investigated.
Materiality
Trend
Control

Chapter 7: Activity-Based Costing and Activity-Based Management
I. Activity-Based Costing (ABC) – costing techniques that assigns costs to cost objects (such as products, departments, or customers) based on the activities these cost objects require.
Matches resources consumed with the products the consumed them.
Numerous allocation bases applied to many different products.
EQ: Activity (Allocation) Base = Tot Activity Cost/ Tot Activity Cost Driver
More accurately identifies the cost of the product because more appropriately
What doesn’t ABC do?
Does not affect direct materials or direct labor, ABC only deals with allocation.
Does not affect the total amount of overhead allocated, only shifts the overhead amongst products.
An activity is any action or event that consumes resources.
Classification of Activities
a. Unit-Level: activities performed on each individual unit of product.
b. Batch-Level: activities performed all at once on a group (or batch) of units of products.
c. Product-Level: activities that support the products or services a company provides.
d. Customer-Level: activities that are performed for specific customers.
e. Organizational-Level: activities required to provide productive capacity and to keep the business in operation.
Activity Proportion Method
EQ: Activity Proportion = Activity Cost Driver for each Product/ Tot Activity Cost Driver
Activity-Based Management – process of using activity-based costing information to manage business activities
Business activities ex:
a. Value-Added vs. Non-Value added activities
b. Process Improvement
c. Activity-Based budgeting
d. Reassessment of profit profitability
II. Traditional Volume-Based Cost System – to allocate indirect costs (or overhead costs) to products, departments, services, etc.
Single allocation based applied to many products
EQ: Predetermined Overhead Rate = Budgeted total Manufacturing Overhead Cost/ Budgeted Level of Application (Allocation) Base

Chapter 8: Unit Accounting Information to Make Managerial Decisions

I. Identifying Relevant Information
In order for info (i.e. revenue or cost) to be relevant, it must meet the following two criteria:
a. It must occur in the future
b. It must differ between the alternatives
Avoidable Costs – costs that are incurred under one alternative but are not incurred (avoidable) under the other alternative.
Unavoidable Costs – costs that are incurred under all alternatives.
Sunk Costs – costs that have already been incurred in the past.
Relevant Cost Decision Model
a. What is the decision to be made?
b. What are the alternatives?
c. What are the relevant revenue and relevant costs?
d. What are the qualitative issues that need to be considered?
e. Which alternative offers the greatest benefit or the least cost?
II. 5 Managerial Decision Making Methods
1. Special Order Pricing – a customer (or potential customer) offers to purchase a large quantity of the company’s product but wants to pay an amount less than the regular sales price. Company can either accept or reject special order.
Incremental Analysis – if the special order is accepted, what are incremental (additional) revenues generated, and what are the incremental cost incurred?
Opportunity Cost – the amount of profit given up if operating at full capacity and special order is accepted.
EQ: Incremental Profit = Incremental Revenue – Incremental Costs (Direct costs+ Variable costs (+ lost CM on regular sales if at capacity))
Two Scenarios:
i. The special order would not put the company over its capacity. ii. The special order would put the company over its capacity. In this case, if the special order is accepted the company would have to shift units away from its regular customers to fulfill the special order. This presents an opportunity cost (value of the next best alternative that you’re giving up when you make a decision).
2. Outsourcing – transfers the production of goods (or the delivery of services) to a provider outside of the company.
Decisions involving whether to manufacture a good within the company or to have someone else do it are often referred to as make-or-buy decisions.
EQ: Total relevant costs = Direct costs + Variable costs
If a certain amount of the fixed costs is avoidable, then add that to total relevant costs.
For any outsourcing decision, one must also consider qualitative factors such as:
a. Quality of the product provided by the supplier
b. Reliability of the supplier
c. Stability of the price offered by the supplier
d. Theft of intellectual property
3. Allocating Constrained Resources
Constrained resource – anything limiting a company’s ability to produce products (or provide services).
Ex: cash, machine hours, facilities, labor hours
Bottleneck – the most constrained resource that limits the business’ ability to produce products (or provide services).
4. Keeping or Eliminating Operations
Segment margin – contribution margin of a particular segment less any direct fixed costs.
For a location means that location can cover its variable costs and fixed costs as well as being able to contribute to common fixed cost for company.
EQ: Sales – VC = CM – Direct FC = Segment Margin – Common F = OI
i. If Operating Income is positive – don’t shut location down because it is generating revenue ii. If OI is negative – shut down because it is not making enough money to stay active
Direct Fixed costs – fixed costs that can be attributed to one special segment. Therefore, if the segment is eliminated, these fixed costs will be eliminated.
Common Fixed Costs – fixed costs that are shared by all segments. These fixed costs will continue to be incurred even if a segment is eliminated. Also called allocated or assigned fixed costs. (allocated to each location)
i.e. costs incurred at corporate headquarters, CEO
salary.
Not affected by factory being shut down
Qualitative Factors:
The ability to use resources for other purposes.
The impact that eliminating a product or service may have on other services.
5. Sell or Process Further
Some products or services may be sold “as is” or can be processed further into a different product (service) that can sold for a higher amount, managers must decide.
Additional costs will be incurred to process further.
Costs that have already occurred will be sunk costs
Want rev > costs