Performance evaluation
What is decentralization in an organization?
Larger Firms breaking into smaller divisions, departments, etc.
Decisions are made by managers throughout the company rather than by a few top executives
When allocating costs to their corresponding departments, what are the two main types of cost types/behaviors?
Indirect and Direct Costs
What is a rolling budget?
In Ex: at the end of February 2023, you create the budget for February 2024.
What is a Cost Center?
incurs costs without directly generating revenues
ex: accounting, advertising, purchasing
How are Service Department Costs allocated to other departments?
They are allocated the departments that actually generate revenue, based on certain activities/drivers that would cause the service department to increase costs.
What is the difference between a flexible and fixed budget?
Flexible budgets us actual units (typically actual unit sales or actual units produced)
What are the differences between Performance Centers and Investment Centers? What are some examples?
Performance Centers: generates revenue and incurs cost
ex: product lines and selling department
Investment Center: holds managers responsible for revenues, costs and investments
ex: manger of kraft's beverage division has the authority to make decisions such as building a new manufacturing plant
What are some examples of how an Advertising Department would allocate its expenses?
How would rent likely be allocated?
Advertising: Likely based on sales
Rent: Likely based on square footage occupied by the department
What are the two parts of Materials Variances? How would you calculate them?
Materials Variances: Price and Quantity Variances
To Calculate:
AQ X AP - AQ X SP - SQ X SP
Price Variance Materials Variance
What is the purpose of a Responsibility Accounting System?
provides information used to evaluate the performance of a department manager based on costs they can actually CONTROL
How do you determine if a department is worth keeping?
If the department can cover its own direct costs, then that means it can contribute to OH that will be incurred regardless of if the dept. was eliminated or not.
What are the two parts of Labor Variances? How would you calculate them?
Labor Variances: Rate and Efficiency Variances
To Calculate:
AH X AR - AH X SR - SH X SR
Rate Variance Efficiency Variance
What are controllable and uncontrollable costs? What are the main differences?
Controllable: Managers have the power to determine or at least significantly affect the amount incurred
Uncontrollable: Costs that are not within the manager's control or influence
Where are service department costs allocated?
Why are service department costs allocated?
Service Dept. Costs are allocated to Operating Departments
They are allocated to operating departments, essentially to match up expenses with the revenue those expenses generated.
What are the two main parts of OH variance?
What are the differences? What causes each variance?
Volume (Uncontrollable) and Controllable Variances
Volume variances occur when the company operates at a different capacity level than originally planned/budgeted. (in ex: a company produced 3,500 units but they predicted they would produce 4,000 units)
The Controllable variance occurs when there is a difference between the actual amount of cost driver used (in ex: DLH, MH, etc.) and the standard amount of the cost driver that should have been used at the actual activity level.