Cash Budget & Flexible Budgets
Standard Costs
Performance Measurement
Decisions
Statement of Cash Flow
Ratios/Intro. to Managerial Accounting
100
______________ needs to be budgeted before you can complete a cash budget.
What is Everything?
•Sales Budget - Cash Receipts Budget
•Production Budget
- Raw Material Budget
- Labor Budget
- Overhead Budget
- Selling and Admin Budget
- Cash Disbursements Budget
The cash budget is a tool that helps you plan your financing activities. It will allow you to anticipate your cash needs and to negotiate your line of credit during a period when you can receive favorable terms.
100
This is how you calculate the labor rate variance.
What is:
100
The formula for Return on Investment.
What is
Net Operating Income / Average Operating Assets?
Definitions -
Net operating income is income before interest and taxes
Net operating assets – exclude assets held for speculation, investment in other companies, or rental assets.
100
A decision concerning whether an item should be produced internally or purchased from an outside supplier is often called a ____________ decision.
What is make vs. buy?
In evaluating the costs of producing the item internally, consider only those costs which disappear if production is terminated. This includes only variable costs and traceable fixed costs. Common fixed costs are irrelevant!
100
These are the three sections of a cash flow statement.
What is operating activities, investing activities & financing activities?
•Investing: Includes transactions that involve the acquisition or disposal of non-current assets.
•Financing: Includes transactions involving receipts from or payments to creditors and owners.
•Operating: Increases or decreases of cash that are not Investing or Financing. Includes those activities that affect net income
100
Financial accounting produces information for ____ users, while managerial accounting produces information for ____ users.
1. External Users 2. Internal Users
Managerial Accounting is also -
1. Unregulated - timeliness over precision
2. Looks at subunits
3. Both financial and non-financial measures
- It provides information for decision making and planning.
- Assists managers in directing and controlling operations.
- Motivates managers/employees to accomplish organizations' goals.
- Measures performances against goals.
- Assess competitive position.
200
The difference between the planning budget revenues and expenses and the flexible budget revenues and expenses.
What is Activity Variance?
200
The material price variance is computed on the ____________ quantity purchased while the quantity variance is computed on the _____________ used.
What is:
1. entire
2. quantity
200
The formula for Residual Income.
What is
Net Operating Income - (Average Operating Assets x Minimum Required Rate of Return)
Residual income is another way to measure an investment center's performance. It encourages managers to make profitable investments that may be rejected by managers using ROI.
As long as the residual income of a project is a positive amount, the project is deemed attractive because it increases a manager's income pool. Thus, any project that returns more than the cost of capital will be accepted in accordance with top management's desire.
200
In the presence of constrained resources, companies should promote those services that yield the ________ contribution margin, per unit of the constrained resource.
What is highest?
200
The proceeds from issuing common stock and from borrowings would be reported in this section of the cash flow statement.
What is the financing section?
200
This ratio tests a company's ability to pay current liabilities from existing resources.
What is the current ratio?
Current Assets / Current Liabilities
The higher, the better!
A declining ratio may be a sign of deteriorating financial condition, or it might result from eliminating obsolete inventories.
This is similar to the working capital ratio, which measures the company's ability to repay current liabilities using only current assets. The higher the better.
300
The difference between the flexible budget revenue/cost and the actual revenue/cost.
What is Revenue and Spending Variance?
300
This would cause an unfavorable direct labor variance.
What is:
• Direct labor costs (salaries or benefits) were higher than we planned. HR Manager responsible.
• We were not as efficient as planned in our use of labor (more hours). Production manager responsible.
300
How are managers of cost centers evaluated?
What are flexible budgets and standards costs?
Managers of cost centers do not have control over revenues or investments
•Most manufacturing facilities are cost centers
•Service departments do not generate revenues and are also cost centers
•Accounting
•Legal
•Human resources
300
In a joint product setting, the analysis of whether to continue to process one or more product should consider only the ___________ revenues and costs.
What is incremental?
- Incremental cost: the difference between the cost of two alternative decisions. Incremental costs may be fixed, variable or mixed. Also known as differential cost.
- Incremental revenue: the difference in revenue between any two alternatives. Also known as differential revenue.
Incremental costs and revenues are relevant to decision making, whereas costs and revenues that do not differ between alternatives are irrelevant to decision making.
300
Making a loan to a supplier and proceeds from the sale of land would be reported in this section of the statement of cash flow.
What is the investing section?
300
This ratio is the average number of days it takes to collect an account receivable after the sale.
What is the average collection period?
365 Days / Accounts Receivable Turnover
Accounts Receivable Turnover = Sales (on account) / (Accounts Rec. Beg. + Accounts Rec. Ending) / 2
The higher the better for the A/R Turnover, which then translates into a lower average collections period.
A rising collection period may indicate your customers are not as good a quality as before.
400
Which of the following is NOT a characteristic of a flexible budget?
A. May be prepared for any activity level in the relevant range.
B. Show costs that should have been incurred at the actual level of activity, enabling "apples to apples" cost comparisons.
C. Help managers control costs.
D. Improve performance evaluations.
E. All of the above are true.
What is All of the Above are True?
The relevant question is:
"How much of the cost variance is due to higher activity, and how much is due to cost control?" To answer that question we flex the budget to the ACTUAL level of activity.
400
This would cause a favorable materials cost variance.
What is:
• Paid less than expected for raw materials (influenced by # of units ordered, how the order is delivered, quality of materials). Responsibility of the purchasing manager.
• Used less direct materials than expected (production manager responsible).
400
How are managers of profit centers evaluated?
What are flexible budgets, standard costs and segment income statements?
Managers of profit centers are responsible for both costs and revenues, but may not have control over significant investments
•Most retail stores/restaurants are profit centers
•Store managers are responsible for sales and costs, but would not have authority to open new stores
400
In accepting or rejecting a special order, when a company doesn't have excess capacity, in addition to the variable costs, this needs to be added.
What is opportunity cost?
Opportunity cost: The benefit foregone when one action precludes taking an alternative course of action. From an economic perspective, a dollar of opportunity cost associated with an action should be treated as equivalent to a dollar of out-of-pocket cost.
400
This is step one in preparing the cash flow statement using the indirect method.
What is adding back any non-cash expenses (depreciation)?
Second: Remove gains and losses from investing activities
Third: Adjust for changes in current assets and liabilities.
When using indirect method - no supplemental schedule is required. Used by 99% of companies.
400
This ratios formula is Cost of Goods Sold / (Inventory Beg + Inventory End)/2 and is a measure of how many times a company's inventory has been sold or replaced during the year.
What is Inventory Turnover?
If a company’s inventory turnover is less than its industry average, it either has excessive inventory or the wrong types of inventory.
The higher, the better!
500
Label the variances as favorable or unfavorable
500
This would cause a favorable variable MOH spending variance.
What is:
The favorable variable overhead spending variance could be the result of paying less than expected for units of variable overhead (i.e. indirect materials), OR from using less of the variable overhead items than expected, OR both.
In fact, we could have offsetting effects – paid less than expected for indirect materials, but used too many indirect materials because the quality was not as good. If the cost savings > inefficient use, we’d still have a favorable spending variance.
Also Note:Is the reason we have a favorable efficiency variance because we used less variable overhead?
Answer: No! The reason we have a favorable efficiency variance is we used less Direct Labor (or whatever the cost driver is) than expected. The amount of the cost driver determines Variable Overhead.
500
This center uses ROI and residual income to evaluate managers.
What is investment center?
The manager of an investment center has control over costs, revenues and investment activities.
- Additional stores
- New manufacturing facilities
- Technology
500
This type of decision has a bearing on the future and/or differs among competing alternatives.
What is a relevant decision?
- Sunk costs: Sunk costs are costs that have already been incurred. Sunk costs are not relevant to decisions, since their amounts cannot be changed by present or future decisions.
- Avoidable costs are specifically traceable to an activity and can be eliminated by ceasing the activity.
- Unavoidable costs continue whether or not the activity is continued.
When decision whether to add or drop a service, product or department, determine if the company is able to avoid more in fixed costs than it loses in the contribution margin.
500
Will a decrease in inventories be added or subtracted on the statement of cash flow in the operating activities section?
What is added?
•Think about when we collect an Account Receivable:
Cash ↑ DR - cash goes up
Accounts Receivable CR
•Therefore: A decrease in a current asset (accts receivable.) is a source of cash!
•If that is true, an increase in a current asset must be a use of cash!
The opposite happens for liabilities.
500
This ratio measures how much of each sales dollar is left after deducting the cost of goods sold to cover expenses and provide a profit.
What is the gross margin percentage?
(Sales - Cost of Good Sold) / Sales
The higher, the better.
A falling margin is an indication that either cost of product has risen or there is competitive pressure on the company’s sales price. A rising percentage indicates increasing profitability.
600
This ratio is the portion of a company's profit (or loss) allocated to each outstanding share of COMMON stock.
What is earnings per share (EPS)?
EPS = Net Income / Average Number of Common Shares Outstanding.The higher, the better!
It is important since earnings are the driver of dividend payments and future increases in the value of shares. A rising price indicates increasing profitability.