FINAL EXAM notes B03v2.docx

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University of Toronto Scarborough
Financial Accounting
Douglas Kong

FINAL EXAM B03 40 marks MC -1 SAQ – ABC ( chap 5, 7 job costing mark-up) - 1 SAQ – Special Order (Chapter 4, 13 – limited to 1 question short term decision - 1 SAQ- long term decision (chapter 12/16) Chapter 7 Activity based costing - indirect costs are divided into sub pools of cost of activities - activity costs are allocated to the cost drivers - costs are proportionally allocated ABC cost hierarchy - organization sustaining - facility sustaining - customer sustaining - product sustaining, - batch level - unit level STEPS 1. identify cost object 2. identify activities and group homogeneous activities 3. assign costs to activity-based cost pools 4. for each ABC cost pool, choose a cost driver 5. for each ABC cost pool, calculate an allocation rate 6. for each ABC cost pool, allocate activity costs to the cost object Activity-based Management - using ABC to evaluate the costs and bneefits of production and internal support activities, and to identify and implement opportunities for improvements in profitability, efficiency, and quality within an organization manages.. - customer profitablitiy - product and process design - environmental costs - quality - constrained resources Chapter 10 Budgeting (done in order) - operating budget revenue, Production, DM, DL, Manufacturing Overhead, Inventory and COGS, support department, Budgted income statement (Example) Total Requirement Less: beginning inventory Plus: Desired ending inventory = budgeted cost - Financial budget o Capital, long-term financing, cash, budgeted balance sheet, budgeted statement of cash flows - Cash budget o Cash receipts, cash disbursements, short-term borrowings and investments (example) Sales A/R collections: Current month Previous months Total Cash receipts costs Payments on A/P: Current month Previous months Total Cash disbursements Beginning cash balance +Cash receipts -Cash disbursements Ending cash balance Budget variances are investigated and categorized as favourable or unfavourable Chapter 4 Decision making - only VC is relevant to the decision, ignore FC (example) - compare contribution margin and avoidable costs , whichever still generates profit should be kept consider qualitative factors in keep/drop decisions - effect on customers? Effect on reputation? Effect on employees? Effect on community? Effect on the morale of the employees of the remaining products? - Customer profitability o Customer should be dropped if: customer contribution margin is less than relevant fixed costs plus opportunity cost 1. Keep or Drop Keep if- contribution margin lost > fixed costs avoided + CM gain on other products Drop if- contribution margin lost < fixed costs avoided + CM Gain on other products 2. Insource or Outsource (make or buy) Make if cost of purchase > Cost savings of not making + Opportunity cost (CM gain from other projects) Buy if cost of purchase < Cost savings of not making + opportunity cost (CM gain on from other orpojects) 3. Special Order Decisions accept if- incremental revenues > relevant VC + relevant FC + opportunity cost reject if- “ < “ 4. Constrained Resource (product emphasis) decisions allocate scarce resources to products with the highest contribution margin PER UNIT OF THE CONSTRAINED RESOURCE - until demand is met, then move onto the next highest CM/unit product CHAPTER 12 Capital Budgeting Methods that consider Time value of money: NPV & IRR Methods that do not consider time value of money: Payback method & Accrual Accounting rate of return method 1. NPV: sum of all PV of cash flows - Profitability index = PV of benefits / PV of costs o Used to compare between projects - If NPV>0, the investment is acceptable - Uncertainty about future cash flows increase the further the cash flow is in the future, life of project, cost of the initial investment 2. IRR method: find the discount rate required to set the NPV to zero - PVAF discount factor is found by locating the column for the PV factor, given n 3. Payback Method: payback perio in years = Initial investment / annual cash flow - same as the PVAF factor computed in the IRR method 4. Accrual Accounting Rate of Return method: operating income / Annual cash flow Nominal rate of interest = (1 + real) x (1+inflation)-1 Nominal cash flow = real
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