Study Guides (238,471)
Canada (115,151)
Business (1,198)
BU247 (14)

Midterm Review.docx

10 Pages
Unlock Document

Wilfrid Laurier University
Greg Clark

Management Accounting - General What is Management Accounting? -The process of supplying the managers and employees in an organization with relevant information, both financial and nonfinancial, for making decisions, allocating resources, and monitoring, evaluating, and rewarding performance -Demand for accuracy of costing information has increased -Make sure benefits exceed the costs for managerial accounting – cost-benefit analysis -Management account has the following attributes: -It is both retrospective, providing feedback about past operations, and also prospective, incorporating forecasts and estimates about future events. For both retrospective reporting and prospective planning, management accounting uses both financial and nonfinancial measures -It is oriented to meeting the decision-making needs of employees and managers inside the organization. Ideally, a good management accounting system can become a source of competitive advantage for a company -It has no prescribed forms or rules about its content, how the content is to be developed, and how the content is to be presented. All of these get determined by managers’ judgments and decisions about what best meets their needs for actionable information and is defined entirely by the needs of managers using the information. No standard setter or regulator specifically influences the design of management accounting information and systems Strategy -Strategy is about an organization making choices about what it will do and, equally important, about what it will not do -Selecting a strategy forces managers to make choices about what markets the organization should target and how the organization will compete in those markets The Plan-Do-Check-Act (PDCA) Cycle Plan -Identify objectives -Choose a course of action to achieve the desired objectives Do -Implement the chosen course of action Check -Monitor (measure) the results of the implemented course of action -Evaluate the results by comparing them with results expected when the plan was developed Act -Maintain the current direction if results are acceptable. Otherwise return to the plan stage to develop and implement an alternative course of action Behavioural Implications of Management Accounting Information -Information is never neutral -People react when they are being measured The Balanced Scorecard & Strategy Map The Balanced Scorecard -The Balanced Scorecard measures organizational performance across four different but linked perspectives that are derived from the organizations mission, vision, and strategy -Financial – How is success measured by our shareholders? -Customer – How do we create value for our customers? -Process – At which processes must we excel to meet our customer and shareholder expectation? -Learning & Growth – What employee capabilities, information systems, and organizational capabilities do we need to continually improve our processes and customer relationships? -The financial and customer measures represent what the company wants to accomplish with its two most important external constituents: shareholders and customers -The process perspective describes “how” the strategy will be executed -Measures for learning and growth arise from asking “how”: How will employees obtain the skills and knowledge to be able to improve the quality and cycle times of the company’s production processes? -The learning and growth perspective uses a measure of employees’ capabilities to predict improvements in process quality and cycle times Strategy -Any good strategy should have two essential components: 1. A clear statement of the company’s advantage in the competitive marketplace, what it does or intends to do differently, better, or uniquely compared to competitors, and 2. The scope for the strategy, where the company intends to compete most aggressively, either for targeted customer segments, technologies employed, geographic locations served, or produce line breadth Balanced Scorecard Objectives -Increase revenues through expanded sales to existing customers (financial) -Offer complete solutions to our targeted customers (customer) -Achieve excellence in order fulfillment through continuous improvements (process) -Align employee incentives and rewards with the strategy (learning & growth) Perspective Objectives Measures Financial -Increase shareholder value -Return on equity Customer -Retain customers -Percentage of repeat customers -Deliver products on time -Growth in customers’ sales -Offer competitive prices -Percentage of deliveries made on time -Prices compared to competitors Process -Reduce process cycle times -Percentage improvement in cycle times -Improve process quality -Product defect rates -Process yield improvement Learning & growth -Develop employees’ process -Percentage of employees trained and certified in process improvement skills improvement capabilities Strategy Map -Companies use strategy maps to illustrate the causal relationships among the strategic objectives across the four balanced scorecard perspectives Financial Perspective -Contains objectives and measurements that represent the ultimate success measures for profit-seeking companies -Financial performance measures, such as operating income and return on investment, indicate whether the company’s strategy and its implementation are increasing shareholder value -Improves through two basic approaches: productivity improvements and revenue growth -Companies reduce costs by lowering direct and indirect expenses Customer Perspective -Describes how a company intends to attract, retain, and deepen relationships with targeted customers by differentiating itself from competitors -Objectives should include achieving customer satisfaction and loyalty, acquiring new customers, increasing market share, and enhancing customer profitability -Companies like Wal-Mart and McDonalds use the “lowest total cost” buying experience in their category -Companies like Apple, Armani and Mercedes use “product leadership” -IBM who offers customers a one-stop buying experience use “complete customer solutions” Process Perspective -Create and deliver the value proposition for customers -Operations management processes: Improve the cost, quality and cycle times of production processes, and improve asset utilization -Customer management processes: Acquire new customers while satisfying existing customers, and generating growth -Innovation processes: Develop innovative products and services, and be sure to not take away any ‘value added’ Learning and Growth Perspective -Three learning objectives: human resources, information technology, organizational culture and alignment -Developing employee motivation, sending employees away to learn (courses) – companies are currently cutting back on this because the economy is bad Using Costs in Decision Making Pricing -Organizations use cost information in the pricing decision in two ways -In markets where the organization faces a market-determined price, the organization will use product cost information to decide whether its cost structure will allow it to compete profitably -Cost-plus pricing – marking up on total/variable cost -There can be an across the board or an individual mark up on a company’s product Product Planning -Target costing – based around prediction and estimates to make a reasonable mark-up Budgeting -Projects or forecasts costs for various levels of production and sales activity Variable Costs -One that increases proportionally with changes in the activity level of some variable -Because there are many possible types of variables, for convenience, a common term used for a variable that causes a cost is cost driver (amount of goods produced) Variable cost = Variable cost per unit of the cost driver x Cost driver units -The convention is to use variable cost to refer to the total variable cost and variable cost per unit as the variable cost per unit of the cost driver -Variable cost per unit of the cost driver is the total variable costs -Cost driver units is the number of units produced -Variable overhead is costs that go into making product, but they aren’t significant (Ex. Nails on a rocking chair), so small that you can’t figure out how much it costs per chair -Depreciation can be a variable cost, but if its straight-line amortization (which we assume) is fixed Fixed Costs -A cost that does not vary in the short run with a specified activity -Salaries are in fixed cost because you can’t lay the people off (managers) -Fixed costs are often called capacity-related costs Total cost = Variable cost + Fixed cost Cost-Volume-Profit Analysis -Uses the concepts of variable and fixed costs to identify the profit associated with various levels of activity Profit = Revenue – Total costs Equations -The difference between total revenue and total variable cost is called the contribution margin -The contribution margin per unit is the contribution that each unit makes to covering fixed costs and providing a profit -The contribution margin ratio is the ratio contribution margin per unit to selling price per unit Contribution margin = Sales – variable costs Profit = Unit sales x (Price per unit – Variable cost per unit) – Fixed cost {We set profit =0, to solve for break-even units} Units needed to be sold = target profit + fixed cost contribution margin per unit Target profit = Contribution margin per unit x Required unit sales – Fixed cost Incremental profit = Incremental contribution margin – Incremental cost The Multiproduct Firm Profit = Product 1 contribution margin x product 1 sales + product 2 contribution margin x product 2 sales – fixed costs -The breakeven point is found when the profit is 0 -Need sales mix of 2 products (Ex. 80% kitchen chairs, 20% rocking chairs) -Fixed cost needs to be covered by contribution margin -Bundle approach – assumes we sell chairs in bundles of 100 -The bundle approach (shown above is the simplest) Mixed Costs -A cost that has a fixed component and a variable component -Ex. Your cell phone bill may have a fixed component that you pay each month, independent of how many calls you make, and a variable component that depends on the quantity of calls you make Step Variable Costs -Increases in steps as quantity increases -“Costs at a certain point in production, go up to $60 000” – because after hiring a certain number of employees you need to hire another manager with a salary of $60 000 Incremental Costs -The cost of the next unit of production and is similar to the economist’s notion of marginal cost -Generally defined as the variable cost of a unit of production Sunk Costs -A cost that results from a previous commitment and cannot be recovered -Ex. Depreciation -Sunk costs should not be considered in subsequent decisions because they cannot be changed -Sunk cost phenomenon, ‘Concorde effect’, ‘Concorde fallacy’ Relevant Cost -A cost that will change as a result of some decision -Ex. You purchased a concert ticket for $100 weeks ago. If you go to the concert you will spend $70 on refreshments and $50 on parking. You are thinking you don’t want to go and spend the $120, and the $100 is a sunk cost. The relevant cost is $120 -Relevant costs can be controlled and irrelevant costs can’t be controlled Opportunity Cost -Opportunity cost – what you give up when you choose something else What you forego by accepting one offer and not the other Avoidable Cost -A cost that can be avoided by undertaking some course of action -The most o
More Less

Related notes for BU247

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.