Business Explain: Cost Accounting

Showing posts with label Cost Accounting. Show all posts

Describe three reasons for an unfavorable direct manufacturing labor efficiency variance?

1. hiring under skilled workers-less efficency
2. inefficient scheduling of work
3. poor maintenance of machines

List 4 reasons for using standard costs.

1. Pricing decisions.
2. cost management.
3. budgetary planning and control.
4. Financial statement preparation.

Describe the steps in developing a flexible budget.

1. Identify the actual quantity of output.
2.Calculate the flexible budget for revenues based on budgeted selling price and actual quantity of output.
3.Calculate the flexible budget for costs based on budgeted variable cost per output standard quantity of output and budgeted fixed costs.

Why might managers find a flexible budget analysis more informative than a static budget analysis?

A FBA is a better measure of operating performance because it compares actual revenues to budget revenues and actual cost to budget costs. It helps managers gain more insight into causes of variances.

What is the key difference between a static budget and a flexible budget?

Static budget- is based on the level of output at the beginning of the period.

Flexible budget- is based on the actual output level in the budget period.

Distinguish between a favorable variance and an unfavorable variance.

A favorable variance has a result of increasing operating income relative to the budgeted amount. An unfavorable variance has a result of decreasing operating income relative to the budgeted amount

What are the two possible sources of info a company might use to compute the budgeted amount in variance analysis?

Past amounts and detailed engineering studies OR
Past amounts and data from company's standards.

What is the relationship between management by exception and variance analysis?

Management by exception- is the practice of concentrating on areas not operating as expected and giving less attention to areas operating as expected.

Variance analysis-helps managers identify areas not operating as expected.

In CVP analysis, gross margin is a less-useful concept than contribution margin. Do you agree? Explain briefly.

Yes, gross margin calculations emphasize the distinction between manufacturing and nonmanufacturing costs (gross margins are calculated after subtracting variable and fixed manufacturing costs). Contribution margin calculations emphasize the distinction between fixed and variable costs. Hence, contribution margin is a more useful concept than gross margin in CVP analysis.

How can a company with multiple products compute its breakeven point?

A company with multiple products can compute a breakeven point by assuming there is a constant sales mix of products at different levels of total revenue.

"There is no such thing as a fixed cost. All costs can be unfixed given sufficient time." Do you agree? What is the implication of your answer for CVP analysis?

CVP analysis is always conducted for a specified time horizon. One extreme is a very short-time horizon. For example, some vacation cruises offer deep price discounts for people who offer to take any cruise on a day's notice. One day prior to a cruise, most costs are fixed. The other extreme is several years. Here, a much higher percentage of total costs typically is variable. CVP itself is not made any less relevant when the time horizon lengthens. What happens is that many items classified as fixed in the short run may become variable costs with a longer time horizon.

What is operating leverage? How is knowing the degree of operating leverage helpful to managers?

Operating leverage describes the effects that fixed costs have on changes in operating income as changes occur in units sold, and hence, in contribution margin.

Knowing the degree of operating leverage at a given level of sales helps managers calculate the effect of fluctuations in sales on operating incomes.

Give an example of how a manager can increase variable costs while decreasing fixed costs.

Manufacturing--subcontracting a component to a supplier on a per-unit basis to avoid purchasing a machine with a high fixed depreciation cost.

Marketing--changing a sales compensation plan from a fixed salary to percent of sales dollars basis
Customer service--hiring a subcontractor to do customer service on a per-visit basis rather than an annual retainer basis.

See: Give an example of how a manager can decrease variable costs while increasing fixed costs.

Give an example of how a manager can decrease variable costs while increasing fixed costs.

Manufacturing--substituting a robotic machine for hourly wage workers.

Marketing--changing a sales force compensation plan from a percent of sales dollars to a fixed salary.

Customer service--hiring a subcontractor to do customer repair visits on an annual retainer basis rather than a per-visit basis.

See: Give an example of how a manager can increase variable costs while decreasing fixed costs.

Describe sensitivity analysis. How has the advent of the electronic spreadsheet affect the use of sensitivity analysis. How has the advent of the electronic spreadsheet affected the use of sensitivity analysis?

Sensitivity analysis is a "what-if" technique that managers use to examine how an outcome will change if the original predicted data are not achieved or if an underlying assumption changes. The advent of the electronic spreadsheet has greatly increased the ability to explore the effect of alternative assumptions at minimal cost. CVP is one of the most widely used software applications in the management accounting area.

How does an increase in the income tax rate affect the breakeven point?

An increase in the income tax rate does not affect the breakeven point. Operating income at the breakeven point is zero, and no income taxes are paid at this point.

CVP analysis is both simple and simplistic. If you want realistic analysis to underpin your decisions, look beyond CVP analysis. Do you agree? Explain.

CVP certainly is simple, with its assumption of output as the only revenue and cost driver, and linear revenue and cost relationships. Whether these assumptions make it simplistic depends on the decision context. In some cases, these assumptions may be sufficiently accurate for CVP to provide useful insights. The examples in Chapter 3 (the software package context in the text and the travel agency example in the Problem for Self-Study) illustrate how CVP can provide such insights. In more complex cases, the basic ideas of simple CVP analysis can be expanded.

More: What is Cost-Volume-Profit (CVP) Analysis?

Why is it more accurate to describe the subject matter of this chapter as CVP analysis rather than as breakeven analyses?

Breakeven analysis denotes the study of the breakeven point, which is often only an incidental part of the relationship between cost, volume, and profit. Cost-volume-profit relationship is a more comprehensive term than breakeven analysis.

Describe three methods that managers can use to express CVP relationships ?

Three methods to express CVP relationships are

The equation method,
The contribution margin method, and
The graph method.

The first two methods are most useful for analyzing operating income at a few specific levels of sales. The graph method is useful for visualizing the effect of sales on operating income over a wide range of quantities sold.

Define contribution margin, contribution margin per unit, and contribution margin percentage.

Contribution margin is the difference between total revenues and total variable costs. Contribution margin per unit is the difference between selling price and variable cost per unit. Contribution-margin percentage is the contribution margin per unit divided by selling price.