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Managerial accounting > Chapter 11, 13, 14 > Flashcards

Chapter 11, 13, 14 Flashcards

1
Q

What is the term for the net operating income that an investment centre earns above the return on its average operating assets?

A

Residual income

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2
Q

What kind of assets does the ROI formula typically use?

A

Average operating assets for the year

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3
Q

State the two formulas that can be used to calculate the ROI

A

Net operating income / Average operating assets, and margin x turnover

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4
Q

What is the formula for residual income?

A

Net operating income - (Average operating assets x Minimum required rate of return)

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5
Q

Does decentralisation reduce how accountable lower-level managers are for the outcomes of their decisions?

A

Yes

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6
Q

Why does increasing selling prices, reducing operating expenses, or increasing unit sales generally only improve margin and not turnover?

A

Because turnover is the total sales made by a business and increasing selling price would not increase the number of sales

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7
Q

What are operating assets and state 3 examples?

A

Items that a business buys to help run its day-to-day operations. Accounts receivables, inventory, equipment

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8
Q

What does the manager of a profit centre have control of?

A

Both costs and revenues

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9
Q

What will having funds tied up in operating assets depress and lower?

A

Depress turnover and lower ROI

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10
Q

How can lower level managers decision making authority be linked to outcomes of decisions?

A

Responsibility accounting systems

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11
Q

Would a retail outlet be considered a cost centre?

A

No

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12
Q

What is EBIT another term for?

A

Net operating income

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13
Q

Does using the net book value instead of gross cost to calculate average operating assets have an effect on ROI?

A

Yes

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14
Q

What are the formulas to calculate margin and turnover?

A

Margin: net operating income / sales, and turnover: sales / average operating assets

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15
Q

Is net operating income, income before tax and interest?

A

Yes

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16
Q

Does a manager have control over and is accountable for all of the cost, profit, and investments of an organisation in a responsibility centre?

A

Yes

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17
Q

State one drawback of residual income?

A

Cannot be used to compare the performances of divisions of different sizes

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18
Q

What is the formula for the minimum required return?

A

Average operating assets x Minimum required rate of return

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19
Q

What is a transfer price?

A

Price charged when one segment of a company provides goods/services to another

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20
Q

State two synonyms for differential costs

A

Incremental and avoidable

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21
Q

Is a sunk cost one that has already occurred?

A

Yes

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22
Q

What is a sourcing decision?

A

A decision to carry out one of the activities in the value chain internally

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23
Q

What is the formula to calculate how much net operating income will change by if something is dropped?

A

Figure out the contribution margin (sales - variable costs), then minus the avoidable fixed costs. If negative then that’s an increase in NOI

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24
Q

State two advantages of vertical integration

A

Less dependant on suppliers, and make profits on both parts and the final product

25
Q

Should non-differential future costs be included in the analysis when making a decision?

A

No

26
Q

What calculation should be made in deciding what to do with equipment?

A

To find the total savings do: buy price -variable manufacturing cost-supervisor salary (avoidable costs) then multiply by number of units

27
Q

Define differential cost, incremental costs, and avoidable cost (all the same)

A

A future cost that is not the same between any alternatives

28
Q

Would variable overhead be a relevant cost to the sourcing decision of considering buying a component part they currently make using existing equipment?

A

Yes

29
Q

Is differential revenue a relevant benefit?

A

Yes

30
Q

When are relevant and irrelevant costs used when considering decision alternatives?

A

When using the total cost approach

31
Q

What calculation should be done to determine which product should be carried on beyond split off point?

A

Final sales value after further processing - sales value at split off point = incremental revenue from further processing - cost of further processing

32
Q

What is a bottleneck?

A

The machine or process that is limiting overall output

33
Q

Is the project with the shortest payback period always most desirable when a capital investment decision is being made?

A

No

34
Q

Is the net present value of a project the difference between the present value of cash inflows and present value of cash outflows?

A

Yes

35
Q

What is the formula used to find the factor that needed to calculate the internal rate of return?

A

Internal rate of return

36
Q

What happens to any old equipment’s salvage value when computing payback?

A

Is deducted from the cost of new equipment and depreciation is added back to project net income

37
Q

What does recovering the original investment in an equipment capital budgeting decision mean?

A

Investment has generated enough cash inflows to completely cover the cost of the equipment

38
Q

For a project to be acceptable must the discount rate be less than or equal to the minimum rate of return?

A

Yes

39
Q

Is the cost of capital used as the hurdle rate when using the internal rate of return method?

A

Yes

40
Q

What does the discount rate equal when the net present value method is used?

A

The hurdle rate

41
Q

What is the salvage value?

A

The estimated value of an asset at the end of it’s useful life

42
Q

What happens to the salvage value if equipment is being replaced? Is the depreciation added back to project net income?

A

It is deducted from the cost of the new equipment. Yes

43
Q

What are out-of-pocket costs?

A

Actual cash outlays for operating expenses

44
Q

What should happen when a project with a negative NPV has significant intangible benefits?

A

Annual intangible benefit necessary to make the investment worthwhile should be calculated

45
Q

How do you estimate the annual value of intangible benefits needed to accept the project?

A

Divide the negative net present value excluding tangible benefits by the present value factor for an annuity

46
Q

What is the formula to calculate the present value of future cash flows?

A

Profitability index x Investment required

47
Q

What is the formula to calculate the simple rate of return?

A

Annual incremental net operating income / initial investment

48
Q

What is the internal rate of return?

A

The discount rate that makes NPV equal zero for a project

49
Q

What does the time value of money concept?

A

A dollar today is worth more than a dollar a year from now

50
Q

How to calculate the payback period?

A

Add the first years. Keep doing this until the years payback will exceed the cost. When its this year divide how much more you need by the pay back in that month, and you have the answer

51
Q

Does capital budgeting fall into either screening or preference decisions?

A

Yes

52
Q

Are all cash flows generated by the investment project immediately reinvested at a rate of return equal to the discount rate?

A

Yes

53
Q

What is the formula to find out the annual additional required to make investment attractive?

A

Negative net present value to be offset / present value factor

54
Q

When should profitability index be used?

A

When ranking competing projects with different initial investments. For preference decisions

55
Q

What is a limitation of the simple rate of return?

A

Uses accounting income

56
Q

Does simple rate of return consider cash flows?

A

Nor

57
Q

Should the initial investment be reduced by the salvage value of old equipment when computing the simple rate of return?

A

Yes

58
Q

What is the present value formula?

A

Cash flow x Present value

Managerial accounting (4 decks)

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