CMA Part I Flashcards
1
Q
Capital Intensity Ratio
A
The capital intensity ratio is the amount of assets required per dollar of sales. It is assets that increase when sales increase divided by sales. The capital intensity ratio of a firm affects its capital requirements. A company with a high assets-to-sales ratio will require more assets for a given increase in sales and therefore will have a greater need for external financing than a company with a lower assets-to-sales ratio.
2
Q
The variance if the probability of improper operation is:
A
In order to determine this percentage, we must determine at what percentage of likelihood of error the expected cost of the investigation is equal to the expected cost of not investigating. In case of investigation, total costs will be equal to the sum of the cost of investigation itself ($6,000) and the expected cost of correction ($18,000X), where “X” is the probability of improper operations. The expected cost of not doing an investigation is $33,000X. Equating both sides would allow us to find X, or the probability at which it would make no difference whether to investigates or not.
3
Q
The formula to calculate exponential smoothing:
A
The formula to calculate a forecast using exponential smoothing is Ff+1=aYt + (1-a)Ft Where: Ft+1 = forecast for the next period Yt = actual value for period t Ft = forecasted value for period t a = smoothing constant (0-1)
4
Q
The formula for exponential smoothing using alpha is:
A
(a x Last Month’s Actual Sales) + ([1 - a] x Last Month’s Exponential Smoothing Forecasted Sales) = This Month’s Forecasted Sales
a = alpha
5
Q
Net cash flow from operating activities (Indirect Method)
A
Net cash flow from operating activities, using the indirect method, is:
Net income
- Increase in accounts receivable
- Increase in inventory
+ Depreciation expense
+ Increase in accounts payable
+ Increase in accrued liabilities
Net cash flow from operating activities
The increase in inventory is calculated as: Ending inventory excluding depreciation minus beginning inventory including depreciation.
6
Q
The formula to use for accounts receivable is:
A
Beginning Accounts Receivable
+ Sales
- Cash Collections
= Ending Accounts Receivable.
7
Q
These will all cause the company’s requirements for external financing to increase:
A
When the dividend payout ratio increases, it means the company is paying out more of its net income in dividends and so it will have less retained earnings and cash available. When the company changes its credit terms to increase the time it gives customers to pay, this will cause accounts receivable to increase and collections and cash to decrease. Lower prices will decrease the profit margin and will decrease collections from sales, which will result in less cash available.
8
Q
To find Direct Labor Used, Using formula for COGS:
A
Direct Labor Used is one of the components of Cost of Goods Manufactured. To find Direct Labor Used, we will need to know what Cost of Goods Manufactured is. Cost of Goods Manufactured is one component of the calculation of Cost of Goods Sold. To know what Cost of Goods Manufactured is, we need to use the Cost of Goods Sold
formula.
The formula is:
Beginning Finished Goods Inventory
+ Cost of Goods Manufactured
- Ending Finished Goods Inventory.
= COGS
9
Q
The formula for Cost of Goods Manufactured:
A
Beginning WIP Inventory \+ Direct Materials Used \+ Direct Labor Used \+ Manufacturing Overhead Applied - Ending WIP Inventory. = COGM
.
10
Q
The three most significant items to coordinate in budgeting seasonal sales volume:
A
Budgets usually start with the development of the sales budget, and it is the most difficult budget to prepare. (1) Production volume and (2) finished goods inventory budgets are the next budgets to be prepared, and their development is based on the assumptions made in preparing the sales budget. When the business is seasonal in nature it is even more difficult to predict sales volume and subsequent budgets. Thus, for any type of business including seasonal it is critical to coordinate production volume, finished goods inventory, and sales volume first of all.
11
Q
The expected value is:
A
The expected value is the weighted average of all the possible outcomes, with the probability of each possible outcome serving as its weight.
12
Q
The most appropriate basis on which to evaluate the performance of a division manager is:
A
A manager’s performance valuation should be based on the factors controllable by the manager A contribution income statement that presents net revenue minus controllable division costs can be used to isolate the controllable costs of a business unit from its non-controllable costs such as depreciation or allocated central costs. According to the contribution income statement approach to evaluation, a division manager usually controls the division’s revenues, variable costs and a portion of its fixed costs.
13
Q
The amount of depreciation expense for the flexible budget:
A
The flexible budget is a budget that is prepared for the actual level of activity achieved during the period. Only budgeted variable costs are adjusted in a flexible budget. Fixed costs are the same in the flexible budget as they are in the static budget, because fixed costs remain the same regardless the level of activity. Since depreciation is a fixed cost, the amount of depreciation expense for the flexible budget is equal to the depreciation expense for the static budget.
14
Q
When budgetary slack exists:
A
When a budget is easily achieved, it is said to have budgetary slack in it. When budgetary slack exists, either revenues are understated or expenses are overstated or both. Hence, management won’t work hard on cost-minimization as they simply have to achieve “easily attainable goals”. Hence, the resources most likely will be allocated inefficiently.
15
Q
Strategic analysis:
A
Strategic analysis is focused on the long-term and looks at the strengths, weaknesses, opportunities and threats that the company will face in the future. Research, design, production methods will be included in the strategic analysis.
16
Q
When budgeting, the items to be considered by a manufacturing firm in going from a sales quantity budget to a production budget would be the:
A
To decide what quantity should be manufactured during a period given the amount of sales for the period, the levels of finished goods inventory and work-in-process inventories should also be considered.
17
Q
In the standard regression equation y = a + bx.
A
The constant coefficient is represented by “a” in the equation given. It represents the y intercept, because this is the value of y when x = 0.
The “b” in the equation represents the variable coefficient. It represents the amount of increase in y for each unit of increase in x, or “ b” is the slope of the line.
The dependent variable is represented by “y” in the equation.
The independent variable is represented by “x” in the equation given.
18
Q
All of the following are criticisms of the traditional budgeting process
A
1) it is not used until the end of the budget period to evaluate performance.
2) it overemphasizes a fixed time horizon such as one year.
3) it makes across-the-board cuts when early budget iterations show that planned expenses are too high.
A budget is quantitative and does not include non-financial measures in its output.
19
Q
When preparing a performance report for a cost center using flexible budgeting techniques, the planned cost column should be based on the:
A
The actual results need to be compared to the flexible budget.
The flexible budget is the budget developed for the actual level of output. When preparing a performance report, the actual results need to be compared to what the expected results were for the actual level of production.
20
Q
Monitoring is what type of function:
A
Monitoring is a control function, and not a planning function. Though monitoring is very important to the company, it is not a reason for planning.
21
Q
The formula for the physical flow of finished goods:
A
Beginning Inventory
+ Units Produced
- Units Sold
= Ending Inventory.
22
Q
Cost of goods sold calculation:
A
Cost of goods sold (COGS) for a manufacturing firm is defined as
Beginning finished goods inventory
+ cost of goods manufactured (COGM)
- ending finished goods inventory.
The COGM may be expanded in this report, where COGM is defined as budgeted direct materials used (not purchased), budgeted direct labor, and budgeted factory overhead.
23
Q
Pro forma cash flow formula:
A
Cash flow from operations (Net Income) \+ depreciation expense – increase in working capital – expenses paid = Pro forma cash flow
24
Q
Which of the following is not a quality of a direct labor budget:
A
Direct labor budgets are not broken down into fixed and variable direct labor because all direct labor is variable.
25
Combination Budgeting approach:
In an authoritative budget (top-down budget), top management sets everything from strategic goals down to the individual items of the budget for each department and expects lower managers and employees to adhere to the budget and meet the goals. In a participative budget (bottom-up or self-imposed budget), managers at all levels and certain key employees cooperate to set budgets for their areas, and top management usually retains final approval. The ideal process combines the features of each and falls somewhere between these methods.
26
The expected value of perfect information is the
The expected value of perfect information is the maximum amount one would pay to obtain the perfect information. It is calculated as the difference between the expected value under certainty and the expected value without perfect information, that is, the expected value of the best action under uncertainty.
27
The most important criterion in accurate cost allocations
The most important criterion in accurate cost allocations is through the use of homogeneous cost pools. Homogeneous cost pools are a group of overhead costs associated with activities that can utilize the same cost driver.
28
The direct method of service department cost allocation
The direct method eliminates the service performed between service departments.The direct method of service department cost allocation does not recognize the servicing of service departments. All services are assumed to go to production departments only.There are no inter-service department services.
29
Individual departmental rates vs plant-wide rate for applying overhead
Individual departmental rates rather than a plant-wide rate for applying overhead would be used if the departments have different cost drivers and the manufactured products differ in the resources consumed from the individual departments in the plant. For example, one department may be labor-intensive, while another may be machine-intensive, or use highly automated processes.
30
Backflush Costing System
Backflush costing system omits recording some or all of the sequential journal entries relating to the four trigger points that traditional costing systems use: purchase of materials, production, completion of finished goods, and sale of finished goods.
31
Overapplied overhead
Overapplied overhead implies a credit balance in the overhead account (debit overhead for actual costs and credit overhead for applied). To eliminate this balance, a debit to overhead is required. Since the overapplied amount is considered significant, the amount must be distributed between accounts that hold some part of the actual factory overhead, i.e., cost of goods sold, WIP inventory and finished goods inventory.
32
Theory of Constraints (TOC)
The TOC uses three measurements: Throughput contribution, investments, and operating costs.
In the TOC, exploiting the constraint changes how the organization uses the constraint without spending more money. Elevating the constraint requires investing more money to increase the constrained resource's capacity.
33
Plant-wide Overhead rate Calculation:
With a plant-wide overhead rate, the overhead amounts and the labor-hours amounts are totaled and the total plant overhead is divided by the total units of the cost driver: labor-hours = $ labor-hour.
34
Which of the three methods (direct, step-down, reciprocal) will result in the same amount of service department costs being allocated to each operating department, regardless of the order in which the service department costs are allocated?
Direct and reciprocal methods of cost allocating will result in the same amount of service department costs being allocated to each operating department, regardless of the order in which the service department costs are allocated.
35
Material Requirements Planning (MRP)
An MRP system is an integrated production and inventory control system used to determine:
1. what to make, when to make it, and how much to make; and,
2. what to purchase, when to purchase it, and how much to purchase.
Therefore, it helps determine optimal inventory levels.
MRP is used to set production and purchasing schedules. It facilitates the coordination of purchasing activities to take advantage of bulk purchasing and quantity discounts. Since MRP is used to plan production and inventory levels based upon sales forecasts, and forecasts are subject to variability, there is always the possibility that the system will lead to over-production of products and/or to purchasing too much raw materials and too many purchased parts.
MRP is an integrated production and control system that has three objectives:
1. Ensuring materials are available for production and products are available for customers at the proper time and in the right quantities;
2. Maintaining the lowest possible levels of inventory; and,
3. planning manufacturing activities, delivery schedules, and purchasing activities.
36
Theoretical Capacity vs Practical Capacity
Using theoretical capacity when calculating overhead allocations would mean that a large denominator activity level would be used, resulting in a lower overhead allocation to individual units of product, distorting allocated costs and provide management with costs too low. Practical capacity represents the highest level of capacity that can be achieved, while allowing for unavoidable losses of productive time.
37
Prevention Costs:
Prevention costs include all costs incurred to try to prevent production of goods and services that do not conform to quality standards. The prevention costs presented are design engineering, labor training, product testing, and supplier evaluation.
```
The sum of :
design engineering ($300,000)
+ labor training ($150,000)
+ product testing ($65,000)
+ supplier evaluation ($240,000)
= $755,000.
```
*Note: Prevention costs are design engineered to train labor and test products that evaluate suppliers.
38
A quality audit involves all these elements:
Involves an in-depth analysis of its best and worst practices within a company and compare these results to other companies, and form a long-term plan for strategic quality improvement.
39
Prevention Costs:
Prevention costs include all costs incurred to try to prevent production of goods and services that do not conform to quality standards. The prevention costs presented are design engineering, labor training, product testing, and supplier evaluation.
```
The sum of :
design engineering ($300,000)
+ labor training ($150,000)
+ product testing ($65,000)
+ supplier evaluation ($240,000)
= $755,000.
or
1) Quality training and planning costs
2) Equipment maintenance costs
3) Supplier training and confirmation costs
4) Information systems costs
```
*Note: Prevention costs are designed to train labor and test products that evaluate suppliers.
40
Completeness Controls:
Completeness controls are measures taken to account for all transactions. Poor control over blank forms, blank checks, or unnumbered forms can provide access to assets and allow transfers to unauthorized personnel.
41
Top-down, Risk Assessment (TDRA):
TDRA is a hierarchical approach that applies specific risk factors to determine the scope of work and evidence required in the assessment of internal controls. The steps in TDRA are:
1) Identifying significant accounts or disclosures.
2) Identifying material misstatement risks within these accounts or disclosures.
3) Determining which entity-level controls sufficiently address the risks.
4) Determining which transaction-based controls compensate for possible entity-level control failures.
5) Determining the nature, extent, and timing of evidence gathering tests needed to complete the assessment of the internal controls.
42
Business Process Re-engineering (BPR)
By definition, BPR is the fundamental analysis and radical redesign of business processes within and between enterprises to achieve dramatic improvements in performance measures. BPR promotes the idea that sometimes wiping the slate clean and radically redesigning and reorganizing an enterprise is necessary to lower costs and increase the quality of a product or service.
43
Benchmarking
Through benchmarking, a firm identifies best levels and conducts a benchmarking study to help define how those levels can be adopted to create improved performance. Agreement on a data-gathering method, identification of organizations to benchmark, and collection of data are the logical activities when attempting to identify best-in-class performance.
44
Foreign Corrupt Practices Act requirements:
Requirement regarding a company's system of internal control under the Foreign Corrupt Practices Act of 1977
1) The recorded accountability for assets is compared with the existing assets at reasonable intervals, and appropriate action is taken with respect to any differences.
2) Transactions are executed in accordance with management's general or specific authorization.
3) Transactions are recorded as necessary (1) to permit preparation of financial statements in conformity with GAAP or any other criteria applicable to such statements, and (2) to maintain accountability for assets.
45
Section 302 of the Sarbanes-Oxley Act of 2002 requires:
Section 302 of the Sarbanes-Oxley Act of 2002 requires that a publicly held corporation's CEO and CFO verify the corporation's quarterly and annual financial reports and requires the corporation's management to design and implement internal controls to ensure the preparation of reliable financial reports. Documenting the assessment of the effectiveness of the internal control structure and procedures is a requirement of SOX Section 404, not section 302.
46
Detection Risk
Detection Risk = (Audit Risk) ÷ (Inherent Risk × Control Risk).
Detection risk is the probability that a misstatement will not be discovered by the auditor, as detection risk decreases, the planned audit evidence required will decrease. The formula for detection risk shows that inherent risk is inversely related to planned detection risk and directly related to planned evidence.
47
Disaster recovery policies and procedures (business continuance plans):
Disaster recovery policies and procedures—also called business continuance plans—are designed to enable the firm to carry on business in the event that an emergency, such as a natural disaster, disrupts normal function. A company's disaster recovery plan should define the roles of all members of the disaster recovery team, appointing both a primary leader and an alternate leader for the process. The plan should specify backup sites for alternate computer processing.
48
Control risk is:
Control risk is an assessment of the effectiveness of a firm's internal controls in preventing or detecting misstatements.
49
Edit checks:
Edit checks are executed upon data entry(input control). Their purpose is to detect and correct problems in data input. They are performed upon data entry prior to updating a file to assure accuracy of the update. The edit checks prevent the phenomenon of "garbage in, garbage out."
50
Audit Risk
Audit Risk = (Inherent Risk × Control Risk × Detection Risk). The risk that the auditor with provide the wrong opinion that the misstatement is not present when in fact it does.
Inherent risk is the probability of a misstatement due to an error or fraud. Control risk is the probability that the misstatement gets by the client's internal control system. Detection risk is the probability that the misstatement is not detected by the auditor.
51
A check digit:
A check digit is an input control used during the data entry process of an individual record.
52
The Master Budget consists of:
An operating budget is broken down into the different operational budgets of the organization, including a (1) sales budget, (2) production budget, (3) direct materials budget, (4) direct labor budget, (5) overhead budget, (6) cost of goods sold budget, and (7) selling and administrative expense budget. Not a cash budget. A cash budget is one of the subsets of the financial budget.
53
What is the risk of a company allowing its managers to regularly revise the budget whenever they feel that circumstances merit a change:
Employees may be confused due to less clear operating guidelines is not a risk. Regular revisions usually provide clearer operating guidelines.
54
The logical order for the Planning Process
The logical order for the activities listed is 1) vision and mission, 2) strategic objectives, 3) tactical goals, and 4) operational plans. An operational plan formulates specific goals for each SBU, with detailed revenue and expense budgets.
55
Cumulative Average Time Learning Curve
Using a cumulative average time learning curve, as the cumulative output doubles, the cumulative average direct labor hours per unit becomes the learning curve percentage times the previous cumulative average direct labor hours per unit.
So, if the first lot used 5,000 direct labor hours and the second lot required 3,000 direct labor hours, then the total for the 2 lots would be 8,000 direct labor hours and the cumulative average hours for the two lots would be 4,000 direct labor hours (8,000 direct labor hours / 2).
Therefore, the learning curve percentage would be calculated by taking the cumulative average hours for the two lots (4,000 direct labor hours) and dividing it by the number of direct labor hours used for the first lot (5,000), or 4,000 / 5,000 = 0.8, or 80%.
56
Exponential Smoothing uses:
Exponential smoothing uses a weighted average of past time series, selecting only one weight, that of the most recent set of data. The calculation computes a value comparing the forecast and actual value for the last time series before the series being forecast. It employs a smoothing constant between zero and one that is derived through a series of trials and errors on an initial set of data.
Exponential smoothing is a statistical technique that is used for sales forecasting.
57
Activity-based Budgeting (ABB)
An activity-based budgeting places emphasis on teamwork, synchronized activity, and customer satisfaction. Traditional budgeting places emphasis on increasing management performance.
ABB adds activity-based cost drivers to the traditional volume-based cost drivers but doesn't remove any options. ABB also separates similar acting costs such as fixed and variable costs into their own cost pools.
58
Determine the budgeted cost of purchases:
To determine the , the number of units to be produced should be adjusted by the change in inventory and then multiplied by the budgeted purchase cost.
Begin with budgeted amounted needed.
```
Need in production in units,
+ the desired ending inventory of circuit boards,
− the expected beginning inventory
x the purchase cost
= budgeted cost of purchases
```
59
The direct materials budget:
The direct usage budget
+ the direct materials purchase budget
= the direct materials budget.
60
A potential drawback of a Kaizen budget:
A potential drawback of a Kaizen budget is that managers may lower quality levels or move practices to cheaper labor markets in order to meet the goals set by a system that stresses continuous improvement.
61
Cash Collection using Accounts Receivable (A/R Formula)
Cash collections, first quarter,
Beginning of quarter Balance
+ net, or 95% of sales for first quarter
− accounts receivable balance at end of first quarter
= net accounts receivable balance
62
The increase in production to cover an increase in income.
Increasing production over sales allows the company to “bury” fixed overhead costs in the ending inventory, resulting in an increase in net income. The increase in net income from the extra production can be calculated as follows:
Increase in net income = (fixed overhead rate)(excess of production over sales) = 20 x 1,500 = 30,000
Fixed overhead rate = (fixed manufacturing costs)/(the denominator activity level) Fixed overhead rate = $100,000 / 5,000 units = $20 per unit
Therefore, the increase in production over sales = $30,000 / $20 per unit = 1,500 units
63
Which of the following correctly orders the breakdown of budgets from most general to most specific?
Operating, sales, production, overhead
Operating budgets include sales budgets; sales budgets include production budgets and selling and administrative expense budgets.
Production budgets are broken down into direct materials, direct labor, overhead, and cost of goods sold budgets.
64
Which of the following is least likely to be a factor in determining medium- and long-term cash forecasts
When determining medium- and long-term cash flows, it is important to consider changes in any factors that can be reasonably forecast. Changes in production (fixed and variable costs), wage expenses, and increases in the cost of natural resources can typically be predicted with varying degrees of accuracy. Since potential governmental tax law changes cannot be known until signed into law, it would be difficult for a business to accurately anticipate these changes.
65
Pro forma cash flow =
The amount a company can use for capital expenditures without having to resort to outside financing sources is equal to the pro forma amount of cash flow from operations. The pro forma cash flow from operations is calculated by taking the pro forma net income plus the pro forma depreciation less the pro forma increase in working capital.
Pro forma cash flow:
Cash flow from operations
+ depreciation expense
− increase in working capital
= Pro forma cash flow
66
Production volume variance:
Production volume variance is defined as budgeted fixed overhead minus applied fixed overhead, where:
budgeted fixed overhead = standard quantity times x fixed overhead rate
applied fixed overhead = actual quantity x standard fixed overhead rate.
Production volume variance is favorable in this example because overhead is a cost and this cost was less than expected due to a lower than expected actual quantity of the cost driver.
67
Mix Variance Calculation
Weighted Average Standard Price Actual Mix
- Weighted Average Standard Price Standard Mix
x Actual Quantity
or
WASPAM - WASPSM x AQ
1. Multiply the budgeted cost per unit times the actual total quantity times the actual mix ratio for each item
2. Add these two amounts:
3. Multiply the budgeted cost/unit times the actual total quantity used times the budgeted mix ratio for each item:
4. Add these two amounts:
5. The first sum less the second sum equals the mix variance:
68
Goal congruence is enhanced:
Goal congruence is enhanced by lower management participation in budgeting and by Management By Objective (MBO). MBO identifies managers' areas of responsibility and ties performance measurements to the areas. It pushes responsibilities for meeting goals and objectives down to the lowest possible management levels and encourages participation.
69
Substitution variance:
When a product has two or more ingredients that can be substituted for one another, the product can have a mix variance or a variance in the usage of the substitutable materials.
70
The overhead spending variance calculation:
Overhead Spending Variance = (actual overhead) − (budgeted overhead at actual direct labor hours used)
Budgeted overhead at the actual direct labor hours used = (fixed overhead) + (actual direct labor hours)(rate of labor hours used to apply variable overhead)
71
Fixed overhead volume variance (FOVV) calculation:
Fixed Overhead Volume Variance = (fixed overhead rate) x [(normal base level of production − actual production level)]
72
Variable overhead efficiency variance calculation:
Variable overhead efficiency variance = standard variable overhead rate per direct labor hour (SRV) x (actual direct labor hours − standard direct labor hours)
73
Using full costs as a transfer price would:
Using full costs as a transfer price would allow the selling division to pass on any cost increases to the buying division. The seller would have no incentive to control the costs of the item transferred.
74
An advantage of using a flexible budget compared to a static budget is that in a flexible budget:
When using a flexible budgeting system, the activity levels for all costs are adjusted according to that activity level. Unlike a static budget, in a flexible budget, fixed cost variances are more clearly presented as those fixed costs are related directly to the activity level of the given period.
75
An allocation approaches will ensure that the production departments do not underestimate their planned usage of service at the start of the budget period:
The ensure a production department does not underestimate their planned usage of service at the start of the budget period, as well as make the service department's costs cost efficient is to develop budgeted rates and standard hours allowed for output attained for variable costs and budgeted rates and capacity available for fixed costs.
76
Profit center accounting where the manager who has the responsibility to make decisions incurring the costs:
Profit center accounting is accounting used for profit centers. If a sales manager had the control over costs associated with the sale, he/she is a profit center manager and is/are charged with the additional costs associated with a rush order.
77
A dual pricing arrangement
A dual pricing arrangement promotes goal congruence between the supplying and buying subunits of the firm.
78
The most appropriate basis on which to evaluate the performance of a division manager is:
Responsibility accounting involves holding managers responsible for only those things under his/her discretion and control, such as net revenue and controllable division costs.
79
The methods that would not be helpful in measuring international business performance:
Measuring international business performance relies on the same principles as measuring domestic business performance. Time series analysis relies on historical information, but cannot be relied on to predict present and future performance. Balanced scorecard, activity-based costing, and total quality management are the three most widely used methods of measuring business performance.
80
A product profitability analysis does not include:
The per unit fixed costs that would not disappear if the product line were discontinued are removed from the product profitability analysis.
81
Customer performance drivers include:
Customer performance drivers include lead time, while the other options are outcome measures.
82
Full absorption costing operating income calculation:
Sales
− standard cost of sales
− unfavorable volume variance
(fixed overhead per unit) x (denominator level of activity − actual activity)
− selling and administrative costs
= Full absorption costing operating income
83
One reason for using variable costing:
A decision to use a variable costing system can best be decided on due to fixed factory overhead being more closely related to the capacity to produce than to the production of specific units.
84
Budgeted indirect labor cost rate per direct labor hour calculation in a normal costing system:
In a normal costing system:
Budgeted indirect costs
/ Budgeted direct labor hours
= Budgeted indirect labor cost rate per direct labor hour
85
The primary purpose for allocating common costs to joint products is:
The primary purpose for allocating common costs to joint products is to determine the inventory cost of joint products for financial reporting.
86
The theory of constraints:
The theory of constraints focuses on eliminating constraints and improving/speeding up cycle or delivery time by identifying, analyzing, and removing production bottlenecks (e.g., constraints).
Organizations that implement the TOC often use activity-based costing (ABC). The short-term aspects of TOC and long-range focus of ABC make them complementary profitability analysis methods.
87
Using theoretical capacity:
Using theoretical capacity when calculating overhead allocations would mean that a large denominator activity level would be used, resulting in a lower overhead allocation to individual units of product, distorting allocated costs and provide management with costs too low. Practical capacity represents the highest level of capacity that can be achieved, while allowing for unavoidable losses of productive time. In this case, Squeal's management incorrectly used theoretical capacity as they used sales forecasts and did not consider the limiting factors on practical capacity.
88
The value chain:
The value chain is the sequence of business functions where value is added to the products or services of an organization. The sequence is as follows:
1. Research and Development;
2. Product Design;
3. Procurement;
4. Production;
5. Marketing;
6. Distribution; and,
7. Customer Service.
89
Foreign Corrupt Practices Act (FCPA)
Foreign Corrupt Practices Act (FCPA) requires:
1. A firm must design internal control procedures.
2. Transactions must be executed with management's authorization.
3. Access to assets must be authorized.
90
Sarbanes-Oxley Act
Sarbanes-Oxley Act provides that:
1. The board of directors must appoint an audit committee.
2. Management must certify financial statements.
3. Management must provide a written report on the effectiveness of internal control procedures within 90 days of the publication of the annual report.
4. A public accounting firm may NOT audit the books of an issuer of public securities if ANY officer or director of the issuer was employed by the public accounting firm and participated in any audit activity with the issuer within ONE YEAR.
91
ABM vs ABC
ABM uses ABC data on process, product, and market performance and examines how to redirect and improve the use of resources to increase value for customers and other stakeholders. But where ABC is more of a static analysis of "what is" and is focused on controlling existing costs, ABM is forward-looking and change-oriented. ABM seeks ways to avoid unnecessary costs and put existing resources to maximum use.
92
Inherent risk is:
Inherent risk is the probability of an error or irregularity causing a material misstatement in an assertion. This is also referred to as the probability that a threat to the system will occur.
93
Mapping programs:
Mapping programs are used to identify those portions of the software application program code that are not executed and not triggered by some event.
94
Key verification:
The best method of data control in situations where it is crucial that data be entered correctly into an accounting information system is through the use of key verification.The best method of data control in situations where it is crucial that data be entered correctly into an accounting information system is through the use of key verification.
Key verification, or keystroke verification, is the process of inputting the same information twice and comparing the two inputs. Key verification is nearly always used when changing a password, to confirm that the password has been typed correctly.
95
Accounting controls are designed to provide reasonable assurance that all of the following take place except:
Compliance with methods and procedures ensuring operational efficiency and adherence to managerial policies.
An internal control system is concerned with safeguarding assets, accuracy and reliability of records, operational efficiency, adherence to policy, and compliance with laws and regulations. The first two are called accounting controls. The latter three are referred to as administrative controls.
96
All of the following are acceptable access controls
Companies must use a variety of controls to protect their systems and data from unauthorized access, beginning, at the most basic, with passwords. Software-based access controls such as user ID's and profiles allow the system administrators to manage access privileges. An additional step many firms take is to encrypt data so that unauthorized users who have been able to bypass first-level controls are not able to read, change, add to, or remove the data.
97
Disaster recovery policies and procedures:
Disaster recovery policies and procedures—also called business continuance plans—are designed to enable the firm to carry on business in the event that an emergency, such as a natural disaster, disrupts normal function. A company's disaster recovery plan should define the roles of all members of the disaster recovery team, appointing both a primary leader and an alternate leader for the process. The plan should specify backup sites for alternate computer processing.
98
A check digit:
A check digit is an input control used during the data entry process of an individual record. The other three items are all examples of batch input controls and are designed to catch errors and improve the accuracy of data processing in batches before new information is written to the master file and includes all of the following, control total, hash total, record count.
99
The IMA Statement of Ethical Professional Practice Integrity standard states:
The IMA Statement of Ethical Professional Practice Integrity standard states that each member has a responsibility to: mitigate actual conflicts of interest, regularly communicate with business associates to avoid apparent conflicts of interest, advise all parties of any potential conflicts, refrain from engaging in any conduct that would prejudice carrying out duties ethically and abstain from engaging in or supporting any activity that might discredit the profession.
100
The cost center:
The cost center is the building block for a responsibility accounting system in a decentralized organization. From the cost center, one can design profit centers and investment centers. Costs centers first become a part of the profit center and then the profit center becomes a part of the investment center.
101
Which one of the following is in the correct order of feedback, feed-forward, and preventative control systems?
Cost accounting variances are feedback controls, since they provide feedback, after the fact, of the degree of manufacturing efficiency. Cash budgeting is a feed-forward control, since it can warn in advance of any looming problems. Organizational independence, properly enforced, is a preventative control, since it prevents unauthorized people from performing an incompatible function.
102
When preparing a performance report for a cost center using flexible budgeting techniques, the "planned cost" column should be based on what?
Budget adjusted to the actual level of activity for the period being reported.
The flexible budget uses the actual sales for the period and the revenue and cost estimates that were used in preparing the master budget. In the case of revenues and variable costs, the revenue and cost estimates on a per unit basis are used.
103
Predetermined overhead rate:
Planned annual fixed overhead (Budget)
+ planned annual variable overhead (Budget)
/ planned annual machine hours (activity base)
= Predetermined overhead rate
104
The variable overhead rate
The variable overhead rate = planned annual variable overhead / planned annual machine hours = per machine hour
105
Fixed manufacturing overhead rate
Fixed manufacturing overhead rate = total overhead rate - variable overhead rate =
106
Which one of the following may be considered an independent item in the preparation of the master budget?
The capital investment budget has an impact on the income statement (depreciation), the balance sheet (asset amount) and the cash flow statement (cash needs); however, in developing the capital budget, one does not have to consider any impact that another budget has on the capital budget. For example, changes in inventory have no impact.
107
Lower-level managers vs Upper-level managers
Lower-level managers are more likely to rely on non-financial indicators to monitor operational aspects of the business. Upper-level managers need more comprehensive reports which must be expressed in financial terms.
108
What is the principal disadvantage of using the physical quantity method of allocating joint costs?
Costs assigned to inventories may have no relationship to value.
Often, the products coming out of a joint process have quite a wide variance in value and that variance is not measured by the physical quantities that come out of the process. For example, the value per pound of pigs knuckles is far less than the value per pound of pork chops. However, if the physical units method were used to allocate joint costs, a large portion of the joint costs would be allocated to pigs knuckles.
109
The expected average usage during a regular production week was 300 units, the expected usage during lead time
10% of the time the lead time is 3 weeks, and 90% of the time it is 2 weeks. Thus, the expected average lead time is:(3 * .1) + (2 * .9) = 2.1 weeks.So, if we assume that the expected average usage during a production week is 300 units, then the expected usage during lead time is:300 units/week * 2.1 weeks = 630 units.
110
The choice of a production volume level as a denominator in the computation of fixed overhead rates can significantly affect reported net income.
The higher the budgeted overhead rate, the higher the value of the ending inventory. The higher the value of the ending inventory, the lower the cost of goods sold and the higher the net income. The overhead rate associated with master budget is higher than the rate associated with the practical capacity.
111
Linear programming:
Linear programming is a technique to maximize or minimize an objective function subject to constraints. In this case, the company would want to maximize profits subject to constraints on supplies of nuts and market demand.
112
Sales volume/quantity variance on the contribution margin calculation:
This question is asking for the sales volume/quantity variance on the contribution margin that is calculated as follows:
(Actual Sales Volume - Budgeted Sales Volume)
x Standard Contribution per Unit.
The total budgeted contribution margin was $120,000, which gives us a $20 contribution margin per unit ($120,000 / 6,000).
113
Variable Overhead Efficiency Variance
the Variable Overhead Efficiency Variance divided by the budgeted rate for applying variable manufacturing overhead of $20 per direct labor hour This will tell us the difference between the actual quantity of direct labor hours used for the actual output and the standard quantity of direct labor hours allowed for the actual output. That, in turn, will tell us how efficient or inefficient the company's use of direct labor was.
Another way of looking at it is this: Since (AQ - SQ) x SP equals the Variable Overhead Efficiency Variance, the Variable Overhead Efficiency Variance divided by the standard price ($20) equals the difference between AQ and SQ. And the difference between AQ and SQ is what we need to find to answer the question.
The Variable Overhead Efficiency Variance is the difference between the Total Variable Overhead Variance and the Variable Overhead Spending Variance (because the Variable Overhead Spending Variance plus the Variable Overhead Efficiency Variance equals the Total Variable Overhead Variance.)
114
Segment Margin vs Segment Manager
The marketing segment should be measured by what it controls and by fixed costs traceable to it, even if not controlled by it. This is called the segment margin, and the expenses included in it are the segment's variable costs, fixed costs it controls and fixed costs that are controllable by corporate management.
Segment manager performance includes only costs controllable by the segment manager. Segment manager performance would not include fixed costs controllable by the corporate management.
However, in this question we are measuring the segment, not the segment manager, because the question asks for the best measure of the economic performance of the segment. The segment margin includes the following items:
Net Sales
- Fixed costs controllable by suburban mgr
- Fixed costs controllable by corporate mgr-ment
- Total variable costs
= Segment margin
115
Which of the following is not true about international transfer prices for a multinational firm?
It is not true that it allows firms to correctly price products in each country in which it operates.
The transfer price is the price used for internal transactions. This by itself does not enable the firm to determine the appropriate external price in each country in which it operates.
116
Variable overhead efficiency variance is calculated:
The variable overhead efficiency variance is calculated as follows:
Budgeted variable overhead for inputs actually used
- Standard variable overhead applied to production
= Variable overhead efficiency variance
The variable overhead efficiency variance is a comparison of a budgeted amount of variable overhead calculated using direct labor hours actually used with the standard amount of variable overhead calculated using direct labor hours allowed for the actual production. So it is essentially a calculation of the effect of a difference between the number of direct labor hours used with the number of direct labor hours allowed.
117
Fixed overhead spending (or budget) variance
The fixed overhead spending (or budget) variance is equal to the difference between the actual and budgeted amounts of fixed overhead.
118
Sales volume/quantity variance:
The total sales variance on the contribution
margin is the difference between actual and budgeted amount of contribution margin. The sales volume/quantity variance is calculated as follows: (Actual Sales Volume - Budgeted Sales Volume) x Budgeted Contribution per Unit.
119
The fixed overhead production-volume variance
The fixed overhead production-volume variance is the difference between the budgeted amount of fixed overhead and the amount of fixed overhead applied (standard rate x standard input for the actual level of output). It is Budgeted Fixed Overhead minus Applied Fixed Overhead. This is the only time for an expense variance calculation that a budgeted cost amount comes before an actual cost amount, and yet a negative amount (actual is higher than budget) is a favorable variance.
The fixed overhead production-volume variance is caused by the actual production level being different from the production level used to calculate the budgeted fixed overhead rate. It measures usage of facilities, and so it is not a comparison of actual incurred cost with budgeted cost the way other variances are. When production facilities are used more than was planned (actual is greater than budget), the variance will be favorable because the company has gotten more use from its capacity than it thought it would. When
production facilities are used less than was planned (actual is less than budget), the variance is unfavorable because it means the company had unused capacity. The amount of the variance is a rough measure of the cost of the unused capacity.
120
Fixed Overhead Applied:
Fixed Overhead Applied is the fixed overhead application rate per unit multiplied by the number of units actually produced.
121
Accounting control is:
Policies and procedures for maintenance of control over unused checks because they relate to the control objective of safeguarding cash.
122
The full audit report:
The full audit report should be distributed to everyone who has a direct interest in the audit. This includes the executive or executives to whom internal audit reports, the person to whom people will reply about the report, persons responsible for the activities or operations audited, and people who will need to take corrective action as a result of the audit. The payroll manager has responsibility for the payroll function and thus this communication should be most useful to that person.
123
An accounting system identification code that uses a sum-of-digits check digit will not detect :
Transposition errors will not be detected. Even though the digits will be in the wrong sequence, the sum of the digits will be correct. Therefore, the sum of the digits will check with
the check digit.
124
Change controls:
Change controls are the set of procedures that ensure that only authorized, tested programs are run in production. If change controls are being followed, an unauthorized person would not be able to make a change in a program that would alter the way it performed its processing.
125
A hash total:
A hash total is a meaningless sum of numbers in a batch, such as the sum of all the employee I.D. numbers. A hash total would detect a substituted employee time card, because the employee ID. number of the substituted employee would be different from the employee ID. number of the original employee.
126
A due diligence engagement:
A due diligence engagement is an engagement to confirm company records, both financial and those of ownership of property, utilized especially when a unit is being acquired, merged or sold. An auditor would not have the legal expertise to evaluate the merit of lawsuits currently filed against the target company.
127
IMA member's responsibilities with respect to the "Integrity" standard of ethical conduct:
Each IMA member has the following responsibilities with respect to the "Integrity" standard of ethical conduct:
1) Mitigate actual conflicts of interest; regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.
2) Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
3) Abstain from engaging in or supporting any activity that might discredit the profession.
128
The difference between the actual amounts and the flexible budget amounts for the actual output achieved is the
The flexible budget variance is the difference between the actual pre-tax profit and the flexible budget
pre-tax profit.
129
Statistical sampling
Statistical sampling requires random sample selection. Every unit within a group must have the same probability of being selected. Thus, non-random, or judgment, or haphazard, sampling selection does not provide the advantages of statistical sampling.
130
Formula for absorption costing operating income:
Sales (750 x$200) $150:000
COGS [750 x (90 + 20)] 82,500
Underapplied fixed cost (50 x $20)* 1,000
Selling & administrative 45,000
Operating income $21,500
*Underapplied fixed cost is the cost that reside in ending inventory (50) time the fixed manufacturing costs (20).
131
The basic purpose of a responsibility accounting system is:
Responsibility accounting structures the reporting of performance information around the organization in order to properly evaluate the performance of managers. This routine evaluation is designed to motivate the managers.
132
PERT/Cost analysis
PERT/Cost analysis is used to construct a model of a network of tasks, showing the relationships (e.g., predecessor tasks) among the tasks. Then, the critical path (the longest path through the network and hence, the length required for the entire project) can be found. With cost analysis, one can calculate whether it is cost-beneficial to crash any tasks, incurring more cost to rush them in order to complete the entire project sooner.
133
Inventory the by-product or not.
If a company does not inventory the by-product, it implies that the by-products are first recognized in the accounting records when the by-products are sold. Thus, the entire amount of the joint costs will be allocated between the products that are inventoried using the net realizable value method.
134
Which one of the following is the best reason for using variable costing?
Fixed factory overhead is more closely related to the capacity to produce than to the production of specific units.
Using variable costing, fixed overhead is treated as a period cost rather than a product costs that becomes part of inventory. It can be argued that this is more appropriate as the fixed costs of equipment, space, etc. should not be inventoried but expensed annually
135
The coefficient of determination:
The coefficient of determination, r squared, measures the percent of the total variance which can be explained by the regression equation. Here, r squared equals 99.724%, which is quite high so the equation could be used with confidence.
136
In Markov analysis:
It assumes that the probabilities of an event depend only on the current state.
In Markov analysis, the probability of the occurrence of the next state depends only upon the current state.
137
The IMA Statement of Ethical Professional Practice Credibility standard states that each member has a RESPONSIBILITY to:
Communicate information fairly and objectively, disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations, disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.
Responsibility requires actions to be performed with faithfulness and loyalty. Examples of responsibility include conveying information at the appropriate time, ensuring information on reports and statements is accurate, and gathering enough information to make an informed decision.
138
Employing prior year results as the following year's budget:
Provides no expectation for improvement. Another reason for not using historical results as a budget is that past performance is not always indicative of future results. A budget process attempts to predict and account for future changes, both positive and negative. Relying only on raw historical data leads to a sense that the past year must always be the benchmark.
The budget would be set too low, and the sales force would be less motivated to surpass those goals
139
A kaizen budget:
A budgeting method that incorporates continuous improvement ("kaizen" in Japanese) into each budget. While traditional budgeting continues current practices, a kaizen budgeting process is based on planned future operating practices.
140
Make or Buy Decision:
The cost to purchase ten T305's from Simpson Castings is $360,000 ($300,000 total purchase price for 10 units ($30,000 × 10), plus $60,000 (0.2 × $30,000 in material handling costs per unit × 10 units).
The cost to make the T305 per unit consists of avoidable variable costs per unit, avoidable fixed costs per unit and the unit cost of any lost opportunities.
This equals $368,000, which is calculated as follows: (10 units)($2,000 direct materials + $400 material handling costs + $16,000 direct labor + $8,000 (1/3 of $24,000) in variable overhead) = $264,000, plus the $104,000 in lost contribution caused by making the T305's . The difference between the cost to buy ten units ($360,000) and the cost to make the ten units ($368,000) is $8,000.
141
Individual departmental rates vs plant-wide rate for applying overhead.
Individual departmental rates rather than a plant-wide rate for applying overhead would be used if the departments have different cost drivers and various products are manufactured that do not pass through the same departments or use the same manufacturing techniques. For example, one department may be labor-intensive, while another may be machine-intensive, or use highly automated processes.
142
Operating Income (EBIT)
Operating Income (Earnings Before Interest and Taxes)
143
Sensitivity Analysis
Sensitivity analysis helps analysts determine how changes in the probabilities for states of nature or changes in the potential payoffs themselves, which may be based on subjective assessments, will affect recommended decision alternatives.
144
The cash budget
The cash budget must be prepared before you can complete the:forecasted balance sheet.
The cash budget determines the projected borrowings, repayments, investments, interest received and interest paid. All of this information is needed to forecast the balance sheet.
145
Debt covenants:
The significance of financial forecasts in relation to debt covenants is that the forecast provides a detailed financial forecast that assures that debt covenants are being met no matter the results.
Debt covenants are clauses in debt contracts that organizations must meet to be in compliance with lender requirements. Financial forecasts are often used in predicting whether performance related debt covenants will be met.
146
A cost driver
A cost driver is an event, factor or activity that causes cost to arise and be incurred. It can be the level of activity or volume (for example, production volume or the number of purchases). The main idea is a cause-and-effect relationship between an activity and the incurrence of costs. For example, as an activity such as purchasing increases, all of the costs associated with purchases also increase – costs of shipping, insurance, telephone, etc. If there are no purchases, there will not be any purchasing costs. So, a purchase is a cost driver.
147
A proper segregation of duties requires:
That an individual recording a transaction not compare the accounting record of the asset with the asset itself. Organizational control includes the proper segregation of duties also.
An individual performing the record keeping function should not be able to compare the accounting record of the asset with the asset itself, because this is a reconciliation function
and the reconciliation function should be separate from the record keeping function.
148
Processing controls:
Processing controls are controls designed to ensure that processing has occurred properly and that no transactions have been lost or incorrectly added. Control totals are of various kinds, but they all involve comparison of counts at various points with the correct count. A limit check, or a reasonableness check, tests a value to determine whether it falls within a prescribed range. A sequence test verifies that records are in the correct sequence.
149
The fixed overhead efficiency variance is:
There is no such thing as a fixed overhead efficiency variance because fixed costs are not related to levels of output and therefore are unable to be used efficiently or inefficiently.
150
The variable overhead spending variance is calculated as follows:
Actual VOH Cost/Unit of allocation base actually used
- Standard Application Rate
x Actual Quantity of variable overhead allocation base used for the actual output.
= variable overhead spending variance
151
Which of the following is not a benefit of materials resource planning (MRP)?
It helps the company avoid having to determine what parts are necessary for assembly of its products.This is not a true statement.
A company using MRP software still needs to determine what parts are necessary for assembly of its products. However, MRP automates the process of determining what sub-assemply parts need to be ordered and when to place the order, so that the needed items can be ordered at the proper times back-dated from the scheduled assembly dates.
152
Monitoring:
Monitoring is an activity of management. Monitoring assesses the quality of the internal control system's performance overtime. Monitoring
can be done in two ways: (1) through ongoing monitoring during normal operations, and (2) separate evaluations by management with the assistance of the internal audit function.
If monitoring is done regularly during normal operations, it lessens the need for separate evaluations. When management prepares a detailed analysis of gross margin per store
and investigates any store that shows a significantly lower gross margin, it is performing a monitoring activity.
153
A accounting controls is:
Policies and procedures for maintenance of control over unused checks are accounting controls because they relate to the control objective of safeguarding cash.
154
IMA member responsibilities regarding Integrity:
Each IMA member has the following responsibilities with respect to the "Integrity" standard of ethical conduct:
1) Mitigate actual conflicts of interest; regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.
2) Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
3) Absain from engaging in or supporting any activity that might discredit the profession.
155
IMA member responsibilities regarding Credibility:
With respect to the "Credibility" standard of ethical professional conduct, each IMA member has a responsibility to:
1) Communicate information fairly and objectively.
2) Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations.
3) Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.
156
The characteristics of value-chain analysis (VCA):
The value chain is the sequence of customer value-added activities, including internal cost analysis, internal differentiation analysis and vertical linkage analysis.
VCA adopts a process perspective. Because a value chain desegregates the firm into distinct strategic activities, organizations are able to use VCA to determine where in the operations, from design to distribution and customer service, customer value can be enhanced and costs lowered. In this way, VCA helps to identify sources of profitability and to understand the costs of the related activities and processes. VCA looks at activities differently than do the formal hierarchy of existing functions. Also, it should support implementing the firm's generic strategy, not formulating it.
157
Activity analysis for activity-based cost drivers:
Firms use an activity analysis to determine a detailed description of each type of activity. Each step becomes a different cost driver. The intent is to determine how changing the steps will change the overall cost of the operation.
158
Value-added activities.
By definition, value-added refers to activities that convert resources into product and services consistent with external customer requirements; non-value-added refers to activities that can be eliminated with no deterioration in product service, functionality, performance, or quality in the eyes of the end user. Rework would be non-value-added because faulty products provide no direct value to a customer.
159
Appraisal cost
An appraisal cost is cost of inspecting incoming materials or products for quality purposes.
160
The law of diminishing marginal capacity applies to:
Volume-based cost drivers as they reach the end of their relevant range.
Up to a certain level of production, costs will increase linearly with the increase in production (the relevant range). At a certain point when the capacity of the persons or equipment reaches its limit, rises in volume will generate a more than proportional increase in costs, called the law of diminishing marginal capacity. This curve applies to volume-based cost drivers.
161
Full absorption cost operating income is calculation:
```
The full absorption cost operating income is calculated as:
Sales
− cost of sales
− variable selling costs
− fixed selling costs
− fixed administrative costs
= Full absorption cost operating income
```
number of units sold
x (direct materials cost per unit
+ direct labor cost per unit
+ variable manufacturing overhead cost per unit
+ fixed manufacturing overhead cost per unit)
= Cost of sales
162
A Trojan horse:
A Trojan horse is a computer program containing an intentional line of code created by a programmer for personal gain (transferring funds without the company knowing) or revenge.
163
The following business unit profitability measures would allow a manager to be evaluated based on whether or not the business unit can be profitable even when common costs are deducted from the unit's profits:
Income before taxes deducts all fixed and variable costs from a business unit's profits except taxes. This measure forces a manager to be realistic about the level of profitability needed to sustain the unit.
164
A company applies variable overhead based upon direct labor hours and has a variable overhead efficiency variance that is favorable. A possible cause of this variance is that:
In this case, variable overhead is based upon direct labor hours. Given that the variable overhead efficiency variance was favorable, we can assume that the labor force was higher skilled and, though the learning curve, became more efficient in the production process.
165
A company has a fixed overhead volume variance that is unfavorable. The most likely cause for this variance is that:
When there is a fixed overhead volume variance that is unfavorable, it is assumed that the volume was lower than what was budgeted. Therefore, less was produced than planned.
166
Corporate and support costs:
Should be allocated to divisions and departments to REMIND profit-center managers that earnings must be adequate to cover some share of the indirect costs, CREATE competition between divisions and departments, and their managers, and to FIX accountability and evaluate profit centers.
They are not intended to stimulate profit-center managers to put pressure on central managers to control service costs
167
An advantage of using a flexible budget compared to a static budget is that in a flexible budget:
Fixed cost variances are more clearly presented.
When using a flexible budgeting system, the activity levels for all costs are adjusted according to that activity level. Unlike a static budget, in a flexible budget, fixed cost variances are more clearly presented as those fixed costs are related directly to the activity level of the given period.
168
Which of the following is not a property of a normal probability distribution?
The tails of the curve are asymptotic to the y-axis.This is an incorrect statement because the tails of a normal distribution curve are asymptotic to the x-axis. not to the y-axis.
An asymptote is a straight line approached by a curve as one of the variables in the equation of the curve approaches infinity. The distance between the curve and the straight line becomes smaller and smaller as the curved line approaches infinity, but the curve does not intersect the line.
The two tails of a normal distribution curve continue in both directions to infinity, getting closer and closer to the x-axis but never meeting it. We say that the tails of the curve are asymptotic to the x-axis, meaning they never intersect the x axis.
169
The expected monetary value of an act is the:
Sum of the products of the conditional profit (loss) for each event multiplied by the probability of each event's occurrence.
The expected value is the weighted average of the probable outcomes.
170
Operation costing:
Operation costing is a hybrid, or combination, of job-order costing and process costing. In this method of costing, a company applies the basic operation of process costing to a production process that produces batches of items. These different batches follow a similar process, but the direct materials that are input to each batch are different.
In operation costing the direct materials are charged to the specific batch where they are used, but conversion costs are accumulated and distributed using a predetermined conversion cost per unit. These conversion costs are allocated by batch.
171
If employee paychecks are distributed by hand to employees, which one of the following departments should be responsible for the safekeeping of unclaimed paychecks?
The Cashier Department is a part of the treasury function, which should properly be responsible for a custodial function such as safekeeping of unclaimed checks.
172
IMA Statement of Ethical Professional Practice, one of the overarching ethical principles is "Fairness." "Fairness" means:
Acting in an impartial manner; being open-minded, tolerant and accepting; being free from injustice.
173
IMA Statement of Ethical Professional Practice, one of the overarching ethical principles is "Honesty." "Honesty" means
fairness, straightforwardness; being upright, truthful, sincere, frank, and free from deceit or fraud.
174
Which of the following credit approval procedures would be the basis for developing a deficiency finding for a wholesaler?
Salespeople should not be responsible for monitoring customers' financial condition. Salespeople make contact with customers and potential customers, make sales and provide
customer service where appropriate. If salespeople are responsible for credit approval, their conflict of interest (desire to make the sale) could lead to inappropriate approvals. There should be a separate credit approval function.
175
Concurrent auditing techniques
Concurrent auditing techniques are instructions embedded within application or system software, such as a database management system, that auditors use to collect audit evidence about the reliability of an application while the application is actually processing data.
Concurrent auditing techniques are not standard components of generic software packages. Concurrent auditing techniques require the use of specialized programs with auditor-defined parameters that are applied to transactions during processing to detect unusual patterns.
In applications where accuracy is vital, concurrent auditing techniques may be executed continuously; or, they may be executed only periodically. They collect information which can be reported immediately to the auditor, or it can be stored and reported periodically.
176
General Controls sometimes called pervasive controls:
Are controls related to computer technology, or information technology function:
1) Organizational, personal, and operational
2) Systems development controls
3) Network, hardware, and facility controls
4) Backup and disaster recovery controls
5) Accounting Controls
177
Budget cycle:
1) Create master budget and sub-budgets and get management Buy-in
2) Analyze current performance vs expectations
3) Examine variations and take corrective actions
4) Obtain feedback and revise plan
178
Variances for variable overhead:
1) Actual Variable Overhead - actual incurred
2) Predicted Variable Overhead - AQ x SP
3) Applied Variable Overhead - SQ x AP
Variable Overhead Spending Variance=1-2
or Actual OH cost - (AQ cost driver x Stand var OH Rate)
Variable Overhead Efficiency Variance =2-3
179
Depreciation is a period cost, while maintenance and direct labor are product costs.
Depreciation, maintenance and direct labor are product costs because they relate to the manufacturing process. Depreciation and maintenance of equipment are indirect costs, labor is a direct cost.
180
Unit product cost (variable costing)
Direct materials cost per unit
+ direct labor cost per unit
+ variable manufacturing overhead cost per unit
= Unit product cost (variable costing)
181
The following activities help to relieve the problem of a bottleneck in operations:
1) shifting products that do not have to be made on bottleneck machines to non-bottleneck machines.
2) reducing setup time at the bottleneck operation.
3) eliminating idle time at the bottleneck operation.
Eliminating idle time and reducing setup time at the bottleneck operations, in addition to shifting products that do not have to be made on bottleneck machines to non-bottleneck machines are all activities to help to relieve the problem of a bottleneck according to the Theory of Constraints.
182
Conformance quality measures:
How close the manufactured product is to the design specifications.
183
Responsibility accounting:
Responsibility accounting, which structures the reporting system around the responsibility of individual managers, relies on the participative goal setting and budgeting of those managers. If the managers have been involved in the development of the goals and budgets, those managers are more likely to be motivated to accomplish.
A responsibility accounting system is one which focuses on controllable revenues and costs and compares actual controllable costs with budgeted controllable costs.
The responsibility accounting system is characterized by a comparison of actual cost versus budgeted costs categorized by departments.
184
The cost center:
The cost center is the building block for a responsibility accounting system in a decentralized organization. From the cost center, one can design profit centers and investment centers. Costs centers first become a part of the profit center and then the profit center becomes a part of the investment center
185
The choice of a production volume level as a denominator in the computation of fixed overhead rates can significantly affect reported net income. (Theoretical, Practical, Normal, Master-Budget)
The choice of practical capacity as the denominator level will result in a lower net income amount than if master-budget capacity is chosen.
The higher the budgeted overhead rate, the higher the value of the ending inventory. The higher the value of the ending inventory, the lower the cost of goods sold and the higher the net income. The overhead rate associated with master budget is higher than the rate associated with the practical capacity.
186
The proper order to prepare certain budget schedules would be:
Cost of Goods Sold, Income Statement, Statement of Cash Flows, and Balance Sheet
The statement of cash flows must be prepared prior to the preparation of the balance sheet because the change in cash balance must be known before the balance sheet can be prepared.
187
Predetermined overhead rate:
Predetermined overhead rate = (planned annual fixed overhead + planned annual variable overhead) / planned annual machine hours
188
Total amount of overhead applied to product:
Predetermined overhead rate per machine hour
x planned machine hours based on output.
= Total amount of overhead applied to product
189
Information needed for to calculate the dollar impact of a change in market share on operating income:
The budgeted market share and the actual total market size.
The dollar impact of a change in market share can be obtained by multiplying the change in market share times the actual market size times the budgeted average contribution margin per unit.
190
Single point of failure:
Single sign-on, although a great convenience to users, because they don't need to remember multiple passwords and user-IDs and can assess all IT resources using single sign-on data. This however, becomes a single-point of failure, if the sign-on does not work and the user is not able to access any of the IT resources.
191
The most fundamental responsibility center affected by the use of market-based transfer prices:
A profit center is affected by the use of a market-based transfer price; and this responsibility center is more fundamental or basic than an investment center.
192
The following groups of controls are generally considered the most cost-effective controls:
1) Preventive
2) Corrective
3) Feedforward
Preventive, Corrective and Feedforward controls are more cost-effective than Detective and Feedback controls, because they try to identify and correct costly mistakes before they happen; rather than investigate these mistakes after they take place.
193
Regression equation:
Regression quantifies the relationship between an independent variable (such as direct labor hours) and a dependent variable (such as overhead cost). The independent variable may then be used to try to explain or predict changes in the dependent variable.
194
The BEST source documents in order to control purchasing and accounts payable:
purchase requisitions, purchase orders, receiving reports, and vendor invoices.
195
In linear programming, the shadow price refers to what?
Measurement of the value of relaxing a constraint in a problem with dual variables.
The shadow price is the amount we would pay for an additional unit of one of the limiting resources. It is determined by calculating how much our objective function would increase if we had another such unit of the resource represented by the binding constraint.
196
When allocating service department costs to production departments, the method that does NOT consider different cost behavior patterns is the?
The single rate method results in a single factory overhead rate that is an aggregation of both variable and fixed overhead costs. Because of the aggregation, the insights concerning cost behavior are lost.
197
A system where several minicomputers are connected for communication and data transmission purposes, but where each computer can also process its own data, is known as a
Distributed data processing distributes computers at remote locations and links them. Each computer can do its own processing, but data can be shared because of common standards.
198
The four perspectives of the balanced scorecard:
The four perspectives of the balanced scorecard include options:
1) Financial performance measures
2) Internal business processes
3) Employee innovation and learning
4) Customer perspective.
199
Total Spoilage Calculation formula:
```
Beginning units
+ units started and completed
− units transferred out
− ending units
= Total spoilage
```
