Planning & Management Flashcards
(141 cards)
1
Q
Define “direct costs.”
A
Product costs that can be associated with specific units of production; comprised of direct material and direct labor costs.
2
Q
Define “overhead allocation rate.”
A
The rate used to apply overhead to production; calculated by dividing the estimated total overhead costs by estimated normal volume of the allocation base (direct labor hours, machine hours, raw material weight, etc.).
3
Q
Describe the accounting treatment of over-applied or under-applied overhead (e.g., the difference between actual overhead and overhead applied to production).
A
If immaterial, simply charge to Cost Of Goods Sold (COGS); if material, prorate to Work In Process (WIP), Finished Good (FG), and COGS.
4
Q
Define “product costs.”
A
Cost that can be associated with making or acquiring goods for sale; product costs are held in inventory until the products are sold; also known as inventoriable costs.
5
Q
List the three factors of production.
A
- Direct Material; 2. Direct Labor; 3. Factory Overhead.
6
Q
Define “applied overhead.”
A
The estimated overhead charged to production: calculated by multiplying the overhead rate times the allocation base activity units (direct labor hours, machine hours, raw material weight, etc.).
7
Q
Define “actual overhead.”
A
The amounts actually paid for indirect costs (utilities, maintenance, supervision, etc.).
8
Q
Define “prime costs.”
A
Product costs that can be associated with specific units of production; comprised of direct material and direct labor costs; also known as direct costs.
9
Q
Define “conversion costs.”
A
Costs necessary to convert raw materials into a finished product: comprised of direct labor costs plus factory overhead costs.
10
Q
Define “period costs.”
A
Costs that cannot be matched with the production of specific revenues and so are expensed in the period incurred.
11
Q
Define “indirect costs.”
A
Manufacturing costs which cannot easily be traced to specific units; also known as manufacturing overhead.
12
Q
Define “abnormal spoilage.”
A
Unplanned but considered controllable, for example, spoilage due to natural disaster, carelessness, inefficiency, or accidents. Abnormal spoilage is separated and deducted as a period expense in the calculation of net income.
13
Q
Describe the accounting treatment of proceeds from sale of scrap.
A
Sale proceeds are used to reduce overhead (and consequently, COGS), they are not reported as revenue.
14
Q
Describe the accounting treatment of normal spoilage.
A
Included with other costs as an inventoriable product cost.
15
Q
Define “normal spoilage.”
A
Unavoidable as part of the manufacturing process. Normal spoilage is included with other costs as an inventoriable product cost.
16
Q
Describe the differences between retail inventories and manufacturing inventories.
A
Retail = merchandising inventory; Manufacturing = raw materials, work-in-process and finished goods.
17
Q
Describe the accounting treatment of costs of abnormal spoilage and scrap.
A
Separate costs and deduct as a period expense; do not include as part of product cost.
18
Q
Define “fixed costs.”
A
Costs that remain constant in total regardless of production volume.
19
Q
Define “mixed costs.”
A
Costs that have a fixed component and a variable component.
20
Q
Define “variable costs.”
A
Costs that vary in total in direct proportion to changes in production volume.
21
Q
Define “step-variable costs.”
A
Costs that remain constant in total over a small range of production levels, but vary with larger changes in production volume.
22
Q
Define “relevant range.”
A
(1) the range of activity for which the assumptions of cost behavior reasonably hold true; AND (2) the range of activity over which the company plans to operate.
23
Q
What is usually the main reason for outsourcing?
A
Outsourcing is often used to lower cost and increase quality by utilizing a vendor’s specialization.
24
Q
What does process management do that activity-based costing (ABC) alone does not do?
A
Increase manager understanding of the cause-and-effect relationships involved between processes and the resources they consume, and promote the elimination of waste.
25
How is Business Process Reengineering (BPR) different from incrementally reducing non-value activities?
BPR often involves an extreme transformation by analyzing and making sweeping improvements to an entire process.
26
Define "shared services".
An arrangement where one part of an organization provides an essential business process where previously it had been provided by multiple parts of that same organization.
27
Describe the differences between off-shoring and outsourcing.
Outsourcing is always outside of the company (but may or may not be outside the country). Off-shoring is always outside of the country (but may or may not be outside the company).
28
Define "direct costing".
A product cost allocation method that assigns only variable manufacturing costs (i.e., direct material, direct labor, and variable manufacturing overhead) to products: fixed manufacturing overhead is written off as period expenses; not acceptable for external reporting.
29
Define "contribution margin".
Sales revenue minus variable costs: the amount of sales revenue available to cover fixed costs and generate a profit.
30
Define "absorption costing".
A product cost allocation method that assigns all manufacturing costs (i.e., direct material, direct labor, and both variable and fixed manufacturing overhead) to products; absorption costing is required for external reporting.
31
How is the contribution margin calculated using the direct costing method?
Contribution margin is equal to revenue minus all variable costs, including period costs.
32
What types of product costs are included in the direct costing model?
Only variable manufacturing costs are included in product costs.
33
Which costing method is required for compliance reporting (i.e., financial and tax reporting)?
Absorption costing.
34
What is the fundamental purpose of the calculations in process costing?
To determine the portion of costs that belong in Ending WIP inventory and the portion of cost that is transferred to Finished Goods inventory.
35
How should you think about transferred-in costs in process costing?
Transferred-in costs are viewed by the transferring department as "cost of goods transferred out," while the receiving department should treat those costs in a manner similar to an additional category of direct materials used.
36
Define "process costing".
Product costing method that spreads production costs across a large number of mass-produced units; used to accumulate costs for homogeneous items which are often small and inexpensive.
37
Describe how job order costing is used.
It is used to accumulate costs related to the production of large, relatively expensive, heterogeneous (custom ordered) items.
38
What are the three major steps involved with process costing?
(1) determine equivalent units; (2) determine cost per equivalent unit; and (3) Determine (a) cost of goods transferred out of WIP and (b) Ending WIP Inventory.
39
Define "process costing (weighted average method)".
Product costing method that calculates a single equivalent unit price for goods manufactured during the period by adding beginning WIP costs to current period costs dividing the total by the total equivalent units for the period.
40
Define "job order costing".
Product costing method that identifies costs associated with production of specific items; used for production of large, relatively expensive, heterogeneous (custom-ordered) items.
41
Define "transferred-in costs".
Costs transferred from one department (process) to the next.
42
Describe the differences between normal spoilage and abnormal spoilage.
Normal spoilage occurs as a result of normal operating procedures and cannot be avoided under current technological conditions. Abnormal spoilage is the result of an unplanned or accidental event.
43
Define "equivalent units".
In process costing, the number of whole units represented by the partially complete beginning and/or ending work-in-process inventory; for example, 100 units that are 50% complete equal 50 equivalent units.
44
Describe the relative physical volume allocation used in joint product costing.
Joint costs are allocated to products based on the quantity of products produced (units, gallons, feet, pounds, etc.).
45
How are by-products accounted for when produced?
The ultimate sales value of the by-product is deducted from the cost of joint products when the by-product is produced.
46
Define "joint products".
Products which are produced from the same set of raw materials and which are not separately identifiable until a split-off point; only products with significant sales value are treated as joint products: products with little or no sales value are treated as by-products or scrap.
47
What is the accounting treatment of scrap and by-products in joint product costing?
Costs: Joint costs are not allocated to scrap or by-products; costs incurred to process scrap or by-products after split-off are offset against proceeds from the sale of the scrap or by-product. Proceeds: Proceeds from sale of the scrap or by-product are used to reduce joint product overhead costs (unless they can be identified with a particular direct material, in which case they may be offset against that cost).
48
List the methods of accounting for by-product sales.
The sales value of the by-product may be recognized (e.g., used to reduce the cost of joint products) either: 1. When the by-product is produced; or 2. When the by-product is sold.
49
Define "joint costs".
Costs incurred prior to split-off that must be allocated to the joint products.
50
How are by-products accounted for when sold?
The net proceeds are used to reduce the cost of joint products when by-product is sold.
51
Describe the relative sales value allocation used in joint product costing.
Joint costs are allocated to products based on the relative sales values of the products either at split-off or after additional processing.
52
Define "strategic budgeting."
Strategic budgeting is a top-down process, starting with the goals and mission the organization wants to achieve and allocating resources in proportion to priorities.
53
Define "zero-based budgeting."
A process of starting over each budget period and justifying each item budgeted. This requires additional work over an incremental approach but may provide more accuracy.
54
Which budget must be done first - production or purchases?
Production must be done first. The production budget establishes how many units must be produced to achieve projected sales volume and inventory level targets.
55
Define "rolling budget."
An incremental budget that adds the current period and drops the oldest period. Kaizen (continuous improvement) type companies typically use rolling budgets.
56
Define "participative budget."
A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by the manager's supervisor, and any issues are resolved by mutual agreement. This method is widely considered a positive behavioral approach.
57
Define "master budget."
A comprehensive plan for all activities of a company (sales, production, cash management, etc.); this is a static budget: it provides a basis for comparison at a planned level of sales and production and is not usually changed to conform to actual events.
58
Define "budgetary slack."
The deliberate overestimation of expenses or underestimation of revenue for a project. Budgetary slack may be built into a project for a cushion in case targets are not met.
59
What purpose does probability analysis serve?
It evaluates the likelihood of a specific event occurring when several outcomes are possible; the probability of a particular outcome is always between 0 and 1 (never and always); the sum of the probabilities associated with the possible outcomes is always 1.
60
What does the correlation coefficient (R) measure?
Measures the strength of the relationship between the dependent and independent variable. The correlation coefficient can have values from -1 to 1.
61
Define "expected value".
The long-run average outcome; determined by calculating the weighted average of the outcomes (multiply the value of each outcome by its probability and then sum the results).
62
What does the coefficient of determination (R2) indicate?
Indicates the degree to which the behavior of the independent variable predicts or explains the dependent variable. The coefficient of determination is calculated by squaring the correlation coefficient. R2 can take on values from 0 to 1.
63
Describe the cost equation.
The relationship between fixed costs, variable costs, and total costs expressed as a regression equation: y = A + Bx where: y = Total Costs (dependent variable) A = Fixed Costs (the y intercept) B = Variable Cost per Unit (the slope of the line) x = Number of Units (independent variable) or Total Costs = Fixed Costs + (Variable Cost per Unit X Number of Units.)
64
Define "joint probability".
The probability of an event occurring given that another event has already occurred. The joint probability is determined by multiplying the probability of the first event by the conditional probability of the second event.
65
What is the importance of the contribution margin to breakeven analysis?
Contribution margin represents the portion of revenues which are available to cover fixed costs.
66
Describe the breakeven formula in units.
Fixed costs divided by (price - variable costs per unit).
67
How is the contribution margin ratio calculated?
CM ratio = CM per unit / price; this represents the percentage of each sales dollar that is available to cover fixed costs.
68
How does the denominator differ when calculating breakeven units and breakeven dollars?
Units = price - variable costs per unit; Dollars = (CMunit /price).
69
List the basic formula for breakeven analysis.
(Quantity X Sales Price) = Fixed Costs + (Quantity X Variable Costs per unit).
70
What are the major assumptions of the cost-volume-profit (CVP) model?
All relationships are linear; the number of units sold equals the number of units produced; fixed costs, unit variable costs, and price must behave as constants; volume is the only driver of costs and revenues; total costs can be divided into a fixed component and a component that is variable with respect to the level of output; and the model applies to operating income (i.e., the CVP model is a before-tax model).
71
What does the flat line on a cost-volume-profit (CVP) graph always represent?
It represents fixed costs.
72
How do we calculate sales in units needed to achieve a target level of income?
Sales in Units = (Fixed Costs + Targeted Profit) / Contribution Margin per Unit.
73
What is the intersection of total cost and total revenue on a graph?
The breakeven point.
74
On what are sales variances based?
Sales variances are based on budgeted sales levels.
75
Describe the accounting treatment of non-significant variances at the end of the period.
These amounts are closed to Cost of Goods Sold.
76
Define "standard quantity".
Standard quantity is the standard amount of input units allowed for the actual number of output units produced.
77
Are standards based solely on historical results?
Standards are not only based on historical performance, as this may incorporate past periods' inefficiencies.
78
Who is responsible for direct material price variances?
The purchasing manager is responsible for these.
79
Define the "variable overhead spending variance."
A controllable variable overhead variance calculated by multiplying the difference between the actual variable overhead rate and the estimated variable overhead rate by the actual number of units used (hours, gallons, pounds, etc. depending on the allocation base used).
80
Define "volume variance."
An uncontrollable fixed overhead variance equal to the difference between budgeted fixed overhead and fixed overhead applied to production (fixed overhead rate times the standard quantity of units allowed for actual production).
81
Define "overhead efficiency variance."
A controllable variable overhead variance calculated by multiplying the difference between the actual allocation base units used (hours, gallons, pounds, etc.) and the estimated allocation base units by the estimated cost per unit.
82
Define "budget variance."
A controllable fixed overhead variance equal to the difference between the budgeted fixed overhead and the actual fixed overhead; budget variances are the result of unexpected changes in components of fixed overhead (i.e., a change in the salvage value or the estimated life of a piece of manufacturing equipment triggers a change in deprecation expense).
83
Define "avoidable costs".
Costs that can be eliminated by choosing one alternative over the other.
84
Define "sunk costs".
These are costs that are historical/in the past and are irrelevant for decision making going forward since they cannot be changed.
85
When deciding whether to process a product further, what costs are relevant?
The only relevant costs are the differential future costs and benefits.
86
Define "irrelevant costs".
Future costs which do not differ between alternatives.
87
What items should be considered relevant for a special order decision, if there is adequate excess capacity to fill the order?
If the special order can be completed using existing capacity, only sales revenues and the (avoidable) variable costs of producing the order need be considered.
88
What items should be considered relevant for a make-or-buy decision?
Only avoidable costs (i.e., costs that go away when accepting the decision to buy) and any new revenues are relevant to the make or buy decision.
89
What items should be considered relevant for a special order decision, if there is no excess capacity to fill the order?
Sales revenues, avoidable/variable costs of producing the order, and the opportunity cost of not providing the special order need to be considered.
90
In the context of transfer pricing, what is "dual pricing"?
Dual pricing is where the price for the buying and selling divisions are different as established by top management to achieve specific goals that differ between the buyer and seller.
91
What is the primary focus of international transfer price setting, other than goal congruence?
Minimizing income incidence to reduce tax liability.
92
Define "negotiated price".
A price that is mutually agreeable to both the selling and purchasing unit.
93
Define "transfer price".
In intra-company sales, the product price charged by the selling division to the buying division.
94
What is the general transfer pricing rule?
Transfer price per unit = additional outlay cost per unit + opportunity cost per unit.
95
What should the transfer price be when the selling division has excess production capacity?
The transfer price should be equal to the additional costs incurred to produce each unit.
96
Define "opportunity cost".
The benefit that is forgone as a result of making one choice instead of an alternative (in transfer pricing, usually of selling internally rather than selling externally).
97
What is usually the most important criterion used by top management in establishing transfer pricing mechanisms?
Achieving goal congruence.
98
Define "economic order quantity model".
A push model that specifies the most efficient quantity to order to minimize inventory costs.
99
Define "backflush".
A just in time (JIT) product costing approach in which costing is delayed until goods are completed or, in some cases, until the goods are sold.
100
List some examples of measures of performance from the customer perspective.
Market share, product returns as a percentage of sales, number of new customers, percentage of repeat customers, sales trends, etc.
101
List the four features of a good balanced scorecard.
1. Articulates a company's strategy; 2. Assists in communicating the strategy; 3. Limits the number of measures; 4. Highlights suboptimal tradeoffs that managers may make.
102
Define "benchmarking."
A process in which organizations compare their own processes and performance with the processes and performances of business leaders within or across competing industries.
103
List the five pitfalls that should be avoided with a balanced scorecard.
Don't assume all linkages to be precise; don't seek improvements across all measures all the time; don't use only objective measures on the scorecard; don't fail to consider both costs and benefits of initiatives such as spending on information technology and research and development; and don't ignore nonfinancial metrics when evaluating managers and employees.
104
List the four evaluation perspectives for a balanced scorecard.
1. Financial; 2. Customer; 3. Internal Business Processes; 4. Learning, Innovation, and Growth.
105
List the three important points and features of benchmarking.
1. A company can't be the best at everything; 2. Benchmarking should be an ongoing process within the organization; 3. Don't try to focus on improving in every benchmark area all the time.
106
What does the acronym SWOT stand for?
Strengths, weaknesses, opportunities, and threats.
107
Define "cost leadership strategy".
Competitive strategy in which the organization seeks to gain an advantage by selling a high volume of low cost products.
108
List the five forces outlined in Michael Porter's framework for industry analysis and business strategy development.
(1) Bargaining power of customers; (2) bargaining power of suppliers; (3) threat of new entrants; (4) threat of substitute products; (5) intensity of competition.
109
Define "product differentiation strategy".
Competitive strategy in which the organization strives to produce a product that is perceived to offer unique features or benefits to the customer and which therefore commands a higher price.
110
What is the key to revenue maximization under constrained resources?
Produce the product that offers the highest contribution margin per unit of the constrained resource (e.g., if production in a bakery is constrained by the amount of oven time available, produce the product that maximizes the contribution margin per hour of oven time).
111
Define "environmental scanning".
A process in which the organization continuously gathers and evaluates information that could impact its ability to compete using its current organizational strategies.
112
Define "market segmentation".
Customizing the market to meet the demands of a specific customer group; AKA niche marketing or focus strategy.
113
List the formula for economic value added (EVA).
Net Operating Profit After Taxes (NOPAT) - Weighted Average Cost of Capital (WAAC) (Total Assets - Current Liabilities).
114
List the formula for residual income (RI).
Operating Income - required rate of return (invested capital).
115
Describe the DuPont approach to return on investment (ROI).
Separates ROI into two parts for analysis - Profit Margin x Asset Turnover.
116
Define "price elasticity of demand".
The percentage change in quantity demanded divided by the percentage change in price.
117
Describe the prevalent value-based management (VBM) themes and concepts.
Accrual-based metrics are discredited; Cost of capital is increasingly emphasized; Shareholders and shareholder value as the primary element of interest is common; and relating VBM to strategy and making linkages to drivers of success is important.
118
List the formula for return on investment (ROI).
Net Income / Total Assets.
119
What purpose do debt-utilization metrics serve?
They provide measures of balance sheet risk (i.e., in terms of financial leverage). An enterprise is considered more leveraged, and thus more risky, if it has a comparatively high amount of debt versus owners' equity.
120
Describe the difference between gross margin (GM) and contribution margin (CM).
GM = revenue minus cost of goods sold; CM = revenue minus variable expenses.
121
What purpose do market ratios serve?
They are used to evaluate the value of the enterprise as based on capital market reflections of stock price as related to earnings and book value.
122
What purpose do liquidity metrics serve?
They are used to evaluate an enterprise's ability to meet its short-term obligations.
123
List the formula for operating profit margin.
Operating income / Revenue.
124
What purpose do asset-utilization metrics serve?
They examine the efficiency with which assets are used to maintain and generate wealth.
125
How is operational risk best controlled?
Operational risk is best controlled by exceptional execution of the strategic plan. This is often enhanced by attention to customer credit checks, quality, employee training, and management expertise.
126
How is market risk best controlled?
Market risk can be controlled to some degree by insurance for specific hazard risks, but economic events often cannot be controlled. Thus, companies must assess their exposure to economic downturns and use sensitivity analysis to evaluate their position.
127
How is strategic risk best controlled?
Strategic risk is best controlled by rigorous forecasting and planning, optimizing operating leverage.
128
Differentiate between strategic, operational, and market risk.
1. Strategic risk is relatively long-term and can be managed by continually assessing the competitive space in which the organization operates; 2. Operational risk is short-term in nature and involves daily implementation issues; 3. Market risk is associated with large-scale economic events or natural disasters that, to some extent, influence all companies.
129
Describe demand flow technology (DFT).
Uses mathematical methods to link materials, time, and resources based on continuous flow planning. The objective is to link process flows and manage those flows based on customer demand.
130
List the characteristics of lean manufacturing.
Flexible equipment, low setup times, and highly-skilled labor.
131
Describe the lean manufacturing process.
Making small batches of a high variety of unique products usually with automated or otherwise sophisticated machinery and highly skilled labor (usually cross-trained).
132
Describe the Theory of Constraints (TOC).
TOC identifies strategies to maximize income when the organization is faced with bottleneck operations. A bottleneck operation occurs when the work to be performed exceeds the capacity of the production facilities.
133
Define "Six Sigma".
Six Sigma is a continuous improvement approach with a philosophy similar to Total Quality Management (TQM) that is designed to systematically reduce defects.
134
Describe the five phases of the Six Sigma DMAIC (Define, Measure, Analyze, Improve and Control) project methodology.
(1) Define customers and their requirements; (2) measure defects and other items related to quality; (3) analyze to determine root cause of failures and the sources of variation; (4) improve through experimentation; and (5) control results using TQM statistical process control tools (e.g., control charts).
135
Define "project management".
A series of related activities to achieve a defined output in a specified and finite amount of time using a temporary structure.
136
Define "crashing".
Crashing is the process of adding resources (such as overtime labor or adding additional materials or equipment) to shorten selected activity times on the critical path. Crash time is the shortest possible time to complete an activity after accelerating resources.
137
How do the Program Evaluation and Review Technique (PERT) and the Critical Path Method (CPM) use relationships to assist with project management?
Uses a precedence relationship that specifies a sequence for activities in the network.
138
How is the projected completion time determined using Program Evaluation and Review Technique (PERT)?
Expected time of completion is determined by assigning a weighting of one for each of the optimistic and pessimistic estimates, a weighting of four for the most probable estimate, adding the assigned values together, and then dividing that sum by six.
139
How does the work breakdown structure assist with project management?
This defines the work to be completed by dividing project components into subcomponents, and successive levels of specificity to define all activities of the project team, the resources involved, and their costs.
140
Define the "critical path".
The critical path is the longest path in the network and indicates that if any activity on the critical path is delayed, then the project will not be accomplished according to the original schedule. The critical path is specified by the sum of the mean completion times of each of the activities on the path.
141
Define "project risks".
Project risks are related to adequately defining the project, properly organizing resources, and organizing and committing team members.
