English for management accounting

Managerial Accounting Topic Job-order costing Glossary No 10 11 12 13 14 15 16 Terms Allocation base Meaning A measure of activity such as direct labor-hours or machine-hours that is used to assign costs to cost objects Bill of materials A document that shows the quantity of each type of direct material required to make a product Cost driver A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs Cost of goods The manufacturing costs associated with the goods that were manufactured finished during the period Finished goods Units of product that have been completed but not yet sold to customers Job cost sheet A form that records the materials, labor, and manufacturing overhead costs charged to a job Job-order costing A costing system used in situations where many different products, jobs, or services are produced each period Materials requisition A document that specifies the type and quantity of materials to be form drawn from the storeroom and that identifies the job that will be charged for the cost of those materials Multiple A costing system with multiple overhead cost pools and a predetermined different predetermined overhead rate for each cost pool, rather overhead rates than a single predetermined overhead rate for the entire company Each production department may be treated as a separate overhead cost pool Normal cost system A costing system in which overhead costs are applied to a job by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job Over-applied A credit balance in the Manufacturing Overhead account overhead that occurs when the amount of overhead cost applied to Work in Process exceeds the amount of overhead cost actually incurred during a period Overhead The process of charging manufacturing overhead cost to job cost application sheets and to the Work in Process account Predetermined A rate used to charge manufacturing overhead cost to jobs that is overhead rate established in advance for each period It is computed by dividing the estimated total manufacturing overhead cost for the period by the estimated total amount of the allocation base for the period Raw materials Any materials that go into the final product A schedule that contains three elements of product Schedule of cost of goods manufactured 17 18 19 20 costs—direct materials, direct labor, and manufacturing overhead—and that summarizes the portions of those costs that remain in ending Work in Process inventory and that are transferred out of Work in Process into Finished Goods Schedule of cost of A schedule that contains three elements of product costs—direct goods sold materials, direct labor, and manufacturing overhead — and that summarize the portions of those costs that remain in ending Finished Goods inventory and that are transferred out of Finished Goods into Cost of Goods Sold Time ticket A document that is used to record the amount of time an employee spends on various activities Under-applied A debit balance in the Manufacturing Overhead account overhead that occurs when the amount of overhead cost actually incurred exceeds the amount of overhead cost applied to Work in Process during a period Work in process Units of product that are only partially complete and will require further work before they are ready for sale to the customer Concepts in Action Read and fill in the blanks with the following words: costing data, project variances, unique, last-minute, profitable, identified, leverage, budgeted, cost, individually, pricing decisions, direct labor-hours, completed, success, experience, grand opening, stages, estimated overhead costs, allocation bases, the percentage Job Costing on Cowboys Stadium Over the years, fans of the National Football League have (1) the Dallas Cowboys as “America’s Team.” Since 2009, however, the team known for winning five Super Bowls has become just as recognized for its futuristic new home, Stadium in Arlington, Texas When the Cowboys take the field, understanding each week’s game plan is critical for (2) But for Manhattan Construction, the company that managed the development of the $1.2 billion Cowboys Stadium project, understanding costs is just as critical for making successful (3) , winning contracts, and ensuring that each project is (4) Each job is estimated (5) because the (6) endproducts, whether a new stadium or an office building, demand different quantities of Manhattan Construction’s resources In 2006, the Dallas Cowboys selected Manhattan Construction to lead the construction of its 73,000 seat, million- square-foot stadium To be (7) in three years, the stadium design featured two monumental arches spanning about a quarter-mile in length over the dome, a retractable roof, the largest retractable glass doors in the world (in each end zone), canted glass exterior walls, 325 private suites, and a 600-ton JumboTron hovering 90 feet above the field With only 7% of football fans ever setting foot in a professional stadium, “Our main competition is the home media center,” Cowboys owner Jerry Jones said in unveiling the stadium design in 2006 “We wanted to offer a real (8) that you can’t have at home, but to see it with the technology that you have at home.” Generally speaking, the Cowboys Stadium project had five (9) : (1) conceptualization, (2) design and planning, (3) preconstruction, (4) construction, and (5) finalization and delivery During this 40-month process, Manhattan Construction hired architects and subcontractors, created blueprints, purchased and cleared land, developed the stadium—ranging from excavation to materials testing to construction—built out and finished interiors, and completed (10) changes before the stadium’s (11) in mid-2009 While most construction projects have distinct stages, compressed timeframes and scope changes required diligent management by Manhattan Construction Before the first game was played, Manhattan Construction successfully navigated nearly 3,000 change requests and a constantly evolving budget To ensure proper allocation and accounting of resources, Manhattan Construction project managers used (12) The system first calculated the (13) of more than 500 line items of direct materials and labor costs It then allocated (14) (supervisor salaries, rent, materials handling, and so on) to the job using direct material costs and (15) as (16) Manhattan Construction’s job-costing system allowed managers to track (17) on a weekly basis Manhattan Construction continually estimated the profitability of the Cowboys Stadium project based on (18) of work completed, insight gleaned from previous stadium projects, and revenue earned Managers used the job-costing system to actively manage costs, while the Dallas Cowboys had access to clear, concise, and transparent (19) Just like quarterback Tony Romo navigating opposing defenses, Manhattan Construction was able to (20) its job-costing system to ensure the successful construction of a stadium as iconic as the blue star on the Cowboys’ helmets Listen and fill in the blanks Making movie Big Hollywood movies are fraught with costs of story writers, camera, equipment, studio space, actors, even the right to shoot in a specific location like a famous restaurant has a cost (1) is critical to the studio’s success because it helps them to (2) such as what type of films to produce in the future? How much to charge for DVD? and even figure out if the director is keeping to a film’s budget while it is being made (3) involves the (4) , (5) and (6) of (7) From these data, companies can determine both (8) and (9) of each product There are two basic types of (10) : a job-order cost system and a process cost system Under (11) ,a company like a movie studio or an independent self – financed film maker assigns costs to each job or in this case each movie produced And an (12) of job order costing is that each job or batch has its own (13) , it measures costs for (14) rather than for set time periods Heidi van Leer knows a lot about film costs She ‘s not only a programmer for the annual Slamdance Film Festival in Park City Ulta but in independent film maker herself Heidi van Leer:” production costs, especially the studio production they’re really used to spending a lot of money on everything In an independent film, I usually just try and feed my crew, pay for my equipment, pay for stock and that’s about it” Companies that manufacture large volumes of (15) use a (16) which accumulates product related costs for (17) such as a quarter or year and assigns them to (18) or processes Job order costing is more precise in assignment of costs to projects than process costing However recording the information is (19) Just the same, it isn’t unusual for a company to use both systems For example Jones Soda practices process costing when manufacturing soda but uses job order costing when producing small custom orders for its my Jones program Studios today must be more budget – conscious than ever that means maintaining a good job order (20) The flow of costs (21) , (22) and (23) in job order cost accounting parallels the physical flow of the materials as they are converted into finished goods While a film is produced, the studio accumulates (24) through accurate record keeping and assigns those costs to the account for each film as a (25) When the film is finished, they transfer the cost to the film to finished good inventory Later, when the film is sold or distributed, they transfer the costs for that film to (26) So that they can compare costs to the final revenues of the film to determine their profit Not all cost can be easily attributed to one section as the flow of material Overhead costs like studio executive office space cannot be assigned to specific jobs on the basis of (27) incurred Instead companies assign costs to a work - in process into specific jobs on an estimated basis to the use (28) In general, company across industries established a predetermined overhead rate (29) of the year Small companies often use a single company – wide predetermined overhead rate Large companies often use rates that vary from department to department The formula for a predetermined overhead rate is as follows: (30) divided by (31) equals Predetermined overhead rate Overhead relates to production operations as a whole To know what the whole is, the logical thing is to wait until the end of the years operation At that time, the studio know all of its costs for the period As a practical matter though, managers cannot wait until (32) To price product accurately they need information about product costs of (33) completed during the year Using a predetermined overhead rate enables the cost to be determined for the job immediately Job order costing can be fairly (34) and (35) manufacturing situations But how costs are assigned to a movie is often (36) and may be subjected to (37) For example in Hollywood studios often negotiate producer, director and actors payment based on a percentage of a films (38) As a movie has gone to larger box office grosses it is not uncommon to see the various players fighting over what they perceive to be their fair share Filmmaking has changed greatly in the last half century Before 1917 it was nearly impossible to a film outside of a major studio Technology has changed all that But even with new distribution channels like cable networks and the internet the overwhelming supply of material has reduced the price, studio can pay for any individual film The (39) of film both great and small is dependent upon the practices of a careful (40) Summary Read and fill in the blanks with the following words: predetermined overhead rate, labor time tickets, job-order costing, over-applied overhead, manufacturing overhead costs, the actual overhead cost, materials requisition forms, the estimated total manufacturing overhead cost, finished goods, the estimated total amount of the allocation base direct laborhours machine-hours, under-applied, cost of goods sold, work- in process (1) is used in situations where the organization offers many different products or services, such as in furniture manufacturing, hospitals, and legal firms (2) and (3) are used to assign direct materials and direct labor costs to jobs in a job- order costing system (4) are assigned to jobs using a (5) All of the costs are recorded on a job cost sheet The predetermined overhead rate is determined before the period begins by dividing (6) for the period by (7) for the period The most frequently used allocation bases are (8) and (9) Overhead is applied to jobs by multiplying the predetermined overhead rate by the actual amount of the allocation base recorded for the job Because the predetermined overhead rate is based on estimates, (10 ) incurred during a period may be more or less than the amount of overhead cost applied to production Such a difference is referred to as (11) or (12) The under-applied or over-applied overhead for a period can be either closed out to (13) or allocated between (14) , (15) , and Cost of Goods Sold When overhead is under-applied, manufacturing overhead costs have been understated and therefore inventories and/or expenses must be adjusted upwards When overhead is overapplied, manufacturing overhead costs have been overstated and therefore inventories and/or expenses must be adjusted downwards Questions Why aren’t actual manufacturing overhead costs traced to jobs just as direct materials and direct labor costs are traced to jobs? Explain the four-step process used to compute a predetermined overhead rate What is the purpose of the job cost sheet in a job-order costing system? Explain how a sales order, a production order, a materials requisition form, and a labor time ticket are involved in producing and costing products Explain why some production costs must be assigned to products through an allocation process Why companies use predetermined overhead rates rather than actual manufacturing overhead costs to apply overhead to jobs? What factors should be considered in selecting a base to be used in computing the predetermined overhead rate? If a company fully allocates all of its overhead costs to jobs, does this guarantee that a profit will be earned for the period? What account is credited when overhead cost is applied to Work in Process? Would you expect the amount applied for a period to equal the actual overhead costs of the period? Why or why not? 10 What is under-applied overhead? Over-applied overhead? What disposition is made of these amounts at the end of the period? 11 Provide two reasons why overhead might be under-applied in a given year 12 What adjustment is made for under-applied overhead on the schedule of cost of goods sold? What adjustment is made for over-applied overhead? 13 What is a plant-wide overhead rate? Why are multiple overhead rates, rather than a plant - wide overhead rate, used in some companies? 14 What happens to overhead rates based on direct labor when automated equipment replaces direct labor? Topic Process costing Glossary No Terms Conversion cost Equivalent units Meaning Direct labor cost plus manufacturing overhead cost The product of the number of partially completed units and their percentage of completion with respect to a particular cost Equivalent units are the number of complete whole units that could be obtained from the materials and effort contained in partially completed units Equivalent units of The units transferred to the next department (or to finished goods) production during the period plus the equivalent units in the department’s ending (weighted-average work in process inventory method) FIFO method A process costing method in which equivalent units and unit costs relate only to work done during the current period Operation costing A hybrid costing system used when products have some common characteristics and some individual characteristics Process costing A costing method used when essentially homogeneous products are produced on a continuous basis Processing An organizational unit where work is performed on a product and department where materials, labor, or overhead costs are added to the product Weighted-average A process costing method that blends together units and costs from method both the current and prior periods Concepts in Action Read and fill in the blanks with the following words: combination, customer profile, production costs, opportunity, job costing, retail stores, a mass-production, hybrid-costing system, the conversion cost, customized ,three-step, process costing, digitize Hybrid Costing for Customized Shoes at Adidas Adidas has been designing and manufacturing athletic footwear for nearly 90 years Although shoemakers have long individually crafted shoes for professional athletes like Reggie Bush of the New Orleans Saints, Adidas took this concept a step further when it initiated the mi adidas program Mi adidas gives customers the (1) to create shoes to their exact personal specifications for function, fit, and aesthetics Mi adidas is available in (2 around the world, and in special mi adidas “Performance Stores” in cities such as New York, Chicago, and San Francisco The process works as follows: The customer goes to a mi adidas station, where a salesperson develops an in-depth (3) , a 3-D computer scanner develops a scan of the customer’s feet, and the customer selects from among 90 to 100 different styles and colors for his or her modularly designed shoe During the (4) , 30-minute high-tech process, mi adidas experts take customers through the “mi fit,” “mi performance,” and “mi design” phases, resulting in a customized shoe (5) their needs The resulting data are transferred to an Adidas plant, where small, multiskilled teams produce the (6) shoe The measuring and fitting process is (7) , but purchasing your own specially made shoes costs between $40 and $65 on top of the normal retail price, depending on the style Historically, costs associated with individually customized products have fallen into the domain of job costing Adidas, however, uses a (8) — (9) for the material and customizable components that customers choose and (10) to account for the conversion costs of production The cost of making each pair of shoes is calculated by accumulating all (11) and dividing by the number of shoes made In other words, even though each pair of shoes is different, (12) of each pair is assumed to be the same The (13) of customization with certain features of mass production is called mass customization It is the consequence of being able to (14) information that individual customers indicate is important to them Various products that companies are now able to customize within (15) setting (for example, personal computers, blue jeans, bicycles) still require job costing of materials and considerable human intervention However, as manufacturing systems become flexible, companies are also using process costing to account for the standardized conversion costs Listen and fill in the blanks Jones Soda In a world where soda brands and flavors can be found almost anywhere and often fill entire aisle supermarkets , John Soda manages (1) from the competition This is partly due to quirky label photos which are submitted by customer as well as their fund yet eccentric line of soda flavors Mike Spear “ it’s kind of a modern terms but I would say that Jones is an (2) , today we had 1,2 million photos in our gallery, online photo gallery, so we really let consumers participate in the brand You know that and our flavors and colors of our flavors are very unique There is not a lot of green apples sodas out there, not a lot of fruits sodas out there” Fans of Jones Soda are so well fanatic that many create video tributes to their favorite flavors or feel themselves trying some of the more challenging flavor There are many companies today that manufacture sodas, so competition is understandably fears for both market share and sell space (3) is a cost accounting method that works ideally for the soda industry or any industry where costs are assigned to (4) that are (5) in a continuous fashion (6) on the other hand is better suited for organizations looking to assign costs to (7) such as advertising agencies, motion picture companies and law firms (8) between the two include: both (9) track three manufacturing (10) , the accumulation of the costs of materials, labor and overhead and (11) is the same The (12) between a job order cost and a process cost system are : the number of (13) accounts used, the documents used (14) costs, the point at which costs are (15) and unit cost computations As a general rule, manufacturing of soda normally consists of two processes: blending and bottling As the flow of costs indicates companies can add materials labor and manufacturing overhead in both departments When the blending Department finishes its work , they transfer the (16) to the bottling department The bottling department finishes the goods and then transfers (17) Within each department (18) is performed on (19) Since Jones Soda uses a wide variety of labels particularly within the my Jones personal customization program, they have three major processes: blending, bottling and labeling The use of custom labels has a bit of a story history of Jones Soda When they first incorporated custom labels ten years ago, the process was quite humble They used an intern and inkjet printer Mike Spear:” Literally it was sort of a (20) as business grew we decided that we had to outsource it and then the process actually goes through a machine now where the labels are glued in, the liquid goes through a process of applying to the bottles so it’s not hands on anymore Vendors such as this can give Jones a (21) because as suppliers they have expertise in specialized areas Alternatively, large (22) like Coke and Pepsi have the resources and economy of scale to almost everything internally Now let’s look at an example where we’ve generalized to the assignment of cost at Jones for the previous month For purposes of this exercise let’s assume Jones does everything in-house, so there would be three processes First ,we have a work - in process for raw materials Raw materials used were blending 16,000; bottling 3,000 and labeling 7,000 Factory labor costs were blending 10,000; bottling 4,000 and labeling 6,000 and manufacturing overhead costs were blending 5,000; bottling 2,000 and labeling 2500 The company transfers units completed at a cost of $19,000 in the blending department to the bottling department The bottling department transfers units completed at a cost of $10,000 to the labeling department and the labeling department transfers units completed at a cost of $8,000 to finished goods Companies often use a combination of a process cost and a job order cost system called (23) This (24) is similar to process costing in its assumption that (25) are used to manufacture the product The my Jones program for example with its highly customized small quantity order is a good example of a manufactured product more suited to a job order cost system Jones Soda has a model run with the little guy create some changes Cost accounting helps Jones to compete in a cutthroat business against industry mega corporations along the way they’ve inspired a great loyalty among fans and organizations including NASA who ordered soda during their space shuttle program Mike Spear: ” and I find out that was just neat They put it in their VIP areas so I would imagine senators and vice president senior drinking Jones as they watch the space shuttle launched into space I think in a model of some other soda brands if another CBG brand that we make this emotional connection with consumers, and it just makes me feel good that we can make people feel good so” Summary Read and fill in the blanks with the following words: transferred out, the cost reconciliation report, percentage of completion, equivalent units, process costing, a job-order costing system, specific cost category, partially completed units, costs flow, completed units, weighted-average method , work–in process (1) is used in situations where homogeneous products or services are produced on a continuous basis (2) through the manufacturing accounts in basically the same way in a process costing system as in (3) However, costs are accumulated by department rather than by job in process costing In process costing, the (4) of production must be determined for each cost category in each department Under the (5) , the equivalent units of production equals the number of units transferred out to the next department or to finished goods plus the equivalent units in ending work in process inventory The equivalent units in ending inventory equals the product of the number of (6) in ending work in process inventory and their (7) with respect to the specific cost category Under the weighted-average method, the cost per equivalent unit for a (8) is computed by adding the cost of beginning work in process inventory and the cost added during the period and then dividing the result by the equivalent units of production The cost per equivalent unit is then used to value the ending (9) inventory and the units (10) to the next department or to finished goods (11) reconciles the cost of beginning inventory and the costs added to production during the period to the cost of ending inventory and the cost of units transferred out Costs are transferred from one department to the next until the last processing department At that point, the cost of (12) is transferred to finished goods Questions Under what conditions would it be appropriate to use a process costing system? In what ways are job-order and process costing similar? Why is cost accumulation simpler in a process costing system than it is in a job-order costing system? How many Work in Process accounts are maintained in a company that uses process costing? Assume that a company has two processing departments—Mixing followed by Firing Prepare a journal entry to show a transfer of work in process from the Mixing Department to the Firing Department Assume that a company has two processing departments—Mixing followed by Firing Explain what costs might be added to the Firing Department’s Work in Process account during a period What is meant by the term equivalent units of production when the weighted-average method is used? Watkins Trophies, Inc., produces thousands of medallions made of bronze, silver, and gold The medallions are identical except for the materials used in their manufacture What costing system would you advise the company to use? Topic CVP analysis Glossary No Terms Meaning Break-even point The level of sales at which profit is zero Contribution margin ratio A ratio computed by dividing contribution margin by (CM ratio) dollar sales Cost-volume-profit graph (CVP) A graphical representation of the relationships between an organization’s revenues, costs, and profits on the one hand and its sales volume on the other hand Degree of operating A measure, at a given level of sales, of how a leverage percentage change in sales will affect profits The degree of operating leverage is computed by dividing contribution margin by net operating income Incremental analysis An analytical approach that focuses only on those costs and revenues that change as a result of a decision Margin of safety The excess of budgeted or actual dollar sales over the break-even dollar sales Operating leverage A measure of how sensitive net operating income is to a given percentage change in dollar sales Sales mix The relative proportions in which a company’s products are sold Sales mix is computed by 10 between pitchers of soy, nonfat, and low-fat milk—some stores experienced a 10% (8) in transactions using the same number of workers or fewer The company took additional steps to align (9) costs with its pricing Starbucks cut prices on easier-to-make drinks like drip coffee, while lifting prices by as much as 30 cents for larger and more complex drinks, such as a venti caramel macchiato Starbucks’ focus on (10) year-over-year variances paid off In fiscal year 2009, the company reduced its store operating (11) by $320 million, or 8.5% Continued focus on direct-cost (12) will be critical to the company’s future success in any economic climate Summary Summary Read and fill in the blanks with the following words: favorable, unfavorable, flexible, static, actual, budgeted, reasons, spending, level, cost, fixed, variable, variances, behavior, activity, change, compared, adjusted Directly comparing (1) planning budget revenues and costs to (2) revenues and costs can easily lead to erroneous conclusions Actual revenues and costs differ from budgeted revenues and costs for a variety of (3) , but one of the biggest is a (4) in the level of activity One would expect actual revenues and costs to increase or decrease as the activity level increases or decreases (5) budgets enable managers to isolate the various causes of the differences between budgeted and actual costs A flexible budget is a budget that is (6) to the actual level of activity It is the best estimate of what revenues and costs should have been, given the actual level of activity during the period The flexible budget can be (7) to the budget from the beginning of the period or to the actual results When the flexible budget is compared to the budget from the beginning of the period, (8) variances are the result An activity variance shows how a revenue or cost should have changed in response to the difference between (9) and actual activity When the flexible budget is compared to actual results, revenue and (10) variances are the result A (11) revenue variance indicates that revenue was larger than should have been expected, given the actual level of activity An (12) revenue variance indicates that revenue was less than it should have been, given the actual level of activity A favorable spending variance indicates that the cost was less than expected, given the actual (13) _ of activity An unfavorable spending variance indicates that the (14) was greater than it should have been, given the actual level of activity A flexible budget performance report combines the activity variances and the revenue and spending variances on one report Common errors in comparing budgeted costs to actual costs are to assume all costs are (15) or to assume all costs are (16) If all costs are assumed to be fixed, the (17) for variable and mixed costs will be incorrect If all costs are assumed to be variable, the variances for fixed and mixed costs will be incorrect The variance for a cost will 25 only be correct if the actual (18) benchmark of the cost is used to develop the flexible budget Summary Read and fill in the blanks with the following words and terms: investigated, attained, emphasized, fixed, quantity standards, cost standards, variance, quantity variances, price variances, standard cost variances, price, cost, quantity A standard is a benchmark, or “norm,” for measuring performance Standards are set for both the quantity and the (1) of inputs needed to manufacture goods or to provide services (2) indicate how much of an input, such as labor time or raw materials, should be used to make a product or provide a service (3) indicate what the cost of the input should be Standards are normally set so that they can be (4) by reasonable, though highly efficient, efforts Such “practical” standards are believed to positively motivate employees When standards are compared to actual performance, the difference is referred to as a (5) Variances are computed and reported to management on a regular basis for both the (6) and the (7) elements of direct materials, direct labor, and variable overhead (8) are computed by taking the difference between the actual amount of the input used and the amount of input that is allowed for the actual output, and then multiplying the result by the standard price of the input (9) are computed by taking the difference between actual and standard prices and multiplying the result by the amount of input purchased Not all variances require management attention Only unusual or particularly significant variances should be (10) —otherwise a great deal of time would be spent investigating unimportant matters Additionally, it should be (11) that the point of the investigation should not be to find someone to blame The point of the investigation is to pinpoint the problem so that it can be (12) and operations improved Traditional standard cost variance reports are often supplemented with other performance measures Overemphasis on (13) may lead to problems in other critical areas such as product quality, inventory levels, and on-time delivery Questions What is a static planning budget? What is a flexible budget and how does it differ from a static planning budget? What are some of the possible reasons that actual results may differ from what had been budgeted at the beginning of a period? Why is it difficult to interpret a difference between how much expense was budgeted and how much was actually spent? What is an activity variance and what does it mean? What is a revenue variance and what does it mean? What is a spending variance and what does it mean? What does a flexible budget performance report that a simple comparison of budgeted to actual results does not do? 26 What assumption is implicitly made about cost behavior when a static planning budget is directly compared to actual results? Why is this assumption questionable? 10 What assumption is implicitly made about cost behavior when all of the items in a static planning budget are adjusted in proportion to a change in activity? Why is this assumption questionable? 11 What is a quantity standard? What is a price standard? 12 What is meant by the term management by exception? 13 Why are separate price and quantity variances computed? 14 Who is generally responsible for the materials price variance? The materials quantity variance? The labor efficiency variance? 15 The materials price variance can be computed at what two different points in time? Which point is better? Why? 16 If the materials price variance is favorable but the materials quantity variance is unfavorable, what might this indicate? 17 Should standards be used to identify who to blame for problems? 18 “Our workers are all under labor contracts; therefore, our labor rate variance is bound to be zero.” Discuss 19 What effect, if any, would you expect poor-quality materials to have on direct labor variances? 20 If variable manufacturing overhead is applied to production on the basis of direct laborhours and the direct labor efficiency variance is unfavorable, will the variable overhead efficiency variance be favorable or unfavorable, or could it be either? Explain 21 What is a statistical control chart, and how is it used? 22 Why can undue emphasis on labor efficiency variances lead to excess work in process inventories? Topic Managerial Accounting Information for Shorterm Decisions Glossary No Terms Avoidable cost Bottleneck Constraint Joint costs Joint products Meaning A cost that can be eliminated by choosing one alternative over another in a decision This term is synonymous with relevant cost A machine or some other part of a process that limits the total output of the entire system A limitation under which a company must operate, such as limited available machine time or raw materials that restricts the company’s ability to satisfy demand Costs that are incurred up to the split-off point in a process that produces joint products Two or more products that are produced from a common input 27 Make or buy decision Relevant benefit Relevant cost 10 Sell or process decision Special order 11 Split-off point 12 Sunk cost A decision concerning whether an item should be produced internally or purchased from an outside supplier A benefit that differs between alternatives in a decision Synonyms are differential benefit and incremental benefit A cost that differs between alternatives in a decision Synonyms are avoidable cost, differential cost, and incremental cost further A decision as to whether a joint product should be sold at the split-off point or sold after further processing A one-time order that is not considered part of the company’s normal ongoing business That point in the manufacturing process where some or all of the joint products can be recognized as individual products Any cost that has already been incurred and that cannot be changed by any decision made now or in the future Concepts in action Read and fill in the blanks with the following words: solutions, resources, savings, costs, outsourcing, offshoring, scarce, labor, defined, discovered, invented, development, innovation Pringles Prints and the Offshoring of Innovation According to a recent survey, 67% of U.S companies are engaged in the rapidlyevolving process of “offshoring,” which is the (1) of business processes and jobs to other countries (2) was initially popular with companies because it yielded immediate labor-cost (3) for activities such as software development, call centers, and technical support While the practice remains popular today, offshoring has transformed from lowering (4) on back-office processes to accessing global talent for innovation With global markets expanding and domestic talent (5) companies are now hiring qualified engineers, scientists, inventors, and analysts all over the world for research and development (R&D), new product development (NPD), engineering, and knowledge services Innovation Offshoring Services R&D NPD Engineering Knowlegde services  Programming  Prototype design  Testing  Market analysis  Code  Product  Reengineering  Credit analysis development development  Drafting/modeling  Data mining  New technologies  Systems design  Embedded systems  Forecasting  New  Support services  development  Risk 28 materials/process management research By utilizing offshoring innovation, companies not only continue to reduce (6) costs, but cut back-office costs as well Companies also obtain local market knowledge and access to global best practices in many important areas Some companies are leveraging offshore (7) by creating global innovation networks Procter & Gamble (P&G), for instance, established “Connect and Develop,” a multinational effort to create and leverage innovative ideas for product (8) When the company wanted to create a new line of Pringles potato chips with pictures and words—trivia questions, animal facts, and jokes—printed on each chip, the company turned to offshore (9) Rather than trying to invent the technology required to print images on potato chips inhouse, Procter & Gamble created a technology brief that (10) the problems it needed to solve, and circulated it throughout the company’s global innovation network for possible (11) As a result, P&G (12) a small bakery in Bologna, Italy, run by a university professor who also manufactured baking equipment He had (13) _ an ink-jet method for printing edible images on cakes and cookies, which the company quickly adapted for potato chips As a result, Pringles Prints were developed in less than a year—as opposed to a more traditional two year process—and immediately led to double-digit product growth Listen and fill in the blanks Incremental Analysis at Method When Adam Lowry and Eric Ryan, friends since high school got tired of Monday looking cleaning products that were (1) They have a decision to make: live with them like everyone else or try to create an entirely new line, eco-friendly cleaning products even if that meant competing against (2) corporations Eric Ryan: “We knew when we started this business that we weren’t going up against one goliath player, we were actually going up against seven goliath players who arguably had 100 years head start on us So reinventing soap is no easy task because It’s a very basic product and our only chance of success was to bring a lot of differentiations So this tiny bottle does 50 loads of laundry which would be the equivalent to a very large jog and essentially it’s not only the world’s most efficient laundry detergent but it’s also the world’s greenest laundry detergent.” Managers make important decisions all the time and some of those decisions require (3) in unusual ways For Adam and Eric, their first was to decide whether to (4) themselves, (5) _ or because of their unique needs, outsource in a way that gave them (6) Which of these methods would cost more? Which would be more environmentally friendly? Like many managers they followed (7) in their decision-making process They identified a basic challenge How would they manufacture Method soap? They (8) their options: open a factory, completely outsource production or outsource production and retain some control (9) all the costs and benefits, they made a decision And, after all the number started to roll in, they (10) the results of that 29 decision to make sure they (11) The process used to identify the financial data that change under alternative courses of action is called (12) To make their decision, Method management analyzed (13) factors, (14) factors, such as costs that would change depending on which alternative course of action is chosen There was a major benefit to opening their own factory Method would have (15) but they would have to buy or lease a large building, purchase tons of equipment and employ a huge staff Adam Lowry: “Building a manufacturing infrastructure is really expensive and it burdens your business with a lot of (16) ” Eric Ryan: “As I knew as you go up against companies with incredible economies of scale, it’s really really hard to go into that same cost structure” By outsourcing they share these costs with all the other clients of vender with whom they did business Adam Lowry: “Contract manufacturers are built for scale and can run them more efficiently than we would if we scale our online first small business.” So, from a purely quantitative perspective it made the most sense for Eric and Adam to outsource production of their soaps to an outside party But costs aren’t the only consideration for managers at the company, Method had to also consider (17) Those considerations which are (18) but still important in making decisions Their main mission to make soap that’s easier to use more attractive to display and better for the environment sets them apart from other cleaning products The size of their company also sets them apart from their competition and to that end, a large expensive factory might hinder them strategically Adam Lowry: “And as the little guy in our category, we need to be very quick to market and very flexible so that we can be innovative It’s how we compete.” Another consideration, of course, was (19) To stay green, they need lots of control over their production methods, exactly the kind of control they be giving up using an outside factory Ultimately, they chose to outsource manufacturing of their products but only with vendors that (20) for ecological production methods Adam Lowry: “We have a program called Green sourcing and what that program’s about is working with our contract manufacturers and our suppliers to get greener together and the reason we that is the footprint of our manufacturing business is actually the footprint of our suppliers and venders.” But executing a plan is not always as simple as it might seem In the case of one manufacturer, for example, Method offered to install solar panels on the roof of the factory to power the forklift Adam Lowry: “But because we didn’t own that facility, and actually our vendor didn’t own that facility, they (21) , we had to get very creative in how we did the solar installation, so we installed the solar on top of the decommissioned tractor-trailer and parked it on the side of the building and running the wires in the side door.” There are many qualitative factors that are important to Adam and Eric, and the loyal customer base which compete with quantitative factors when making decisions Adam Lowry: “They include things like what are the carbon footprint of the products that we’re using and then on the social side there’s issues of where we manufacture this 30 product or people being paid a living wage There are four primary factors that we use to choose our contract manufacturers and all of the suppliers we use which are (22) ” Even though Method’s environmentally friendly manufacturing choices cost more upfront In the long-term they usually save money on day-to-day operating costs associated with using those technologies Adam Lowry: “We have a fleet of semi-trailers, 53 foot-trailers that we run exclusively off of waste vegetable oil biodiesel but now they are cheapest trucks in our fleet because they get 30 to 50 percent better mileage than any other truck.” Adam Lowry and Eric Ryan are on a mission to change the way we clean and by making great (23) that weight different options based on how they impact (24) like brand identity They keep Method soap cleaning up at the cash register and the environment Summary Read and fill in the blanks with the following words and terms: future costs, sunk costs, differ, constrained, relevant, irrelevant, applications, decisions Everything in this chapter consists of applications of one simple but powerful idea Only those costs and benefits that (1) between alternatives are (2) in a decision All other costs and benefits are (3) and should be ignored In particular, (4) are irrelevant as are (5) that not differ between alternatives This simple idea was applied in a variety of situations including (6) that involve adding or dropping a product line, making or buying a component, accepting or rejecting a special order, using a (7) resource, and processing a joint product further This list includes only a small sample of the possible (8) of the relevant cost concept Indeed, any decision involving costs hinges on the proper identification and analysis of the costs that are relevant Questions What is a relevant cost? Define the following terms: incremental cost, opportunity cost, and sunk cost Are variable costs always relevant costs? Explain “Sunk costs are easy to spot—they’re the fixed costs associated with a decision.” Do you agree? Explain “Variable costs and differential costs mean the same thing.” Do you agree? Explain “All future costs are relevant in decision making.” Do you agree? Why? Prentice Company is considering dropping one of its product lines What costs of the product line would be relevant to this decision? What costs would be irrelevant? “If a product is generating a loss, then it should be discontinued.” Do you agree? Explain What is the danger in allocating common fixed costs among products or other segments of an organization? 10 How does opportunity cost enter into a make or buy decision? 11 Give at least four examples of possible constraints 31 12 How will relating product contribution margins to the amount of the constrained resource they consume help a company maximize its profits? 13 Define the following terms: joint products, joint costs, and split-off point 14 From a decision-making point of view, should joint costs be allocated among joint products? 15 What guideline should be used in determining whether a joint product should be sold at the split-off point or processed further? 16 Airlines sometimes offer reduced rates during certain times of the week to members of a businessperson’s family if they accompany him or her on trips How does the concept of relevant costs enter into the decision by the airline to offer reduced rates of this type? Topic Managerial Accounting Information for Long-term Decisions Glossary No Terms Capital budgeting Cost of capital Internal rate of return Net present value Out-of-pocket costs Payback period Preference decision Project profitability index Screening decision 10 Simple rate of return 11 Working capital Meaning The process of planning significant investments in projects that have longterm implications such as the purchase of new equipment or the introduction of a new product The average rate of return a company must pay to its long-term creditors and shareholders for the use of their funds The discount rate at which the net present value of an investment project is zero; the rate of return of a project over its useful life The difference between the present value of an investment project’s cash inflows and the present value of its cash outflows Actual cash outlays for salaries, advertising, repairs, and similar costs The length of time that it takes for a project to fully recover its initial cost out of the net cash inflows that it generates A decision in which the alternatives must be ranked The ratio of the net present value of a project’s cash flows to the investment required A decision as to whether a proposed investment project is acceptable The rate of return computed by dividing a project’s annual incremental accounting net operating income by the initial investment required Current assets less current liabilities 32 Concepts in action Read and fill in the blank with the following words: NPV, AAR, returns, techniques, ratio, capital, money, entertainment, revenue, budgeting, project, decision, investment, positive, evaluated, developed, experienced International capital budgeting at Disney The Walt Disney Company, one of the world’s leading (1) producers, had more than $36 billion in 2009 (2) through movies, television networks, branded products, and theme parks and resorts Within its theme park business, Disney spends around $1 billion annually in (3) investments for new theme parks, rides and attractions, and other park construction and improvements This (4) is divided between its domestic properties and international parks in Paris, Hong Kong, and Tokyo Years ago, Disney (5) a robust capital budgeting approval process Project approval relied heavily on projected (6) on capital investment as measured by net present value (NPV) and internal rate of return (IRR) calculations While this worked well for Disney’s investments in its domestic theme park business, the company (7) _ challenges when it considered building the DisneySea theme park near Tokyo, Japan While capital (8) in the United States relies on discounted cash flow analysis, Japanese firms frequently use the average accounting return (AAR) method instead AAR is analogous to an accrual accounting rate of return (AARR) measure based on average investment However, it focuses on the first few years of a (9) (five years, in the case of DisneySea) and ignores terminal values Disney discovered that the difference in capital budgeting (10) between U.S and Japanese firms reflected the difference in corporate governance in the two countries The use of NPV and IRR in the United States underlined the perspective of shareholder-value maximization On the other hand, the preference for the simple accounting based measure in Japan reflected the importance of achieving complete consensus among all parties affected by the investment (11) When the DisneySea project was (12) , it was found to have a positive (13) , but a negative (14) To account for the differences in philosophies and capital budgeting techniques, managers at Disney introduced a third calculation method called average cash flow return (ACFR) This hybrid method measured the average cash flow over the first five years, with the asset assumed to be sold for book value at the end of that period as a fraction of the initial (15) in the project The resulting (16) was found to exceed the return on Japanese government bonds, and hence to yield a (17) _ return for DisneySea As a result, the DisneySea theme park was constructed next to Tokyo Disneyland and has since become a profitable addition to Disney’s Japanese operations Summary Read and fill in the blanks with the following words and terms: cash inflows, cash outflows, projects, funds, initial investment, accounting net operating income, time value of money, net present value, internal rate of return, minimum required rate of return, project profitability index, required 33 Investment decisions should take into account the (1) because a dollar today is more valuable than a dollar received in the future The net present value and (2) methods both reflect this fact In the net present value method, future cash flows are discounted to their present value The difference between the present value of the (3) and the present value of the cash outflows is called a project’s net present value If the (4) of a project is negative, the project is rejected The discount rate in the net present value method is usually based on a minimum required rate of return such as a company’s cost of capital The internal rate of return is the rate of return that equates the present value of the cash inflows and the present value of the (5) , resulting in a zero net present value If the internal rate of return is less than a company’s (6) , the project is rejected After rejecting (7) whose net present values are negative or whose internal rates of return are less than the minimum required rate of return, more projects may remain than can be supported with available (8) The remaining projects can be ranked using either the (9) or internal rate of return The project profitability index is computed by dividing the net present value of the project by the required (10) _ Some companies prefer to use either the payback method or the simple rate of return to evaluate investment proposals The payback period is the number of periods that are (11) to fully recover the initial investment in a project The simple rate of return is determined by dividing a project’s (12) by the initial investment in the project Questions What is the difference between capital budgeting screening decisions and capital budgeting preference decisions? What is meant by the term time value of money? What is meant by the term discounting? Why isn’t accounting net income used in the net present value and internal rate of return methods of making capital budgeting decisions? Why are discounted cash flow methods of making capital budgeting decisions superior to other methods? What is net present value? Can it ever be negative? Explain Identify two simplifying assumptions associated with discounted cash flow methods of making capital budgeting decisions If a company has to pay interest of 14% on long-term debt, then its cost of capital is 14% Do you agree? Explain What is meant by an investment project’s internal rate of return? How is the internal rate of return computed? 10 Explain how the cost of capital serves as a screening tool when using ( a ) the net present value method and ( b ) the internal rate of return method 11 As the discount rate increases, the present value of a given future cash flow also increases Do you agree? Explain 12 How is the project profitability index computed, and what does it measure? 34 13 What is meant by the term payback period? How is the payback period determined? 14 How can the payback method be useful? 15 What is the major criticism of the payback and simple rate of return methods of making capital budgeting decisions? Managerial Accounting Today Listen and fill in the blanks In 1959 when Pizza Hut began to expand out from its first store in Witchita Kansas, the idea of pizza chains was still very much a novelty Half of a century later the competitive environment for restaurants and fast-food both in the US and worldwide has changed dramatically To stay on top, managerial (1) for companies like Pizza Hut and parent company Yum Brands must be forward-looking One of the ways managerial accountants improve productivity and eliminate waste is to analyze the (2) The value chain refers to all activities associated with (3) Activities include research and development, acquisition of materials, production, sales, delivery and customer relations At Pizza Hut, (4) fresh fully cooked pizza for in-store dining, take-out and delivery requires a team effort Every link in the chain has to work together in order to reach the goal of bringing the best value to (5) Companies focus on (6) through a variety of techniques Tools such as these allow companies to respond quicker to make better decisions and they often provide more insight into (7) Let’s take a closer look at Pizza Hut and some of the techniques they use to improve productivity and (8) in their value chain For many companies, often the most difficult part of computing accurate unit costs is determining the proper (9) , the ongoing operating cost of running a business to assign to a product This is especially true with new products Several years ago, Pizza Hut introduced its line of Tuscani Pastas which required new ingredients and processes and a massive marketing campaign directed at the public who previously only associated Pizza Hut with pizza (10) helped Pizza Hut to accurately assign overhead costs during and beyond this transition phase When acquiring basic ingredients, Pizza Hut can sometimes find profitability and workflow constrained by shortages and price fluctuations of basic commodities like flour and cheese Using the theory of constraint, they can anticipate such constraints called (11) and circumvent them through clever strategies and creative hedging Chris Fuller: “When dairy costs go up, cheese costs can skyrocket and we can’t tomorrow charge an additional $5 for a pizza, so we work with our suppliers to hedge against commodity prices So a year in advance we may set the price for cheese even though it might go up on the exchange, we can hedge against to get a lower cost to keep providing a good value, low cost pizzas to our customers.” The production of each customer order happens at the store level Most of which are franchised out But even if the supply chain is abundantly supplied, they try to limit space and budget for inventory or spoilage due to over stocking Thus Pizza Hut provides (12) that track the current stock levels of everything 35 from tomatoes to drinking straws, giving managers easy to use tools to reorder supplies online from central distribution points around the country Many companies now employ (13) software systems which provide a centralized integrated source of information that companies can use to manage all (14) , from sales to purchasing, to manufacturing, to human resources For Pizza Hut, one benefit is that their customers can order at the place that is the most convenient for them Chris Fuller: “Our goal is really to be wherever our customers are In addition to the website and other places, we can order picking up the phone, the whole traditional way You can order from our iPhone app which was recognized as one of the most downloaded apps It’s really fun and you need an interactive way to order your pizza.” All this trouble is wasted if the food doesn’t get where it’s going in a timely fashion or arrive piping hot and tasty, so Pizza Hut employs (15) protocols that aim to reduce errors in order fulfillment Even though most stores are independently owned, each franchisee must learn and adhere to the core company guidelines like methodologies for assembling, cooking and transporting pizza and other dishes Chris Fuller: “The brand has to be the same whether they’re ordering form Amarillo Texas or from one of our restaurants in Rhode Island We want to make sure we are fulfilling that order and creating them the perfect pizza every time All the way to a smile on her face when the delivery driver rise at the door or they come to our restaurant to pick up.” Finally, Pizza Hut seeks customer feedback in order to gauge how it’s doing in their eyes For example, customers can use www.tellpizzahut.com and that information goes back to the individual store to help it improve Pizza Hut measures both (16) evaluating all aspects of the company’s performance in an integrated way, in a balanced scorecard This helps Pizza Hut understand not only how customers vote with their wallets but also how well the brand is perceived via community participation Chris Fuller: “We encourage our franchisees to get involve with their communities and doing philanthropists in their communities as well, so why we have World Hunger Relief Week and we have the Book it! program You also see different programs across the country their causes that are important to our local operators and their communities.” It isn’t easy to be the largest pizza company in the world and it is even harder to stay on top in (17) , but the value chain and the various techniques used to help manage the value chain, all play a key role in helping companies like Pizza Hut stay number one Discussion Use “think-pair-share” to work on this exercise First, read the following exercise Then, take one to two minutes to think of your answers Pair with another student to discuss your answers Finally, be prepared to share your responses with the rest of the class 36 Name a product and a service you have purchased that you believe was accounted for using job-order costing Explain why you think so Then, think how that product and service can be transformed such that process costing would be appropriate Discussion No Free Lunch Hardly a week goes by without a company advertising a free product with the purchase of another Examples are a free printer with a digital camera purchase or a free monitor with a computer purchase Can these companies break even, let alone earn profits? We are reminded of the nofree-lunch adage, meaning that companies expect profits from the companion or add-on purchase to make up for the free product Discussion A local movie theater owner explains to you that ticket sales on weekends and evenings are strong, but attendance during the weekdays, Monday through Thursday, is poor The owner proposes to offer a contract to the local grade school to show educational materials at the theater for a set charge per student during school hours The owner asks your help to prepare a CVP analysis listing the cost and sales projections for the proposal The owner must propose to the school’s administration a charge per child At a minimum, the charge per child needs to be sufficient for the theater to break even Prepare a list of questions being answered by the owner of the movie theater that enable you to complete a reliable CVP analysis of this situation Discussion Norton Company, a manufacturer of infant furniture and carriages, is in the initial stages of preparing the annual budget for 2010 Scott Ford has recently joined Norton’s accounting staff and is interested in learning as much as possible about the company’s budgeting process During a recent lunch with Marge Atkins, sales manager, and Pete Granger, production manager, Scott initiated the following conversation Scott: Since I’m new around here and am going to be involved with the preparation of the annual budget, I’d be interested in learning how the two of you estimate sales and production numbers Marge: We start out very methodically by looking at recent history, discussing what we know about current accounts, potential customers, and the general state of consumer spending Then, we add that usual dose of intuition to come up with the best forecast we can Pete: I usually take the sales projections as the basis for my projections Of course, we have to make an estimate of what this year’s closing inventories will be, which is sometimes difficult Scott: Why does that present a problem? There must have been an estimate of closing inventories in the budget for the current year Pete: Those numbers aren’t always reliable since Marge makes some adjustments to the sales numbers before passing them on to me Scott: What kind of adjustments? 37 Marge: Well, we don’t want to fall short of the sales projections so we generally give ourselves a little breathing room by lowering the initial sales projection anywhere from to 10 percent Pete: So, you can see why this year’s budget is not a very reliable starting point We always have to adjust the projected production rates as the year progresses, and of course, this changes the ending inventory estimates By the way, we make similar adjustments to expenses by adding at least 10 percent to the estimates; I think everyone around here does the same thing Required: a Explain why Marge and Pete behave in this manner, and describe the benefits they expect to realize from the use of budgetary slack b Explain how the use of budgetary slack can adversely affect Marge and Pete Discussion In November 2005, Microsoft introduced its highly anticipated new video game player, the Xbox 360 In early July 2007, Microsoft announced it was extending the warranty on its Xbox 360 to three years for a certain type of malfunction indicated by three flashing red lights on the game console The warranty extension would apply to previously sold units; however, the warranty for any other type of failure would not be extended beyond the original one-year warranty term In making this announcement, Microsoft indicated it would take a charge of $1.05–1.15 billion in the quarter ending June 30, 2007, for the costs of the warranty extension [Source: Nick Wingfi eld, “Microsoft’s Videogame Eff orts Take a Costly Hit,” Wall Street Journal (July 6, 2007), p A3.] a What relevant costs were likely considered by Microsoft management in reaching the decision to extend the warranty on the Xbox 360 and, in so doing, incur in excess of $1 billion of additional costs? b Comment on whether Microsoft was ethically obligated to extend the warranty on the Xbox 360 to three years Discussion CXI has formal policies and procedures to screen and approve capital projects Proposed capital projects are classified as one of the following types: Expansion requiring new plant and equipment, Expansion by replacement of present equipment with more productive equipment, or Replacement of old equipment with new equipment of similar quality All expansion and replacement projects that will cost more than $50,000 must be submitted to the top management capital investment committee for approval The investment committee evaluates proposed projects considering the costs and benefits outlined in the supporting proposal and the long-range effects on the company The projected revenue and/or expense effects of the projects, once operational, are included in the proposal After a project is accepted, the committee approves an expenditure budget from the project’s inception until it becomes operational The expenditures required each year for the expansions or replacements are also incorporated into CXI’s annual budget procedure The budgeted revenue and/or cost 38 effects of the projects for the periods in which they become operational are incorporated into the 5-year forecast CXI does not have a procedure for evaluating projects once they have been implemented and become operational The vice president of finance has recommended that CXI establish a postinvestment audit program to evaluate its capital expenditure projects a Discuss the benefits a company could derive from a post- investment audit program for capital expenditure projects b Discuss the practical difficulties in collecting and accumulating information that would be used to evaluate a capital project once it becomes operational 39 ... fixed costs but (15) variable costs for streaming and performance royalties Over time, as Pandora’s popular service attracted millions of (16) , its costs for performance royalties––set by the Copyright... detailed plan for the future that is usually expressed in formal quantitative terms Budget committee A group of key managers who are responsible for overall budgeting policy and for coordinating... budget for it? First, let’s go over some basics Budgeting which is defined as a written statement that management s plans for a specific period expressed in (1) is a cornerstone of planning for