acct 2302 fundamentals of accounting ii spring 2011 lecture 16 professor jeff yu

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ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

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Page 1: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

ACCT 2302

Fundamentals of Accounting II

Spring 2011

Lecture 16

Professor Jeff Yu

Page 2: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

Review: ROI and Residual Income

MarginMargin

TurnoverTurnoverROI = NOI ÷ AOA

AOA

Sales

Sales

NOI

RI = NOI - Required rate of return × AOA

Page 3: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

Review: Residual Income VS. ROI

Under ROI, the basic message is:

Maximize rate of return, a percentage.

Under the residual income approach, the basic message is:

Maximize residual income, an absolute amount.

Residual income may encourage managers to make profitable investments that would be rejected by managers using ROI to evaluate that same investment.

However, residual income cannot be used to compare the performance of divisions with different sizes (i.e. different AOA).

Page 4: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

Review: The Balanced Scorecard

Management translates its strategy into performance measures (both financial and non-financial) that employees understand.

Management translates its strategy into performance measures (both financial and non-financial) that employees understand.

Performancemeasures

Customers

Learningand growth

Internalbusinessprocesses

Financial

Page 5: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

Wednesday, March 30: class time & in the classroom.

The exam will cover lectures 9 through 16 and chapters 8 through 12.

Please plan to arrive 10 minutes earlier. The exam will start when everyone in the room has an exam packet and will stop promptly after 100 minutes or the end of the class, whichever comes earlier.

Please spread out as much as possible when you get seated. I may ask you to change seats if I determine that you sit too close to the other student. Your cooperation will expedite the exam handout process so that all students will have more time to work on the exam.

This is a closed-book exam. But you may bring a one-page (single sided) cheat sheet. I may choose not to answer your question during the exam, to be fair.

You will need a non-programmable calculator. Please bring one!

Midterm Exam II Information

Page 6: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

Type of questions Multiple Choice Questions (6%)

No partial credit

Problems (94%)Show your work with legible and carefully labeled computations so that I can assign partial credit. If I cannot understand your computations, I will not assign partial credit.

Similar to practice problems in the lecture notes and HW problems.

Page 7: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

• Carefully study lecture notes• Re-work problems in the lecture notes• Re-work HW and quiz problems• If you need more practice, use the review problem at the end of

each chapter in the textbook. • Don’t look at the solutions before you have made at least one

serious attempt to solve each problem.

• Come to my additional office hours to clarify difficult materials. Additional office hours? There will be no office hour on Wednesday, March 30 (to be fair

with section 1 students) There will be no TA office hours this Thursday

Studying for the exam

Page 8: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

• I will post the exam solutions on the class website

• I will try my best to post your exam grades on Blackboard ASAP. Please understand that it takes a lot of time to assign partial credits and I will be working extremely hard to ensure that I grade your exam consistently and fairly.

• I will return the graded test to you ASAP. Grade disputes procedure is written in detail on the syllabus.

After the exam

Page 9: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

Review: Activity–Based Costing

Purposes: ABC is for internal decision making (e.g. drop or retain a segment), while absorption costing is for external reporting (e.g. value inventory, CGS).

Product Cost: ABC assigns some manufacturing (excluding e.g. factory manager’s office supplies) & some nonmanufacturing costs (e.g. shipping costs, sales commissions) to products on a cause-and-effect basis, while absorption costing assigns all manufacturing costs and none of the nonmanufacturing costs to products.

Overhead cost pool: ABC uses many overhead cost pools, each with unique cost driver, while absorption costing typically has only one plant-wide cost pool and uses either DLH or MH as the single cost driver.

Activity-based Costing (ABC) vs. Traditional Absorption Costing

Page 10: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

Review: Steps for Implementing ABC

1. Define activity cost pools & activity measures.

2. Assign overhead costs to activity cost pools: first-stage allocation.

3. Calculate activity rates: for each activity cost pool, divide total assigned OH costs by estimated total activity levels.

4. Assign OH costs to the specific product or customer using the activity rates: second-stage allocation

Assigned OH = Activity Rate * Actual activity level

5. Prepare management reports: calculate product margin and customer margin.

Page 11: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

Budgeted Sales $ = budgeted sales in Units * unit price

Expected cash collections (inflow)

Budgeted Account Receivable Balance

Budgeted Production units = budgeted Sales in Units + desired ending F.G. Inventory – beginning F.G. Inventory

Review: Profit Planning

Page 12: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

Budgeted R.M. Purchase in units

= budgeted Production in Units * R.M. needed for each unit + desired ending R.M. inventory – beginning R.M. Inventory

Expected cash disbursements for R.M. (or Accounts Payable)

Budgeted DL cost = budgeted DL hours * hourly rate(Adjust for “guaranteed hours” & higher hourly rate for overtime)

Budgeted MOH cost (Important: calculation of POHR)

Budgeted S&A expense

Budgeted ending F.G. Inventory

Review: Profit Planning

Page 13: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

Production costs per unit Quantity Cost Total Direct materials 5.00 lbs. 0.40$ 2.00$ Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing overhead 0.05 hrs. 49.70$ 2.49

4.99$

Budgeted finished goods inventory Ending inventory in units 5,000 Unit product cost 4.99$ Ending finished goods inventory 24,950$

From Production BudgetFrom Production BudgetFrom Production BudgetFrom Production BudgetPOHR from MOH budgetPOHR from MOH budgetPOHR from MOH budgetPOHR from MOH budget

Review: Ending F.G. Inventory Budget

From DM & DL From DM & DL budgetbudget

From DM & DL From DM & DL budgetbudget

Page 14: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

Cash Budget: (1) determine the amount of cash excess or deficiency; (2) determine required borrowing if cash deficiency; (3) calculate interest expense.

Budgeted Balance Sheet

Budgeted Income Statement

Review: Profit Planning

Page 15: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

Review: Performance Evaluation

Cost Center(controls costs only) Spending Variance;

Standard Cost Variances

Profit Center(controls costs & revenues)

SegmentedIncome Statement(Segment Margin)

Investment Center(controls costs & revenues

& Investments)

Return on Investment (ROI);Residual Income

Evaluation Tool

Page 16: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

Review: Flexible Budget

Flexible budget is prepared based on the actual activity level and is used for performance evaluation (control) purpose.

Activity Variance = Flexible budget amount – planning (static) budget amount

Spending Variance = Actual cost – flexible budget cost Spending variance is unfavorable if positive, favorable if negative;

Spending variance captures the efficiency of cost control.

Revenue Variance = Actual revenue – flexible budget revenue

Revenue variance is favorable if positive, unfavorable if negative;

Page 17: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

Review: Standard Cost

Standard vs. Budget: • A budget is set for total costs;• A standard is set for per unit cost;

Quantity standards are set for each unit of production (How much units of input are needed for each unit of output?)

SQ = standard quantity of materials allowed for the actual output

SH = standard hours allowed for the actual output

Price standards are set for each unit of input (How much should be paid for each unit of input?)

Standard Price (SP) for materialsStandard Rate (SR) for labor and overhead

Page 18: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

Review: Standard Cost Variances

Materials Price Variance

AQ(AP - SP)

Labor/VOH Rate Variance

AH(AR – SR)

Materials Quantity Variance

SP(AQ - SQ)

Labor/VOH Efficiency Variance

SR(AH – SH)

AP (AR)= Actual Price (Actual Rate): the amount actually paid foreach unit of the materials (labor or VOH).

SP (SR)= Standard Price (Standard Rate): the amount that should Have been paid for each unit of the materials (labor or VOH).

AQ (AH)= Actual Quantity (Actual Hour): the amount of materials(labor or VOH activity) actually used in the production.

SQ (SH)= Standard Quantity (Stan. Hour) allowed for the actual output = actual production in units * standard quantity (hours) per unit

Page 19: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

When material purchased ≠ material used

To compute the PRICE variance, use the total quantity of raw materials PURCHASED.

To compute the QUANTITY Variance, use only the quantity of raw materials USED.

Review: Materials Variances

Page 20: ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

Sales - Variable ExpensesContribution Margin

- Traceable Fixed costsSegment Margin

NOI for the company = the sum of segment margins minus Common fixed costs.

Important: CVP analyses using the segmented income statement!

Review: Segmented Income Statement