P1 Review

Advantages of Budgeting:-Budgets force managers to think about and plan for the future.-The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively.-The budgeting process can also uncover potential bottlenecks before they occur.-Budgets communicate management’s plans throughout the organization.-Budgets coordinate the activities of the entire organization by integrating the plans of its various parts.-Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.-Budgetary Slack:1. Define budgetary slack:-Is the excess of resources budgeted over the resources necessary to achieve organizational goals.-Nature tendency for manager to negotiate for a less stringent measure to avoid unfavorable variance.-Either by overestimating costs or underestimating revenues.-Firm may decrease slack by emphasizing the consideration of all variables, holding in-depth reviews, and allowing for additional budget changes.2. Discuss budgetary slack’s impact on goal congruence: Slack might adversely affect asfollows:-By limiting the usefulness of the budget to motivate top performance from their employees-By affecting ability to identify trouble spots and take appropriate corrective action-By reducing credibility in the eyes of managementTime series analysis projects future trends based on past experience (trend analysis): Secular trend ; Seasonal variations; Cyclical fluctuations; Irregular or random variables.Limitation: Assume past pattern will hold the future; Can not predict irregular events. Advantages of Standard Costs:-Standard costs are a key element of the management by exception approach that helps managers focus their attention on the most important issues.-Standards that are viewed as reasonable by employees can serve as benchmarks that promote economy and efficiency.-Standard costs can greatly simplify bookkeeping.-Standard costs fit naturally into a responsibility accounting system.Performance Measures:1. ROI: can be used for comparison of different sizes; High return divisions may reject aprofitable investment.2. Advantages of ROI:-It encourages manager to focus on the relationship among sales, expenses, and investments.-It encourages manager to focus on cost efficiency.-It encourages manager to focus on operating asset efficiency.3. Disadvantages of ROI:-It can produce a narrow focus on divisional profitability at the expense of profitability for the overall firm.-It encourages managers to focus on the short run at the expense of the long run.-ROI is not consistent with cash flow models used for capital expenditure analysis.-ROI frequently is not controllable by the division manager because many components included in the computation are committed in amount or are the responsibility of others.4. RI: Residual income = net income – average total assets * target ROI-Being consistent with profit maximizing, superior to ROI-May not reject a profitable investment-Can not be compared among different investment bases-The controllable divisional profit less an interest charge on the controllable divisional investment-The portion of every dollar of profit generated by the company’s assets5. Advantage of RI:-Residual income encourages managers to make profitable investments that would be rejected by managers using ROI.6. Limitations of RI:-Single statistic. It is easier to manipulate single statistic than multiple measures.-RI is also subject to accounting manipulations. Similar to ROI.-Results are not comparable between different size units. Calculates an absolute amount, not a percentage.-Exacerbates the horizon problem by stressing short term performance measures. Transfer pricing1. Ways of determining transfer pricing: 1) Market price; 2) Differential outlay cost plusopportunity cost to the seller; 3) Full absorption cost; 4) Variable cost; 5) Cost plus a lump sum or a markup percentage; 6) Negotiation; 7) Dual pricing.2. Considerations in transfer pricing: 1) Goal congruence; 2) Segmental performance factor;3) Negotiation factor; 4) Capacity factor; 5) Cost structure factor.3. Considerations in multinational transfer pricing: 1) Exchange rate fluctuation; 2) Threatsof expropriation; 3) Limits on transfer of profits outside the host country; 4) Tax liability. BSC – Balanced ScorecardThe balanced scorecard is an accounting report that connects the firm’s critical success factors to measurement of its performance.- A strategic performance management tool-Enables top management to translate its strategy into 4 groups of performance measures. The premise of these four groups of measures is that:-Learning is necessary to improve internal business processes-This in turn improves the level of customer satisfaction, thereby improving financial results.-Note the emphasis on improvement, not just attaining some specific objective.1. Financial-CSFs: sales, fair value of the firm’s stock, profit, and liquidity-Measures: sales, new product sales, operating earnings, ROI, RI, turnover2. Customer-CSFs: customer satisfaction, dealer and distributor relationships, marketing & selling performance, prompt delivery, and quality-Measures: customer retention rate, returns, complaints, defects, lead time, survey results, training of marketing people, sales trend, market share and its trend, on-time delivery rate, service response time and effectiveness3. Internal business process-CSFs: quality, productivity, flexibility of response to changing conditions, operating readiness and safty-Measures: new product marketed, technological capabilities, rate of defects, amount of scrap and rework, return, survey results, field service report, capacity usage,maintenance, cycle time4. Learning and growth-CSFs: development of new products, promptness of their introduction, HR development, moral, and competence of the work force-Measures: number of design changes, patents and copyrights registered, R&D personnel qualifications, hours of training, skill set level attained, personnel turnover, personnelcomplaints, organizational learning, and industry leadershipThe BSC relies on non-financial measures in addition to financial measures for two reasons: 1) Financial measures are lag indicators that summarize the results of past actions. Non-financial measures are leading indicators of future financial performance.2) Top managers are ordinarily responsible for financial performance measures – not lower level mangers. Non-financial measures are more likely to be understood and controlled by lower level managers.Life-cycle Costing-Is sometimes used as a basis for cost planning and product pricing-Is useful when revenues and related costs do not occur in the same periods-Emphasizes the need to price products to cover all costs, not just those for production Advantage of ABC-More accurate, useful in pricing & strategic decisions-Identify non-value adding activitiesDisadvantage of ABC-Not everything can be allocated strictly on a cost driver basis-May not confirm with GAAP-Maintain a separate accounting system-Expensive-Time consumingAdvantage of Outsourcing: 1) Focus on core business, 2) Reliable service, 3) Reduced cost. Disadvantage of outsourcing: 1) Dependence on an outside party, 2) Loss of control over a necessary function.COQ Cost of Quality measurement can track changes over time for one particular process, or be used as a benchmark for comparison of two or more different processes.Four categories: Conformance cost - Prevention cost & Appraisal cost; Nonconformance cost –Internal failure cost & External failure cost.Prevention cost: training & planning cost; equipment maintenance cost; supplier training & confirmation cost; information system cost; contract reviews; design reviews; defect prevention activities; reliability engineering & testing; capability studies.Appraisal cost: testing & inspection: set-up, materials, personnel, equipment/tools, energy; quality audit; any activities associated with checking previously performed work.Internal failure cost: scrap & rework, failure investigations, overtime to correct internal failures, downtime, delay time, corrective action to eliminate the internal failures, design & development of rework/repair techniques.External failure cost: repair, replacement expenses under warranty, customer complaint, product liability claims, failure investigations, corrective actions, downtime charges, modification delays & costs, product recalls, loss of customer loyalty, environmental cost.。