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Discussions for Managerial Accounting

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    Week 4: Discussion 1 How does activity-based costing differ from the traditional costing approach? When would it give more accurate costs than traditional costing systems? * Activity based costing (ABC) is a method for assigning costs to products, services, projects, tasks, or acquisitions, based on the activities that go into them and the resources consumed by these activities. ABC contrasts with traditional costing, which sometimes assigns costs using somewhat arbitrary allocation percentages for overhead costs or the so-called indirect costs.

    Think about when and if the cost of this additional information is beneficial? * The ABC approach will have more cost because of the cost to use the system but will be beneficial because of the three will be more precise data in which to make better informed decisions. This is reflected is this week’s lecture. Everyone, is ABC considered GAAP? Can it be used for external reporting? Why or why not? * ABC system does not conform to GAAP principles.

    According to these principles product cost calculated for external reports purpose must include all of the manufacturing costs; but in ABC system products costs product costs exclude some manufacturing costs, and include some non-manufacturing costs. Some companies do use ABC in their external reports and some do not for the following reasons: 1- external reports are less detailed than internal reports prepared for decision making 2- On external reports, individual product costs are not reported. http://accounting4management. com/activity_based_costing_external_reports. htm

    Week 4: Discussion 2 Only those costs that change need be included in the decision making process. Evaluate this statement and discuss its merits or shortcomings. * Incremental analysis is the process of identifying relevant revenue and costs under different assumptions to make the best possible decision on how much to produce and at what price. The decision process involves choosing between alternatives based on the differences. The three major components of incremental analysis are the revenue differences (often called benefits), costs differences and cost savings difference.

    If one assumption produces higher incremental benefits or revenue than all others, then the right choice is to select that alternative. * Sunk costs are costs that have already been incurred and will not be changed by any decision that is made. In the decision to sell a product or process it further, prior production costs are sunk costs. These production costs have already been incurred and cannot be changed regardless of whether the company decides to sell the product as it is or process it further. Therefore, they should not be included in the analysis.

    Definition: Opportunity cost is the potential benefit that is given up when one alternative is selected over another. To illustrate this important concept, consider the following examples: Example 1: Vicki has a part-time job that pays her $200 per week while attending college. She would like to spend a week at the beach during spring break, and her employer has agreed to give her the time off, but without pay. The $200 in lost wages would be an opportunity cost of taking week off to be at the beach. Example 2:

    Suppose that Neiman Marcus is considering investing a large sum of money in land that may be a site for future store. Rather than invest the funds in land, the company could invest the funds in high-grade securities. If the land is acquired, the opportunity cost will be the investment income that could have been realized if the securities had been purchased instead. Example 3: You are employed in a company that pays you $30,000 per year. You are thinking about leaving the company and returning to school. Since returning to school would require that you give up $30,000 salary.

    The forgone salary would be an opportunity cost of seeking further education. Opportunity cost is not usually entered in the accounting records of an organization, but it is a cost that must be explicitly considered in every decision a manager makes. Virtually everyalternative has some opportunity cost attached to it. http://accounting4management. com/decision_making_costs. htm Class, please take a look at the Case 7-1 on page 282 of your text, Primus Consulting Group. What costs and/or revenues are relevant in this decision? | | | | | | RE: Case 7-1| Jodie Peters | 11/24/2012 11:12:39 PM| | Since accepting the job for Northwood Industries would mean being paid a flat fee of $70,000 Primus would be losing $14,350 in revenue. Primus would have to reallocate their normal overhead costs or take them as a loss OR reduce their variable costs for this particular job. Is it really necessary to use a Partner, Senior Consultant and Staff Consultant for every job or is it possible for the Northwood Industries job to be done with fewer people? It would remove one person’s pay for this particular job. I am not really sure. This is only my opinion. | | Week 5 Discussion Topic 1

    Compare target costing and cost-plus pricing. When is each the most appropriate method to use? Provide an example of each. * Target Costing is a disciplined process that uses data and information in a logical series of steps to determine and achieve a target cost for the product. In addition, the price and cost are for specified product functionality, which is determined from understanding the needs of the customer and the willingness of the customer to pay for each function. Cost-plus pricing is a strategy that is used to determine the retail and/or wholesale price of goods and services offered for consumption.

    Businesses of all sizes tend to use this simplistic pricing model as a guideline for arriving at sale prices that will allow the company to cover all costs associated with the production and sale of the products, and still make a reasonable profit from the effort. The basic formula for cost-plus pricing works as well for calculating pricing goods such as the cost of a meal in a café as it does for pricing services such as utilities or courier services. How does the target costing process work for a new product? * For new products, target costing can be difficult.

    First the company must analyze the market to see what they will be able to sell their product for. When the price is determined they then must decide how to produce and what features to include in their product so that the costs are low enough that they can still get their desired profit margin when the product is sold at the predetermined price. Topic 2 Start off this topic by describing NPV and IRR methods. So in the NPV method a company is deciding wether or not to make an investment. NPV has three steps according to our text. It states that you need to determine the amount of cash flow and the time period of the cash flow.

    You next use the required rate of return to discount the cash flows to the present value. If the NPV is 0 or greater you should accept the project. This is because the company would be taking in what is expected or more. let’s also discuss the nature of capital budgets and their importance. This is a really good explanation of capital budgets in simplified and easy to understand terms: Capital budgeting is the process most companies use to authorize capital spending on long-term projects and on other projects requiring significant investments of capital.

    Because capital is usually limited in its availability, capital projects are individually evaluated using both quantitative analysis and qualitative information. Most capital budgeting analysis uses cash inflows and cash outflows rather than net income calculated using the accrual basis. Some companies simplify the cash flow calculation to net income plus depreciation and amortization. Others look more specifically at estimated cash inflows from customers, reduced costs, proceeds from the sale of assets and salvage value, and cash outflows for he capital investment, operating costs, interest, and future repairs or overhauls of equipment.

    http://www. cliffsnotes. com/study_guide/Capital-Budgeting-Techniques. topicArticleId-21248,articleId-21247. html please explain the cost of equity financing? What does this mean? Cost of equity financing is giving up ownership of a portion of your company for funding to invest in the company. This type of financing is very costly to business because it is very risky for the investors, and the investors want to be well compensated for the risk they take.

    Investors won’t generally invest in a business this way until it is three or four years old. Large corporations may pay around 10% -15% return on the invest in their company, but small businesses pay much, much more – even up to 100%! The business would have to be extremely lucrative for repaying this type of funding not to cripple it. “On average, venture capitalists expect a return of five times their investment in five years. ” http://www. forbes. com/2009/04/09/small-business-equity-entrepreneurs-finance-dileep. html Week 6 topic 1 Start off by describing the master budget and its components.

    One main budget that is made up of multiple smaller budgets. For instance, a city government may group its general fund, enterprise fund and internal services fund — each with its own expenses and revenue sources — under a single, all-encompassing operating budget. Many organizations rely on master budgets, from businesses to municipalities to individual households. Components 1. Sales Budget 2. Production Budget 3. Material Budgeting | Direct Materials Budget 4. Labor Budget 5. Manufacturing Overhead Budget 6. Ending Finished Goods Inventory Budget 7. Cash Budget 8. Selling and Administrative Expense Budget . Purchases Budget for a Merchandising Firm 10. Budgeted Income Statement 11. Budgeted Balance Sheet the planning process produces a formal plan that is developed with the input of managers. This causes them to consider their goals and how they will go about achieving them.

    These plans are the budgets for each department or activity. The budget of the marketing department, will feed into the production department so that they can plan materials and labor. One budget leads to the next in the planning process and these budgets will be used to coordinate a manager’s activities for the budgeted period. Paraphrased from Jiambalvo. Managerial Accounting. 4. VitalSource Bookshelf. John Wiley & Sons, pg. 360 ) Topic 2 What role do standard costs play in controlling the operations of a business? Standard costing and the related variances is a valuable management tool. If a variance arises, management becomes aware that manufacturing costs have differed from the standard planned, expected costs. If actual costs are greater than standard costs the variance is unfavorable. An unfavorable variance tells management that if everything else stays constant the company’s actual profit will be less than planned.

    If actual costs are less than standard costs the variance is favorable. A favorable variance tells management that if everything else stays constant the actual profit will likely exceed the planned profit. http://www. accountingcoach. com/online-accounting-course/30Xpg01. html what’s the difference between a budget and a standard? deal standards are those that can be attained only under the best circumstances. They allow for no machine breakdowns or other work interruptions and they call for a level of effort that can be attained only by the most skilled and efficient employees working at peak effort 100% of the time.

    Some managers feel that such standards have a motivational value These managers argue that even though employees know that they will rarely meet the standards, it is a constant reminder of the need for ever increasing efficiency and effort. Few firms use ideal standards. Most managers feel that ideal standards tend to discourage even the most diligent workers. Moreover, variances from ideal standards are difficult to interpret. Large variances from the ideal are normal and it is difficult to manage by exceptions. How often should standard costs be adjusted? “Standard cost can be adjusted yearly or ad hoc.

    Once the standard cost of an item has been updated, the system will automatically revaluate the inventory and WIP cost and post the revaluation to GL. The history of standard cost change is kept in the system”. http://www. kingdee. com/foreign_account/product/StandardCost. pdf Week 7 topic 1 Compare and contrast the three types of responsibility centers. What is the best way to evaluate a manager’s performance in each type of center? A cost center is a subunit that has responsibility for controlling costs but does not have responsibility for generating revenue.

    The managers of these departments are responsible for making sure that their services are provided at a reasonable cost to the company. A profit center is a subunit that has responsibility for generating revenue as well as for controlling costs. The performance of the profit center can be evaluated in terms of profitability. Evaluation in terms of profitability is useful because it motivates managers to focus their attention on ways of maximizing profit-center profitability. An investment center is a subunit that is responsible for generating revenue, controlling costs, and investing in assets.

    An investment center is charged with earning income consistent with the amount of assets invested in the segment. What are the pros and cons of decentralization? What about centralization? Centralized Advantages -Better IT asset management, Ensure quality and standards, Better accountability. Disadvantages -Longer RFP cycles , longer support cycles and everything are in one place. Decentralized Advantage -Shorter approval , faster support , more secure and fault-tolerant. Disadvantage- Unnecessary asset duplication and Technology compatibility.

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