AMA Test 2

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klvm70
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71974
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AMA Test 2
Updated:
2011-03-09 23:18:15
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Advanced Managerial Accounting
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Advanced Managerial Accounting Test 2
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  1. Transfer pricing should accomplish what four things?
    • - provide relevant info
    • - induce goal congruent decisions
    • -measure economic performance
    • - be simple to understand and administer
  2. 2 Profit Center Decisions
    • - Sourcing
    • - Transfer Price
  3. Goal congruence is achieved if you have what 6 things?
    • - competent people
    • - good atmosphere
    • - market price
    • - freedom to source
    • - full information
    • - negotiation
  4. Markets may be limited because of what three things?
    • - no external sales (max. cap. internally)
    • - sole producer of differentiated product
    • - significant investment in facilities
  5. How do you determine market price?
    • - published market price
    • - bids
    • - similar products sold
    • - similar products bought
  6. Cost-plus-profit questions
    • - how to define cost (usually standard)
    • - how to calculate profit markup
    • - basis (percentage of cost or investment)
    • - profit allowed
  7. Two-Step Pricing Characteristics
    • - fixed costs and profit should be negotiated periodically
    • - questions possible about accuracy of cost and investment allocations
    • - manufacturing unit's profit not affected by sales volume of final unit
    • - possible conflict between manufacturing unit and company
    • - similar to "take or pay" pricing
  8. Profit Sharing System Characteristics
    • - product transferred to marketing unit at standard variable cost
    • - after product is sold, BUs share contribution earned
  9. Two types of transfers
    • - central services unit must accept but can partially control amount used
    • - central services BU can use or not
  10. Arbitration Committee Responsibilities
    • - settling transfer pricing disputes
    • - reviewing sourcing changes
    • - changing transfer pricing rules
  11. 2 Classes of Products
    • Class I: Sr. management controls sourcing
    • Class II: all other products
  12. How does two sets of prices work?
    • - Manuf. Unit's revenue credited at outside sales price.
    • - Buying Unit charged total standard cost
    • - Difference charged to HQ account and eliminated when statements are combined
  13. Investment Base
    sum of assets that may be employed in an investment center
  14. Methods for relating profit to Investment Centers
    • ROI
    • EVA (economic value added)
  15. EVA =
    net operating profit - capital charge
  16. Benefits of ROI
    • - comprehensive measure
    • - simple and meaningful
    • - common denomenator
  17. Reasons EVA better than ROI
    • - all BUs have same profit objective
    • - decisions that increase ROI may decrease overall profits
    • - different interest rates may be used for different assets
    • - EVA has stronger positive correlation with changes in market value
  18. Reasons shareholder value creation is important
    • - reduces risk of takeover
    • - creates currency for aggressiveness in mergers and acquisitions
    • - reduces cost of capital
  19. Capital charge =
    cost of capital X capital employed
  20. Breakup Value
    estimated amount shareholders would receive if BUs were sold separately
  21. Terminal value
    assets on hand at the end of period covered
  22. Strategic Planning
    process of deciding on the programs that the organization will undertake and the approximate amount of resources that will be allocated to each program over the next several years
  23. BU manager's performance objectives
    • - generate adequate profits from the resources at their disposal
    • - invest in additional resources when it will produce an adequate return
  24. Actions which increase EVA
    • - increase ROI through business process reengineering and productivity gains without increasing asset base
    • - divestment of assets whose ROI is less than the cost of capital
    • - aggressive investment in assets with ROI above cost of capital
    • - increase in sales, profit margin, or capital efficiencies
    • - decrease in cost of capital percentage without affecting other variables
  25. Strategy formulation
    process of deciding on new strategies
  26. Formal strategic planing gives what four things?
    • - framework for developing annual budget
    • - management development tool
    • - mechanism to force managers to think long term
    • - means of aligning managers with the long-term strategies of the company
  27. Pitfalls/limitations to formal strategic planning
    • - can become form-filling exercise
    • - delegated to strategic planning department
    • - time consuming and expensive
  28. Strategic Planning is desirable in what type of organization?
    • - with top management buy in
    • - relatively large and complex org.
    • - considerable uncertainty of future but with flexibility to adapt to change.
  29. Strategic Planning steps
    • - review and update last year's strategic plan
    • - decide on assumptions and guidelines
    • - first iteration of new strategic plan
    • - analysis
    • - second iteration of new strategic plan
    • - final review and approval
  30. Planning gap
    sum of individual plans doesn't add up to attainment of corporate objectives.
  31. 3 ways to close planning gap
    • - find opportunities for improvement in BU's plans
    • - make acquisitions
    • - review corporate objectives
  32. Value Chain Analysis
    • - linkages with suppliers
    • - linkages with customers
    • - process linkages
  33. Activity =
    cost center
  34. Cost driver =
    basis of allocation
  35. Activity-Based Costing characteristics
    • - collect materials costs separately
    • - direct labor + other costs = conversion costs
    • - assign R&D, gen. and admin., and marketing costs to products
    • - use multiple allocation bases
    • - allocation basis should reflect cause of cost occurrence
    • - labor costs less important
    • - indirect costs dominant part of cost
  36. Operating Budget Characteristics
    • - covers 1 year
    • - states planned revenues and expenses
    • - estimates BU's profit potential
    • - stated in monetary terms
    • - management commitment
    • - reviewed and approved by authority
    • - once approved, only changed under certain circumstances
    • - periodically compared to actual
  37. Forecast characteristics
    • - may or may not be in monetary terms
    • - any period of time
    • - forecaster doesn't accept responsibility
    • - no approval by authority
    • - updated with new information
    • - variances not analyzed
  38. Purpose of Budgets
    • - fine tune strategic plan
    • - coordinate activities of parts of organization
    • - assign responsibility to managers
    • - obtain commitment (basis of evaluation)
  39. Types of budgets
    • - operating
    • - capital
    • - budgeted balance sheet
    • - budget cash flow statement
  40. Budget department responsibilities
    • - reports to corporate controller
    • - administers information flow
    • - publishes procedures and forms
    • - coordinates and publishes basic corporate assumptions
    • - provides assistance to budgetees
    • - analyzes proposed budgets and makes recommendations
    • - administers budget revision process
    • - coordinates work of lower budget departments
    • - analyzes budget vs. actual
  41. Changes in external forces
    • - general economic activity
    • - price of purchases
    • - labor rates
    • - discretionary activity costs
    • - selling prices
  42. Changes in internal policies and practices
    • - production costs
    • - discretionary costs
    • - market share
    • - product mix
  43. Reasons to approve achieveable budgets
    • - no short term action contrary to long term interests
    • - reduce data manipulation
    • - management confident of profit targets
    • - avoids overcommittment of resources
    • - "winning" atmosphere
  44. Analytical framework for variance analysis
    • - ID key causal factors for profits
    • - Breakdown overall profit variances by KCFs
    • - Focus on profit impact of each KCF
    • - Calculate impact of each KCF
    • - Add complexity sequentially until adding doesn't provide insight
  45. Selling Price Variance =
    (Actual price - standard price) X actual volume
  46. Mix and volume variance =
    (Actual volume - budget volume) X Budget unit contribution
  47. Mix Variance =
    actual sales volume - (Actual sales volume X budget proportion) X budget unit contribution
  48. Volume Variance =
    (actual sales volume X Budget %) - budget sales X budget unit contribution
  49. Market Share Variance =
    (actual sales - industry volume) X budget market penetration X budget unit contribution
  50. Industry Volume Variance =
    (Actual industry volume - budget industry volume) X budget market penetration X budget unit contribution
  51. Formal standards used in Evaluation of Reports on Actual Activity
    • - predetermined standards or budgets
    • - historical standards
    • - external standards
  52. Nonfinancial standards are needed because
    • - discourage short term action contrary to long term interests
    • - encourage BU managers to take advantage of long term opportunities despite short term loss
    • - avoid distortion of communication between BU managers and senior management
    • - avoid data manipulation
  53. Balanced Scorecard categories
    • - financial
    • - customer
    • - internal business
    • - innovation and learning
  54. Customer-focused key variables
    • - bookings
    • - backorders
    • - market share
    • - key account orders
    • - customer satisfaction
    • - customer retention
    • - customer loyalty
  55. Internal Business Key Variables
    • - capacity utilization
    • - on-time delivery
    • - inventory turnover
    • - quality
    • - cycle time
  56. Cycle time =
    processing time + storage time + movement time + inspection time
  57. Steps to implement performance management system
    • - define strategy
    • - define measures of strategy
    • - integrate measures in management system
    • - review measures and results frequently
  58. Difficulties in implementing performance management system
    • - poor correlation between nonfinancial measures and results
    • - fixation on financial results
    • - measures not updated
    • - measurement overload
    • - difficulty establishing trade offs
  59. Interactive Control
    management control information used as basis for think about new strategies in industries subject to very rapid environmental change.
  60. Learning organization
    ability of an organization to learn to cope with environmental changes on an ongoing basis
  61. In effective learning organizations
    • - all employees continuously scan the environment
    • - ID potential problems and opportunities
    • - exchange environmental information candidly and openly
    • - experiment with alternate business models to adapt to emerging environments
  62. Strategic uncertainties
    fundamental environmental shirts that could potentially disrupt the rules by which an organization is playing today
  63. Interactive Control characteristics
    • - subset of management control information with a bearing on strategic uncertainties facing business becomes the focus point
    • - Sr. management takes it seriously
    • - all managers focus on information produced
    • - all levels meet face to face to interpret and discuss implications
    • - face to face meetings take the form of a debate and challenge assumptions
  64. Internet and e-commerce growth indicators
    • - growth in the number of internet users
    • - rollout of broadband communications
    • - emergence of ubiquitous point and click interfaces that are based on open standards, cheap to set up and run, and global
    • - increasing power of competing and communication technologies
    • - growth in mobile communications for both voice telephony and internet access
    • - development and deployment of speech recognition and machine-based language translation technologies that may make it possible for people speaking or writing different languages to communicate with each other in real time.
  65. Converging technologies have the following effects
    • - convergence of voice, data, and image has implications for firms operating in consumer electronics, telecommuncations and computer industries
    • - integration of chemical and digital technology has impact on firms
    • - blending of hardware and software has impact on firms
    • - merging of plant engineering and biotechnology opens up opportunities for firms in life sciences
  66. The following discontinuities created by globalization have the potential to create new opportunities
    • - liberalization, deregulations, and privitization have the potential to create huge new customer segments in emerging markets such as China, India, and Brazil
    • - new competitors from emerging markets may become global players in the future
  67. a subsystem should satisfy the following conditions before it can be used as an interactive control system
    • - the data continued in the subsystem should be unambiguous and simple to understand and interpret
    • - the subsystem must contain data on strategic uncertainties
    • - the data in the subsystem should help the firm develop new strategies

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