Cost Accounting for Manufacturing
45 Questions
0 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

Are the costs associated with fringe benefits for assembly line workers typically classified as direct labor?

  • No, they are solely attributed to administrative costs.
  • Yes, they can generally be traced to the products. (correct)
  • Yes, they are always considered direct labor costs.
  • No, they are treated as non-manufacturing costs.

    • How is an assembly line worker's regular overtime premium classified?

  • As marketing costs, due to its impact on production efforts.
  • As manufacturing overhead, since it cannot be traced to specific products. (correct)
  • As administrative costs, since it is related to employee wages.
  • As direct labor costs, because they directly relate to the production.

    • Which of the following costs is NOT included in manufacturing overhead?

  • Sales commissions for marketers. (correct)
  • Wages for factory supervisors.
  • Depreciation on factory machinery.
  • Utilities for the factory.

    • What type of costs are associated with securing customer orders and delivering finished products?

    <p>Marketing or selling costs.</p> Signup and view all the answers

    What are indirect materials in manufacturing primarily characterized by?

    <p>Materials that are difficult to trace to particular products economically.</p> Signup and view all the answers

    What is primarily involved in logistics activities?

    <p>Moving goods and collecting payments</p> Signup and view all the answers

    Which of the following is NOT considered a marketing activity?

    <p>Shipping and delivery</p> Signup and view all the answers

    What factor can make it difficult to evaluate the effectiveness of marketing efforts?

    <p>Economic conditions and competitor actions</p> Signup and view all the answers

    Which of the following activities is defined as 'order-getting'?

    <p>Sales promotion</p> Signup and view all the answers

    What is emphasized over budgetary commitments in the evaluation of marketing groups?

    <p>Sales volume</p> Signup and view all the answers

    How are the revenue-generating activities evaluated?

    <p>By comparing actual revenue and physical quantities sold with budgeted figures</p> Signup and view all the answers

    Which of the following best describes the term 'engineered expenses'?

    <p>Costs associated with logistics activities</p> Signup and view all the answers

    Which statement is true regarding marketing activities?

    <p>They include establishing and supervising the sales force.</p> Signup and view all the answers

    What is the primary purpose of preparing an annual R&D budget?

    <p>To assist in cash and personnel planning</p> Signup and view all the answers

    How often do companies typically compare actual expenses with budgeted expenses?

    <p>Monthly or quarterly</p> Signup and view all the answers

    What does the first type of financial report on R&D activities typically compare?

    <p>Latest forecast of total cost versus approved amount</p> Signup and view all the answers

    What is NOT a characteristic of the second type of financial report on R&D activities?

    <p>It evaluates the effectiveness of research efforts</p> Signup and view all the answers

    What are the two distinct types of activities grouped under marketing?

    <p>Filling orders and obtaining orders</p> Signup and view all the answers

    Which aspect of the R&D budget preparation is directly connected to the strategic plan?

    <p>The approval process</p> Signup and view all the answers

    What critical question does management consider during the preparation of the annual R&D budget?

    <p>Are we using our resources effectively for the next year?</p> Signup and view all the answers

    Which of the following describes the filling or logistics activities in a marketing context?

    <p>Actions taken after an order has been received</p> Signup and view all the answers

    How is the monetary value of an input typically calculated?

    <p>By multiplying physical quantity by price per unit</p> Signup and view all the answers

    Which statement best describes efficiency?

    <p>Efficiency is the ratio of outputs to inputs.</p> Signup and view all the answers

    What major flaw exists in the method of measuring efficiency by comparing actual costs to standard costs?

    <p>Recorded costs may not accurately reflect resources consumed.</p> Signup and view all the answers

    How is effectiveness determined for a responsibility center?

    <p>By evaluating how outputs align with objectives.</p> Signup and view all the answers

    Which of the following statements about efficiency and effectiveness is true?

    <p>Both must be optimized for a responsibility center to meet goals.</p> Signup and view all the answers

    What is a common way to express 'cost' in a management control system?

    <p>In monetary terms based on input quantities.</p> Signup and view all the answers

    Which aspect makes measuring effectiveness particularly challenging?

    <p>Objectives and outputs are often difficult to quantify.</p> Signup and view all the answers

    Which of the following best describes the relationship between efficiency and effectiveness?

    <p>One can improve without affecting the other.</p> Signup and view all the answers

    What is the first charge in the two-step pricing method for each unit sold?

    <p>Standard variable cost of production</p> Signup and view all the answers

    What might be a disadvantage of using a profit sharing system?

    <p>It may lead to disputes over profit division</p> Signup and view all the answers

    In the agreement among business units method, what purpose do the representatives serve?

    <p>To decide on outside selling prices</p> Signup and view all the answers

    In the two-step pricing method, what does the lump sum charge typically cover?

    <p>Fixed costs and profit</p> Signup and view all the answers

    Why might a company choose to use a profit sharing system over the two-step pricing method?

    <p>If demand for the product is inconsistent</p> Signup and view all the answers

    What is a potential outcome of using the profit sharing system?

    <p>The marketing unit’s performance affects manufacturing unit profits</p> Signup and view all the answers

    What type of costs does the two-step pricing method not cover?

    <p>Sales commissions</p> Signup and view all the answers

    What aspect of the profit sharing system can lead to challenges for management?

    <p>Determining the profit-sharing ratio</p> Signup and view all the answers

    What is the primary purpose of an operating budget?

    <p>To state the planned revenues and expenses for the year</p> Signup and view all the answers

    How does a budget differ from a forecast?

    <p>A budget serves as both a planning and control tool, while a forecast is only a prediction</p> Signup and view all the answers

    Which characteristic is essential for a budget in an organization?

    <p>It is a management commitment to achieve specific objectives</p> Signup and view all the answers

    What is meant by order getting costs?

    <p>Costs that vary widely based on managerial decisions</p> Signup and view all the answers

    What do businesses influenced by seasonal factors often do regarding budgeting?

    <p>Implement multiple budgets to reflect different seasons</p> Signup and view all the answers

    Why is the measurement of order getting costs considered subjective?

    <p>There is no clear consensus on optimal amounts</p> Signup and view all the answers

    In what way does strategic planning relate to budgeting?

    <p>A budget represents a portion of the overall strategic plan</p> Signup and view all the answers

    What must happen before a budget can be officially implemented?

    <p>It must be approved by a higher authority</p> Signup and view all the answers

    Study Notes

    Management Control Systems

    • Management control systems aim to align individual actions with organizational goals.
    • Control is important to ensure strategic intentions are met.
    • Controlling an organization is more complex than controlling a car.

    Basic Concepts

    • Control involves managing speed and direction.
    • Control devices need to be in place for the system to operate.
    • An inoperative device puts the system out of control.
    • Implementing plans appropriately ensures control within an organization.

    Elements of a Control System

    • Every control system needs a detector, assessor, effector, and a communication network.
    • A detector/sensor measures what's happening.
    • An assessor compares actual performance to standards.
    • An effector alters behavior if needed.
    • A communication network transmits information between these elements.

    Example: Driving a Car

    • Detectors/sensors include the eyes and speedometer.
    • The assessor (the brain) compares the speed to the desired speed.
    • The effector (the foot) adjusts the accelerator accordingly.
    • Communication network (nerves) transport information between the detectors, assessor and effector.

    Elements of the Control Process

    • The steps involve a detector, assessor, and effector.
    • The control device monitors what is happening.
    • The assessor compares the information with some standard.
    • The effector may need to alter behavior if deemed needed.

    Management

    • Organizations are groups of people working together to achieve common goals.
    • A major goal of business organizations is a satisfactory profit.

    Hierarchy of Managers

    • Organizations are led by a hierarchy of managers, with the CEO at the top.
    • The level of management in an organization depends on its size.
    • Other managers supervise their teams, and they, themselves, are supervised by others.

    Management Control Process

    • The CEO (or senior management team) defines the overall strategies for the organization's success.
    • Leaders of business units tailor strategies to their specific organization units.
    • The process ensures employees and teams implement the stated strategies.

    Contrast with Simpler Control Processes

    • Management control has the same elements as simpler systems (detector, assessor and effector).
    • In management control, detectors report throughout the organization, and an assessor compares to standards..
    • Employees and managers take corrective actions.
    • A communication system relays information.

    Differences (1)

    • In simpler systems, the standard is set, whereas in management control it results from conscious planning processes.
    • Actual performance is compared with plans.
    • Control requires planning, and planning and control are intertwined in management control.

    Differences (2)

    • Management control, unlike automatic systems, involves human beings and requires communication between managers.

    Differences (3)

    • Unlike car driving, management control requires coordination among multiple individuals.

    Differences (4)

    • Unlike a thermostat, a management control system is a "black box"
    • The manager's actions during a change in the system are not fully known/predictable.
    • What another manager will do in response to a manager's actions is complex/unpredictable.

    Differences (5)

    • Management control is usually self-control, using managerial judgement.

    Systems

    • A system has a prescribed, repetitive and coordinated method for accomplishing a specific goal/task

    Definition of Systems

    • Systems are characterized by a prescribed, usually repetitive, and coordinated series of steps to accomplish a desired goal/task.

    Management Actions

    • Many management actions are unsystematic, requiring judgment in deciding actions.
    • Effectiveness of actions is a function of skill in dealing with people.

    Boundaries of Management Control

    • Management control must be distinguished from strategy and task control, which have different time horizons and types of activities.
    • Strategy formulation looks at the long-term, while task control focuses on short-term activities.

    Management Control

    • Management control falls between strategy and task control activities.
    • It uses rough estimations of the future versus the precise data of tasks.

    Major Considerations in Management Control

    • Planning and control must be of equal importance.
    • The control process is more important in task control relative to strategy formulation.

    General Relationships Among Planning and Control

    • Strategy formulation results in goals, strategies, and policies.
    • Management control implements strategies.
    • Task control ensures efficient and effective performance of individual tasks.

    Management Control Activities

    • Planning, coordination of activities, informing, evaluating, and influencing behavior are part of the management control process.

    Management Control Activities (continued)

    • Management control does not require precise adherence to pre-planned budgets.
    • Plans often need to adapt to changes as they arise.
    • If a better approach arises, the control system should not impede its implementation.

    Goal Congruence

    • The goal is to influence personal actions of individuals to support organizational goals.
    • Goal congruence means personal and organizational goals are consistent.

    Tool for Implementing Strategy

    • Management control systems support strategy execution by aiding in achieving organizational objectives.
    • Implementing strategies can involve organization structures, human resources management and the overall culture of the organization.

    Framework for Strategy Implementation

    • Includes strategy, organization structure, culture, human resources management and management controls to achieve performance
    • They function together to aid in the implementation of strategy.

    Financial and Nonfinancial Emphasis

    • Management control systems use both financial and non-financial measures.
    • Financial measures include metrics like net income; non-financial measures include things like product quality and employee engagement.

    Aid in Developing New Strategies (Interactive Control)

    • Management control, especially in rapidly changing environments, can inform new strategies.
    • Interactive control uses current developments (both positive and negative) to formulate new strategic initiatives.

    Strategy Formulation

    • Strategy formulation is the process of determining organizational goals and the associated strategies for achieving these goals.
    • Goals exist until changed but changes to goals/strategies are infrequent.
    • Important goals for many companies include earnings, market share, and maximizing service for non-profits.

    Strategies

    • Strategies are a general direction of the organization, as determined by senior management
    • Strategic decisions are usually based on threats or opportunities for improvement.
    • A new CEO might adopt different strategies considering business situations and needs.

    Strategies (continued)

    • Strategic ideas may come from various sources across an organization.

    Strategy Formulation: Responsibilities

    • Responsibility for formulating strategy should not be held by a single individual or department.
    • The goal is to welcome ideas and give the necessary platform to share them.

    Distinctions Between Strategy Formulation and Management Control

    • Strategy formulation is unsystematic, while management control focuses on implementing the formulated strategies.

    Strategic Decisions

    • Strategic decisions are made in response to unexpected threats or opportunities in the business environment.
    • They are not made on a regular basis.

    Strategic Analysis

    • The analysis used for a firm's strategy varies based on the strategy itself.
    • Analysis usually involves estimates and judgments.

    Strategy vs. Management Control

    • Strategy analysis involves relatively few people, mostly senior management.
    • Management control processes need wider consultation from managers and their respective staffs.

    Task Control

    • Task control aims to ensure effective and efficient execution of tasks.
    • It's more transactional in nature (a focus on specifics).

    Task Control (continued)

    • Tasks may not always require the presence of human beings.
    • Tasks are often numerically controlled (machine tools), electronically controlled (computers), or automated.

    Task Control (continued)

    • Some task control tasks involve humans only when human intervention is less expensive or more efficient than automation

    Task Control (continued)

    • Many task control activities follow a scientific approach.
    • This means the optimal methods for these tasks are usually predictable.

    Task Control (continued)

    • Some task control activities involve calculating the optimal amount and timing of orders (e.g., economic order quantity).

    Task Control (continued)

    • Much of the information in an organization revolves around task control, including data relating to order quantities, manufacturing goods and the disbursement of cash.

    Task Control (continued)

    • Important organizational activities are associated with task control such as procurement, scheduling, order entry, logistics, quality control, and cash management.
    • All these activities are sometimes extremely complicated.

    Distinctions Between Task Control and Management Control

    • Task control often uses scientific principles.
    • Management control is not reducible to science; its focus is on the actions of managers.

    Distinctions Between Task Control and Management Control (Continued)

    • Management control focuses on organizational units (sections).
    • Task control focuses on specific tasks within the organization units.
    • Management control emphasizes the actions of the managers in a unit that decides what will be done within the constraints of strategy
    • Task control relates to specified tasks that require minimal judgement.

    Impact of the Internet on Management Control

    • The internet has increased the speed and efficiency of information processing.
    • The internet also enables easy access, multi-targeted communication, costless communication, and sharing of images.
    • This shift of power and control to the individual is significant in how businesses function.

    The Internet's Impact on Management Controls (continued)

    • The internet improves and facilitates coordination and control.

    The Internet's Impact on Management Controls (continued)

    • Management controls are impacted by information processing.
    • The improvement in information processing (faster and cheaper) doesn't replace the need for management.
    • Implementing strategies via management controls are still social and behavioral processes.

    Differences (Financial Control)

    • The standard in manufacturing systems is set, or given, ahead of time.
    • In management control, the standard is determined after careful discussion.

    Strategy Formulation

    • It is usually the process of determining an organization's goals and the associated strategies for achieving these goals.

    Strategy Formulation (continued)

    • Goals and strategies generally exist until they change, but changes to goals or strategies are rare.
    • Businesses often strive to earn profits and increase market share, but non-profit organizations aim to maximize services given available resources.

    Strategies

    • Strategies outline the direction senior management desires the organization to take.
    • They are often developed in response to perceived threats or opportunities.
    • New CEOs frequently introduce changes to an organization's strategy.

    Strategies (continued)

    • New strategies can arise from across an organization, not just the top management.

    Strategy Formulation Considerations

    • Full responsibility for strategy formulation cannot be assigned to an individual or office.
    • A way for new ideas to be presented and considered should exist.

    Distinctions Between Strategy Formulation and Management Control

    • Strategy formulation is an essentially unsystematic process.
    • Management control is a systematic process involved in implementing strategy decisions.
    • Strategic decisions occur at irregular intervals (to respond to emerging situations).

    Strategic Analysis (additional points)

    • The analysis of a proposed strategy will vary with the nature of the strategy.
    • A significant portion of the process involves judgments.

    Task Control (continued)

    • Task control usually features a high degree of predictability from its scientific and quantitative nature to a specified state, which is why it is mostly associated with manufacturing/production.

    Task Control (continued)

    • Task control often involves cost-efficient order management.

    Task Control (continued)

    • Many activities within organizations are considered part of task control activities, including procurement, scheduling, order entry, logistics, quality control, and cash management.

    Task Control (Continued)

    • In most circumstances, activities associated with task control are often complicated.

    Distinctions Between Task Control and Management Control

    • Task control systems are usually scientific, while management control systems are not.
    • Management control involves the actions of managers, which can not be captured by formal equations/models.

    Distinctions Between Task Control and Management Control Continued

    • Management control focuses on organizational units; task control focuses on specific tasks performed within units.

    Distinctions Between Task Control and Management Control Continued

    • Control in management is related to deciding on the organization’s activities and plans within the constraints of strategies.
    • Control in tasks pertains to the activities that are mostly technical/operational, and that require little judgment.

    Distinctions Between Task Control and Management Control Continued

    • Errors in task-based control systems are often made when management control principles are used in task control situations.
    • Management control implies communication between managers
    • In task control, human intervention might only be involved when it is more cost-effective.

    Distinctions Between Task Control and Management Control Continued (further points)

    • In management control, the focus is on organizational units, whereas in task control, the focus is on specific tasks within these units (e.g., running a manufacturing process or placing orders).
    • Management control is concerned with activities and activities of managers deciding what should be done within the general constraints of strategies.

    Distinctions Between Task Control and Management Control Continued (further points)

    • Task control may be concerned with specified tasks that require little management judgment.

    Distinctions Between Task Control and Management Control Continued

    • In management control, the focus is on organizational units (like departments within the organization); in task control, the focus is on specific tasks. (making 100 of X, for example).

    Distinctions Between Task Control and Management Control Continued

    • Management control deals with broad issues regarding activities, but task control addresses the more specific matters of activities within these units that are more directly associated with operational functions.

    Differences (Continued)

    • Serious errors can be made by applying task control to management control.
    • Management control usually involves more than one manager and staff; task control is often automated and/or involves only one or a non-manager.

    Differences (Final Points)

    • In management control, efforts focus on units within an organization
    • Task control emphasizes products and services.

    Cost and their Importance: Overview of Cost Categories for a Manufacturing Firm

    • All costs incurred by a firm must be accounted for in financial statements
    • Manufacturing costs (direct materials, direct labor and overhead)
    • Non-manufacturing costs (marketing/selling and administrative)

    Cost and their Importance: Direct Materials (DM)

    • Materials consumed in production.
    • Costs which are sufficiently high to justify tracing costs.

    Cost and their Importance: Direct Labor (DL)

    • Labor directly associated with producing products.
    • Includes labor costs for direct labor.

    Cost and their Importance: Idle Time

    • Idle time, time not used efficiently, is commonly not considered direct labor

    Cost and their Importance: Overtime Premium

    • Overtime premiums are not considered direct labor costs, but rather overhead costs.

    Cost and their Importance: Manufacturing Overhead

    • Manufacturing overhead represents various other manufacturing costs like indirect materials (glue, nails, cleaning supplies, etc.), indirect labor(Maintenance, etc), and other relevant manufacturing overhead.

    Cost and their Importance: Non-manufacturing costs

    • These consist of marketing/selling and administrative costs.
    • Marketing/Selling costs involve costs of customer support, shipping, sales commissions.
    • Administrative costs include CEO's salary, administrative costs for accounting offices, and depreciation on administrative buildings.
    • Administrative costs are distinct from other manufacturing costs, yet are vital for the continuation of the production process.

    Cost and their Importance: Exercise

    • Cost items are classified to their appropriate categories.
    • Direct materials, direct labor, indirect materials, indirect labor, overhead costs, Marketing or selling costs and administrative costs are classified to the appropriate category.
    • Classifying costs to the appropriate category is critical for financial analysis.

    Cost and their Importance: Product Cost

    • Product costs pertain to costs incurred in transforming inputs into outputs and are included in the measure of value of the finished products.
    • Costs relating to the finished products are recognized as expense when the product is sold.
    • Unsold goods are part of inventory.

    Cost and their Importance: Period Costs

    • Period costs are not part of the production process and are not included in the product's value.
    • Period costs are associated with products that are sold/completed during that production period.

    Product Cost vs. Period Cost

    • Product costs are included in the inventory amount on the balance sheet. Cost of Goods Sold are part of the product costs and are expensed on the income statement
    • Period costs are expensed on the income statement.

    Product costs vs period cost: which costs are included under each category.

    Quick Check: Which of the following costs would be considered a period cost?

    • In a manufacturing firm, manufacturing equipment depreciation is a product cost
    • Headquarters property taxes are a period cost.
    • Direct materials are a product cost.
    • Electrical costs of the factory are a product cost.
    • Sales commissions are a period cost.
    • Opportunity costs represent the revenue or profit forgone from choosing one action instead of another.
    • For instance, accepting a special order limits the firm's ability to fulfill other orders that require the use of the same resources.
    • Incremental costs are the additional costs incurred when choosing a particular course of action versus another.
    • Incremental costs can include opportunity costs.
    • The incremental benefits relate to added benefits when choosing one course of action over an alternative course of action.
    • Sunk Costs include costs that have already been incurred and are not affected by any action/decision.
    • Historical costs are irrelevant for future decisions.
    • Examples include depreciation on a building, the cost of acquiring assets that have been already used.

    Cost Flows in a Manufacturing Company

    • Input costs such as labor and capital equipment increase through manufacturing to become work-in-progress inventory.
    • When the product is completed, these costs are transferred to finished goods inventory.

    Cost Flows in a Manufacturing Company (continued): Inventories

    • The costs recorded relate to raw materials inventory, work-in-progress inventory and finished goods inventory.

    The Inventory Equation

    • Beginning inventory plus additions equals ending inventory plus items removed from inventory.

    Quick Check

    • If beginning inventory is $1,000, additions are $100 and sales $300, ending inventory will be $800.

    Quick Check

    • If beginning inventory is $32,000, purchase is $276,000 and ending inventory is $28,000, direct materials used would be $272,000.

    Quick Check

    • If beginning work-in-process is $125,000, cost added is $835,000, cost remaining at the end is $200,000, then the cost of goods manufactured will be $910,000.

    Variable and Fixed Costs

    • Variable costs change in total with activity level.
    • Fixed costs remain constant in total regardless of activity level (within a relevant range).

    Variable and Fixed Costs Per Unit

    • Variable costs per unit remain constant when activity levels change
    • Per unit fixed costs decline as activity levels increase.

    Relevant Range

    • The relevant range is the range of activity in which costs are variable or fixed.
    • A change in the activity level outside the relevant range might result in significant changes in the cost structure (variable and fixed costs).

    Total Costs

    • Total costs are calculated as a sum of fixed costs and variable costs.

    Chapter 3: Behavior in Organizations

    • Management control systems influence human behavior
    • Good management systems are goal-congruent; actions should align with personal and company goals.

    Goal Congruence

    • The central purpose of a management control system is to ensure goal congruence;
    • to strive for consistency between individual and company goals.

    Formal Control Process

    • Includes strategic planning, budgeting, performance center responsibility, and corrective action.

    Types of Organization: Functional Organization

    • This type of structure groups related functions together in separate departments
    • It is often used in manufacturing, sales, and other operational functions.
    • Advantages include reinforcing specialized skills, reducing duplication of resources, facilitating communication, within departments.
    • Disadvantages include a short-term focus on routine tasks, narrow business perspectives, and reduced cross-departmental communication.

    Types of Organization: Functional Organization - diagram

    • Diagram showing the structure of a functional organization, with a president at the top and functional managers within different departments (Finance, Marketing, Manufacturing, etc.)

    Types of Organization: Business Unit (SBU) Organization

    • In this organizational structure, an organization is divided into different SBU's
    • Each SBU has a manager who is responsible for their respective units.

    Types of Organization: Matrix Organization

    • Managers in the matrix organization have multiple reporting responsibilities,
    • Managers are often responsible for reporting to functional departments or groups.

    Functions of the Controller

    • The controller is responsible for designing and running the management control system.
    • Controllers play roles in preparing financial reports and statements for shareholders.
    • Also included are performance review and reporting of the various programs/segments, and coordination among the various departments/sections to prepare the annual budget.

    Functions of the Controller: (continued)

    • The controller is responsible for internal audit and accounting procedures and fraud prevention.
    • The controller is crucial in developing employees, providing training and education related to management and accounting (specifically controller functions).

    The functions of the Financial Controller

    • The financial controller is in charge of the company's finances for monitoring, control, and reviewing financial records.
    • This role is more operationally-focused where there is a larger group of individuals in the management chain.
    • The financial controller's functions depend on the size and structure of the company (subsidiary or larger group).

    Financial Controller of a Medium Sized Company/Subsidiary 1

    • The main function is to oversee the yearly accounting and fiscal operations of the company.
    • The controller ensures compliance to the internal, external regulations and reporting standards.

    Financial Controller of a Medium Sized Company/Subsidiary 2

    • The controller assists in optimizing information systems and oversight of financial resources/investments.
    • Reporting is important
    • Internal personnel training and development are also part of this responsibility.
    • The controller also interacts with the external auditors.

    Financial Controller in the Central Company 1

    • The controller's work is often less operational and becomes more focused on higher level concerns.
    • This role is more concerned with the direction of the overall organization (in a large company, not necessarily a small company).
    • Supervises preparation of the accounting statements of all business units

    Financial Controller in the Central Company 2

    • Oversees the reporting system, including cross-divisional projects.
    • Deals with broader financial objectives like budgets, investments, and overall business planning.

    Responsibility Centers (Revenue and Expense)

    • Responsibility centers are sections of an organization that are headed by a manager and responsible for their actions.
    • The hierarchy often consists of sections and units—sections and units may be seen as responsibility centers if they are headed by a reporting manager.

    Nature of Responsibility Centers

    • Company/organizational goals help decide upon the objectives of the responsibility centers.
    • The goal/objectives of responsibility centers should support the larger-scale organizational goals.

    Core operations of responsibility centers

    • Responsibility centers receive inputs such as materials, labor, or services.
    • They employ capital, equipment; and other resources and transform inputs into outputs (goods or services).
    • Staff units, like administration, human resources, etc, will generate services.

    Operation of responsibility centers

    • Outputs from one unit often become input for another unit.
    • Products from a responsibility center may be sold to other units within the company; or, to outside customers (in the marketplace).

    Relationship Between Inputs and Outputs

    • Inputs and outputs/products/services may not be directly related/dependent, as there are many other factors that affect both.

    Measuring Inputs and Outputs

    • Inputs and outputs can be measured quantitatively using physical measures.
    • The control process uses monetary terms, converting physical measurements into monetary information/data.

    Cost

    • Cost is a monetary value/measurement of resources used within a responsibility center.

    Efficiency and Effectiveness

    • Efficiency is the relationship between outputs and inputs (ratio of output per unit of input).
    • Effectiveness relates output to goals (how well the output fulfills the objectives).
    • Both are important factors for a responsibility center and thus an organization.

    Efficiency (Continued)

    • Efficiency is usually measured by comparing actual costs to expected costs in a certain standard.

    Efficiency vs. Effectiveness

    • Efficiency is measured by the relationship between output and input; effectiveness is measured by the relationship between output and objectives.
    • Non-financial considerations may influence the degree of effectiveness for some responsibility centers.

    Efficiency and Effectiveness (continued)

    • Efficiency and effectiveness are not mutually exclusive and desired outcomes for responsibility centers, thus an organization.

    The Role of Profit

    • A major goal for a profit-oriented organization is earning a satisfactory profit.
    • Profit represents a measure of effectiveness (difference between revenue and expenses).
    • Profit also measures efficiency (the relationship between input and output).

    Types of Responsibility Centers

    • The categorization of responsibility centers is determined by the nature of the inputs (in financial terms) and the outputs (in financial terms) that are used for control purposes.
    • They are: expense centers, revenue centers, profit centers and investment centers

    Types of Responsibility Centers (Expense Center)

    • Expense centers focus on measuring inputs (and costs expended on them).
    • Engineered expense centers have a clear relationship between inputs and outputs; discretionary expense centers do not have this clear association.

    Two Types of Cost: Engineered vs. Discretionary

    • Engineered costs relate to those for which the appropriate amount is predictable (with reasonable reliability).
    • Discretionary costs relate to costs for which there is no readily apparent, direct relationship to output- the appropriate amount must be judged by management/the managers.

    Engineered Expense Centers: Characteristics

    • Inputs can be measured in monetary terms
    • Outputs can be measured in physical terms
    • The optimum unit cost can be determined
    • Examples include costs in warehousing, distribution, trucking (manufacturing operations)

    Discretionary Expense Centers

    • Primarily concerned with administrative units/activities
    • Outputs are often intangible and not readily measurable with monetary terms
    • Examples include accounting, legal, PR (support-oriented activities in companies)
    • Discretionary costs include the decision-making processes of the managers who determine the amounts/levels of these costs
    • These activities generally have no clear relationship between inputs and outputs in financial terms

    Budget Preparation: General Considerations

    • Budget preparation often involves managers in the planning.
    • Discussing the various activities and efforts required should be a critical factor, as well the level/amount of effort appropriate for each.
    • Financial control in a discretionary expense center is exercised in the planning stage.

    Budget Preparation: Continuing Work

    • Consistent budgeting for yearly activities such as preparing financial reports or statements is an example of continuing work within some departments/responsibility centers

    Budget Preparation: Special Work

    • A type of job-based task
    • Example, developing and installing a profit-budgeting system within a division/department of a company

    Budget Preparation: Management by Objectives

    • Management by Objectives (MBO) is often used in preparing discretionary expense budgets.
    • This involves a formal process, in which budget holders agree to specific tasks and goals, with measurements to evaluate performance.

    Cost Variability

    • Costs in engineered expense centers are highly associated with short-term volume, whereas discretionary expense centers are less so.
    • Budgets for discretionary centers can often change in response to changed sales volumes.

    Cost Variability: Personnel Costs

    • Personnel and personnel-related costs are the largest expense items in many discretionary expense centers.
    • The annual budget for these costs can therefore remain at a constant percentage of budgeted sales volume.

    Type of Financial Control

    • Financial control in an engineered center has the goal of achieving cost competitiveness.
    • Costs are measured based on established standards/measures, comparing actual costs for these activities/operations and actions to established standards or benchmarks.
    • In discretionary centers, financial control means monitoring costs, and costs are addressed in advance/during the planning stage of the process.

    Measurement of Performance

    • The goal in discretionary expense centers is achieving the desired output.
    • Budget compliance is usually seen as satisfactory performance.
    • Spending more or less than the approved budget can raise cause for concern in an organization.

    Financial Performance Report

    • The financial performance report in discretionary centers is not directly used to measure/evaluate a manager's efficiency.

    Administrative and Support Centers

    • These centers encompass the managerial support units of an organization.
    • Examples include senior company management, business unit management, and managers of support functions (e.g., HR, IT, legal etc.).

    Control Problems: Administrative Expense

    • Controlling administrative expense is difficult due to challenges in measuring output, as outputs are usually not readily quantifiable in financial terms.
    • Often there is a lack of goal congruence between the goals of the staff members and the organization as a whole.

    Difficulty in Measuring Output

    • Some staff activities are rather routinized (like payroll accounting).
    • But those activities where advice and service are provided (e.j., legal, HR, or consultation) are virtually impossible to measure/evaluate quantitatively.
    • Thus, it becomes difficult to establish benchmarks/standards for evaluation.

    Lack of Goal Congruence

    • Administrative staff often seeks functional excellence, which is not always consistent with the company’s goals.
    • Seeking excellence can lead to increased costs for bureaucratic and support operations, which may not always be cost-effective or congruent with the overall needs of the company.

    Budget for Administrative/Support Centers

    • Usually consists of a list of expense items, compared with previous/current year's actual expenses.
    • Budgets for these activities often include a section addressing basic costs and discretionary activities, as well as explanations of increased expenses.

    Research and Development Centers

    • The control of R&D presents unique difficulties because of the difficulty in measuring results relative to inputs.

    Difficulty in Relating Results to Inputs

    • R&D outputs, like patents or new products/processes, may take years to produce/develop.
    • It's often difficult to directly link the results to the inputs and budget in terms of time/expenditure.
    • Research inputs and outputs are often not related/consistent.

    Lack of Goal Congruence (R&D)

    • Research managers may want to build elaborate and expensive research units to support their research goals, possibly in excess of resources available.
    • Research personnel may not possess sufficient knowledge of a product/service to be able to determine the ideal direction of the projects and/or work.

    Nature of R&D: The R&D Continuum

    • R&D activities often lie along a continuum (from basic/exploratory research to product testing/finalization).
    • Basic research is unplanned and takes much time (often over many years) before a product is commercialized/introduced into the marketplace.

    The R&D Continuum (continued)

    • A company may either include research and development expenses as a lump sum in the budget or explicitly allocate time for research projects for a certain period of time (e.g, one day per week or 15% of the time).

    Content of an R&D Program

    • R&D budget cannot be precisely defined, and many firms have merely used a percentage of average revenue as a base.
    • Historical data and competitor's spending is used to set benchmarks for the current year.

    Annual Budgets: R&D

    • With a system of projects and/or program approvals, creating/preparing annual R&D budgets may be fairly simple.
    • Budgets often involve evaluating the previous/current data or current knowledge to determine the best use of resources for the next year/fiscal period.

    Measurement of Performance: R&D Activities

    • Companies perform reporting of expenses, costs, and expenditures in a particular/specific type of intervals (e.g., monthly reporting), for all responsibility centers and projects running in a company's business.
    • These reports help track the progress of the R&D projects.

    Measurement of Performance: R&D Activities (continued)

    • The comparison of budgeted or predetermined expenses versus actual expenses in a certain period will help management predict and anticipate expenses.

    Marketing Costs

    • Marketing activities are categorized as order-filling/logistics and order-getting activities.
    • Order-filling/logistics activities pertain to fulfilling orders that have been already placed/requested.
    • Order-getting activities involve efforts to obtain new orders (e.g. marketing, training, sales, advertising)

    Logistics activities

    • These usually involve tasks like order entry, warehousing, picking, transportation, and accounts receivable related to customer orders.
    • They are often considered part of the marketing/sales activities in an organization

    Marketing Activities (summary)

    • Marketing costs can also be classified into three major categories, which can be used in an organization to analyze and evaluate these costs: order-filling/logistics, revenue generation and cost of obtaining orders/cost of new orders.

    Budgets: Nature (general)

    • Budgets are critical short-term planning and control tools
    • An operating budget (for a firm) covers a year and outlines the expected revenues and expenses over that time.

    Budget: Main Characteristics

    • Budget expressions should generally be in monetary terms, possibly based on other/non monetary terms like the number of products sold/produced in an organization
    • Cover the duration of a year or multiple periods, including different seasons.
    • Represents an organization-wide commitment by managers to achieve the budgeted objectives.
    • The review and approval of budgets usually come from higher-level management than the individuals or the staff who prepared them.
    • Changes to the budget are possible under certain conditions but usually require approvals from higher-level managers
    • Budgets and forecasts are often used together

    Relation to Strategic Planning

    • Strategical plans outline the nature and sizes of programs
    • Strategic planning, budget preparation both involve planning
    • Budget is a one-year snapshot of an organization's strategic plan.

    Contrast with Forecasting

    • Budgets are management plans, while forecasts are predictions.
    • Forecasts are only planning tools, but budgets are both planning and control tools.
    • All budgets need forecasting elements/components to be effective.

    Use of a Budget

    • Preparation of an operating budget helps fine-tune the strategic plan, coordinate activities in the organization, assign responsibility to managers, authorize and set limits for various amounts to spend, and evaluate manager's performance.

    Fine-tuning the Strategic Plan: Overview

    • The strategic plan is often prepared early in the year.
    • This helps estimate available resources needed for programs.
    • The budget is mainly based on the judgment/estimation of managers at all levels.

    Coordination: Budget

    • All managers/staff members within the organization should participate in budget preparation.
    • Inconsistencies are addressed when the planning/budget team assembles the details for an overall plan.
    • It's important to make sure the various departments/sections have aligned resources and activities
    • Budget preparation identifies and resolved any inconsistencies that may exist within an organization's plan

    Assigning Responsibility

    • The approved budget should clarify the responsibilities of each manager.
    • The budget is an essential tool for setting expenditure limits for specified purposes without further approval.

    Basis for Performance Evaluation

    • An organizational budget is often viewed as a commitment by a manager to his or her superiors.
    • The budget will be used as a benchmark for evaluating the actual performance of a particular person
    • The budget is subject to changes when initial assumptions/estimations are revised in the course of the fiscal year.

    Content of an Operating Budget

    • Exhibits are included to show the content of an operating budget, including strategic plans, capital plans, cash budgets, and budgeted balance sheets.

    Operating Budget Categories

    • In smaller organizations, the whole operating budget can often be placed in one page/document.
    • In larger organizations, a summary page is often included with individual unit plans, as well as R&D and administration activities.

    Revenue Budgets

    • A revenue budget usually takes into account projected sales volume multiplied by expectations for selling prices.
    • This is a crucial portion of the overall budget because of potential uncertainties in sales within and outside of the organization.

    Revenue Budgets (continued)

    • Revenue budgets anticipate economic conditions that the marketing managers may not control.
    • The marketing staff are responsible for generating anticipated sales and revenue numbers.
    • The sales targets, not the expense targets, are usually the main driver to consider in evaluating marketing costs

    Budgeted Production Cost and Cost of Sales

    • Production managers plan to obtain materials and labor.
    • This may include procurement budgets for long-lead items.
    • Production schedules may need to be created to use resources efficiently to fulfill the number of units anticipated to be sold.

    Marketing Expenses

    • Marketing costs often include expenses incurred to obtain sales, many of which are incurred well in advance/before the start of the budget period
    • This includes advertising, personnel and/or other employee-related costs.

    Logistics Expenses

    • These are often reported separately from other/main marketing expenses and include: order entry, warehousing, picking (and distribution), accounts receivable collections, and transportation to customers.

    General and Administrative (G&A) Expenses

    • These are discretionary expenses of staff units in or out of headquarters.
    • Usually includes bookkeeping costs and other, more general support/administrative costs
    • G&A budget preparation often includes much debate on the appropriate amounts to authorize for this category.

    Research and Development (R&D) Expenses

    • The R&D budget may use one of two main methods: either focus on a lump sum total for R&D, adjusted for inflation or, focusing/designating on a percentage of the organization's potential revenue (for R&D).

    Capital Budget

    • Identifies and shows the approved capital projects within a company.
    • This often includes small capital projects that do not require high-level approval.
    • Capital budgets are usually prepared separately than operating budgets and are handled by different teams

    Budgeted Balance Sheet

    • This includes the balance sheet implications of the decisions in the operating budget/capital budget.
    • It shows the balances of different amounts/items like inventory, marketable securities, accounts receivable and accounts payable.
    • Managers who oversee these components are often responsible for the levels of these items (e.g., inventory and accounts receivable).

    Budgeted Cash Flow Statement

    • The cash flow statement shows

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Related Documents

    Accounting Management Control Systems PDF

    Description

    This quiz delves into key concepts related to cost accounting in manufacturing, focusing on fringe benefits, overtime classifications, and the components of manufacturing overhead. Test your knowledge on logistics, marketing activities, and the evaluation of revenue-generating processes in a manufacturing context.

    More Like This

    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser