Managerial Accounting: Controllable Costs

Podcast Beta

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the primary focus of a performance report in a profit entity?

Optimize budget goals

Evaluate management by exception

Minimize cost of providing services

Maximize net income (correct)

What is a controllable cost?

A cost that can be controlled by top management

A cost that is allocated to a responsibility level

A cost that can be controlled by any manager

A cost over which a manager has control (correct)

Why are exception guidelines more restrictive for controllable items?

Because they are directly related to budget goals

Because top management focuses on them

Because they are directly controllable by the manager (correct)

Because they are more material

What is the primary purpose of management by exception?

To focus on differences between actual results and planned objectives Signup and view all the answers

What is the principle of performance evaluation that states that managers should have direct input into establishing budget goals?

Behavioral principle Signup and view all the answers

What type of costs are incurred indirectly and allocated to a responsibility level?

Noncontrollable costs Signup and view all the answers

What is the primary purpose of a performance report in a not-for-profit entity?

Minimize cost of providing services Signup and view all the answers

Why is it important to establish a materiality threshold in management by exception?

To avoid investigating every budget difference Signup and view all the answers

Under responsibility accounting, what is the basis for evaluating a manager's performance?

Ability to control matters that the manager directly controls Signup and view all the answers

What type of costs are typically included in responsibility reports for cost centers?

Controllable costs Signup and view all the answers

What type of costs are considered traceable costs?

Direct fixed costs Signup and view all the answers

Which type of responsibility center is evaluated based on controllable revenues and controllable costs?

Profit center Signup and view all the answers

What is the focus of responsibility accounting for cost centers?

Meeting budgeted goals for controllable costs Signup and view all the answers

Which of the following is a characteristic of direct fixed costs?

They are incurred for the sole benefit of the center Signup and view all the answers

What type of costs are most likely to be controllable by a profit center manager?

Direct fixed costs Signup and view all the answers

Under responsibility accounting, what is the primary focus of evaluating a manager's performance?

Ability to control matters that the manager directly controls Signup and view all the answers

What is a key principle of evaluation in a responsibility reporting system?

To identify both good and poor performance Signup and view all the answers

What type of data should be included in a report according to the reporting principles?

Only controllable data by the manager of the responsibility center Signup and view all the answers

What is the purpose of highlighting significant differences between actual results and budget goals?

To identify areas for improvement Signup and view all the answers

How often should reports be prepared according to the reporting principles?

At reasonable time intervals Signup and view all the answers

What is the purpose of a responsibility reporting system?

To prepare reports for each level of responsibility in the organization's chart Signup and view all the answers

How does a responsibility reporting system permit management by exception?

By permitting each higher level to obtain detailed reports for each lower level Signup and view all the answers

What is the flow of reporting in a responsibility reporting system?

From lower-level management to top-level management Signup and view all the answers

What is the purpose of Report A in the partial organization chart?

To show summary data of vice presidents for the president Signup and view all the answers

What is the formula for Return on Investment (ROI)?

Controllable Margin / Average Operating Assets Signup and view all the answers

What is included in operating assets?

Current assets and plant assets used in operations Signup and view all the answers

How are average operating assets calculated?

Based on beginning and ending cost or book values of assets Signup and view all the answers

What is the ROI of the investment if controllable margin is $1,000,000 and average operating assets are $5,000,000?

20% Signup and view all the answers

What is the purpose of the Balanced Scorecard?

To evaluate the performance of a business from four perspectives Signup and view all the answers

What is the factor that represents the profitability of an investment in the ROI formula?

Controllable Margin Dollars Signup and view all the answers

What is the term for the assets used in operations and controlled by a manager?

Operating Assets Signup and view all the answers

What is the learning objective that discusses the Balanced Scorecard?

LO 4 Signup and view all the answers

Which perspective of the Balanced Scorecard focuses on measures such as return on assets and net income?

Financial Signup and view all the answers

What is the objective 'Percentage of customers who would recommend product' a measure of in the Balanced Scorecard?

Customer satisfaction Signup and view all the answers

Which of the following is an objective used in the Internal Process perspective of the Balanced Scorecard?

Percentage of defect-free products Signup and view all the answers

What is the objective 'Training hours' a measure of in the Balanced Scorecard?

Employee development Signup and view all the answers

Which of the following is NOT an objective used in the Learning and Growth perspective of the Balanced Scorecard?

Customer retention Signup and view all the answers

What is the objective 'Stockouts' a measure of in the Balanced Scorecard?

Internal process efficiency Signup and view all the answers

Which perspective of the Balanced Scorecard focuses on measures such as customer retention and brand recognition?

Customer Signup and view all the answers

What is the objective 'Profit per employee' a measure of in the Balanced Scorecard?

Financial performance Signup and view all the answers

Study Notes

Performance Evaluation

Emphasizes controllable costs and relevant data for performance reports
Applies to both profit and not-for-profit entities
- Profit entities: maximize net income
- Not-for-profit: minimize cost of providing services

Controllable versus Noncontrollable Costs

Controllable costs: costs over which a manager has control
Top management controls all costs, but fewer costs are controllable as one moves down to each lower level of managerial responsibility
Noncontrollable costs: costs incurred indirectly and allocated to a responsibility level

Principles of Performance Evaluation

Management function that compares actual results with budget goals
Includes both behavioral and reporting principles
Behavioral principles:
- Managers should have direct input into establishing budget goals
- Performance evaluation should be based entirely on controllable matters
- Top management should support the evaluation process
- The evaluation process must allow managers to respond to their evaluations
- Evaluations should identify both good and poor performance
Reporting principles:
- Contain only data controllable by the manager of the responsibility center
- Provide accurate and reliable budget data to measure performance
- Highlight significant differences between actual results and budget goals
- Be tailor-made for intended evaluation by ensuring only controllable costs are included
- Be prepared at reasonable time intervals

Responsibility Reporting System

Preparation of a report for each level of responsibility in the company's organization chart
Begins with the lowest level of responsibility and moves upward to higher levels
Permits management by exception at each level of responsibility
Each higher level can obtain detailed reports for each lower level

Types of Responsibility Centers

Cost Centers: based on manager's ability to meet budgeted goals for controllable costs
Profit Centers: based on detailed information about both controllable revenues and controllable costs
Direct fixed costs: relate specifically to one responsibility center, incurred for the sole benefit of the center, and are usually controllable by the profit center manager

Return on Investment (ROI)

ROI formula: controllable margin ÷ average operating assets
Controllable margin: revenue minus controllable costs
Average operating assets: average of beginning and ending balances of operating assets

Balanced Scorecard

A framework for performance evaluation that includes four perspectives:
- Financial
- Customer
- Internal Process
- Learning and Growth
Examples of objectives within each perspective:
- Financial: return on assets, net income, credit rating
- Customer: customer retention, response time per customer request, brand recognition
- Internal Process: percentage of defect-free products, stockouts, labor utilization rates
- Learning and Growth: percentage of employees leaving in less than one year, number of cross-trained employees

Studying That Suits You

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

Description

This quiz focuses on controllable costs in managerial accounting, including the role of managers in controlling costs and making decisions in profit and non-profit organizations.