1. ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 16 Professor Jeff Yu

2. Review: ROI and Residual Income Margin Turnover ROI = NOI ÷ AOA RI = NOI - Required rate of return × AOA

3. Review: Residual Income VS. ROI Under ROI, the basic message is: Maximize rate of return, a percentage. Under the residual income approach, the basic message is: Maximize residual income, an absolute amount. Residual income may encourage managers to make profitable investments that would be rejected by managers using ROI to evaluate that same investment. However, residual income cannot be used to compare the performance of divisions with different sizes (i.e. different AOA).

4. Review: The Balanced Scorecard Management translates its strategy into performance measures (both financial and non-financial) that employees understand. Performance measures Customers Learning and growth Internal business processes Financial

5.  Wednesday, March 30: class time & in the classroom.  The exam will cover lectures 9 through 16 and chapters 8 through 12.  Please plan to arrive 10 minutes earlier. The exam will start when everyone in the room has an exam packet and will stop promptly after 100 minutes or the end of the class, whichever comes earlier.  Please spread out as much as possible when you get seated. I may ask you to change seats if I determine that you sit too close to the other student. Your cooperation will expedite the exam handout process so that all students will have more time to work on the exam.  This is a closed-book exam. But you may bring a one-page (single sided) cheat sheet. I may choose not to answer your question during the exam, to be fair.  You will need a non-programmable calculator. Please bring one! Midterm Exam II Information

6. Type of questions  Multiple Choice Questions (6%) No partial credit  Problems (94%) Show your work with legible and carefully labeled computations so that I can assign partial credit. If I cannot understand your computations, I will not assign partial credit. Similar to practice problems in the lecture notes and HW problems.

7. Carefully study lecture notes Re-work problems in the lecture notes Re-work HW and quiz problems If you need more practice, use the review problem at the end of each chapter in the textbook. Don’t look at the solutions before you have made at least one serious attempt to solve each problem. Come to my additional office hours to clarify difficult materials.  Additional office hours?  There will be no office hour on Wednesday, March 30 (to be fair with section 1 students)  There will be no TA office hours this Thursday Studying for the exam

8. I will post the exam solutions on the class website I will try my best to post your exam grades on Blackboard ASAP. Please understand that it takes a lot of time to assign partial credits and I will be working extremely hard to ensure that I grade your exam consistently and fairly. I will return the graded test to you ASAP. Grade disputes procedure is written in detail on the syllabus. After the exam

9. Review: Activity–Based Costing Purposes: ABC is for internal decision making ( e.g. drop or retain a segment ), while absorption costing is for external reporting ( e.g. value inventory, CGS ). Product Cost: ABC assigns some manufacturing (excluding e.g. factory manager’s office supplies) & some nonmanufacturing costs (e.g. shipping costs, sales commissions) to products on a cause-and-effect basis, while absorption costing assigns all manufacturing costs and none of the nonmanufacturing costs to products. Overhead cost pool : ABC uses many overhead cost pools, each with unique cost driver, while absorption costing typically has only one plant- wide cost pool and uses either DLH or MH as the single cost driver. Activity-based Costing (ABC) vs. Traditional Absorption Costing

10. Review: Steps for Implementing ABC 1.Define activity cost pools & activity measures. 2.Assign overhead costs to activity cost pools: first-stage allocation. 3.Calculate activity rates: for each activity cost pool, divide total assigned OH costs by estimated total activity levels. 4.Assign OH costs to the specific product or customer using the activity rates : second-stage allocation Assigned OH = Activity Rate * Actual activity level 5. Prepare management reports : calculate product margin and customer margin.

11. Budgeted Sales $ = budgeted sales in Units * unit price Expected cash collections (inflow) Budgeted Account Receivable Balance Budgeted Production units = budgeted Sales in Units + desired ending F.G. Inventory – beginning F.G. Inventory Review: Profit Planning

12. Budgeted R.M. Purchase in units = budgeted Production in Units * R.M. needed for each unit + desired ending R.M. inventory – beginning R.M. Inventory Expected cash disbursements for R.M. (or Accounts Payable) Budgeted DL cost = budgeted DL hours * hourly rate (Adjust for “guaranteed hours” & higher hourly rate for overtime) Budgeted MOH cost (Important: calculation of POHR) Budgeted S&A expense Budgeted ending F.G. Inventory Review: Profit Planning

13. From Production Budget POHR from MOH budget Review: Ending F.G. Inventory Budget From DM & DL budget

14. Cash Budget: (1) determine the amount of cash excess or deficiency; (2) determine required borrowing if cash deficiency; (3) calculate interest expense. Budgeted Balance Sheet Budgeted Income Statement Review: Profit Planning

15. Review: Performance Evaluation Cost Center ( controls costs only ) Spending Variance; Standard Cost Variances Profit Center (controls costs & revenues) Segmented Income Statement (Segment Margin) Investment Center (controls costs & revenues & Investments) Return on Investment (ROI); Residual Income Evaluation Tool

16. Review: Flexible Budget Flexible budget is prepared based on the actual activity level and is used for performance evaluation (control) purpose. Activity Variance = Flexible budget amount – planning (static) budget amount Spending Variance = Actual cost – flexible budget cost Spending variance is unfavorable if positive, favorable if negative; Spending variance captures the efficiency of cost control. Revenue Variance = Actual revenue – flexible budget revenue Revenue variance is favorable if positive, unfavorable if negative;

17. Review: Standard Cost  Standard vs. Budget: A budget is set for total costs; A standard is set for per unit cost;  Quantity standards are set for each unit of production (How much units of input are needed for each unit of output?) SQ = standard quantity of materials allowed for the actual output SH = standard hours allowed for the actual output Price standards are set for each unit of input (How much should be paid for each unit of input?) Standard Price (SP) for materials Standard Rate (SR) for labor and overhead

18. Review: Standard Cost Variances Materials Price Variance AQ(AP - SP) Labor/VOH Rate Variance AH(AR – SR) Materials Quantity Variance SP(AQ - SQ) Labor/VOH Efficiency Variance SR(AH – SH) AP (AR)= Actual Price (Actual Rate): the amount actually paid for each unit of the materials (labor or VOH). SP (SR)= Standard Price (Standard Rate): the amount that should Have been paid for each unit of the materials (labor or VOH). AQ (AH)= Actual Quantity (Actual Hour): the amount of materials (labor or VOH activity) actually used in the production. SQ (SH)= Standard Quantity (Stan. Hour) allowed for the actual output = actual production in units * standard quantity (hours) per unit

19. When material purchased ≠ material used To compute the PRICE variance, use the total quantity of raw materials PURCHASED. To compute the QUANTITY Variance, use only the quantity of raw materials USED. Review: Materials Variances

20. Sales - Variable Expenses Contribution Margin - Traceable Fixed costs Segment Margin  NOI for the company = the sum of segment margins minus Common fixed costs.  Important: CVP analyses using the segmented income statement! Review: Segmented Income Statement