Final Exam Review

1. Identify managers three primary responsibilities.

a. Planning
b. Directing
c. Controlling

2. The three most common types of companies and their inventories

a. Service
i. No inventory
b. Merchandising
i. Retailers
ii. Wholesalers
iii. Merchandising inventory
c. Manufacturing
i. Raw materials
ii. Work in process
iii. Finished goods
3. Cost Objects
a. Direct Costs
b. Indirect Costs
4. Costs for internal decision making and external reporting
a. Total costs for internal decision making
b. Inventoriable product costs for external reporting
i. GAAP- specified inventoriable costs
ii. Period costs (operating expenses) other costs in the value chain
5. Inventoriable Product Costs for Manufacturing Companies
a. Direct Materials (including freight in)
b. Direct Labor
c. Manufacturing Overhead
i. Indirect materials
ii. Indirect labor
iii. Other indirect manufacturing costs
d. Prime and Conversion costs
6. Other Cost Terms
a.
b.
c.
d.

Controllable versus uncontrollable costs

Relevant and irrelevant costs
Fixed and variable costs
Calculating total and average costs

7. Calculating pre-determined overhead rate (POHR) and allocating overhead costs

8. Steps used in ABC costing system
9. Traced costs and Allocated costs

10. Process costing and job costing

11. Behavior of variable and fixed cost (per unit and in total)
12. Contribution Margin and Contribution Margin Income Statement.
13. Calculate Breakeven Point and Target Operating Income
14. Indicators of risk
a. Margin of safety = excess of actual or expected sales over breakeven sales
i. In units
ii. In sales dollars
iii. In percentage
b. Operating leverage = the relative amount of fixed and variable costs that make up total
costs
c. How operating leverage affects operating income.

15. Prices setters, price takers, target costing, cost plus pricing
16. Master Budget Operational Budgets (Cost of goods budget will not be tested)
From point 18 onwards the testing will be more in depth. From points 1 -18 only high level
concepts will be tested.
17. Explain decentralized operations
a. Advantages of decentralization
i. Frees top managements time
ii. Encourages use of expert knowledge
iii. Improves customer relations
iv. Provides training
v. Improves motivation and retention
b. Disadvantages of decentralization
i. Potential duplication of costs
ii. Potential problems achieving goal congruence
c. Performance evaluation systems
i. Clearly communicate expectations
ii. Providing benchmarks
iii. Motivate segment managers
18. Discuss responsibility accounting
d. Four Types of Responsibility Centers (Exhibit 10-1)
i. Cost
ii. Revenue
iii. Profit
iv. Investment
e. Responsibility center performance reports
i. Favorable variance
ii. Unfavorable variance
iii. Management by exception
19. Evaluation of investment centers
a. Return on Investment (ROI)
i.
Sales margin
ii.
Capital turnover
b. Residual Income (RI)
c. Goal congruence
iv. Comparing ROI and RI

20. Flexible budget performance reports

a. Flexible budget versus master budget
b. Master budget variance
i. Volume variance
ii. Flexible budget variance
iii. Underlying causes of the variances
21. Define and explain standard costs
a. Benchmark
b. Types of standards
c. Developing and updating standards
i. Ideal (or perfection) standards
ii. Practical (or attainable) standards
d. Computing standard costs
i. Standard cost of direct materials (DM)
ii. Standard cost of direct labor (DL)
iii. Standard cost of manufacturing overhead (MOH)
iv. Standard cost of one unit
22. Discuss how managers use standard costs to compute DM and DL variances
a. Using standard costs to develop the flexible budget
b. Direct material variances
i.
Price variance
ii.
Quantity variance
iii.
Exhibit 11-4 DM Variances if DM Purchased Equals DM Used
iv.
Evaluating DM Variances
v.
DM variances when quantity of DM purchased differs from quantity of
DM used
c. Direct labor variances
i.
DL rate variance
ii.
DL efficiency variance
d. Advantages of using standard costs and variances
i.
Cost benchmarks
ii.
Usefulness in budgeting
iii.
Motivation
e. Disadvantages of using standard costs and variances
i.
Outdated or inaccurate standards
ii.
Lack of timeliness
iii.
Focus on operational performance measures and visual management
iv.
Lean thinking
v.
Increase in automation and decrease in DL
vi.
Unintended behavioral consequences
23. Discuss how managers use standard costs to compute MOH variances
a. Variable MOH variances
i.
Variable overhead rate (or spending) variance
ii.
Variable overhead efficiency variance
iii.
Exhibit 11-10 Calculation of Variable Overhead Variances
b. Fixed MOH variances
i.
Fixed overhead budget (or spending) variance
ii.
Fixed overhead volume variance
iii.
Exhibit 11-11 Calculation of Fixed Overhead Variances

iv.
v.

Exhibit 11-12 Favorable Fixed Overhead Volume Variance

Exhibit 11-13 Unfavorable Fixed Overhead Volume Variance

24. Define capital budgeting

a. Four methods of capital budgeting analysis
i. Payback period
ii. Accounting rate of return (ARR)
iii. Net present value (NPV)
iv. Internal rate of return (IRR)
b. Focus on cash flows
c. Exhibit 12-1 Capital Budgeting Process
25. Payback period
d. Payback with equal annual net cash inflows
e. Payback with unequal net cash inflows
f. Criticism of payback period method
26. Accounting rate of return (ARR)
g. Investments with equal annual net cash inflows
h. Investments with unequal net cash inflows
27. Discuss the time value of money
i. Factors
i. Principal amount
1. Single lump sum
2. Annuity
ii. Number of periods
iii. Interest rate
j. Future values and present values
i. Factors
ii. Calculating future values of single sums and annuities
iii. Calculating present values of single sums and annuities
28. Net present value (NPV)
k. NPV with equal annual net cash inflows (annuity)
l. NPV with unequal annual net cash inflows
29. Internal rate of return (IRR) just definition
30. Compare and contrast the four capital budgeting methods
m. Exhibit 12-16 Capital Budgeting Methods That Ignore the Time Value of Money
n. Exhibit 12-17 Capital Budgeting Methods That Incorporate the Time Value of Money