Introduction

This assignment I will discuss and give some of basic questions and answers about
our final managerial accounting syllabus I will try to answer most of theoretical
questions about the three main chapters which we took the first chapter is profit
planning, the second one Segment reporting, Decentralization and balanced
scorecard and third one is Relevant cost for decision making.

Chapter 9 Profit Planning

In this chapter,focus on the steps taken by businesses to achieve their
planned levels of profits—a process called profit planning. We shall see that
profit planning is accomplished through the preparation of a number of
budgets, which, when brought together, form an integrated business plan
known as the master budget. The master budget is an essential
management tool that communicates management’s plans throughout the
organization, allocates resources, and coordinates activities

What is budget, and budgetary control?

A budget is a detailed quantitative plan for the acquisition and use of financial and
other resources over a given time period. Budgetary control involves the use of
budgets to control the actual activities of a firm.
Discuss some of the major benefits to be gain from budgeting control?

1. Budgets communicate management’s plans throughout the organization.

2. Budgets force managers to think about and plan for the future.
3. The budgeting process provides a means of allocating resources to those parts
of the organization where they can be used most effectively.
4. The budgeting process can uncover potential bottlenecks before they occur.
5. Budgets coordinate the activities of the entire organization by integrating the
plans of its various parts. Budgeting helps to ensure that everyone in the
organization is pulling in the same direction.
6. Budgets define goals and objectives that can serve as benchmarks for
evaluating subsequent performance.

What is meant by major by the term by responsibility?

Responsibility accounting is a system in which a manager is held responsible for

those items of revenues and costs—and only those items—that the manager can
control to a significant extent. Each line item in the budget is made the
responsibility of a manager who is then held responsible for differences between
budgeted and actual results.

What is master budget? And briefly discuss its contents?

A master budget represents a summary of all of management’s plans and goals for
the future, and outlines the way in which these plans are to be accomplished. The
master budget is composed of a number of smaller, specific budgets encompassing
sales, production, raw materials, direct labor, manufacturing overhead, selling and
administrative expenses, and inventories. The master budget generally also
contains a budgeted income statement, budgeted balance sheet, and cash budget.

What is sales forecasting the starting point of forecasting?

. The level of sales impacts virtually every other aspect of the firm’s activities. It
determines the production budget, cash collections, cash disbursements, and selling
and administrative budget that in turn determine the cash budget and budgeted
income statement and balance sheet.

As a practical matter, planning and control mean exactly the same did you
agree?

No. Planning and control are different, although related, concepts. Planning
involves developing goals and developing budgets to achieve those goals. Control,
by contrast, involves the means by which management attempts to ensure that the
goals set down at the planning stage are attained.
 Chapter12 Segment reporting, Decentralization and balanced scorecard.

12–1 What is meant by the term decentralization?

In a decentralized organization, decision-making authority isn’t confined to a few

top executives, but rather is spread throughout the organization with lower-level
managers and other employees empowered to make decisions.

12–2 What benefits result from decentralization?

The benefits of decentralization include:

(1) by delegating day-to-day problem solving to lower-level managers, top

management can concentrate on bigger issues such as overall strategy;

(2) Empowering lower-level managers to make decisions puts decision-making

authority in the hands of those who tend to have the most detailed and up-to-date
information about day-to-day operations;
(3) by eliminating layers of decision-making and approvals, organizations can
respond more quickly to customers and to changes in the operating environment;

(4) granting decision-making authority helps train lower-level managers for

higher-level positions; and

(5) empowering lower-level managers to make decisions can increase their

motivation and job satisfaction.

12–3 Distinguish between a cost center, a profit center, and an investment

center.

The manager of a cost center has control over cost, but not revenue or the use of
investment funds. A profit center manager has control over both cost and revenue.
An investment center manager has control over cost and revenue and the use of
investment

12–4 Define a segment of an organization. Give several examples of segments.

A segment is any part or activity of an organization about which a manager seeks

cost, revenue, or profit data. Examples of segments include departments,
operations, sales territories, divisions, and product lines.

12–5 How does the contribution approach assign costs to segments of an

organization?

Under the contribution approach, costs are assigned to a segment if and only if the
costs are traceable to the segment (i.e., could be avoided if the segment were
eliminated). Common costs are not allocated to segments under the contribution
approach.

12–6 Distinguish between a traceable cost and a common cost. Give several
examples of each.

A traceable cost of a segment is a cost that arises specifically because of the

existence of that segment. If the segment were eliminated, the cost would
disappear. A common cost, by contrast, is a cost that supports more than one
segment, but is not traceable in whole or in part to any one of the segments. If the
departments of a company are treated as segments, then examples of the traceable
costs of a department would include the salary of the department’s supervisor,
depreciation of machines used exclusively by the department, and the costs of
supplies used by the department. Examples of common costs would include the
salary of the general counsel of the entire company, the lease cost of the
headquarters building, corporate image advertising, and periodic depreciation of
machines shared by several departments.

12–7 Explain how the segment margin differs from the contribution margin.

The contribution margin is the difference between sales revenue and variable
expenses. The segment margin is the amount remaining after deducting traceable
fixed expenses from the contribution margin. The contribution margin is useful as a
planning tool for many decisions, particularly those in which fixed costs don’t
change. The segment margin is useful in assessing the overall profitability of a
segment.
12–8 Why aren’t common costs allocated to segments under the contribution
approach?

If common costs were allocated to segments, then the costs of segments would be
overstated and their margins would be understated. As a consequence, some
segments may appear to be unprofitable and managers may be tempted to eliminate
them. If a segment were eliminated because of the existence of arbitrarily allocated
common costs, the overall profit of the company would decline and the common
cost that had been allocated to the segment would be reallocated to the remaining
segments—making them appear less profitable.
 Chapter 13 Relevant cost for decision making

Making decisions is one of the basic functions of a manager. Managers are

constantly faced with problems of deciding what products to sell, whether to make
or buy component parts, what prices to charge, what channels of distribution to
use, whether to accept special orders at special prices, and so forth. Decision
making is often a difficult task that is complicated by numerous alternatives and
massive amounts of data, only some of which may be relevant. Every decision
involves choosing from among at least two alternatives. In making a decision, the
costs and benefits of one alternative must be compared to the costs and benefits of
other alternatives. Costs that differ between alternatives are called relevant costs.
Distinguishing between relevant and irrelevant costs and benefits is critical for two
reasons. First, irrelevant data can be ignored—saving decision makers tremendous
amounts of time and effort. Second, bad decisions can easily result from
erroneously including irrelevant costs and benefits when analyzing alternatives.

13–1 What is a relevant cost?

A relevant cost is a cost that differs in total between the alternatives in a decision.

13–2 Define the following terms: incremental cost, opportunity cost, and sunk
cost.

An incremental cost (or benefit) is the change in cost (or benefit) that will result
from some proposed action.
An opportunity cost is the benefit that is lost or sacrificed when rejecting some
course of action.

A sunk cost is a cost that has already been incurred and that cannot be changed by
any future decision.

13–3 Are variable costs always relevant costs? Explain.

No. Variable costs are relevant costs only if they differ in total between the
alternatives under consideration

13–4 “Sunk costs are easy to spot—they’re simply the fixed costs associated
with a decision.” Do you agree? Explain.

No. Not all fixed costs are sunk—only those for which the cost has already been
irrevocably incurred. A variable cost can be a sunk cost, if it has already been
incurred.

13–5 “Variable costs and differential costs mean the same thing.” Do you
agree? Explain.

No. A variable cost is a cost that varies in total amount in direct proportion to
changes in the level of activity. A differential cost is the difference in cost between
two alternatives. If the level of activity is the same for the two alternatives, a
variable cost will not be affected and it will be irrelevant.

13–6 “All future costs are relevant in decision making.” Do you agree? Why?

No. Only those future costs that differ between the alternatives under consideration
are relevant.
 13–7 Prentice Company is considering dropping one of its product lines.
What costs of the product line would be relevant to this decision? Irrelevant?

Only those costs that would be avoided as a result of dropping the product line are
relevant in the decision. Costs that will not differ regardless of whether the product
line is retained or discontinued are irrelevant.

13–8 “If a product line is generating a loss, then it should be discontinued.”

Do you agree? Explain.

Not necessarily. An apparent loss may be the result of allocated common costs or
of sunk costs that cannot be avoided if the product line is dropped. A product line
should be discontinued only if the contribution margin that will be lost as a result
of dropping the line is less than the fixed costs that would be avoided. Even in that
situation the product line may be retained if it promotes the sale of other products.

13–9 What is the danger in allocating common fixed costs among product
lines or other segments of an organization?

Allocations of common fixed costs can make a product line (or other segment)
appear to be unprofitable, whereas in fact it may be profitable.

13–10 How does opportunity cost enter into the make or buy decision?

If a company decides to make a part internally rather than to buy it from an outside
supplier, then a portion of the company’s facilities have to be used to make the
part. The company’s opportunity cost is measured by the benefits that could be
derived from the best alternative use of the facilities.

13-10 What is Market price, Negotiated transfer price, Range of acceptable

transfer prices, Suboptimization and Transfer price ?

Market price The price being charged for an item on the open market.

Negotiated transfer price A transfer price agreed on between buying and selling
divisions.

Range of acceptable transfer prices The range of transfer prices within which
the profits of both the selling division and the buying division would increase as a
result of a transfer.

Suboptimization An overall level of profits that is less than a segment or a

company is capable of earning.

Transfer price The price charged when one division or segment provides goods
or services to another division or segment of an organization.

THE END.