Accounting for decision making and control

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Accounting for decision making and control af Mind Map: Accounting for  decision making and control

1. Absorption costing (kap 9, 10 og 11)

1.1. Absorption Cost Systems (Kap 9)

1.1.1. Allocating Overhead to Jobs Overhead rates Over and underabsorption Flexible budgets to estimate overhead Expected vs normal volume

1.1.2. Permanent vs temporary volumen changes

1.1.3. Plantwide versus multiple overhead rates

1.1.4. Process costing: the extent of averaging

1.1.5. manufacturing process (392) Job shops (job ordering costing) batch manufacturing (job ordering costing) assembly processes (job ordering costing or process costing ) Continoous flow processing lines (process costing )

1.1.6. 2 types of absorption costing systems (392) job ordering costing (393) Job sheet job number 5167 process costing

1.2. Criticism of absorption costing

1.2.1. Incentives to over produces (Kap 10) Incentives to overproduce Variable (direct) costing Problms with variable costing Beware of unit cost

1.2.2. Inaccurate product costs (kap 11) ABC

2. Cost

2.1. Opportunity costs (23)

2.1.1. definition: "the benefit forgone as a result of choosing one course of action rather than another"

2.1.2. Forward looking

2.1.3. differs from accounting expenses (backward looking)

2.2. sunk costs

2.3. Period vs. product costs

2.3.1. Period cost that are expensed in ythe period in which they are incurred. They oncl all nonmanufactiring accounting costsed incurred to sell yhe product (45)

2.3.2. Product incl all accounting costs incurred to manufature a product (45)

2.4. Cost estimation (48)

2.4.1. Account classification Simple Common and normal to use Not very presice

2.4.2. Motion and time studies estimations

3. Internal accounting system

3.1. Motivate / monitor

3.2. Provide knowledge

3.3. (det kan ikke begge dele...)

3.4. Characteristics

3.4.1. provide information to assess profitability of products to optimally price and market the products

3.4.2. Provide information to detect production ineffeciencies to ensure that rge proposed products and volumes are produced at minimum cost

3.4.3. When combined with performance evaluation and reward systems creates incentives to managers to maximize firm value

3.4.4. Supports finacial accounting and tax axccounting reporting functions

3.4.5. Contributes more to firm value than it costs

4. Cases

4.1. Votec Medical Probe

4.1.1. The manufacturing division produces the probes, that marketing division sells them to distributors. The marketing divisions is rewarded on the basis of sales revenues. The manufacturing dicision is evaluated and rewarded on the basis of average unit cost of the making probes (15) 4 points: (17) Beware of AC Use opportunity costs supplement accounting data with other information Use accounting numbers as performance measures cautiosly

5. Capital budgeting

5.1. Case ( discounted cash flow (DCF) analysis)

5.1.1. Decision to aquire an MBA: Sue NPV of an MBA - comparing alternatives tat have cash flows occuring at different points in time

5.1.2. Decision to open a day spar

5.2. Risk (101)

5.2.1. A safe dollar is more value than a risky dollar

5.2.2. ri=rf+risk premium

5.3. Inflation (102)

5.3.1. real interest rate

5.3.2. nominal interest rate

5.3.3. 1+rnominal = (1+rreal)(1+f)

5.4. Taxes and depreciation taxt shoilds (104)

5.5. Alternatives

5.5.1. Payback

5.5.2. Acoounting og rate of return (and ROI) (107

6. Organizational Architecture (kap 4)

6.1. Basic building blocks

6.1.1. Self interested behavior, Team production and agency costs (130) horizon problem (fx direktør, der får mere ud af profit nu, fordi han heller vil skifte job)

6.1.2. Decision rights and rights systems (136) Employee empowerment

6.1.3. Role of knowledfe abd decision making

6.1.4. Merket vs firm (137)

6.1.5. Influence costs

6.2. Organizational Acitecture

6.2.1. Three legged stool Measure performance Reard performance allocation of decision right

6.2.2. Descion management vs decsion control (145) Initiation (decision management) request to hire new employee Ratefication (decision control) approval of the request Implementation (decision management) hiring the emplyee Monitoring (decision control ) assessing the perforamnce of the hired emplyee at periodic intervals to evaluate the person who hires the emplyee

6.2.3. Accountings role in organizational Architecture

6.3. Cases

6.3.1. Coporate Jet Pilots Refuel pilots get discount agenten logges til a vælge et alternativ, der ikke er i virksomhedens interessse

7. Responsible accounting and transfer pricing (kap 5)

7.1. Centres (165)

7.1.1. Cost Decision rights: input mix (labor, materials, supplies) Performance measures: Minimize total cost for a fixed output Maximize output for a fixed budget Typically used when,... Central managers can measure output, knows the cost fuction and can set the optimal quantity and appropriate rewards Central managers can observe the quality of the cost centers output cost center managers has knowledge of the optimal input mix

7.1.2. Profit Decision rights: Input mix Product mix Selling prices (or output quantities) Performance measures Actual profits Actual compared to budgeted profirs Typically used when ... Profit centermanager gas rge knowledge to select the optimal P/Q Profit center managers has the knowledge to selecr rge optimal product mix

7.1.3. Investment Typically used when ... Investment center managers has the knowledge to select the optimal P/Q Investment managers has the knwoledge to select the optimal product mix Investnent managers has knowledge about investment opportunities Performance measures Actual ROI Actual residual income Actual compared with budgeted ROI or residual income Decision rights: Input mix Product mix Sellingprices (or output quantities) capital invested in the center

7.1.4. (revenue)

7.1.5. ()

7.2. Economic value added

7.3. Transferpricing

7.3.1. International taxation

7.3.2. Economics of TP With perfect info With asymmetric info

7.3.3. Common tranfer pricing method Market based advantages disadvantages Variable cost advantages disadvantages full cost advantages disadvantages negotiated advantages disadvantages Reorganizing advantages disadvantages

8. Budgeting (kap 6)

8.1. Definition (220)

8.1.1. "a budget is managements formal quantification of the operations of on organization for a future period. It is an aggregated forecast of all transactions expected to occur."

8.1.2. varetager følgende funktioner (245) koordinere sales production, makring and finance formulation of a profitavke sles and production progam coordination of sales and production with all other activities of the business control of expenditures formaulation of a financial program incl. investment and financing

8.2. Trade - off between decision management and decision control (229)

8.2.1. Communicating specialized knowledge vs. performance evaluation (229) Decision control: performance avaluation Decision management: communicating specialized knowledge Gaming: budget setting process AND actions during the year

8.2.2. Budget Ratching (230) Basing next years budget on this years performance -> only adjust up -> dysfunctional behavior dysfuctional behavior(231) managers barely exceed quota delay customrs to the next fiscal year spread productivity improovements over more years (instead of at one time) Solutions(232) Alternativet er endnu værre... Folk bliver belønnet på hele deres performance: fx 2% på hele sales så får de noget når bare de performer. Spørge folk hvad de mener næste år vil give ... men her vil de jo så sætte det laver Frequent job rotations: Men det ødelægger customer specific relationships

8.2.3. Participative budgeting (323) Bottom up budgetting Lower level managers kommer med udkast Problem Top down budgetting Her deltager low level managers ikke

8.2.4. New Approaches to Budgetting (234) Kritik: time consuming to construct add little value are developed and updated too frequently are based ob unsupported assumptions and guess work constrain responsiveness and act as a barrier to change Are rarely strategically focused and often contradictory strengthen vertical comman and control concentrate on cost reduction 3encourage gaming and perverse behaviors do not reflect emerging network structures organizations are adopting reinforce departmental barriers rather than encourage knowlegde sharing make people feel undervalued To nye approaches to budggetting building budgetting in two distinct steps breaking the so-called annual performance trap

8.3. Resolving Organizational Problems (237)

8.3.1. Short run vs long run budgets (237) Short run budget, sales and prices Long run budgets, strategic firm's overall objectives: remember maintenance, advertising, R&D

8.3.2. Line item budgetting (239) savings on any category can't be moved to other items advantages reduce agency problems disadvantages managers har ikke incitament til at gemme/spare

8.3.3. budget lapsing (240) defintion: beløb kan ikke overføres fra en periode til en anden periode advantages control Disadvantages reduce managers flexibility

8.3.4. static vs flexible budgets (241) Sttic budgets do not vary with volume flexible bduget adjusting for volume changes mamnagers are not held responsible for fluctuations

8.3.5. Incremental vs. zerobased bugdetting zero based starter helt forfra dyrt bruges ikke så meget Incremental Bygger oven på det eksisterende billigt

8.4. Large corporations (226)

8.4.1. budgets are used to (229): assign decision rights communicate and coordinate information both vertically and horizontally Set goals through negotiation and internal contracting measure perfoamnce

8.4.2. Case: Xerox (226) Sharing knowledge both vertically and horizontally Vertically: op og ned i hierakiet Horizontally: among supervisors stor organisation hvor information bliver kommunikeret rundt via budgettet. (verdens største printer/kopi maskiner)

9. Cost allocation (kap 7 og 8)

9.1. Cost allocation Practices (kap 8)

9.1.1. Death Spiral (330) Case: Company with sunk cost related to phones (full cost transfer price) The departments has the decision right to choose inhouse and market More chooses to buy in makret -> the prices rises to the existing in-house buyers -> more buys in the market -> death spiral Resolution: practical capacity unused capacity is not charged to excisting

9.1.2. Allocating Capacity Costs (335) Depreciation Will the future users be charged for future use or not - and do they know?

9.1.3. Allocating Service Department Costs (335) Direct allocation methods (337) The service departent costs are allicated directly to the operating divisions rather than to the other service department firsts and then to the operating divisions Step-down allocating methods (339) Partilly overcomes the problem with direct allocation: Stor forskel afhængende af hvad man starter med Service department costs and transfer pricing of direct and stepdown method (341) Telecommunicaton and IT: cars and truck Reciprocal allocation method (334) Most precise way to do it... Not very used

9.1.4. Joint costs Joint cost allocation and death spiral Net realized value decision maiking and control Decision: Case: Chicken (fillets and drumsticks and wings) (348) remember the split off point

9.1.5. Segment reporting and joint benefits (354)

9.2. Cost Allocation Theory (kap 7)

9.2.1. cost allocation where does it happen? Universities Hospitals Manufacturing organization Defition: "the assignment of indict common or joint costs to different deparments , processes or products (284) 3 steps:

9.2.2. Reasons to allocate costs External Reporting/taxes (288) Costbased Reimbursement (290) reported costs Decisionmaking and control (291)

9.2.3. Incentives/organizational reasons for cost allocation (292) Costallocation are a tax system (292) Case: Sales people vs Banner ads Taxing Externalities (293) tilførsel af externaliteter på andre afdelinger (fx HR) Insulating vs Noninsulating cost cost allocation (299) Case: Modem division & disk drive division None insulating Summary: (302)