Management Accounting Flashcards

What is the primary advantage of using residual income (RI) over return on investment (ROI) for divisional performance evaluation?

Answer: RI encourages managers to accept all projects earning above the cost of capital, regardless of the division's current ROI

Residual income overcomes the dysfunctional behavior associated with ROI by showing a dollar amount of value created above the required return. Managers are motivated to accept any project earning above the cost of capital because it will increase RI, even if it lowers ROI.

In a service department cost allocation, what is the advantage of the step-down (sequential) method over the direct method?

Answer: It partially recognizes services provided between service departments

The step-down method partially recognizes inter-service department relationships by allocating each service department's costs in a sequential order. Once a department's costs are allocated, it receives no further allocations, making it more accurate than the direct method but less so than the reciprocal method.

A company uses life-cycle costing. What does this approach capture that traditional costing may miss?

Answer: Total costs across all phases: R&D, design, production, marketing, distribution, and end-of-life

Life-cycle costing captures the total cost of a product across its entire life cycle, from initial concept and R&D through design, manufacturing, distribution, customer service, and eventual disposal or recycling. This provides a more complete picture for pricing and profitability analysis.

In a decentralized organization, what is the most likely outcome when divisions are treated as profit centers?

Answer: Division managers are evaluated based on the revenues they generate minus the costs they control

In a profit center, the division manager has responsibility and authority over both revenues and costs, and is evaluated based on the profit generated by the division. This differs from a cost center (costs only) or an investment center (profit and assets).

What is the primary purpose of variance analysis in management accounting?

Answer: To identify deviations from planned performance and investigate their causes for corrective action

Variance analysis compares actual results to planned (standard or budgeted) amounts to identify significant deviations. By investigating the causes of variances (whether favorable or unfavorable), management can take corrective action and improve future performance.

A manufacturing company uses backflush costing. What is the main characteristic of this system?

Answer: It delays recording costs until units are completed or sold, simplifying journal entries

Backflush costing is a simplified costing method that delays the recording of costs until the goods are completed or sold, then works backward to allocate costs. It is suitable for JIT environments where WIP levels are minimal and reduces the number of journal entries needed.