1. Management Accounting Techniques (repetition)

Question 1

ABC Costing steps

Answer 1

1. Identify the Indirect activities & cost driver
2. Group the costs
3. Divide the costs by the expected frequency of the driver
4. Charge the costs accordingly

Question 2

Absorption costing points to consider

Answer 2

Pro:
1. Product cost developed is ‘full’ cost.

Cons:
1. The arbitrary decisions regarding apportionment. (Mitigate using ABC costing)

2. The expected volume of output must be calculated in order to work out OAR. Variation means product cost will be inaccurate. (Over Under absorption .. Cr or Dr to direct to Income statement)

Question 3

HILO method whenthere is a stepped fixed cost or a volume discount on the variable element - need to be able to calc. The Osbourne examples are easy

Answer 3

.

Question 4

remember a problem with analysing costs based on behaviour in marginal costing…

Answer 4

non-linear behaviour

ie. production costs considered fixed may actually may actually increase slightly with increased activity.
ie. unit cots normally categorised as variable may increase or decrease due to discounts or availability issues at higher activity level.

Question 5

making managers responsible for aspects of the org is responsibility accounting. Standard costing makes good use of the idea of responsibility accounting

Answer 5

.

Question 6

Responsibility accounting often divides the Org into ‘responsibility centres’ of 3 main types…

Answer 6

Cost centres:
(costs but no income)

Profit cantres
(costs and income ..measure in £ and % of income)

Investment centres
(costs, income, investments eg. NC assets .. could also include elements of working capital eg stock, AR, AP, maybe also cash.

Investment centre is like a mini biz within the main org. Use measures like RO net assets or RO capital employed)

Question 7

Discounted Cash Flow (DCF).

Helps with long term decision making by taking account of the ‘time-value’ of money when comparing cash flows.

Answer 7

We would say that £1000 in 3 years has a ‘present value’ of £751. (Based on 10% interest p/a)

Question 8

Net Present Value (NPV)

Answer 8

The net result of comparing the ‘present values’ of all the relevant future cash flows - deducting negative from positive ones.

If result (NPV) is positive then even after taking account of the ‘time-value’ of the cash flows, the Incoming flows are greater than Outgoing flows. This usually means the situation or project the figs are based on is worthwhile.

Question 9

Internal Rate of Return (IRR)

Answer 9

Describes the interest rate that when applied to the cash flows from a project results in a NPV of zero.

Calculated roughly using trial and error.

If IRR is greater than the Orgs cost of capital then the project may be worthwhile.

Question 10

when doing a NPV projection remember..

Answer 10

Example solar panel installation:

1. Col 1. Put the years including year 0 down the left side.
2. Col 2 for detail. eg purchase; INCREASED rent receipts .. dont make mistake of putting full rent amount!!!
3. Col 3 for the cash flow amount (at future values)
4. Col 4 for discount factors. (year 0 should have a factor of 1)
5. Col 5 for PV amounts
6. Bottom line added for NPV in col 5 only.

If its positive then the solar panels are worthwhile

Question 11

Management accounts are based around the Orgs costing system which can be derived from:
Absorption Costing
Marginal Costing
Activity Based Costing.

Answer 11

Absorption costing often better for Planning; Monitoring; Control.

Marginal Costing often better for decision making.