5- Relevant cost and decision making Flashcards
What are 3 main ways management accounting distinguishes itself from financial accounting?
- It’s not a legal requirement
- It’s only used internally
- Uses present data as well as past to make future decisions
What are the 2 main cost components?
- Production/prime costs
- Non-production costs/overheads
What are the 3 main components of production costs?
- Materials
- Labour
- Direct overheads
What are the 4 main components of non-production costs?
- Administration
- Selling
- Distribution
- Finance
What are the 2 categories production costs can be split into?
- Direct costs
- Indirect costs
What is a direct cost?
A cost that can be traced in full to the product, service or department that is being costed.
Total direct costs=prime costs
What are indirect costs?
Costs incurred in the course of making a product/service but cannot be aligned with a particular cost unit
Total indirect costs=production overheads
What is breakeven point?
Sales volume giving a profit of 0
What are the 3 main assumptions of cost-volume-profit (C-V-P) analysis?
-Selling price per unit
-Variable cost per unit
-Fixed costs
Are all constant
What is contribution per unit?
Price per unit - Variable cost per unit
What is the formula for breakeven point (BEP)?
BEP = Fixed costs/contribution per unit
What is absorption costing (AC)?
Method whereby all production costs are included in the cost of a cost-unit
What are 3 main advantages of absorption costing?
- Consistent with SSAP9 & IAS2
- Doesn’t require the separation of mixed costs into fixed and variable components
- Ensure fixed costs are covered when setting prices
What are 3 main disadvantages of absorption costing?
- Profit can be manipulated by changing inventory levels
- No relationship between profit and sales volumes
- Based on the assumption that overheads are volume related
What is marginal costing (MC)?
MC includes only the variable cost of a product or service; cost which could be avoided if the unit were not produced
What is a relevant cost?
It is a future incremental cash flow, net additional cash flows generated by a company by undertaking a project
What is opportunity cost?
It is the value of the best alternative that is foregone when a particular course of action is undertaken
What is the principal budget factor?
The scarce resource or limiting factor that may impact a company’s production and sales budget
Give 4 principal budget factors
- Market demand
- Materials
- Manpower (labour)
- Machine hours
How do you maximise contribution with a single contraint?
- Determine limiting factor by producing to maximum demand
- Rank products by contribution per unit of limiting factor
- Prepare a production plan
What are the 7 steps to maximise production mix?
- Identify constraint(s) on key resources
- Maximise throughout
- Work out contribution per product
- Work out contribution per limiting factor
- Rank products based on highest contribution per limiting factor
- Prioritise confirmed/essential orders
- Make as much of the highest contributing product
What are the 2 main decision types in relevant costing?
- Minimum selling price
- Special order acceptance
How do you approach minimum selling price decisions?
Calculate the relevant cost of the contract. This will be the absolute minimum selling price that the company should accept
How do you approach accept or reject an order decisions?
This is basically the same as the minimum selling price decision. Calculate the relevant cost of the contract and, if offered more, the contract should be accepted
