Accounting A Level P4 Flashcards
uses and limitations of ABC costing (2)
pros:
- accurate cost allocation (Assigns overhead costs based on actual activities)
- better pricing decisions & budgeting
cons:
- complex & time consuming
- expensive (need software)
cost driver
factor that directly influences or causes a change in the cost of an activity
ABC Costing Techniques for Business Decisions (4)
Pricing Strategy – Adjust product prices based on real costs.
Cost Reduction – Eliminate or optimize costly activities.
Process Improvement – Improve efficiency in high-cost areas.
Outsourcing Decisions – Decide whether to produce in-house or outsource based on cost analysis.
standard costing
accounting system that records the cost of operations at pre-determined standards.
standard costing pros & cons (3)
pros:
1. Able to control the business more effectively by comparing standard costs with actual costs.
2. Can improve productivity as a result of the increased motivation of staff having realistic and achievable targets
3. Budgets and forecasts can be prepared more easily due to the standard data having been prepared.
cons:
1. Standards must be reviews regularly and amended if they are to be of use.
2. Time-consuming and costly process when collecting necessary information.
3. Most suitable for businesses with established repetitive processes.
variance + adverse vs favorable
the differences between actual costs and budgeted costs.
adverse = actual costs > budgeted
favorable = budgeted > actual
variances (12)
- Material price variance = AQ x (AP - SP)
- Material usage variance = SP x (AQ - SQ)
- Labour rate variance = AH x (AR - SR)
- Labour efficiency variance = SR x (AH - SH)
- Sales Price variance = Actual Sales - Flexed Sales or AS x (ASS - SSP)
- Sales Volume Var = Flexed Sales - Budget Sales or SSP x (AS - SS)
- Sales Volume Var (as a a measure of change in profit) = (budgeted unit - actual unit) x standard profit
- Fixed OH Expenditure = Standard - Actual
- Fixed OH Volume = Standard - Flexed
- Cost Variance = Budgeted Cost - Actual Cost
- FOH efficiency = standard FOH rate x (actual hours - flexed hours)
- FOH capacity = standard FOH rate x (actual hours - standard hours)
advantages and disadvantages of a budgetary control system
pros:
- improved financial planning of resources & costs
- performance evaluation
cons:
- time consuming
- may be inflexible
advantages and disadvantages of preparing budgets using spreadsheets
pros:
- efficient & neat
- saves space
cons:
- training & computer costs
- data security
master budget
Consolidation of all the prepared budgets and consists of a budgeted I/S and SOFP
the effect of limiting factors on the preparation of budgets
Limiting factors, such as resource shortages, production constraints, or financial restrictions, impact budget preparation by requiring businesses to adjust forecasts, prioritize spending, and optimize resource allocation to maintain profitability.
flexed budget advantages
- adapts to changes
- improved decision making based on real data
payback period pros & cons + basis (2)
pros:
- simple & easy to calculate
- focuses on liquidity (how fast they can recover the costs)
cons:
- ignores time value of money
- Focuses Only on Recovery, Not ROI (over looking the overall financial impact)
basis: cash flow (profit excluding depn)
ARR + pros & cons + basis (2)
average profit/average investment
pros:
- simple & easy to calculate
- expected profitability can be compared with present profitability
cons:
- ignores time value of money
- doesn’t take into account timing of cash flows
basis: profit (includes depreciation)
NPV & IRR + pros & cons + basis (3)
NPV = (present value) (1 + interest rate) x time
IRR = P + ((P - N) x p / p + n)
- P = rate of positive
- N = rate of negative
- p = positive
- n = negative
advantages
- Considers the time value of money
- Includes all of the net cash flows from the whole life of the capital project.
- Greater importance is given to earlier cash flows.
disadvantages
- relatively complex to calculate
- The life of project and Inflows & outflows are difficult to predict.
-The current cost of capital may change over the life of the project.
basis: cash flow (excludes depn)
