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1
Q

How do you work out the overhead absorption rate?

A

OAR = budgeted overheads / budgeted activity

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2
Q

how do you work on ABC ( activity based costing )

A

Cost driver rate = cost pool / level of cost driver

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3
Q

What are some examples of cost drivers?

A
  • machine costs could be charged using machine hours
  • quality control costs could be charged using number of inspections
  • set up costs could be charged using number of setups
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4
Q

What are the benefits of ABC?

A
  1. Provides more accurate product line costing
  2. Is flexible enough to analyse costs by cost objects
  3. Provides financial (cost driver rates and non financial ( cost driver volume) measures
  4. Helps understand cost behaviour and can help improve cost estimation
  5. Provides a more logical acceptable comprehensive basis for costing
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5
Q

What are the limitations to ABC?

A
  1. May not improved corporate profitability
  2. Information is historic and internally orientated and so lacks direct relevance for future strategic decisions
  3. Practical problems such as cost driver selection
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6
Q

What is the life cycle costs per units equation for non discounting?

A

Life cycle cost per unit = total costs over its entire life/ total number of units

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7
Q

How is target costing done?

A
  • estimates the likely product price by looking at market conditions,competition etc.
  • a target markup % is deducted fro, the price to give a target cost
  • production then sees if they can produce the product at cost require
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8
Q

How do you work out indices when given a forecast table with indexes?

A

Price given = forecasted index / original index given

When given more pricing using price for year 2 x year 2 index / year 1 index

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9
Q

The cost difference between the BLANK and the estimated product cost per unit.

A

Target cost

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10
Q

Target costing works the opposite to BLANK techniques in that it starts by setting a competitive selling price first

A

Traditional pricing

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11
Q

To calculate the target cost, subtract the BLANK from the target price.

A

Target profit

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12
Q

If there is a cost gap, attempts will be made to close the gap. Techniques such as value engineering and value BLANK may be used to help close the gap.

A

Analysis

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13
Q

What is value engineering?

A

It is the philosophy of designing products which meet customer needs at the lower cost whilst assuring the required standard of quality and reliability.

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14
Q

What is value analysis?

A

Relates to existing products. For example a company may sell a product with an added feature that has no value to the customer but incurs a cost. So using value analysis they would remove this feature, so saving money and it won’t harm the value of the product to the customer

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15
Q

How could value engineering reduce the cost gap?

A
  1. Could look to negotiate discounts on materials
  2. Could look to train staff to speed up labour and lower time needed
    3.for machines, could look at newer machines that are quicker or look at machines that would be cheaper by the hour
  3. Training could reduce the amount of quality inspections needed
  4. Training could help reduce amount of remedial work (corrections made)
  5. For marketing, could look into alternative marketing tools or distribution networks to reduce costs
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16
Q

What are four benefits of data analytics?

A

Cost control : a product break down could help control the manufacture of the product as have more improved data (could help with budgets etc.)

Inventory management : enables more accurate purchasing decisions based on popular materials. This reduces the need for a variety of stock, reducing stock held costs and space.

Sales analysis : can make better sales decisions as can see what is popular at which time

Predictive analysis : overtime sales patterns should be shown and therefore could anticipate trends and therefore could capitalise on this.

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17
Q

What are the ethical considerations that could I,pact the target costing process?

A
  1. Focusing on reducing the costs is good for the profit however the value needs to remain high for the customer.
  2. Target costing is in place to reduce costs but NOT the quality of the product and should not put employees or customers at risk.
  3. Negotiating prices can put a lot of pressure on suppliers to provide materials at cheaper prices which can lead to poorer conditions at the supplier or put them out of business
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18
Q

What is the standard cost?

A

The budgeted cost per unit for variances

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19
Q

Linear programming techniques should NOT be used when there is only one scarce resource

A
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20
Q

Linear programming aims to maximise contribution to profits

A
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21
Q

Linear programming techniques can cope with more than two scarce the same time

A
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22
Q

What are some limitations of linear programming technique?

A

Linear relationships must exist
There can only be two products
All variables must be completely divisible

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23
Q

How do you work out return on investment?

A

Profit / investment x 100

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24
Q

How do you work out residual income?

A

Profit - imputed interest ( investment x cost of capital percentage)

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25
What is transfer pricing?
Transfer pricing is all the costs and the mark up fees in total for another division in the same company to pay. However these can be sourced externally so can check which is cheaper
26
For transfer pricing
If the the income of a transfer is greater than the net income of an external sale then it is worthwhile. The division will need to give up a unit sold externally in order to make a transfer
27
How do you do ABC costing?
Total costs / budgeted activity (procedures,hours etc.) + extra cost
28
How do you do traditional costing?
Fixed overheads / total budgeted activity (procedures,hours etc.) + any extra costs per unit
29
How to work out target total production cost per unit?
Selling price minus the target profit equals the target cost
30
How do you work out the target fixed production cost per unit?
Variable costs - target cost
31
Total target fixed production cost ?
Unit level x target cost minus the variable costs
32
How do you work out the price to achieve target profit margin?
33
BLANK relates closely to target costing as it is cost avoidance or cost reduction before production
Value engineering
34
BLANK is cost avoidance or cost reduction of a product already in production; both adopt the same approach I.e a complete audit of a product
Value analysis
35
BLANK is a systematic and organised approach to providing the necessary functions in a project at the lowest cost
Value engineering
36
How do you work out target cost for kg for example?
Maximum materials cost per unit x 1000/500g
37
How do you work out maximum material cost per unit
Target cost - costs including fixed
38
How do you work out minimum percentage discount
Take maximum target cost of materials - quote given, then take that variance and divide by quote x 100
39
How do you work out ARR?
Average profit / investment x 100
40
How do you work out average profit
Profit / years for
41
How do you narrow the payback period to years and months?
What we need / what we have x 12 months Cumulative cash flow end / cash flow for last year x 12 months Round up/down to the month.
42
How do you work out gross profit margin?
Gross profit / revenue x 100
43
How do you work out operating profit?
Operating profit (before interest and tax) / revenue x 100
44
How do you work out sales growth as a percentage?
Take two numbers and minus each other. The variance divided the larger number x 100
45
How do you work out return on capital employed?
Operating profit / capital employed x 100
46
How do you work out capital employed?
Total assets - current liabilities
47
How do you work out asset turnover?
Revenue / ( total assets - current liabilities)
48
How do you work out current ratio? NOT A PERCENTAGE ANSWER
Current asset / current liabilities
49
How do you do the acid test?
Current assets - inventory / current liabilities
50
How do you work out inventory days?
Inventory / cost of sales x 365
51
Receivables days equations
Receivables / revenue x 365
52
Payables equation
Payables value / cost of sales x 365
53
Working capital cycle equation
Inventory days + receivables days - payables days
54
Gearing equation
Debt / debt + equity x 100
55
How do you work out value added?
Revenue - materials and services bought in
56
How do you work out materials as a % turnover?
Material cost / revenue x 100
57
What are some non conformance costs?
External failure : refunds, cost of replacement, discounts, compensation, complaints Internal failure : reworking products, stop production for investigation, reduced prices, scrap
58
What are some conformance costs?
Appraisal costs : anything to do with checking and quality so more early inspections Prevention costs : training staff, maintaining equipment, design of products, developing relationships with suppliers.tracking money spent to improve wuality
59
How do you work out efficiency variance?
Standard time actual production / actual time actual productions x 100
60
How do you work out capacity variance?
Actual hours worked / budgeted hours x 100
61
How do you work out activity/productions variance?
Standard time actual production / budgeted hours x 100
62
How do you work out return on investment?
Operating profit ( before tax and interest)/ investment x 100
63
How do you work out residual income?
Profit - ( investment x cost of capital)
64
What goes in the net cash low column?
65
Is it better to have a longer or shorter payback period?
Shorter then longer it is to earn the investment the riskier it is
66
How do you work out NPV on a table?
Take minus investment + all present values A negative NPV shows the investment isn’t working hard enough A positive NPV shows the return is greater than required Or zero in which isn’t is earning exactly what is required
67
Estimating IRR
If NPV is 0 then found IRR if cost of capital and IRR is same percentage. The cost of capital should be below the IRR for it to be worth it. If the cost of capital is above the IRR then leave investment
68
What is the IRR Calculation?
First % that gives NPV + (NPV at FIRST PERCENTAGE / NPV at 10%- - NPV second normally a minus) x (2nd rate of return- 1st rate of return) DONT INCLUDE PERCENTAGES ON CALCULATOR
69
Pack ack method is based on the project cash flow
70
A requirement for early payback can increase a company’s liquidity
71
How do you work out average profit?
Total profit over years / number of years
72
How do we calculate interest cover?
Operating profit for the period / interest payable
73
How do we work out current ratio?
Current assets / current liabilities
74
How do you work out cost of sales from gross profit?
Revenue - gross profit
75
Is markup and any overheads included in relevant costing
No
76
Is absorption of existing production overheads relevant costing?
No
77
Is depreciation charge for machinery to be used on a job relevant costing
No
78
Is overtime costs where overtime is not normally require classed in relevant costing
Yes
79
Is site survey fees incurred for a new building proposal relevant costing
No
80
Premium adds onto hourly wage
81
82
What are quality reporting costs?
Non conformance and conformance costs
83
What are conformance costs?
Prevention - training etc. Appraisal - inspections before
84
What are non conformance costs
Internal failure - reworks, reduced prices, production stopped for investi Extrernal failure - replacement, refunds, warranties, complaints damage rep
85
How do you average profit
Total cash inflows - total depreciation/ length of project
86
Benefits of NPV
-it looks at entire project - it can allow for risk - it shows the change in shareholders wealth - it allows the time value of money
87
Drawbacks of NPV
- calculations can be time consuming and not easily understood by managers - it requires a cost of capital to be estimated
88
Benefits of IRR
- it looks at entire project - it does not require an exact cost of funds to be known - known by non accountants - it allows the time value of money
89
Drawbacks to IRR
It is not ideal in situations with mutually exclusive projects or non conventional cash flows It ignores the size of the investment as it is just a percentage measure
90
Benefits of ARR
It is simple to calculate Familiar to non accountants It looks at the entire projects It reflects the way external investors judge the organisation
91
Drawbacks of ARR
It ignores time value of money It is based on profits not cash flow It doesn’t consider the length of project since it is a relative measure
92
Benefits of payback
It is simple to calculate It is easy to understand for non accountants Could be used as an initial screening tool on projects before a more detailed review It allows for risk in the timing of cash flow
93
Drawbacks of paybacks
It ignores time value of money It only considers cash flows up to the payback date There are no clear decision rules It may lead to short term decision making
94
What is value engineering
An upfront exercise at the development stage of a product to keep costs low but maximise value and use to the customer
95
What is value analysis
An approach to cost reduction on an existing product thinking about how to reduce costs with adversely affecting the value
96
Explain a bit about absorbed costing
Take a the production cost including a share of the fixed production overheads and adds a markup for profit to arrive at a price
97
Explain a bit about marginal costing
Marginal costing offers a lower price as the cost base used to establish a mark up is based on marginal costs only rather than including a share of the fixed production overheads. Focuses on gaining contribution
98
Explain a bit about target costing
Target costing works back wards using the selling price and required margin and leaves the target costs to be achieved. This forces consideration of the use and cost of underlying resources
99
Name a few examples of measures
Mins per unit Hours of overtime Average hourly rate
100
Financial measures
Net profit margin Gross profit margins Return on capital employed Asset turnover
101
Benefits of data analytics
Cost control Inventory management Sales analysis Predictive analysis
102
Explain aBC
Activity based costing a works on the premise that the volume of actives creates costs and not the volume of production so it is more accurate per unit

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