Ba2 Flashcards
Direct Costs
Clearly Identified with the cost object
Prime Cost
Total of all direct costs
Indirect costs
cannot be directly linked to cost unit but clearly incurred in production
fixed cost
cost unaffected by movement in activity
stepped fixed cost
if production grows, fixed cost increases
variable cost
varies with measure of activity
semi variable cost
fixed costs with additional add ons
high low method
find the difference between the highest and lowest activity levels and their respective costs
find variable cost per unit
multiply this by highest activity level to get total variable cost and subtract from total to get fixed
regression analysis y=a+bx
y= total cost
a= fixed cost
b= variable cost per unit
x= activity level
coefficient of determination
r^2 = gives the proportion of changes in y that can be explained by changes in x
relevant costs
costs affected by managerial decision
irrelevant cost
costs that will not change in the future when you make one decision vs another
overheads
these are the same as indirect costs
total cost per unit
direct costs(prime) + overheads
production overheads
indirect costs incurred by the production function
service cost centres
cost centres that are part of production but not directly involved
absorption costing
allocation and apportionment, reapportionment and absorption of overheads
apportioned costs
(total overhead cost/total value of apportionment base) x value of apportionment based off the cost centre being calculated
reapportionment
ratio based of how much should be apportioned to each production centre
absorption of overheads
measure the level of production achieved
work out the OAR
multiply this by hours/units used to get overhead absorbed by cost unit
OAR
production cost centre overhead/ quantity of absorption base
reciprocal servicing
when we need to apportion the costs of multiple service centres
under/over absorption
the amount of overhead could be more/less than budgeted
the quantity of the absorption base could have been more/less than budgeted
overheads absorbed
budgeted OAR x actual hours/units
under/over absorption calc
amount absorbed- actual cost incurred
marginal costing
the additional cost incurred in producing one additional unit of the product including total variable costs but NOT fixed overheads
contribution
sales value - variable costs
total contribution
contribution per unit x sales value
profit
total contribution - fixed costs
profit for absorption costing
opening and closing inventory are valued at full production cost
and adjustment for under/over absorption of overheads is necessary
profit of marginal costing
opening and closing inventory are valued at marginal production cost
if there are variable non production costs these would be deducted before contribution but not included in cost of sales
fixed costs actually incurred are deducted from contribution earned
Costing affects on inventory
inventory levels increase- absorption gives higher profit
inventory levels decrease- marginal gives higher profit
profit mark up
selling price = total cost +%
profit = % of total cost
profit margin
selling price = total cost x (required margin/ 1- required margin)
profit = total cost/ 1- required margin
purpose of budgeting
planning
control
co ordination
communication
motivation
performance evaluation
authorisation
what is a budget
a quantitive expression of a plan for a defined period of time
levels of budgeting
strategic- long term
budgetary- short to medium term
operational- short term/ day to day
master budget
contains all the departmental activity budgets
comprised of a budgeted SOPL, SOFP and cash flow statement
budget preparation steps
sales budget considers how many units can be sold
production budget considers how many units to produce
material labour and overhead budgets are established based on production budget
non production budgets are considered
the master budget is created
cash budget
shows the cash effect of all decisions taken in the planning process
can be a forewarning of potential problems
prepared for each period showing deficits or surpluses
periodic budgeting
costs and revenues for one period at a time
rolling budget
budgets continuously updated by adding a further accounting oeriod
incremental budgeting
based on the previous budget or actual, adjusting for known changes in inflation
zero based budgeting
required all costs to be specifically justified by the benefits expected
bottom up budget
all budget holders have the opportunity to participate in setting their own budgets
top down budget
set without permitting the ultimate budget holder to have the opportunity to participate
fixed budget
used for planning purposes
set at the start of the period and plans expected income and expenditure
flexible budget
used for control purposes
prepared at the end of the budget period to determine whether or not the operations remain under control
total cost variance equations for flexible budgets
original budget - fixed cost = variable cost
budget cost allowance = budgeted fixed cost + (number of units produced x variable cost per unit)
budget variance = flexed budget - actual cost
total cost variance = (fixed budget - flexed budget) - (flexed budget - actuals)
direct material total variance
what a material did cost be what it should have for x units
direct material price variance
what the weight should have cost vs what it did
direct material usage variance
the amount of kg used vs what was planned for x units
direct labour cost variance
what labour did cost vs should have for x units
direct labour rate variance
what labour should have cost vs what it did for x hours
direct labour efficiency variance
how long it should have taken vs did to produced x units
variable overhead total variance
what overheads should have cost vs did for x units
variable overhead expenditure variance
how much variable overheads cost be should have in hours
variable overhead efficiency variance
labour efficiency variance multiplied by the standard variable overhead rate per hour
sales price variance
x units should sell for x$ but did sell for y$
sales volume contribution variance
(actual sales(units) - budgeted sales) x standard contribution variance
gross revenue
total sales achieved by the company
sales revenue
gross revenue - returns
gross profit
sales revenue - cost of sales/ cost of goods sold
gross margin
gross profit/sales revenue x100
operating profit
gross profit - all other expenses
operating margin
operating profit/ sales revenue x 100
ROCE
operating profit/ capital employed
non financial performance measures
measurement of customer satisfaction
resource utilisation
measurement of quality
batch costing
a group of similar units which maintains its identity throughout one or more stages of production and is treated as a cost unit
value for money concept
economy- relationship between money spent and the inputs
efficiency- whether the maximum output is being achieved from the resources used
effectiveness- what extent the outputs generated achieve the objectives of the organisation
relevant costs
materials
labour
overheads
NCA
break even point in units
fixed costs/ contribution per unit
margin of safety in units
projected sales - breakeven sales
margin of safety %
projected sales - breakeven sales/ projected sales
C/S ratio
contribution/sales
breakeven point in $ of sales revenue
fixed costs/ c/s ratio
sales units required to achieve a profit of x
fixed costs + x/ contribution per unit
sales revenue required to achieve a profit of x
fixed costs + x/ c/s ratio
limiting factor
any factor which is in scarce supply and which limits the organisations activites
contribution per unit of limiting factor
contribution per unit/ amount of limiting factor required per unit
LF steps
establish LF
calculate contribution per unit for each product
calculate contribution per unit of LF for each product
rank the products according to their contribution per unit of LF
allocate the LF to the highest ranking product
distribute rest going down in ranking order
make or buy decisions
external= purchase cost is marginal
in house= variable production costs + specific or avoidable fixed costs (+ opportunity cost if there is no spare capacity)
