Bridging Course Flashcards
What is a cost unit?
Unit of product or service to which costs can be attached.
What is a cost card?
A document which groups the costs of a product or service in order to arrive at a total cost.
What is a direct cost?
A cost that can be directly attributable to the cost card
What is an indirect cost?
A cost that cannot be directly attributed to the cost card.
What is a prime cost?
Total of the direct costs
What is the production cost?
Total of the manufacturing costs
What are the 3 main functions of management?
Planning
Control
Decision making
What is activity level?
The number of units produced
What is cost behaviour
The way a cost changes as production quantity or activity level changes
What are overheads?
Indirect costs
What is the formula for OAR?
Total budgeted production overhead / Total budgeted activity level
What is the break even point formula?
Fixed costs / unit contributions
What is the formula for breakeven revenue?
Fixed costs / PV Ratio
What is the formula for PV Ratio?
Contribution / Sales
What is the margin of safety calculated using subtraction?
Budgeted sales volume - breakeven sales volume
What is the margin of safety formula as a %
Budgeted sales volume - Breakeven sales volume / budgeted sales volume x100
What is the target profit formula?
Fixed costs + required profits / unit contribution
What is the formula for overheads?
Indirect materials + indirect labour + indirect expenses
What are the 4 steps in calculating overhead costs per unit?
Allocation
Apportionment
Reapportionment
Absorption
What is allocation?
Is the charging of an overhead to a signe responsibility centre that has incurred the whole of that overhead.
What is apportionment?
The charging of a proportion of an overhead to each responsibility centre that incurs part of that overhead.
What is reapportionment?
Ensuring that all overheads are charged to manufacturing departments and not service departments as the manufacturing departments are responsible for the overheads.
What are the 2 methods of reapportionment?
The direct method
The step down method.
What is the amount absorbed formula?
Actual production activity x OAR
What is over-absorption?
More overheads absorbed than actually incurred
What is under-absorption?
Fewer overheads absorbed than actually incurred.
How to correct under absorption?
Deduction from profit
How to correct over absorption?
Addition to profit
What is the initial double entry for production over heads?
DEBIT production overheads
CREDIT cash
What is the subsequent entry for overhead absorption?
DEBIT production
CREDIT production overheads
What is the underabsorption double entry?
DEBIT SPL
CREDIT production overheads
What is the overabsorption double entry?
DEBIT production overheads
CREDIT SPL
How to use activity based costing - what are the steps?
Identify an organisations major activities.
Identify the cost drivers which cause the costs of the activities.
Collect the costs associated with easy activity into cost pools.
Charge the costs of activities to products on the basis of their usage of the activities.
What is standard cost?
An estimated cost unit
What is standard cost calculated from?
Usage and efficiency of materials and labour.
Prices of materials, labour and overheads.
Budgeted overhead costs and budgeted levels of activity
What is standard costing used for?
Valuing inventories
Preparing cost budgets for production
Provide control information
What are the 2 parts of a sales budget?
Forecast for number of units sold
AND sales revenue budget which is forecasted units sold x expected selling price per unit.
How to calculate material usage budget?
Quantity required to meet production
Add wasted material
Materials usage
How to calculate labour usage budget?
Number of hours x wage rate
What is a fixed budget?
Master budget prepared before the beginning of the period.
What is a rolling budget?
Budgets that are continually updated in order to project a continual amount of time into the future
What are fixed overhead variances?
Difference between actual and budgeted overheads.
What does capital expenditure include?
Purchase in NCAs
Improvement of the earning capability of NCAs
What does revenue expenditure include?
Purchase of goods for resale
Maintenance of the existing earning capability of a NCA
Expenditure incurred in conducting day to day business
What is the OAR calculation?
Total production overheads
What does marginal costing take into account
Variable costs ONLY
What is the contribution calculation?
Contribution = sales revenue - all variable costs
When will absorption costing give higher profits?
When inventory levels are rising
When will absorption costing give lower profits?
When inventory levels are falling.
What are the advantages of absorption costing?
It is fair to charge each unit with an element of the fixed cost
In line with accounting standards for financial statements (no need for 2 calcs)
Advantages of marginal costing?
Fixed costs the same regardless of output so makes sense to charge them as a full cost.
What is a time series?
A series of figures or value recorded over time
Examples of time series?
Output at a factory each day for the last month
Total costs per annum for the last 10 years
Monthly sales over the last 5 years
What is a trend?
A general movement of the time series over a long period of time
How can you find a trend through calculations?
By calculating moving averages or linear regression.
What is seasonal variation?
Predicted movement away from the trend due to repetitive events
What else can impact forecasted data?
Cyclical variations - economy
Random variations - COVID
What is the formula for the additive model and what does each component stand for?
TS = T + SV
What is the formula to find seasonal variation?
SV = TS - T
What is the main method of calculating a trend from a time series?
Calculation of a moving average.
What can you calculate if you can’t do a moving average?
A centred moving average where you calculate the average 2x
What is the formula for the multiplicative model?
TS = T x SV
When is the multiplicative model used?
When seasonal variations are presented as a % movement away from the trend rather than using absolute figures.
What is linear regression?
Involves the prediction of the value of one of the variables when given the value of another variable. It assumes a linear relationship on a graph.
What is the equation of a straight line?
Y = a + bx
Where:
A = point on graph where line intersects Y axis
B = gradient of the line
What is the rearranged formula to forecast semi-variable costs?
TC = FC + (VC x Units)
What does the liner aggression formula look like when forecasting sales?
Y = total sales
X = time period in the time series
B = increase in sales in each time period
A = a constant value which has no specific meaning (?)
What is an index?
A measurement overtime of the average changes in value, price or quantities of a group of items.
What are the characteristics of a price index?
Base period (when the index is 100)
Baskets ( items included within index)
Weightings ( give relative importance)
Index numbers (show general movement)
What is the formula for calculating an index?
Current period figure / base period figure x 100
What should you always compare an index to?
The base period!!!!
What is deflation?
Uses index numbers to reset data in terms of a previous period.
What is the formula for deflation?
Cash flow to deflate x index No of previous period / the current index
What is inflation?
Uses index numbers to restate data to future values
What is the formula for inflation?
Cash flow to inflate x index no. Of future year / current index
What are the limitations of index numbers?
Weightings need evaluating with judgement.
Determining base period can be problematic
New products / items appear and old ones get discontinued - not always continuous
Uses external sources
What is interpolation?
Forecasts data within the historical range
What is extrapolation?
Forecasts data outside the historical range
What are the uncertainties with forecasting?
More data that is used = better results of forecast
Forecast further into future = less reliable.
Assumes that current conditions will continue into future
If based on a Trend random or cyclical events can change the trend
Promotional activity in the future needs to be taken into consideration 
What are strengths of sensitivity analysis?
Easy to understand
Highlights key variables which are crucial to success of project
What are limitations?
Assumes that all changes are independent
Does not offer a clear decision rule.
Only identifies the amount of Change caused by ONE variable - not multiple.
What are the 4 stages of the cycle of planning and control in order?
Objectives
Budgets
Operating in line with budgets
Actual vs Budget
What are the 4 uses for budgetary control?
Planning
Coordinating
Authorising
Cost control
Examples of internal data?
Financial accounting records
Purchase invoices
Sales information
Product information
Examples of external data?
Internet
Market research
National statistics
Online questionnaires
What are the limitations of secondary external sources of data?
Users u aware of limitations of the data
Data may not be relevant
Data may be out of date
Geographical area tested may not be appropriate
What are the key roles of a budget accountant?
Preparing the budget for the organisations
Preparing management accounts
Communicating results to senior management
What is top down budgeting?
When budgets are created by senior management
Advantages of top down budgeting?
Senior management can incorporate strategic plan
Resources will be in harmony with eachother
Budget produced quickly
Junior management who do not have the correct skill set / knowledge input is eliminated
What are the disadvantages of top down budgeting?
Managers may become demotivated while working for targets not set by them.
Managers detailed resource specific knowledge is ignored.
Initiative of low level management may be stifled.
Resentment and departmental rivalry
Advantaged of bottom up budgeting?
Based on detailed working knowledge of managers
Motivation increase
Manager commitment to strategic plans should increase
Disadvantages of bottom up budgeting?
Budgeting takes more time
May be lack of coordination between resources
Managers may be tempted to introduce budgetary slack
What just be in place for performance related pay to be successful?
Managers must know strategic goals of business and know how their budgets fit into the goals
Achievable but challenging goals
Managers must be able to control costs so they have ability to meet targets
Rewards offered must be great enough to have an effect
What is budgetary slack?
The extra amount of cost built into a budget by budget holders in order to make targets easier to meet.
What is goal congruence?
Where the goals of individual functions or departments are consistent with the overall goals and strategy of the organisation.
What is incremental budgeting?
Whereby the previous budget is adjusted for changes in prices and activity levels.
Appropriate when not expecting significant changes
What are the advantages of incremental budgeting?
Fairly simple - fairly quick
Budget is stable and changes are gradual
Coordination of budgets is easy
Disadvantages of incremental budgeting?
Inefficiencies are repeated each period
No incentive to reduce costs or develop new ideas
Budgets may become out of date.
Budgetary slack will be continuous year on year.
What is zero based budgeting?
Whereby the budget for each cost centre is looked at fresh for each period.
Useful for service departments NOT production departments.
Advantages of ZBB?
Challenged existing operations
Budgetary slack is not automatically reproduced.
Inefficient practices can be removed
Cost effectiveness of procedures is constantly monitored
Disadvantages of ZBB?
Time consuming
Complex
Costly
Mainly for short term benefits which can be detrimental in the long term.
What is activity based budgeting?
Method of setting the budget based on the usage and cost drivers throughout the organisation
What are advantages of ABB?
Attempts to provide meaningful product costs
Recognises overhead costs come out cost drivers and takes these into account so they can be better managed.
What are disadvantages of ABB?
Time involved in identifying drivers and activities may be significant
A single cost driver cannot explain every item in an associated pool
Some costs may not be able to relate to production output
What is priority based budgeting and who is likely to use it?
Similar to ZBB ised by public sector organisations and charities.
Activities are reevaluated when the budget is set - not started from 0. Takes into account activity priorities.
What is a rolling budget?
Continually updated to project into - continual amount of time into the future
Advantages of a rolling budget?
Opportunity to react to any changes in circumstance.
More accurate ( in real time)
Disadvantages of rolling budgets?
Budgeting will need to be done more frequently and take up more management time.
What is a contingency budget?
A budget available to cope with unexpected events
What is the market considerations acronym?
Political
Economic
Social
Technological
In what order are budgets prepared?
Sales budget
Production budget
Then combined: material usage budget, labour usage budget and overhead budget.
Then: material purchasing budget and labour cost.
Then Cost if goods sold budget.
Master budget
What 2 factors will affect the amount of production required?
Any changes in inventory levels.
Level of defective finished goods that are forecast
How to calculate the production budget with changes in inventory levels?
Sales quantity
Less opening inventory
Add closing inventory
How to calculate production budget to adjust for defective items?
Sales quantity
Less opening inv
Add closing inv
= quantity required to meet sales demand
Add the anticipated defective units
= total production quantity required.
How to calculate materials usage budget?
Quantity required to meet production
Add wasted material
= material usage
How to calculate materials purchases budget?
Materials usage
Less opening inventory
Add closing inventory
= quantity to be purchased
What is idle time?
Hours for which employees are at working for which they must be paid, but not spent producing products for the business.
More hours needed to pay for production.
What is a fixed budget?
Budget set in advance of a period end and purpose is to provide a single achievable target for entire organisation
What is a flexible budget?
Budgets that recognise different cost behaviours and are designed to change as activity changes
How to deal with uncertainty?
Use planning models
Regularly re forecast
Regularly rebudget
Use a rolling budget
What is a cash budget?
A method of determining the expected net cash flow for a fortune period
How to calculate net cash flow?
Deducting payments from receipts
How will an increase in receivables balance affect cash flow?
Less cash received - lower cash inflow
If payable increase how is net cash flow affected?
Less cash paid out of the business - lower cash outflow
If inventory balance increases how is net cash flow impacted?
Not yet sold the good and not yet generated a revenue so lower cash flow
What do you need to allow for in the operating budget and cash flow budget?
Time lags
What is not included on cash flow statement?
Depreciation.
Proceeds of sale of an NCA
What is standard cost calculated from?
Management expectations of:
Usage and efficiently levels of materials and labour
Prices of materials, labour and overheads.
Budgeted overhead costs and budgeted levels of activity.
What information is used to set the standard?
Materials price per unit
Materials usage per unit
Labour rate per unit
Labour time per unit
Variable production overhead
Fixed production overhead.
What is the ideal standard?
Set on the basis that perfect working conditions exist at all times.
Disadvantages of ideal standard?
No allowance given for wastage inefficiencies or idle time
Unlikely to reflect working conditions and therefore be inaccurate.
Can demotivate due to being unrealistic.
What is a target standard?
Standard that incorporates some improvement but allows for some inefficiency.
What’s good about target standards?
Attainable and therefore motivating
Can lead to favourable variances
What is a normal standard?
Based on current working conditions
- allow for wastage and inefficiency
- needs frequent revision
What are basic standards?
Standards that have been unaltered for long periods of time.
- do not take into account inflation and variances will be large.
- but very easy to set.
What can standard costing aid management in?
Planning
Control
Decision making
What are the limitations of budget flexing?
Splitting mixed costs not always straight forward.
Must consider the assumptions used when original budget was created.
Can confuse managers
What is feedback control?
Examples?
Operates by comparing actual historical results against a standard plan.
Variance analysis
Positive feedback
Negative feedback
What is feedforward control?
Operates by comparing planned results against current forecasts of what results should be. Eg cash budget.
What would cause the material price variance to be favourable?
Unforeseen bulk / trade discounts received - economies of scale.
Negotiating batter prices with suppliers.
Cheaper materials used in production
What would cause a material price variance to be adverse?
General market price increase
Unexpected change to a more expensive supplier.
More expensive materials used in production.
What would cause material usage variance to be favourable?
Higher quality material used in production
More experienced labour used in production- fewer mistakes + less wastage.
What would cause material usage variance to be adverse?
Excessive waste due to defective materials
Theft of material meaning more had to be purchased increasing usage per unit.
Stricter quality control leading to more rework
What would cause labour rate variance to be favourable?
Cheaper less experienced labour used
What could cause labour rate variance to be adverse?
Use of higher paid workers than standard.
Shortage of staff meaning expensive agency staff need to be used.
Unexpected increase in the rates of pay for employees.
What can cause idle time?
Machine breakdown
Illness / injury of a worker
Materials delivered late
What can cause labour efficiency variance to be favourable?
Increased worker motivation
Better quality materials used
Higher skilled staff
More efficient machinery
Greater production volume = learner effect.
What can cause labour efficiency variance to be adverse?
Lack of training for staff.
Lower skilled labour.
Inefficient machinery used.
Lower quality materials used - more rework.
What could cause fixed overhead expenditure variance to be favourable?
Unexpected savings in cost - eg from renegotiation.
Change of supplier in type of service used.
What could cause fixed overhead expenditure variance to be favourable?
Overall market increase in the cost of the service used.
What could cause fixed overhead volume variances to be favourable?
Production or activity level greater than budgeted
What could cause fixed overhead volume efficiency variance to be favourable?
Production or activity level less than budgeted for.
What is an uncontrollable variance?
Driven by an error in the planning of the standard, it is out of the managers control.
What is a controllable variance?
Element that is within a managers control as can be related to factors experienced in actual operations.
When is ABC costing beneficial?
When there are a number of different products being made by the organisation, with considerable differences in the use of activities between the products.
What are the advantages of ABC?
Improved decision making.
Improved cost control and reduction.
Improved pricing.
Diversity of overheads.
What are the disadvantaged of ABC?
Time and cost
Standardised products - very little use for companies that have very few standardised products.
Cost drivers - identification of cost drivers in complex environments can be difficult to determine.
When should ABC be used?
When production overheads are high relative to prime costs
When there’s diversity of the product range
Considerable differences in the use of resources by products.
When consumption is not driven by volume.
What are the stages of the product life cycle?
Development
Introduction
Growth
Maturity
Decline
What are the main types of cost in development stage?
Mostly fixed due to r+d costs. There a few variable direct costs.
What are the main types of cost in introduction phase?
Advertising strong = fixed cost. Recovering r+d mostly fixed. Few variable costs of production.
What are the main types of cost in the growth phase?
Direct materials and labour are biggest proportion = VARIABLE. Some fixed promotional costs.
What are main types of cost in maturity phase?
Economies of scale reduced variable costs and mechanisation increases fixed overheads.
MIXED
What are main types of cost in decline phase?
Increase in obsolescence costs = VARIABLE.
What is lifestyle costing?
Recognises that costs are incurred prior and post production - aims to cost it over its entire lifetime. It ensures that all costs are covered by sales revenue to ensure profitability the whole time
INCLUDES PRELAUNCH COSTS
How to calculate target costs?
Target selling / market price
LESS target profit
= target cost
What to do with fixed costs within target cost?
Deduct them.
What is value analysis?
All aspects taken into account to determine the value provided to the customer and whether the same value can be provided just at a lower cost. Used for EXISTING products.
What is value engineering?
Value analysis applied to new products.
What are non value adding activities examples?
Reworking defective products
Storage of materials
Costs associated with staff turnover
Movement costs
Complex mix of components
What are the benefits of incorporating cloud accounting?
Access from anywhere
Links with external sources eg bank
Access to multiple users
Can be scaled up or down according to demand
What are the challenges with cloud accounting?
Loss of control - data security risk
Reliance on data holder (lost or corrupt data cannot be retrieved)
Fixed costs - if the company fails to pay the company could experience loss of data and stoppage of services
What are the benefits of AI?
Proceeds large amounts of data quickly
Identify complex patterns in data
Ability to make consistent decisions - machines do not suffer tiredness and no cognitive bias
Does not require human monitoring
What are the challenges with AI?
Data quality - machine learning is only as good as the data received.
Models lack flexibility- learn to carry out specific tasks but not capable of multifaceted analysis
How mistakes are dealt with may not suit the organisation
What can data analytics be used for?
Identify relationships outliers and exceptions
Build predictive models
Benefits of data analytics?
Better understanding of customer behaviour
Targeted marketing messages
Faster decision making
Managing reputation
Challenges of adapting data analytics?
Quality of data (more does not = better)
Costs - can be expensive
Skills - entity may lack the skills to interpret data
Loss and theft of data - data protection and privacy laws
Why is data visualisation useful?
Predicting sales volumes or costs
Identify areas for improvement
Highlight factors which influence customer behaviour
Illustrates how sales vary in diff markets
Benefits of data visualisation?
Understand data / information quickly
Pinpoint trends
Identify relationships
Challenges of adopting data analytics?
Lack of skills to create reports which are meaningful
Challenge to identify what data to include in the visualisation
What are the advantages of payback period?
Quick simple calculation
Easily understood concept
Considers liquidity
What’s te the disadvantages of payback period?
Maximum period is guessed
Ignored the timing flows
Does not take into account all of the cash flows assosciated with the project
IGNORES time value of money
When should NPV be accepted?
When it’s POSITIVE.
What’s the advantages of NPV method?
Correctly accounts for time value of money
Based on cash flows less subjective than profit
Consistent with objective of maximising shareholders wealth
What are disadvantages of NPV?
Difficult to identify appropriate discount rate
Tricky concept
Does not allow for risk of the project.
What is IRR?
The discount rate which when applied to project cash flows gives a zero NPV
IRR formula?
a + NPVa / (NPVa - NPVb) x (b-a)
What are advantages of IRR?
Simple % and more easily understood.
Does not require exact cost of capital
Takes into account time value of money
Indicates how sensitive calculations are to changes in interest rates
Disadvantages of IRR?
Cannot accommodate changing interest rates
Can sometimes rank projects incorrectly
Complex to calculate.
How to calculate ARR?
ROCE = annual profit / initial investment
OR
ROCE= annual profit / avg investment
Where avg investment = initial outlay + scrap value / 2
What are advantages of ARR?
Quick simple calculations
Considers alll of the projects life
Easy to compare two investment options even if they’re different sizes
Disadvantaged of ARR?
based on accounting profits and not relevant cash flows
Relative measure rather than an absolute measure therefore takes no account of the size of the investment
ARR ignores the time value of money
