Chapter 1 Flashcards
Cost accounting
Bank data for managerial accounting
Cost accounting is concerned with …
Preparing statements
Cost data collection
Applying costs to inventory, products, services
Six differences between managerial and financial accounting
Users
Purpose
Format
Nature
Legality
Time period
Main functions of management accounting
Costing
Planning
Control
Decision making
Performance measurement
Explain Strategic, Tactical and Operational Planning
Strategic: long term
Tactical: medium term
Operational: daily decisions
Define Data
Raw material for information processing
Information
Processed data
Quantitative data
Data that can be measured
Qualitative data
Data that cannot be measured; descriptive
Types of Information
Financial, non financial, combination of both
Attributes of Good information
A
C
C
U
R
A
T
E
Main sources of Data
Transactional
Human
Machine/sensor
Primary Data
Data collected for a specific purpose
Secondary Data
Data already collected elsewhere but can be used for our purposes
Discrete data
Data that is finite
Continuous data
Data that can take on any value within a range
Non production costs
Administrative costs
Finance costs
Selling and distribution
Coding System
A way of expressing the classification of each cost in a shortened symbolised form
Advantages of a coding system
Reduces ambiguity
More suitable than a description in a computerized system
Structure of a report
Title
Introduction
Analysis
Recommendations
Appendix
Characteristics of Job costing
Each order has a short duration
Work is undertaken to customers special requirements
It is usual for each job to differ in one or more respects from another job
Identify the costs associated with completing the order
Batch costing
Similar to job costing in that each batch of similar articles is separately identifiable
Cost per unit In batch
Total production cost of batch/number of units in batch
Cost plus pricing
A desired profit margin is added to total costs to arrive at the selling price
Mark up
Calculated as a percentage of the total costs of the job
Process costing
A costing method used where it is not possible to identify separate units of production because of its continuous nature
Average cost per unit
Costs of production/expected or normal output
Formula for normal loss
Average cost per unit =
total costs of inputs - scrap value of normal loss units / units input - normal loss units
Cost Object
Anything to which cost data is desired
Cost unit
A product or service to which costs are ascertained
Cost center
A holding place for costs
Revenue center
Accountable for revenues only
Profit center
Accountable for revenue and costs
Investment center
Accountable for profits and investment responsibilities . Performance will be measured by roce, ri and roi
Random sampling
Each item has an equal chance of being selected
Systematic sampling
Considers every nth of an item
Stratified sampling
Population is divided into subgroups based on characteristics they share, then a random sample is picked from each strata
Number in each sample is proportional to the size of that group in the population and is known as sampling with probability proportional to size
Cluster sampling
Researchers divide the population into multiple groups for research; choosing smaller geographic areas until you get a small enough area
Disadvantages of systematic sampling
Sampling method is not completely random
Sample chosen might be biased
Quota sampling
Investigators are told to interview all the people they meet up to a certain quota
Another name for systematic sampling
Quasi random
Which sampling method should not be used if the population follows a repetitive pattern ?
Systematic sampling
The only non probability sampling method
Quota sampling
Multistage sampling
Draw a sample from the population using smaller and smaller groups at each stage
Advantages of high low method
Easy to use
Easy to understand
Disadvantages of high low method
Requires two extreme points so won’t show average costs in normal periods
Relies on historical data
Assumes activity level is the only factor affecting costs
Bulk discounts may be available at large quantities
Trend line/line of best fit
Straight line which passes through many points on the graph as possible
Extrapolating the trend
Extending the trend line into the future
Disadvantages of using scatter graphs as a forecasting technique
Uses past information to predict future
Assumes relationship is linear
Not accurate
Correlation
Measures the strength between two variables
Formula for correlation
Uses r
Correlation coefficient
Measures the strength of a linear relationship between two variables. It can only take on values between -1 and +1
Coefficient of determination
Measures how much of the variation in the dependent variable is explained by the variation of the independent variable .. denoted by r^2
Advantages of linear regression
Reliable approach to forecasting using Mathematical principles
Can use many data sets so therefore more accurate
Disadvantages of linear regression
Complicated
Only valid when relationships are linear
Uses past data
What does the slope of the regression line tell us
How much change in y variable is caused by a unit change in x variable
Does linear regression assume linear cost behavior
No it just assumes linear relationships
Retail price index
Government produced index to measure general rate of price change in the economy
Time series
A series of values recorded over time
Histogram
Graph of time series
Trend
Underlying movement over time in data values recorded
Seasonal variations
Short term fluctuations in recorded values
Cyclical variations
Medium term fluctuations in data values recorded over time
Residual variations
Random variations; unpredictable, non repetitive
Time series formula
Y = T + S + C + R
Moving average
Average of the results of a fixed number of periods
Two step process in carrying out time series analysis and forecasting
Establishing long term trend
Establishing regular seasonal variation
Advantages of time series analysis
Simple approach
Useful when forecasting data which has a regular seasonal pattern
Disadvantages of time series
Assumes that past trend will continue and extrapolating data based on historic information will give valid conclusions
Sales of products may be influenced by the actions of competitors
Product life cycle
Concept suggesting all products pass through a number of stages from development to decline
Importance of product life cycle in forecasting
When they know what stage a rosy t is in you can market the product more effectively and forecast sales from knowledge on the products current position
Limitations of product life cycle
Difficult to determine precise position of a life cycle
Oversymplistic to assume the curve follows the standard model
Big data
Collection and analysis of large amount s of data
5 v of data
Volume
Variety
Veracity
Velocity
Value
Purchase requisition
Sent from stores to purchase department requesting the materials they want
Purchase order
Sent from company to supplier telling them what they would like to order
Perpetual inventory
Recording inventory as they occur
Periodic stocktaking
Checking the balance of every item in inventory at the end if a period
Continuous stocktaking
Valuing selected items on a rotating basis
Holding costs formula
(Q/2 + buffer inventory) * cost to hold one unit for year
Ordering cost formula
(D/Q) * cost to place one order per year
Stock out costs
Occurs when the business runs out of inventory
Can cause loss of sales, customers, reputation reduced profits
Reorder level
Maximum usage * maximum lead time
Minimum level
Reorder level - (average lead time * average usage)
Maximum level
Reorder level + reorder quantity - (minimum usage * minimum lead time)
Average inventory
Minimum inventory + 1/2 reorder quantity
Periodic weighted average formula
Cost of opening inventory + total costs of receipts/ units of opening inventory + total United received
Direct Labour
Basic pay of direct workers
Indirect Labour costs
Basic pay of indirect workers
Bonus payments
Idle time
Sick pay
Time spent by direct workers doing indirect jobs
What is time and a quarter
1.25
Are overtime premiums tested as direct Labour costs ?
Only at the specific request of the customer
Is premium pay and indirect expense
Yes
Labour turnover ratio
Employees at the start - those who left + those replaced * 100
Labour efficiency ratio
Standard hours/ actual hours * 100
Labour capacity ratio
Actual hours/budgeted hours * 100
Labour production volume ratio
Standard hours/budgeted hours * 100
Overheard absorbed
Oar * actual level of activity
Marginal costing
Only variable production units are charged to cost of sales
Formula for contribution
Sales price - all variable costs
Formula for total contribution
Contribution per unit * sales volume
Profit with contribution
Profit = total contribution - fixed overheads
When is marginal costing used for pricing decisions
Short term pricing decisions
More appropriate than absorption in one off pricing decisions
When is absorption costing appropriate
Long term pricing decisions
When used for pricing decisions includes the total cost of the product
Equivalent units
Notional whole units which represent incomplete work and are used to apportion costs between work in process and completed output
Degree of completion equivalent units
Value of 1 closing wip unit/value of a finished unit
Budget
Plan of what an organization is aiming to achieve
Forecast
An estimate of what is likely to happen in the future
Objective of a budgetary planning and control system
Ensure the achievement of organization objectives
Communicate ideas to manages
Evaluate the performance of management
Motivate employees to improve performance
Establish a system of controlling costs by comparing actual with budget
Coordinate activities so managers are working towards the same goal
Stages in planning and control cycle
Set mission
Identify objectives
Search for possible courses of action
Gather data about alternatives
Select course of action
Implement short term plans
Monitor actual plans
Respond to divergences from plan
Mission
Involves establishing the overall aims and goals of the organization
Smart objectives
Specific
Measurable
Attainable
Relevant
Timely
Budget center
Unit responsible for preparing budgets
Functions of budget committee
Issue timetables for budget preparation
Provide info to assist budget preparations
Compare actual results with budget and investigate variances
Coordinate the predation of budget including issuing manual
Budget officer
Ensures deadlines are met
Educates on budgetary control
Deal with budgetary problems
Liaise between budget committee and managers responsible for budget preparation
Budget manual
Charts the organization
Details budget procedures
Timetables the process
Defines responsibility of persons
Contains account codes for revenue and expenditure
Stages in budgetary process
Communicate policy guidelines to budget preparers
Determine limiting factor
Prepare budget using principal budgetary factor
Initial preparation of budgets
Coordination and review of budgets
Final acceptance of budgets
Budget review
Budget principal factor
Factor that restricts output
What items make up the master budget
Budget sofp
Budgeted sopl
Cash budget
When all functional budgets have been prepared, they are summarized and consolidated into what
Master budget
What if analysis
Form of sensitivity analysis which allows the effects of changing one or more data values to be quickly recalculated
Flexible budget
Budget that adjusts or flexes for changes in the volume of activity
When are flexed budgets prepared
At the planning stage, before production starts
Fixed budget
Not changed in response to changes in activity level, costs or revenues
Produced for a single level of activity
Comparison of actual results with different levels of activity is not useful for budgetary control purposes
Purpose of a fixed budget
Useful for controlling any fixed cost and non production fixed costs
Capital investment
Expenditure on non current assets for use to provide a return by way of interest, dividends or capital appreciation
What do capital investment decisions affect
Growth
Risk
Increased funding and company value
Complexity
Steps involved in the prerogative a capital expenditure budget
Identify investment required
Evaluate capital expenditure
Authorize capital expenditure and disposal
Implement, monitor and review investments
Simple interest
Calculated on the original principal only
Compound interest
Internet on principal + interst
Formula for future value
Fv = Pv (1+r)^n
Standard deviation
Measures the spread of data around the mean
Variance
Squared of deviation
Coefficient of variation formula
Standard deviation/mean
Coefficient of variation definition
Standard deviation as a proportion to the mean
Expected values
What an outcome is likely to be in the future if the decision can be repeated many times over
Expected values formula
Sum of px
Where p= probability of outcome occurring
Where x = outcome/results
Limitations of using expected values
Inappropriate for one off decisions
Heavily dependent on probability distribution
Ignores risk where risk is the spread of outcomes
Basic groups of remuneration method
Time work
Piece scheme
Bonus
Standard hour of production
Number of units that can be produced by one worker, working in the standard way, at the standard rate for one hour
Labour turnover rate
No of replacements/ average number of employees in a period * 100
Free inventory
Materials in inventory + materials on order from suppliers - materials requisitioned but not yet issued
Reorder level
Maximum * maximum
Minimum level
Reorder level - (average * average)
Maximum level
Reorder level + reorder quantity (minimum * minimum)
Average inventory
Minimum level + 1/2 reorder quantity
Coefficient of variation formula
Standard deviation/mean
Formula for correlation coefficient
R
Performance measurement
Ensuring the business runs as efficiently as possible
Mission statement
Organizations purpose and they are trying to achieve
Smart objectives
Specific
Measurable
Attainable
Relevant
Time bound
Are secondary objectives strategic, tactical or operational
Strategic objectives
Critical success factor
Performance requirement that is fundamental to competitive success
Examples of critical success factors
Profitbailtity
Market share
Productivity
Employee attitudes
Public responsibility
Key performance indicators
Measures that used to assess whether or not the CSF’s are being achieved
Components of time series
Trend + seasonal + cyclical + random
Goal congruence
When individuals make decisions that are in the self interest and in the interest of the organization
Dysfunctional decision making
Occurs when goal congruence does not exist or is impaired
Is motivating managers an important aspect of setting and achieving targets ?
Yes
Top down budget
Set without allowing the budget holder to have the opportunity to participate in the budgeting process.
Are appropriate in newly opened business and small businesses, in times of economic hardship and when managers lack budgeting skills
Bottom up budget
Budget holds are given the opposite to participate in the budget preparation process
Advantages of bottom up budgeting
More achievable targets based on local knowledge
Increases morale
Reduces workload of top management
Disadvantages of bottom up budgeting
Time consuming
Staff may lack knowledge required
Staff may set targets that are too easy
Should employees receive feedback on performance
Yes
Key features of feedback
Timely reports
Accurate information
Reports identify controllable costs and revenues
Budgetary slack
The difference between the minimum necessary costs and the costs actually incurred
Profit sharing scheme
A scheme where employees receive a certain proportion of their company’s year end profits
Advantages of profit sharing scheme
Company will only pay what it can afford out of profits
Bonus can be paid to non production personnel
Disadvantage of profit sharing scheme
Employees must wait till year end
Factors affecting profit may be outside employees control
Share option scheme
Gives it member the right to buy share in the company
Employee share
A scheme which acquired shares on behalf of a number of employees and must distribute it within a certain number of years of acquisition
Let mechanisms in the control process
Review of corporate plan to reflect significant new information
Actual performance compared with planned performance
Short term iam
Bias towards short term rather than long term performance due to managers performance being measured on short term results
Benchmarking
Measuring business performance against targeted performance
Internal benchmarking
Comparing one unit with another in the same organisation
Competitive benchmarking
Information is gathered about other competitors
Functional benchmarking
Internal functions are compared regardless of industry
Strategic benchmarking
Competitive benchmarking aimed at strategic action and organizational change
External conditions that can affect performance
Market conditions
General economic conditions
Government influences
Interpolation
Using a long of best fit to predict a value within two extreme points of the observed data range
Consumer price index
Measures the change in the average basket of goods and services
Base weighted price index/Laspeyres index formula
PnQo/PoQo * 100
Current weighted index (Passche index)
PnQn/PoQn x 100
Job costing
Consists of a single order or contract
Batch
Cost units that consists of a separate readily identifiable group of units
Service costing
Concerned with establishing the costs of services rendered
Formula for service costing
Total costs for period/number of service units in the period
Characteristics of service organizations
Simultaneous - cannot be inspected for quality in advances
Heterogeneous - services rendered will vary each time
Intangible - actual benefit cannot be touched
Perishable - they cannot be stored
Composite cost units
A cost derived by cost per kg per kk (useful when comparing costs for any weight traveling any journey)
Service department costing
Used to establish a specific cost for an internal service that is a service provided by one department for another rather than one sold externally to customers
Purpose of service department costing
- Control the costs and efficiency of the service departments
- Control the costs of the user departments and prevent the unnecessary use of services
Joint products
Two or more products which are output from the same processing operation but indistinguishable from each other up to the point of separation
By product
A secondary product whose value is small relative to that of the principal product
Objectives of a budgetary planning and control system
P - plan
R - responsibility
I - integration and coordination
M - motivation
E - evaluation and control
Responsibility center
A department or function in an organization that is headed by a manager who is responsible for its performance
Responsibility accounting
Segregates revenues and costs into areas of personal responsibility to assess the performance of each part of an organization
Master budget
Consists of Sopl Sofp and cash budget
Functional budget
Various departments in an organization
Cost control
Regulating the costs of operating a business and keeping costs within acceptable limits
Cost reduction
A planned and positive approach to reducing expenditure
Aproa
Approaches to cost reduction
Crash programmed to cut spending levels
Planned pregames to reduce costs
Value analysis
A planned approach to cost reduction which reviews the material composition of a product and so that improvements can be made which do not r it reduce the value of the product
Value engineering
Application of value analysis to new product so products are Designed at minimum cost
Aspects of value
Cost value: cost producing and selling an item
Exchange value: market value of the product or service
Use value: what the article does; the purpose or fulfills
Esteem value: prestige the customer attaches to the product
Value added incentive scheme
An alternative to profit as a business performance measure and can be used as the basis of an incentive scheme
External conditions that affect performance
Market conditions: entry of new competitions to the market is likely to impact on performance
Economic conditions: overall demand and supply will be affected by interest and inflation charges
Government influence: taxation, legislation
Profitability ratios
How efficiently a business can make profit from the resources it has available
Return on capital employed formula
PBIT/Capital employed
ROCE Definition
Shows how much profit has been made in relation to the amount of resources invested
Operating profit margin
PBIT/revenue
Operating profit margin definition
Return on sales
Gross profit margin
Gross profit/revenue
Gross profit margin definition
Shows the gross profit generated as a percentage of sales
Asset turnover
Revenue/capital employed
How the assets are being used to generate sales
Return on equity
Profit after tax and preference dividend/equity shareholders funds
Shows how much profit each unit of shareholders equity generates
Asset turnover
Measure of how well the assets are being used to generate sales
Current ratio
Current assets/liabilities
Quick ratio
Current assets - inventories/current liabilities
Inventory holding period
Inventory/cost of sales * 365
Inventory turnover
Cost of sales/inventories
Receivables collection
Receivables/credit sales * 365
Payables payment
Payables/credit purchases * 365
Hearing
Debt/equity
Interest cover
PBIT/interest charges
Hearing
Amount of debt in a company’s long term capital structure
Interest cover
Number of times a company can afford to cover its interest costs from the profit generated
Return on investment
Controllable divisional profit/divisional capital employee * 100
Two ways of measuring the performance an investment center
ROI and RI
Residual income
Measure of the center profits after deductions a notional or imputed interwar charge based on the total invested in the division multiplied by the company’s cost of capital
Residual income
Controllable profit - (controllable investment
Opportunity Cost
Value of the benefit sacrificed when one course of action is chosen in preference to another
Incremental costs
Extra costs which will be incurred in the future
