Costing Flashcards
Hi-Lo Advantages
Easy to calculate
Can apply to any level of production
Quick calculation
Easy to communicate
Hi-Lo Disadvantages
Assumes there is a linear relationship
Only takes into account 2 levels of output
Need to have 2 outputs with the same conditions
Feedback Control Definition
Learning from past events and reacting to them.
E.g adjusting budgets
Feedforward Control Definition
Reacting to current issues for future budgets.
E.g day of lockdown announcement
Lagging Definition
Delay in time waiting for money
Top Down Budgeting
AKA Imposed
Decisions made by senior management
Top Down Budgeting Advantages
Less people to agree, quicker to do
Senior management know long term plans
Top Down Budgeting Disadvantages
Lack of local knowledge
Lack of ownership - can be demotivating for staff
Bottom Up Budgeting
AKA Participative
Everybody is involved in creating the budget
Bottom Up Budgeting Advantages
Increased motivation as they have input - ownership of budget
Increased amount of local knowledge
Goal congruence - everyone working together towards the same thing
Bottom Up Budgeting Disadvantages
Slower - more people to agree to the budget
Budget can be manipulated for extra time / money - Budgetary Slack
Staff don’t know long term goals (like directors)
Budgetary Slack
Budget can be manipulated for extra time / money
Incremental Budget
Adjusting the last budget with any relevant changes
Most common type of budget
If there are any errors, they can continue to be included
Zero Based Budget
Budget starts from zero every time
More time consuming
Every part of the budget needs to be justified
Potentially more accurate - can learn from mistakes
Priority Based Budget
Bidding for resources by creating a budget / plan
Have to justify all parts of the plan
Resource allocated on priority (winner of resource)
Activity Based Budget
Budget based on ABC Costing
Looking at the activities that make costs happen
Rolling Budget
Rolling - as a month passes, add another month on
Budget is for a set amount of time
Contingency Budget
Backup budget
Plan for the unexpected
Budget Committee
Usually senior executives in a business form a committee
They AGREE and OVERSEE the ‘master budget’
Budget Manual
INSTRUCTIONS on how the budgets are to be prepared / created
May detail relevant people, policies, format. etc
Master Budget
All small budgets pulled together in one ‘master budget’
May include a budgeted P&L
Budget Holders
The PEOPLE who are CREATING / RESPONSIBLE for all of the small budgets which make up the master budget
Budget Accountant
The accountant to assist the committee, as the accountant will prepare the master budget
Materials Variance
Total:
AQ x AP
SQ x SP
Price:
AQ x AP
AQ x SP
Usage:
AQ x SP
SQ x SP
Labour Variance
Total:
AH x AR
SH x SR
Rate:
AH x AR
AH x SR
Efficiency:
AH x SR
SH x SR
Labour Variance - Idle Time
Idle time = adverse
+ Idle time to Labour efficiency = Favourable
Staff were actually efficient but couldn’t work due to idle time
Material Variance - Excess Iventory
Excess inventory = adverse
= Excess to Material usage = Favourable
Material usage was good, not their fault there was excess inventory
Variable Overhead Variance
SAME AS LABOUR
Only occurs when work occurs
Total:
AH x AR
SH x SR
Rate:
AH x AR
AH x SR
Efficiency:
AH x SR
SH x SR
Ideal Standard
Perfect conditions
No wastage, idle team & machine breakdowns
Unrealistic & demotivating
Attainable Standard
Allowed for some wastage & idle time
Realistic, but still challenging
Current Standard
Based on current working standards
Not trying to improve
Basic Standard
Unaltered over a long period of time
May be out of date
Revised Variances
1) Ignore the change - complete variance as normal
2) Split into:
Controllable (balancing figure)
Uncontrollable - the update to the budget - calculation
Sales Variance
Sales Price Variance:
Difference in selling price x number sold
Sales Volume Variance:
(Actual - Budgeted Sales) x Expected profit / contribution
Fixed Overhead Variance
Total FOH Variance:
Actual FOH
(Budgeted Units x OAR)
Expenditure Variance:
This is the “error” in original budget
Original budgeted FOH
(Actual FOH)
Volume Variance:
Actual - Budgeted Units x OAR
Limiting Factor Steps
Identify LF
Calculate contribution PER UNIT of LF
Rank
Produce optimal production plan
ABC Costing
Looks at activities that CAUSE the costs
Meaning costs will be allocated more accurately
Cost Pool
Amount of money to be split
Cost Driver
The method to split the costs out
Target Costing
We want to close the cost gap
Method to do this:
Value analysis - for existing products
Value engineering - for new / planned products
Looking at all aspects of the product, removing / adapting items that don’t add value
Life Cycle Costing
Add costs together over the life cycle of the product
Product Lifecyle
Development:
Market research, development & testing takes place
Patents / copyrights set up
Introduction:
Introducing product to the market
Big spend on marketing
Some companies start selling at a loss (loss leader) or offers
Growth:
Happens at different rates for different products
Maturity:
Got their space in the market
Steady sales
Reduced marketing
Businesses want this to last as long as possible
Decline:
Costs of closing
Disposal of excess stock
Gross Profit Margin
Gross profit / Revenue X 100
= %
Shows the amount of revenue which has been converted into gross profit
Operating Profit Margin
Operating profit / Revenue X 100
= %
Shows the amount of revenue which has been converted into operating profit
Return On Capital Employed
Operating profit / Capital employed X 100
= %
Shows how well the long term funding is being used and how much profit is being generated from it
Capital Employed
Non Current Liabilities + Total Equity
OR
Total Assets - Current Liabilities
Asset Turnover
Revenue / Capital Employed
= x times
Shows how many times the long term funding has been turned into revenue
Expense As % Of Revenue
Expense / Revenue X 100
= %
Shows how much revenue is spent on a specific expense
Receivable Days
Trade receivables / Revenue (only credit) X 365
= x days
Average number of days for credit customers to pay
Can be affected by: discounts, credit terms, bad debts, credit control department
Aim to be as small as possible / on target
Payable Days
Trade payables / cost of sales X 365
= x days
If no cost of sales, use PURCHASES
Average number of days to pay credit suppliers
If bigger: improve cash flow, possible late fees
If smaller: better supplier relationships, better terms, discounts, increased credit rating
Inventory Days
Average inventory / cost of sales X 365
= x days
Use closing inventory if can’t work out average
Average amount of days inventory is held for
Pros: buffer stock so can meet demand if there are shortages elsewhere
Cons: can become obsolete, have to pay to store / insure
Working Capital Cycle
Inventory days + receivable days - payable days
Ideally want this to be 0
Forecasting
Trying to predict what we expect to happen
In the planning stage
Seasonal Trend
Same things every year repeated
e.g christmas, easter, summer, winter
Cyclical Trend
Long term cycle
e.g recession - less disposable income, less money spent, business closures, job losses, interest rate change
Random Trend
Something out of the ordinary happens
e.g natural disaster
Variation
Differ from the trend
Can be seasonal, cyclical or random
Time Series Analysis
A Graph
Time Series Analysis: Calculation
Trend + or - Variation = Actual
Line of Best Fit
Trend Line
Interpolation
Within the range of information (on graph)
Extrapolation
Outside the range of information (on graph)
Multiplicative Model
Expected X Trend % = Actual
Linear Regression
The cost of production, using a fixed and variable cost
Y = a + bx
Linear Programming
- Make an equation for each limiting factor
- Make a common number
- Subtract from eachother
- Put answer into other equation
Value Added
In House Cost
The value each member of staff is generating
Revenue - (bought in services + materials used)
Indexation
The time/value of money relationship
Inflation / deflation
INDEX BASE = 100
Divide base cost by 100 (base number), multiply/divide other costs with this number to work out their index number
Expected Values
Takes into account uncertain circumstances
Uses probability, various outcomes are possible
Profit/Loss X Probability
PESTLE
Political
Economic
Social
Technology
Legal
Environment
Total Quality Management Costs
Prevention Costs
Appraisal Costs
Internal Failure Costs
External Failure Costs
Total Quality Management - Prevention Costs
Cost of trying to stop problems from occurring
Total Quality Management Costs - Appraisal Costs
Cost of monitoring quality in the business
Total Quality Management Costs - Internal Failure Costs
Cost of mistakes before the product gets to the customer
Total Quality Management Costs - External Failure Costs
Cost of mistakes once the product is with the customer
e.g recalls
Balanced Scorecard
4 PERSPECTIVES
Financial
Customer
Internal
innovation & Learning
Labour Efficiency Ratio
Should be hours / Actual hours = %
Actual Units Produced X Budgeted Hours Per Unit = should be hours
Shows how fast staff are working
Labour Capacity Ratio
Actual Hours / Budgeted Hours = %
Budgeted Units X Budgeted Hours Per Unit = Budgeted Hours
Shows how many hours are available compared to used
Labour Activity Ratio
Actual Units / Budgeted Units = %
Shows how many units should have been produced compared to how many were actually produced
ACE Check
Activity = Capacity X Efficiency
3 Point Moving Average
Calculate average based on previous, current and next period
Accounting Rate of Return - Initial Investment
Average Annual Profit / Initial Investment = %
Shows the conversion of investment to profit
Accounting Rate of Return - Average Investment
Average Annual Profit / Average Investment
Average investment = (Start investment + scrap value) / 2
Sensitivity Analysis
How much % could change before a decision would change?
Adv: Easy to understand, highlights key elements to a projects success
Dis: Only looks at one element, only looks at % of change doesn’t show profit in relation to change
Sunk Cost
Past cost, already paid for - NOT RELEVANT
Committed Cost
Cost already committed to regardless - NOT RELEVANT
Non Cash Cost
Not real money, e.g depreciation - NOT RELEVANT
Avoidable Cost
Only occurs based on the decision made - RELEVANT
Return on Investment (ROI)
Controllable Profit / Controllable Capital Employed
Residual Income
What is left over of the profit after the cost of funding the investment
Internal Rate of Return (IRR)
The discount factor where the value is £0
If DF is lower than IRR - Accept
If DF is higher than IRR - Reject
Inventory Turnover
Cost of Sales / Inventory
Written Question Guide - Performance Indicators / Ratio Analysis
Write introduction
Write headings for each ratio
Write one sentence for each ratio explaining each formula
State whether the variance is positive or negative
Write a conclusion - explain whether performance has improved
