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AAT Level 4 > Costing > Flashcards

Costing Flashcards

1
Q

Hi-Lo Advantages

A

Easy to calculate
Can apply to any level of production
Quick calculation
Easy to communicate

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2
Q

Hi-Lo Disadvantages

A

Assumes there is a linear relationship
Only takes into account 2 levels of output
Need to have 2 outputs with the same conditions

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3
Q

Feedback Control Definition

A

Learning from past events and reacting to them.
E.g adjusting budgets

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4
Q

Feedforward Control Definition

A

Reacting to current issues for future budgets.
E.g day of lockdown announcement

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5
Q

Lagging Definition

A

Delay in time waiting for money

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6
Q

Top Down Budgeting

A

AKA Imposed
Decisions made by senior management

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7
Q

Top Down Budgeting Advantages

A

Less people to agree, quicker to do
Senior management know long term plans

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8
Q

Top Down Budgeting Disadvantages

A

Lack of local knowledge
Lack of ownership - can be demotivating for staff

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9
Q

Bottom Up Budgeting

A

AKA Participative
Everybody is involved in creating the budget

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10
Q

Bottom Up Budgeting Advantages

A

Increased motivation as they have input - ownership of budget
Increased amount of local knowledge
Goal congruence - everyone working together towards the same thing

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11
Q

Bottom Up Budgeting Disadvantages

A

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)

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12
Q

Budgetary Slack

A

Budget can be manipulated for extra time / money

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13
Q

Incremental Budget

A

Adjusting the last budget with any relevant changes
Most common type of budget
If there are any errors, they can continue to be included

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14
Q

Zero Based Budget

A

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

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15
Q

Priority Based Budget

A

Bidding for resources by creating a budget / plan
Have to justify all parts of the plan
Resource allocated on priority (winner of resource)

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16
Q

Activity Based Budget

A

Budget based on ABC Costing
Looking at the activities that make costs happen

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17
Q

Rolling Budget

A

Rolling - as a month passes, add another month on
Budget is for a set amount of time

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18
Q

Contingency Budget

A

Backup budget
Plan for the unexpected

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19
Q

Budget Committee

A

Usually senior executives in a business form a committee
They AGREE and OVERSEE the ‘master budget’

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20
Q

Budget Manual

A

INSTRUCTIONS on how the budgets are to be prepared / created
May detail relevant people, policies, format. etc

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21
Q

Master Budget

A

All small budgets pulled together in one ‘master budget’
May include a budgeted P&L

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22
Q

Budget Holders

A

The PEOPLE who are CREATING / RESPONSIBLE for all of the small budgets which make up the master budget

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23
Q

Budget Accountant

A

The accountant to assist the committee, as the accountant will prepare the master budget

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24
Q

Materials Variance

A

Total:
AQ x AP
SQ x SP

Price:
AQ x AP
AQ x SP

Usage:
AQ x SP
SQ x SP

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25
Q

Labour Variance

A

Total:
AH x AR
SH x SR

Rate:
AH x AR
AH x SR

Efficiency:
AH x SR
SH x SR

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26
Q

Labour Variance - Idle Time

A

Idle time = adverse
+ Idle time to Labour efficiency = Favourable
Staff were actually efficient but couldn’t work due to idle time

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27
Q

Material Variance - Excess Iventory

A

Excess inventory = adverse
= Excess to Material usage = Favourable
Material usage was good, not their fault there was excess inventory

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28
Q

Variable Overhead Variance

A

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

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29
Q

Ideal Standard

A

Perfect conditions
No wastage, idle team & machine breakdowns
Unrealistic & demotivating

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30
Q

Attainable Standard

A

Allowed for some wastage & idle time
Realistic, but still challenging

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31
Q

Current Standard

A

Based on current working standards
Not trying to improve

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32
Q

Basic Standard

A

Unaltered over a long period of time
May be out of date

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33
Q

Revised Variances

A

1) Ignore the change - complete variance as normal
2) Split into:
Controllable (balancing figure)
Uncontrollable - the update to the budget - calculation

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34
Q

Sales Variance

A

Sales Price Variance:
Difference in selling price x number sold

Sales Volume Variance:
(Actual - Budgeted Sales) x Expected profit / contribution

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35
Q

Fixed Overhead Variance

A

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

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36
Q

Limiting Factor Steps

A

Identify LF
Calculate contribution PER UNIT of LF
Rank
Produce optimal production plan

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37
Q

ABC Costing

A

Looks at activities that CAUSE the costs
Meaning costs will be allocated more accurately

38
Q

Cost Pool

A

Amount of money to be split

39
Q

Cost Driver

A

The method to split the costs out

40
Q

Target Costing

A

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

41
Q

Life Cycle Costing

A

Add costs together over the life cycle of the product

42
Q

Product Lifecyle

A

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

43
Q

Gross Profit Margin

A

Gross profit / Revenue X 100
= %

Shows the amount of revenue which has been converted into gross profit

44
Q

Operating Profit Margin

A

Operating profit / Revenue X 100
= %

Shows the amount of revenue which has been converted into operating profit

45
Q

Return On Capital Employed

A

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

46
Q

Capital Employed

A

Non Current Liabilities + Total Equity

OR

Total Assets - Current Liabilities

47
Q

Asset Turnover

A

Revenue / Capital Employed
= x times

Shows how many times the long term funding has been turned into revenue

48
Q

Expense As % Of Revenue

A

Expense / Revenue X 100
= %

Shows how much revenue is spent on a specific expense

49
Q

Receivable Days

A

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

50
Q

Payable Days

A

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

51
Q

Inventory Days

A

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

52
Q

Working Capital Cycle

A

Inventory days + receivable days - payable days

Ideally want this to be 0

53
Q

Forecasting

A

Trying to predict what we expect to happen
In the planning stage

54
Q

Seasonal Trend

A

Same things every year repeated
e.g christmas, easter, summer, winter

55
Q

Cyclical Trend

A

Long term cycle
e.g recession - less disposable income, less money spent, business closures, job losses, interest rate change

56
Q

Random Trend

A

Something out of the ordinary happens
e.g natural disaster

57
Q

Variation

A

Differ from the trend
Can be seasonal, cyclical or random

58
Q

Time Series Analysis

A

A Graph

59
Q

Time Series Analysis: Calculation

A

Trend + or - Variation = Actual

60
Q

Line of Best Fit

A

Trend Line

61
Q

Interpolation

A

Within the range of information (on graph)

62
Q

Extrapolation

A

Outside the range of information (on graph)

63
Q

Multiplicative Model

A

Expected X Trend % = Actual

64
Q

Linear Regression

A

The cost of production, using a fixed and variable cost

Y = a + bx

65
Q

Linear Programming

A
  1. Make an equation for each limiting factor
  2. Make a common number
  3. Subtract from eachother
  4. Put answer into other equation
66
Q

Value Added

A

In House Cost
The value each member of staff is generating
Revenue - (bought in services + materials used)

67
Q

Indexation

A

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

68
Q

Expected Values

A

Takes into account uncertain circumstances
Uses probability, various outcomes are possible
Profit/Loss X Probability

69
Q

PESTLE

A

Political
Economic
Social
Technology
Legal
Environment

70
Q

Total Quality Management Costs

A

Prevention Costs
Appraisal Costs
Internal Failure Costs
External Failure Costs

71
Q

Total Quality Management - Prevention Costs

A

Cost of trying to stop problems from occurring

72
Q

Total Quality Management Costs - Appraisal Costs

A

Cost of monitoring quality in the business

73
Q

Total Quality Management Costs - Internal Failure Costs

A

Cost of mistakes before the product gets to the customer

74
Q

Total Quality Management Costs - External Failure Costs

A

Cost of mistakes once the product is with the customer
e.g recalls

75
Q

Balanced Scorecard

A

4 PERSPECTIVES

Financial
Customer
Internal
innovation & Learning

76
Q

Labour Efficiency Ratio

A

Should be hours / Actual hours = %

Actual Units Produced X Budgeted Hours Per Unit = should be hours

Shows how fast staff are working

77
Q

Labour Capacity Ratio

A

Actual Hours / Budgeted Hours = %

Budgeted Units X Budgeted Hours Per Unit = Budgeted Hours

Shows how many hours are available compared to used

78
Q

Labour Activity Ratio

A

Actual Units / Budgeted Units = %

Shows how many units should have been produced compared to how many were actually produced

79
Q

ACE Check

A

Activity = Capacity X Efficiency

80
Q

3 Point Moving Average

A

Calculate average based on previous, current and next period

81
Q

Accounting Rate of Return - Initial Investment

A

Average Annual Profit / Initial Investment = %

Shows the conversion of investment to profit

82
Q

Accounting Rate of Return - Average Investment

A

Average Annual Profit / Average Investment

Average investment = (Start investment + scrap value) / 2

83
Q

Sensitivity Analysis

A

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

84
Q

Sunk Cost

A

Past cost, already paid for - NOT RELEVANT

85
Q

Committed Cost

A

Cost already committed to regardless - NOT RELEVANT

86
Q

Non Cash Cost

A

Not real money, e.g depreciation - NOT RELEVANT

87
Q

Avoidable Cost

A

Only occurs based on the decision made - RELEVANT

88
Q

Return on Investment (ROI)

A

Controllable Profit / Controllable Capital Employed

89
Q

Residual Income

A

What is left over of the profit after the cost of funding the investment

90
Q

Internal Rate of Return (IRR)

A

The discount factor where the value is £0
If DF is lower than IRR - Accept
If DF is higher than IRR - Reject

91
Q

Inventory Turnover

A

Cost of Sales / Inventory

92
Q

Written Question Guide - Performance Indicators / Ratio Analysis

A

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

AAT Level 4 (6 decks)

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