Decision And Control Flashcards
What is costing information used for?
Setting selling prices
Valuing items of inventory
Identifying ways to reduce costs
Setting cost targets for production staff and managers
Using the cost targets set to review and imprice actual performance
Classifying costs by nature
Direct - traceable e.g. labour and materials
Indirect - overheads e.g. factiry rent, admin expenses
What is prime costs?
Total of direct costs
Classifying costs by function
Production costs - direct materials, wages of production staff are direct costs
Non-production costs - not specific to production, can be direct or indirect
Tyles of cost centres
Production cost centre Service cost centre Revenue centre Profit centres Investment centres
Classifying costs by behaviours
Variable costs
Fixed costs
Stepped fixed costs
Semi-vairable costs
Splitting a semi-variable costs
- Select highest and lowest production volume and related costs
- Find the difference between 2 volume figures and cost figures
- Divide the difference in cost by difference in volumes to determine the cost per unit
- Use the variable cost to establish the fixed cost
Types of costing methods
Absorption
Marginal
Activity based
Absorption costing - costing card
Prime costs + variable overheads + fixed production overheads = full production cost
Process of absorption costing
Identify costs
Allocate and apportion costs
Reapportion to service centre
Absorb indirect costs into cost units
Overhead Absorption Rate
OAR = production overhead / activity level
Under- and over-absorption of overheads
Predetermind OAR = budgeted production overhead / budgeted activity level
Deduct from actual spend
Marginal costing - cost card
All direct costs (prime costs) + variable production overheads = variable production costs
Reconciling absorption to marginal costing
Absorption costing profit
Add: opening inventory x fixed overhead absorption rate per unit
Less: closing inventory x fixed overhead absorption rate oer unit
Marginal costing profit
Activit based costing
Splits overheads into ‘cost pools’ which are then absorbed into production units by the cost driver
Contribution Analysis
Allows managers top understand how profit and cksts are affected by change in volume
Break-even analysis
Sales revenue - variable costs = contribution
Contributuion - fixed costs = profit
Therefore
Contribution = fixed costs
Break-even analysis
Volume of sales X contribution oer unit = fixed costs
Volume of sales to break-even = fixed cksts / contribution per unit
Break-even revenue
Break-even point in units X selling price
Fixed costs / C/S ratio
Margin of Safety
Units v budgeted sales volume = break-even sales volume
% = ((budgeted sales volume - break-even sales volume) / budgeted sales volume) X 100
Dealing with a target profit
Number of units to reach target profit = (fixed costs + target profit) / contribution per unit
Limiting factors on production
Shortages of raw materials
Shortages of experienced labour with a particular skills
Lack of manufacturing capability
Limiting factors on sales
Economic recession
Product being soecialis/niche
Lots of competitors reduces market shares
Calculate optimal production plan
1) identify limiting factor
2) caluclate contribution per phycisal unit of product
3) calculate contribution of the limiting factor
4) rank the products according to their contribution
5) follow ranking to work out optimal plan
Relevant costs
Must be a future cost
Must be an incremental cost
Must be a cash cost
Discount factors
1) identify all cash-flows that are relevant
2) add up the total cash flows for each year and multiply them by the relevant discount factor to give the present value for each year
3) add up the present values to give the ‘net present value’
Discount factor (decision rule)
Positive should be accepted
Negative should be rejected
If multiple - pick highest NPV
Target costing
1) start with the sales price per unit
2) caluculate the profit per unit that we want
3) decuct the profit from the sales price to give the total target cost we can avoid
4) if you are given certain elements cost you can deduct that dron iverakk target cost
Ethical considerations (costs saved by)
Limiting the use of resources and improving efficiencies
Reducing packaging materials
Installing energy efficient lighting in offices and stores
Minimising translortation costs
Linear regression
Y = a + bx Y = total costs at given output X = the production volume achieved A = fixed costs that are incurred no matter level of output B = variable costs per unit
Limitations of linear regression
Recent historical data may not be typical of ‘normal’ situation
Using historical data may not be indicative of future outcomes
Technique assumes linear relationship between 2 variables
If volume increases above levels previously it ,ay increase fixed costs
Time series analysis
Trend (T)
Seasonal Variation (SV)
Cyclical Variation
Random Variation
Time series additive model
TS = T + Sv
Time series multiplicative model
TS = T x SV
Time series steps to follow
1) calculate moving average figures
2) centre the moving averages to establish the trend
3) caluculate the seasonal variations
4) calculate predications for the forecast period
Price index
Measures change in price over a period of time
Quantity index
Measure change in quantity over time
Base period
Point intime which the index was started and future values are compared
Index Values calculations
(price now / price in base period) x 100
Index numbers ot create forecasts
Forecast price = price in the base period x (new index value / 100)
To deflate using an index
Cash flow x (index in earlier period / index in later period)
To inflate using an index
Cash flow x (index in later period / index in earlier period)
