Decision Making

Question 1

Accountants view of cost behaviours

Answer 1

Assumes that the total cost and total revenue vary on a straight line basis as the volume of output and sales increases

Question 2

Economists view of cost behaviour

Answer 2

Sees total cost varying in a non-linear manner due to economies of scale and sees total revenue gradually levelling off as customers reach the point where they do not wish to buy more of the item

Question 3

Contribution

Answer 3

Defined as sales minus variable cost

Question 4

How to calculate break even point

Answer 4

Contribution per unit is compared with fixed overhead cost to calculate break-even point

                                  Fixed costs  Break even point =   ———————
                            Contribution per unit

Question 5

A break even chart and a profit volume chart are useful ways of showing how

Answer 5

Contribution and profit change as the volume of output and sales increases

Question 6

Break even analysis

Answer 6

Can be used to explore the effect of changing unit selling price, unit variable cost or fixed cost

Question 7

Why does break even analysis have limitations

Answer 7

It is only suitable for short term decision making and can only focus on one product at a time

Question 8

A break even chart

Answer 8

Is a graph that shows sales and costs over a range of activity, including the activity level at which total costs equal total sales and at which the business makes neither a profit nor a loss

Question 9

Cost volume profit analysis means

Answer 9

Comparing sales revenue with variable cost and fixed cost to calculate profit or loss over a range of activity, to help with short-term decision making

Question 10

Profit volume chart

Answer 10

A graph on which the horizontal axis shows the volume, measured by activity levels in £s of sales, and the vertical axis shows the profit at that activity level

Question 11

Profit/volume ratio

Answer 11

Calculated as contribution as a percentage of sales value

Question 12

Calculation of contribution can be paper in short term for decisions such as

Answer 12

• decisions on special orders
• abandonment issues
• limiting factors
• make or buy

Question 13

If the market accepts full cost pricing

Answer 13

Pricing decisions may be related to cost

Question 14

If there is heavy competition and manufacturers take whatever price they can get in the market

Answer 14

Pricing decisions may be related to marginal cost

Question 15

Marginal cost

Answer 15

the cost added by producing one additional unit of a product or service.

Question 16

Profit/ volume ratio

Answer 16

Contribution per unit
—————————— X 100
Selling price per unit

Question 17

A budgetary system

Answer 17

Serves the needs of the management in making judgements and decisions, exercising planning and control and achieving effective communication and motivation

Question 18

Long range planning

Answer 18

Begins with a vision statement setting out a vision for the future direction of the organisation
From this vision the long range objectives are set covering a period of perhaps three to five years

Question 19

Strategy

Answer 19

Describes the courses of action to be taken in achieving the long-range objectives
The different functions of the organisation will work together in developing the strategy

Question 20

Budgetary planning and control

Answer 20

Provides a method of quantifying the strategy of the business

Question 21

A budget

Answer 21

A detailed plan which sets out, in money terms, the plans for income and expenditure in respect of a future period of time
It is prepared in advance of that time period and is based on the agreed objectives for that period of time, together with the strategy planned to achieve those objectives

Question 22

Administration of a budget requires

Answer 22

A budget committee which will design the strategy, co-ordinate the inputs and communicate the objectives and strategy

Question 23

Budget preparation usually starts with

Answer 23

The sales budget because sales are the critical factor

Question 24

After the sales budget

Answer 24

Operational budgets are formed, leading to a finance plan and then the master budget

Question 25

Master budget

Answer 25

Consists of a budgeted profit and loss account, a budgeted balance sheet and a budgeted cash flow statement

Question 26

Budgets may be

Answer 26

Participative through a bottom-up process

Or imposed through a top-down process

Question 27

A negotiated budget

Answer 27

Based on a mixture of both approaches (participative and imposed)

Question 28

Co-ordination and review by the budget committee may lead to

Answer 28

A further round of negotiation in order to arrive at the best position for the entity as a whole, before final acceptance by the budget committee

Question 29

The benefits of budgeting are seen in

Answer 29

Planning, control, communication and co-ordination

They also provide a basis for performance evaluation

Question 30

Control through the use of standard costs per unit leads to

Answer 30

A more specific analysis than is available where control is through the use of budgets

Budgets give only the total cost of each line item