EXAM Flashcards
Activity Based Costing is
a method that identifies activities performed within the organisation as it delivers goods and services
cost driver rate formula
activity costs / activity volume = cost driver rate
target cost formula
market price LESS return on sales
basic CVP model is
revenue = var costs + fixed costs + income
revenue estimated as
sales price * units sold
total variable costs estimated as
variable costs per unit * units sold
total fixed costs will
remain constant
at the breakeven point
income = 0
so revenue = var costs + fixed costs
number of units sold to breakeven
number of units breakeven =
fixed costs / (unit contribution margin - variable cost per unit)
unit contribution margin
(sales - variable costs) / sales
break even point in units
fixed expenses / unit contribution margin
break even point in sales
fixed expenses / contribution margin ratio
contribution margin ratio
contribution margin / sales
(units sold to reach) target income
fixed expenses + target income / unit contribution margin
job costing is used when
units are distinctive, have high value and costs can be traced to the job
Basic cost flow model
BB + TI - TO = EB
POHR
budgeted total units in the allocation base
overhead applied
POHR * Actual Activity
job order costing for decision making
provides overview of profitability on individual jobs and gives a quick overview of info to plan future costs
Absorption Costing
direct material
direct labour
variable man o/hd
fixed man o/hd
Variable Costing
direct material
direct labour
variable man o/hd
managing scarce resources
contribution margin per unit of scarce resources should be maximised
influences on pricing
prices are based on costs, and are determined by the market forces
life cycle costing tracks
costs attributable to each product/service from start to finish
linear programming applies to
production situations with lots of products. aims to find the product mix that maximises products.
Theory of constraints
seeks to improve products processes by focusing on constrained resources
bottlenecks are
constraints
6 step process (theory of constraints)
1) identify appropriate measure of value
2) identify organisations bottleneck
3) use bottleneck to produce only high value products
4) synchronize other processes to bottleneck
5) increase bottlenecks capacity
6) find the next bottleneck
centralised
decisions are handed down from the top and subordinates carry them out
decentralised
decisions are made at divisional and departmental levels
ROI formula (1)
income/invested capital * 100
Weighted average cost of capital is
weighted average combination of cost of debt and equity
WACC formula
(after tax cost of debt* market value of debt)
+
(cost of equitymarket value of equity)
/ (market value of debtmarket value of equity)
residual income formula
investment centres profit - (investment centres invested capital * imputed interest rate)
EVA formula
investment centres after tax operating profit -
(investment centres assets - liabilities) * WACC
financial performance measures include changes of
revenues/costs/cash flows/operating income/invested capital/share price
Non financial performance measures help managers
focus on profit drivers and recognise lags between financial and non financial performances
Return on Capital Employed formula
company’s EBIT/ capital employed
Weighted Average Contribution Margin
contribution margin * % of total cost
Performance Measurement leads to dysfunctional behaviour
depends on the design of management system
good systems will
ABM 4 steps
1) cost classification
2) work out monthly revenue
3) target cost
4) cost reduction target
ABM step 1
cost classification
unit level/batch level/product level/facility level/customer level
cost driver rate * cost driver volume
ABM step 2
monthly revenue
monthly revenue - total costs
ABM step 3
target cost
revenue - ROR per month = monthly target cost
* duration = total target cost
ABM step 4
cost reduction target
total cost * duration - target cost = cost reduction
total cost / cost reduction = %
CVP 4 steps
1) estimated income statement
2) breakeven
- – changes
3) new breakeven
4) new income statement
CVP - income statement
sales less VC = contribution margin
less fixed costs = operating income
CVP Breakeven
selling price - VC = unit CM
unit CM * product mix = WAUCM
WAUCM / fixed costs = breakeven volume
- breakeven by product
Balanced Scorecard
-suitable for large organisations
-high cost of implementation
-takes a long time
HOWEVER customer satisfaction may outweigh these
Standard costing
- figures given too late
- not flexible enough to adapt to changes
- variances were overused causing loss of morale in workforce
who made the balanced scorecard?
kaplan and norton
relevant costs
future differentiated cash flows (mention sunk costs and opportunity costs)
relevance depends on info. short term decisions have diff costs to long term
