Exam Practice Flashcards
Calculating transfer pricing costs
Calculate the total profit or loss made by Sales Division for the month, if the transfers are made at full costs plus a mark-up of £10 per unit.
The variable costs are £45 per unit for Production Division and £15 per unit for Sales
Division. Apportioned fixed overheads are £25 per unit for Production Division and £20 per unit for Sales Division. The selling price of the final product is £120 per unit, and 15,000 units are sold in total for a month.
15,000 units x @£(120 – (45+25+10) – 15 – 20) = £75,000
The variable costs are £45 per unit for Production Division and £15 per unit for Sales
Division. Apportioned fixed overheads are £25 per unit for Production Division and £20 per unit for Sales Division. The selling price of the final product is £120 per unit, and 15,000 units are sold in total for a month.
Calculate the total profit or loss made by Production Division for the month, if the transfers are made at variable costs and then the division is credited with pro-rata contribution determined with reference to variable costs.
Calculate maximum monthly profit given constraints:
Max 1,000 demand per model, 20,000 assembly hours total, £3m fixed costs
Find contribution per assembly hour for each model. Prioritise production based on this.
Compact car highest, so make max of that. 11 ASSEMBLY HOURS PER CAR ,’, 11X 1k = 11,000 hours used, 9,000 remaining
Contr. per unit x 1000 = 8,470,000
Saloon next highest on contr. per assembly hour -> takes 14 hours
9,000/14 = 642.82 ,’, 642
Contr. per unit of saloon x 642 = £6,246,000
£8.47M + £6.42M - 3M Fixed Costs = Max profit
By providing examples, briefly explain where profit centres and cost centres can be set in a decentralised organisation with regional divisions.
Each regional division and the whole organisation can be set as profit centres. [1mk]
Within each regional divisions (or at the head office), departments such as accounting, legal,
human resources, research and development, procurement, and production can be set as cost centres
Learn ALL VARIANCES FORMULA’S
Remember to put A or F if its adverse or favourable
Using variance analysis reconcile the budget cost and actual cost for the period
Calculate total budgeted cost and write that at the top
Below, calculate all other costs and the variance between budgeted and actual, write adverse or favourable.
MAKE SURE YOU DO:
- Price variance for each product
- Usage variance for each product
- Labour rate variance
- Labour efficiency variance
- Variable over head rate variance
- VO Efficiency variance
- Fixed overhead expenditure variance
- FO volume variance
Write total actual cost at the bottom
Split variances into operational and planning variances
Calc. planning variance
ENSURE you split Operational Variance into:
- Operational Price variance
- Operational Usage variance
Discuss whether standards should be revised with hindsight when bonuses are
awarded based on variances from standard.
If the planning variance is completely outside the control of the managers then a revision
should be allowed for bonus purposes.
Issues with this however:
- Depends to what extent the planning variance was out of control e.g. external demand supply shifts increasing price is defo out of manager’s control, but not if one supplier went bankrupt and the choice of which alternative was up to the supplier - could say they had some control.
- Depends how much the managers were involved in the planning process as well, may have been up to strategic management instead.
- Managers may have put padding/slack into the budget if they were involved
Process Accounts formula: Aids in calculating normal loss, abnormal loss etc.
Opening WIP + Units inputted = Complete output + Closing WIP + Normal Loss +/- Abnormal gain/loss (Subtract AG, Add AL!)
If you’re given some but not the others, use this formula to calculate it before doing the Eq.Units or process account
Discuss what other factors firms should consider before deciding whether to
process a product further
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Is there a market for the product in the unprocessed state?
Would stopping the processing disappoint customers? Reputational risk as a result?
Would the fixed costs really be saved?
Potential loss of technological/competithe advantages! may be now producing a product many can make similair, if it was processed further it may have been more unique thus commanding higher price/demand
What to do with spare capacity, could it be used for other products?
calculate the level of output at which the company would be financially
indifferent between the two alternatives
For the alternatives to be financially indifferent, saving in total variable costs should be equal to
the increase in total fixed overheads.
If we denote the number of units at which the saving in VC
equals the increase in FC as Q:
Q x @£1.20 = £90,000
Q = 90,000/1.20 = 75,000 units
,’,
If production is expected to be less than 75,000 units, use the current source. If production is
expected greater than 75,000 or greater, use the new source
What selling price would maximise profit?
P = a- bQ
Prof. max is when MR=MC
MC = Variable cost
MR = a - 2bQ
Comment on other factors, both financial and commercial, which should be considered
before deciding which material to use and the price which should be charged
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Reputational risk? Maybe reduced quality from new supplier
Is the price/demand data accurate?
Would a price reduction/rise be acceptable and how would competitors react. Could trigger a price war?
Would production capacity be full or not? Increase in production may cause labour shortages
Profit Maximising Tutorial (INSERT CARD)
The division in Bristol has a capital employed of £900,000 and an imputed interest of
5%. The division is considering a new investment of £50,000, which will generate an
additional profit of £5,000. Assuming the current ROCE of the division is 15%, calculate
the current Residual Income, and calculate the new ROCE of the division if the project is
accepted [ignore depreciation]
Profit = ROCE x CE = 15% x £900,000 = £135,000
RI = Profit – imputed interest % x CE = £135,000 - 5% x £900,000 = £90,000
New profit = £135,000 + £5,000 = £140,000
New CE = £900,000 + £50,000 = £950,000
New ROCE = Profit / CE = 140,000 / 950,000 = 14.74%
How to calculate overall company profit if there is transfer pricing between divisions
Ignore all transfer costs between divisions, only FCs and VCs included
FINDING PROFIT FROM GRAPHS AND FUNCTIONS
Process costing
Apportioning based on volume, sales value and NRV
Columns - Product A, Product B
Sales/Revenue
Joint costs (total final process cost from previous Process table) + further costs - revenue from byproduct. Apportion based on question e.g. volume, sales in ratio format
Further processing costs
Profit
ROCE
2023 Q B3
Profit/Capital employed
Q Will tell you how the firm calculates CE, typically it is:
Capital Employed = NCA + (Current Assets - Current Liabilities)
Further tips:
If profit increases as result of transaction, add it to profit for ROCE formula
If any Current Asset is reduced, remove from CE
If firm disposes of an asset, the saving of depreciation for that year should be added to PROFIT for ROCE calc.
Should also remove the book value of the asset from CE
If firm buys a new asset, subtract depreciation for the year from Profit calc.
Also add the value of the machine to CE
Table of Equivalent Units
Use to calculate unknown value:
Opening WIP + Units inputted = Complete output + Closing WIP + Normal Loss +/- Abnormal gain/loss (subtract AG, Add AL!)
Table (£s) - opening WIP / Input / Total cost
Materials
Less scrap
Total mats
Conversion
Total
Next table (units):
Completed units / Closing WIP / Abn. loss or gain / Total EUs / Cost per EU (Total cost from same row, left side/Total EUs)
same rows as before
In Cost per EU column, add the total cost per EU from mats & conversions
In Completed Units column for Conversion, put the total completed units again, like in above cell. Then
Process account
Left side: Units / £
WIP B/F
Materials
Conversion
Right side: Units / £
Process 2 / £ = UnitsCost per EU
Normal Loss / £ = NLScrap value
WIP C/F / £ = Units from mats row in EU table Cost per EU in Mats row + Unit from conversion table * cost per EU in conv. row
Abnormal loss / £= ALCost per EU. - IF THERE’S ABNORMAL GAIN, PUT IT ON LEFT SIDE
Totals at bottom should be equal
Scrap Account
Left side: Units / £
Normal loss
Abnormal loss
Right side: Units / £
Cash
If there’s abnormal gain, put on Right side.
abnormal gain or loss £value should be the ‘gain or loss * scrap value’. Cash is the balancing figure
Operating statements (absorption)
Detailed statement:
Budgeted profit:
Sales volume variance
Standard profit on actual sales
Sales price variance
Profit after sales variances
Cost variances
Two columns: Favourable, Adverse
Materials - Price
- Usage
Labour - Rate
- Efficiency
Variable O/H - Rate
- Efficiency
Fixed O/H - Expenditure
- Volume
Actual Profit
Stocks valued at standard absorption cost
Standard statement - Just the difference between budgeted and actual
Standard cost:
Materials
- Price
- Usage
Labour
- Rate
- -Efficiency
Variable o/h:
Rate -
Efficiency -
Fixed o/h:
Rate -
Efficiency -
Actual cost:
Variance analysis under marginal costing -
Main differences from absorption costing
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1) Sales volume variance calculated using standard contribution rather than standard profit
(Actual sales volume - Budgeted sales volume) x Standard contribution
2) Fixed overhead volume variances are all zero (AS WE DO NOT ABSORB IN MARGINAL COSTING)
- only the fixed overheaad expenditure variances will appear in the operating statement
3) All other variances are unchanged
Operating Statement under Marginal Costing
Budgeted Contribution
Sales volume variance
Standard contribution on actual sales
Sales price variance
Contribution after sales variances
Cost variances
Two columns: Favourable, Adverse
Materials - Price
- Usage
Labour - Rate
- Efficiency
Variable O/H - Rate
- Efficiency
Actual contribution
Actual fixed O/H
Actual profit
Stocks valued at standard marginal cost
Sales Volume - Further split
Sales volume variance can also be split into two further variances:
- Quantity
- Mix
Sales Mix Variance def. and formula
It indicates the effect on profit of changing the mix of actual sales from the standard mix.
(Actual sales vol. x Average prof. per unit in actual mix) - (Actual sales vol. Average prof. per unit in standard mix)
Sales Quantity variance def. and formula
It indicates the effect on profit of changing the total amount sold from the budget (valued at average contribution per unit).
(Actual sales vol. x Average prof. per unit in standard mix) - (Budgeted sales vol. x Average prof. per unit in standard mix)
Sales Quantity Variance split
Market share variance
Market size variance
Market size variance
[(Budgeted market share x Actual Market Size) -Budgeted Sales Volume] x
Standard Contribution per unit
Budgeted sales vol = Budgeted market share x Budget market size
Market Share Variance
[Actual sales vol. - (Budgeted market share x Actual market size)] x Standard contribution per unit
Actual sales vol = Actual market share x actual market size
Calculating value of abnormal gain/loss to go in Income Statement
Abnormal gain x cost per EU, less scrap proceeds foregone (abnormal gain x scrap value)
Abnormal loss is just x cost per EU
