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Management Accounting 2 > Exam Revision > Flashcards

Exam Revision Flashcards

1
Q

What is meant by “perfect information”?

A

Perfect information is where a future outcome can be predicted with COMPLETE accuracy

“The information can predict perfectly whether… or not”

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2
Q

What is the maximum that a firm should pay for perfect information?

A

Step 1 - calculate the expected value for the 3 products

Step 2 - With perfect information we will choose the product with the highest level of sales. Calculate the expected value at the highest level of sales for the 3 products.

The difference is the maximum a firm should pay for the perfect information. i.e. if the costs of collecting it don’t exceed

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3
Q

What are the building blocks? (performance measurements)

A

Framework to improve performance measures of SERVICE businesses

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4
Q

What 3 concepts should performance be measured on?

building blocks

A
  • Identifying the dimensions to be measured
  • Setting standards
  • Rewarding staff for achieving their performance targets
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5
Q

What are the 6 categories of Dimensions? (building block step 1)

A 
(Results)
- Financial performance
- Competitive performance
(Determinants)
- Quality of service
- Flexibility
- Resource utilisation
- Innovation
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6
Q

How do dimensions lead to improved results?

A

Controlling and improving performance of the DETERMINANTS will lead to improved results

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7
Q

When setting standards (part 2)

What properties should the standards/targets possess?

A
  • Ownership
  • Achievable
  • Fair & equitable
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8
Q

When rewarding staff for achieving their performance targets (part 3)
What properties should the reward schemes possess?

A
  • Clear - staff about the goals they are working towards
  • Controllable - related to areas that they can control
  • Motivating
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9
Q

What are the limitations of expected values?

A
  • The probabilities are usually very subjective
  • The actions of others could seriously undermine the accuracy of the data
  • Used to support a RISK NEUTRAL attitude, not risk adverse or risk seeker
  • More useful to refer to outcomes that occur many times over (based on historical rather than probability)
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10
Q

What is full cost plus pricing?

A

A method of determining the sales price

Calculate the full cost of the product and add a percentage mark up for profit

All fixed costs are included in the profit (e.g. fixed overheads - more profit maximising)

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11
Q

What is marginal cost plus pricing?

A

Calculate the marginal cost of production and add a profit margin

Fixed overheads are not included

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12
Q

What is the problem with cost plus pricing? (both methods)

A

They both fail to recognise that there will be a profit maximising combination of price and demand

They pay little attention to demand conditions and competitor prices

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13
Q

What is the high-low method?

A

Highest cost - lowest cost /
Highest units - lowest units

Finds the VC

Then to find FC:
high cost - VC(high units)

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14
Q

When is profit maximised?

A

When MC = MR

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15
Q

How is the optimum number of units calculated? and the optimum selling price?

A

Y = a + bx

b = change in price/ change in demand
a = selling price when demand is 0 - i.e. selling price - (demand/ fall in demand)

optimum units = a - 2bx
When MR = MC
MR = a - 2bx

optimum price = a - bx

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16
Q

What is risk management?

A

The process of REDUCING the possibility of adverse consequences by

  • reducing the likelihood of an event
  • taking advantage of the upside risk

It is a method of controlling risks

17
Q

Why is risk management important?

A

Identifying risks before they arise means the firm can organise a strategy to deal with them

The consequence of not doing this could be business failure

18
Q

What are the TARA approach to managing risk?

A

Transference - to a third party, i.e. insurance, or sharing the risk as a joint venture
They will suffer the loss if an adverse outcome arises

Avoidance - not investing, playing it safe

Reduction/mitigation - Limiting exposure or attempting to decrease the adverse effects
E.g. Hedging, risk pooling
But can reduce the upside of the risk as well as mitigating the downside

Acceptance - accept the risk will occur, e.g. it may rain
Only appropriate when the risk is SMALL

19
Q

Decision rules

What is the MAXIMAX decision rule?

A

Choosing the outcome with the BEST POSSIBLE result
i.e. that maximises contribution

Risk seeker would choose this

20
Q

Decision rules

What is the MAXIMIN decision rule?

A

Choosing the outcome the offers the LEAST UNATTRACTIVE worst outcome
i.e. maximising the minimum contribution

Risk adverse would choose this

21
Q

Decision rules

What is the MINIMAX REGRET decision rule?

A

Choosing the outcome that MINIMISES maximum regret from making the wrong decision
Minimises the opportunity lost from making the wrong decision
i.e. the lowest (not zero opportunity cost)

Compare best possible contribution (best of 3) with the actual contribution

22
Q

How will change in MC affect the optimal sales quantity and price?

A

Since MC = MR at profit maximisation
When marginal cost (MC) INCREASES
Profit maximising quantity of x will be LOWER
So selling price at profit maximising output will be HIGHER

MC increases
x = lower
p = higher

23
Q

How will a change in fixed overhead costs affect the optimal sales quantity and price?

A

Does not affect the MC

So will not affect the optimal sales quantity or price

24
Q

In general, How is Sensitivity analysis used?

A

Can be used in any situation as long as the relationship between key variables can be established
This can be done by changing the value of a variable and seeing how the results are affected

25
Q

For a company how is sensitivity analysis used?

A

How much costs and revenues would need to differ from their estimated value before the decision would change (or be indifferent)

Estimate whether a decision would change if costs were x% higher or y% lower

26
Q

How can not for profit organisation measure their performance?

A

Assessment of “values for money”

The 3 E’s

27
Q

Define sustainability

A

The concept of balancing growth with environmental, social and economic concerns

28
Q

Sustainability accounting (Burrito and Schaltegger, 2010)

A

“a process of information collection and communication to support internal decision making to implement corporate sustainability”

29
Q

Sustainability accounting (Burrito and Schaltegger, 2010)

A

“A process of information collection and communication to support internal decision making to implement corporate sustainability”

30
Q

What is the managerial perspective to sustainability accounting?

A

“inside out” - managers need relevant and reliable information to make decisions about solving social and environmental problems whilst strengthening competitive position

“outside in” - engaging and communicating with stakeholders to find out their views, expectations and goals to improve corporate economic performance.
Voluntarily external sustainability reporting can increase shareholder value

31
Q

What is the critical perspective to sustainability accounting?

A

It’s just a “fad”
Firms use it as a “buzzword”

Sustainability is insufficiently understood so putting a value on it is flawed and simplistic
Nothing is sustainable in the long-run anyway

Sustainability is not achievable so it should be abandoned

32
Q

What are the problems with conventional accounting systems?

A

Environmental costs cannot be apportioned to product, services and processes - instead just fixed overheads

Managers are unaware of these costs and therefore have no incentive to reduce them

Investment decisions are being made on the basis of incomplete information

Using EMA to make all significant costs visible so that they can be used when making decisions

Management Accounting 2 (1 decks)

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