Extra

Question 1

Why are “direct” and “variable” costs NOT the same?

Answer 1

Direct costs can be specifically traced to a particular cost object. The total direct costs for a particular objects INCLUDES both the direct variable costs and direct fixed costs.
(Direct costs also includes fixed costs!)

Variable costs are costs which vary in direct proportion to the level of sales.

Question 2

What is “process costing”?

Answer 2

Establishing the full cost of an activity, where the units of output are identical or nearly identical

the approach that is taken to full costing where all of the units of output are​ identical

Question 3

What is “full costing”?

Answer 3

Establishing the total of both the direct and the indirect costs of an activity

Question 4

What is “job costing”?

Answer 4

Establishing the full cost of an activity where the units of output are dissimilar to each other

Question 5

In the cash flow, when calculating operating cash flow, what do we do with “Interest payable?”

Answer 5

Add it to the profit before tax !

(Interest receivable is removed - that belongs to investing activities)

Question 6

CHALLENGING Question:

What do we do with a depreciation charge when there is a surplus on the disposal?

depreciation charge = 13m
carrying amount of disposal = 2m
surplus = 3.2m

Answer 6

Disposal must have sold for 5.2m (2m carrying amount + 3.2m surplus)

Actual depreciation would be 9.8 as (13m - 3.2m)

Question 7

what is important to remember when calculating NPV?

Answer 7

ADD the annual depreciation (profit before depreciation)

The operating profit ALREADY includes depreciation!
–> add it back!

Question 8

Equation to calculate IRR

Answer 8

(any random discount factor to make the project a negative NPV and use THOSE figures)

Question 9

Equation to calculate ARR

Answer 9

To calculate average capital employed do the initial cost + depreciation divided by 2 (this gives the mid point, basically the value of the investment itself in exactly the MIDDLE timespan)

Question 10

Do we include depreciation in the income statement and statement of financial position?

Answer 10

YES!!!!

statement of financial position (balance sheet) –> remove from Non current assets

income statement –> expense

Question 11

If an machine, worth 18,200 is exchanged along with 12,000 in cash for another machine costing 30,000. How does this affect the various sheets?

Answer 11

Balance sheet:
- NCA (minus 18,200, add 30,000)
- Cash (minus 12,000)

Income statement:
- “loss of disposal on machine” = 200 (subtract as an expense)

Question 12

When calculating NPV, what is important to remember about sunk costs and interest charges?

Answer 12

• ignore sunk costs (anything before the project)
• ignore interest charges as this would be double counting, the discounting already takes into account the cost of financing