financial statements or organisations // introduction to costing Flashcards
departmental records, incomplete records, partnership, clubs and non profit org, manufacturing // inv valuation, labor, overhead, job cost
advantages of expanding departments (4)
- Expanding one of the departments can allow business to gain higher profits.
- This will let business to gain higher reputation in market.
- There can be more floor space available for use
- specializing in one department can give more comparative advantages
disadvantages of expanding departments (4)
- There will be higher spending when expanding department.
- It will require more staff and managers to operate the department.
- Other departments may get losses if business specialise on one department.
- might get loan for expansion, increasing liability
Positive points in favour of preparing departmental accounts using apportionment of costs. (4)
-reasonable estimate of how costs relate to departments.
- enables the profit for each department to be calculated.
- Decisions can be made supported by information.
- Quickly shows the contribution that each department makes to the profitability of the business.
Negative points of preparing departmental accounts using apportionment of costs. (4)
- only an estimate of costs.
- Cost ‘drivers’ may not allocate a cost accurately/or be difficult to establish.
- Decisions may be made on incorrect information.
- Complementary departments may be affected by decisions about other departments.
advantages of incomplete records (4)
- It will save time when preparing accounts.
- There is no requirement of expensive software to use incomplete records.
- This will need little accounting knowledge- no need to hire qualified accountant.
- Incomplete records are convenient and flexible.
disadvantages of incomplete records (4)
- Difficulty of checking arithmetical accuracy of the accounts
- If the information is missing, the figures for profit may be inaccurate.
- It can be hard to detect errors and fraud.
- doesn’t reflect a true and fair view
goodwill
Goodwill is an asset that doesn’t have any physical appearance. It is considered as intangible asset.
reasons for not recording goodwill (2)
- It doesn’t have physical existence
- It can overestimate the non-current assets in the balance sheet
Reasons of subscription require adjustment for sums paid in advance and in arrears
The matching concept must apply to ensure that the income for the period is Matched against the
expenditure of the period.
Long-term life membership advantages (4)
- The club is able to make payments to creditors since the bank balance will be stimulated.
- The 10 year membership will increase the liquidity in the club.
- Surplus will increase that can be used in the development of club.
- New members will join the organization which will improve the reputation.
- Reduces bad debts as given in discount
Long-term life membership disadvantages (6)
- The organisation will loose some money in the short term.
- Increase in the number of members will stimulate the responsibilities.
- If the expenses are too high then it will be difficult for firm to improve with the long term
membership. - Liability of the club will increase as people will subscribe in advance for long term membership
- Liability to provide services after cash have been spent
- Less overall income due to few members interested in this type of offers due to large upfront payment
Advantages of provision for doubtful debts on subscription (4)
- Provision for doubtful debts on subscription enable club to analyse membership accounts more
accurately. - It can be used to cut costs of club as future bad debts can be detected.
- Club will be warned about subscriptions who may not pay their dues.
- Management issues can be solved if provision for doubtful debts on subscription is calculated.
disAdvantages of provision for doubtful debts on subscription (3)
- It will require time to calculate PDD on subscription.
- Specialists are needed to calculate PDD on subscription.
- The predicted measurement of PDD on subscription may not be accurate because of
uncertainty
advantages of preparing receipts and payments account (3)
- Total receipts and payments available to view.
- The amount of cash at the end of the period.
- Can be used to verify the accuracy of the cash book.
disadvantages of preparing receipts and payments account (3)
- It is not part of the double entry system.
- Does not show accruals and prepayments of income and expenditure.
- It doesn’t distinguish between capital and revenue expenditure.
Decision of club and societies in considering bad debts. (2)
Prudence concept apply.
Not all debts will be collectable and therefore a significant provision should be made.
difference between receipts and payments acc and income and expenditure ac (3)
- Receipts and payments account is a summary of cash transactions and Income and expenditure account is a summary of expenditure and income
- rp is real ac, i.e. is nominal
- rp shows bank and cash receipts, and income and exp shows result of operation
treatment of provision for unrealised profit in income statement
The value of the adjustment would be recorded. An increase in the provision would be recorded to
reduce the profit
treatment of provision for unrealised profit in financial
The total value of the provision would be deducted from the Inventory of finished goods
net realisable value
NRV= selling price – additional costs, method used to evaluate an asset’s value for
inventory accounting
advantages of FIFO (4)
- It is appropriate for valuation of inventory of products that are perishable.
- Easy to calculate and thus time saving measuring the inventory.
- This is realistic as relevant to the movement of inventory.
- FIFO is acceptable to IRS and tax authorities.
disadvantages of FIFO (3)
- The price of the inventory issued to manufacturing is likely to be out of date.
- If prices are rising then it will maximise cost of sales and increase profits which then results in
higher tax. - It might not conform with prudence concept by increasing profits and assets valuation
Advantages of LIFO (4)
- Selling prices reflect up to date costs, as inventory is issued at most recent prices.
- The quality of products will remain high as delivered to customers when LIFO is used in
valuation of inventory. - When prices are falling then issues will be close to the current replacement costs.
- Fairly easy to calculate and this saves time for business.
Disadvantages of LIFO (3)
- This method is not recommended for perishable goods.
- When prices are falling, remaining inventory will be overvalued.
- May understate cost of sales and so not be sensible
Acceptance of cheap rate offer ADVANTAGES (5)
Cheaper manufacturing cost and so possibility of higher profits.
Less on manufacturing responsibilities.
Can concentrate on marketing products.
No manufacturing expense, no management of stuff.
Liquidity position of business can be improved by selling fixed asset of business
Acceptance of cheap rate offer DISADVANTAGES (6)
Loss of manufacturing independence.
The offered price may run in long run.
Supplies placed in the hands of another company.
Problems in exchange rate difficulties.
Loss of control of quality and product management.
Social accounting consideration: loss of jobs, rise of unemployment may lead to poverty and lower standard
of living.
Fixed cost
those costs which remains same and constant and does not varies with the level of output. E.g. rent
Semi-fixed cost
contain both fixed cost and variable cost element. The variable element varying with the level of output. E.g. Electricity,
variable costs
Variable costs are costs that change as the volume changes.
semi variable costs
Costs are fixed for a set level of production or consumption, and they become variable after this production level is exceeded.
Allocated cost:
occurs when a cost can be directly attributed to a specific departments
Apportionment
occurs when a cost cannot be directly attributed to a single department but the cost is apportioned on a reasonable basis. E.g. floor area.
Absorption of overheads
Once all of the costs have been
allocated and apportioned to a
cost centre, the total overhead
cost must be charged to an
individual cost unit
Why is cost of production important (2)
- to calculate how much amount is spent on the production of good. So that per unit cost can be found and selling price can be set.
- in order to compare the cost of production of goods
difference between direct costs and indirect cost (2)
- Direct costs are included in the prime cost whereas indirect costs are included in the factory overheads.
- Direct costs are directly related to production whereas indirect costs are classified as factory overheads or revenue expenses
why manufacturing companies does depreciates its equipment and machineries? (4)
Decrease in value as the assets/machineries wear and tear/obsolesce.
Spread the cost over the years of useful life.
It follows the prudence concept.
Doesn’t overstate the profit taking.
Periodic Inventory
Under the periodic inventory system, a company doesn’t know its unit inventory levels nor its COGS until the physical count process is complete.
may be acceptable for a business with a low number of stock in a slow-moving market
perpetual inventory
Under perpetual method, the application of the stock valuation technique such as FIFO or LIFO
will take place after receipt or issue of stock has taken place in an ongoing basis
advantages of perpetual system (4)
- continuously updates the inventory asset ledger, gives management an instant view of inventory
- updated COGS as movements of inventory occur
- checks individual inventory items. This means that if there are any defective items, the source of the problem can quickly be identified.
- perpetual system is tech-based
disadvantages of periodic system (4)
- time-consuming and can produce stale numbers that are less useful to management.
- cannot give accurate COGS figures between counting periods
- would not allow for prompt resolution of defective goods
- manual
inventory Valuation
The method by which inventory is valued for issues/sales. (1)AO1
There are many methods that can be used such as FIFO and LIFO.
inventory rotation
Stock rotation relates to physical rotation of stock, the oldest stock will be issued first to avoid deterioration
What is the effect on Net profit if the business changes to LIFO method?
Where LIFO is used the value of closing stock is lower than where FIFO is used.
Cost of goods sold will be higher
the Gross and Net profit will be lower.
What is the effect on Net profit if the business changes to FIFO method?
If the cost of inventory rises over time, FIFO will result in a lower COGS and a higher gross profit than LIFO
daywork advantages (4)
- Labour costs are easy to plan and budget
for - Quality may improve as employees not
under time pressure - Employees know the level of
remuneration in advance - Decreased absenteeism
daywork disadvantages (4)
- No employee incentive to increase
productivity and output - Rewards all employees Equally, regardless of performance, may be demotivating
- Supervision is needed to ensure work is
completed - Inefficient working may require extra
overtime working, adding to costs
timework advantages (5)
Workers are guaranteed a fixed wage each week provided they work the agreed hours.
The method is uncomplicated and easy for the workers to understand.
The wages are easy to calculate.
The method can be applied to all workers.
Quality of work is not sacrificed as consequence of attempts to increase earnings.
timework disadvantages (4)
All workers are paid the same regardless of whether they work well or not.
There is no incentive for them to make any extra effort.
Workers may slack during normal hours in order to work overtime at enhanced rates of pay.
It may be necessary to install rigid systems of control to ensure adequate productivity
piecework advantages (3)
Payments of wages linked directly to
output
Employees are encouraged to work
hard
Employees work faster, more efficiency
piecework disadvantages (5)
Costs are unpredictable
Quality may suffer
Employees cannot plan their income
May be difficult to calculate a fair rate for the task
More expensive to operate
bonus scheme advantages (3)
- Some element of wages linked to output,
productivity should increase - More efficient workers will earn more
- It is an opportunity to encourage non-production staff
bonus scheme disadvantages (3)
- Difficult in establishing bonus rate with staff
- Quality might suffer
- Remuneration calculations are difficult
group bonus scheme
reward all members of a group of workers for efficiency gains and time savings when they work together
Labour Productivity
relationship between the inputs used and the outputs gained, measurement to the number of units produced per hour.
Bonus scheme use
designed to encourage and reward labour to complete task in a shorter period of
time.
Evaluate the system of costing orders using labour and overhead hourly rates? (advantage) (2)
Reasonably accurate calculation which will provide sift quotations.
Customers knows exactly what he is paying for.
Evaluate the system of costing orders using labour and overhead hourly rates? (disadvantage) (1)
Only valid if the percentage activity on customers work remains constant.
group bonus scheme advantages (3)
- higher output for lower cost per unit
- The scheme will reward extra effort.
- less supervision may be required as everyone would try to focus on production as it benefits them
group bonus scheme disadvantages (4)
- accidents may increase
- Quality issues remain. So, supervision may
required - Slower workers may not be able to keep up and may leave.
- disagreements btwn workers may increase due to tense environment
Benefits of Apportionment (3)
Provides a realistic estimate of usage of costs by each department.
* Departmental rates can be calculated for pricing and quotation.
* The basis for apportionment will ensure a realistic match between usage and the cost
limitations of Apportionment
- The apportionment will only be an estimate of the usage and subsequent cost.
- Might be difficult to decide on a realistic basis for the apportionment. So, results are arbitrary.
- Skilled accountant needed to calculate the appointment with accuracy.
over-absorption
overheads absorbed are greater than the actual overheads
under-absorption
overheads absorbed are less than actual overheads
Reasons for overheads to be over-absorbed (2)
- The activity level is higher than planned.
- The actual level of overhead expense is lower than planned
Reasons of overheads under-absorbed (2)
- The activity level is lower than the budgeted plan
- The actual level of overhead expense is higher than planned.
overhead expenses
overhead expense refers to an ongoing expense of operating a business. include accounting fees, advertising, insurance
what is job costing
is a method of costing used to find the cost of a non standard job, normally performed according to customer requirements
advantages of job costing (4)
- Allows for the calculation of profit earned on individual jobs.
- This will provide a detailed analysis of all costs for each job.
- Provides a basis for estimating the cost of similar jobs in the future.
- Job costing is necessary for cost plus orders where the price is worked out by the cost
disadvantages of job costing (4)
- The costs may be historic and out of date.
- It will not be efficient if effective production control system not available.
- Overhead absorption rates are based on estimates. So, it can lead to errors when quoting a price
for the job - Job costing will require a great deal of administrative work to keep records of all transactions
over absorption and profi t
means that fewer actual overhead cost were incurred than expected. This
means that the recognition of expense is reduced in the current period, which increases profits
under absorption and profit
means that more actual overhead costs were incurred
than expected. This usually mean that the recognition of expense is accelerated into the current period, so that the
amount of profit recognized declines.
Benefit of using separate overhead recovery rates for the machining and finishing department as an alternative to
calculating a single overhead recovery rate for the business. (3)
If manufacturing uses separate overhead recovery rates this will means that the charges made to customer for
the service of each department would more accurately reflect, the costs incurred in the delivery of services
by that department.
When a single overhead is used, charges levied could represent a loss activity.
Departmental rates help to avoid cross subsidization of rates.
loss of using separate overhead recovery rates for the machining and finishing department as an alternative to
calculating a single overhead recovery rate for the business. (2)
A single overhead recovery rate would be simpler to calculate.
Separate overhead method is time consuming.
overhead recovery rate
it’s a factor used to distribute the total overhead cost to each job based on a chosen allocation base, such as direct labor hours or machine hours.
use of overhead recovery rate
This rate helps to ensure that all jobs bear a share of the company’s indirect costs
job costing for batch production
For batches, the total cost is initially accumulated for the entire batch. Then, the total cost is divided by the number of units in the batch to get the cost per unit.
