Formulas & Acronyms Flashcards
Topic 1 Costing
Total cost
Total cost = Fixed cost + (Variable cost per unit x number of units)
Topic 1 Costing
Prime cost
Prime cost = Total direct cost = Direct materials + direct labour + direct expenses
Topic 1 Costing
What does a Cost Card look like?
Production Costs - HEADING 1
Direct Production Costs (Prime Cost)
Indirect Product Costs (Production Overheads)
Non Production Costs - HEADING 2
Administration Cost
Selling and Distribution Cost
ALL THE ABOVE = Total Product Cost
A direct cost is a cost that can be traced in full to the product, service or department that is being costed
Indirect production costs are those costs which are incurred in the course of making a product/service but which cannot be identified with a particular cost unit.
Indirect production costs are often referred to as production overheads.
Topic 1 Costing
OAR (Overhead Absorption Rate)
OAR = Production Overhead/Activity Level per hour
Topic 1 Costing
Predetermined OAR (Overhead Absorption Rate)
OAR = Budgeted overhead/budgeted activity
Topic 1 Costing
OAR per unit
OAR per unit = OAR per hour x number of hours per unit
Topic 1 Costing
Overhead absorbed
Overhead absorbed = Actual activity (hours or units) x OAR
Topic 1 Costing
Under/over absorption
Under/over absorption = Actual overhead – overhead absorbed
Under = +ve = recognised too less so need to DR expense
Over = -ve = recognised too much so need to CR income
Topic 1 Costing
TotalProductCost
TotalProductCost = DirectMaterialCost + DirectLabourCost + DirectExpenses + Overheads
Topic 1 Costing
Cost per unit manufactured in a batch
Cost per unit manufactured in a batch = Total batch cost / No of units in a batch
Topic 1 Costing
Absorption Costing proforma
Absorption Costing proforma
Sales
Less COS
= Gross profit
Less selling expense
= Net profit
Topic 1 Costing
SOPL UNDER MARGINAL COSTING
SOPL UNDER MARGINAL COSTING
Sales
Less Var COS
Less Other Var costs (selling/admin)
= Contribution
Less Fixed Costs (Production/Selling and distribution/Administration)
= Net Profit
Topic 1 Costing
Contribution
Contribution
= Sales - Var COS - Other Var costs (selling/admin)
OR
= Sales - Production and Non Production
Contribution is a fundamental concept in marginal costing. Contribution is an abbreviation of ‘contribution towards fixed costs and profit’. It is the difference between selling price and all variable costs (including non-production variable costs), usually expressed on a per unit basis.
Topic 1 Costing
Difference in marginal costing and absorption costing profit
Difference in marginal costing and absorption costing profit = Change in inventory units x OAR per unit
Topic 1 Costing
SOPL Absorption Costing
Sales - HEADING 1
Less COS
: Opening Inventory
: Var Production Costs
: Fixed Production Overhead Absorbed
: Closing Inventory
: Fixed Overhead (under/over) Absorbed
Gross profit - HEADING 2
Less selling, administration etc costs (non-production) - inclu variable and fixed
Net profit - HEADING 3
Topic 1 Costing
SOPL Absorption Costing
Sales - HEADING 1
Less COS
: Opening Inventory = Units x Cost card per unit
: Var Production Costs = Direct materials + Var production OVH x actual amount produced
: Fixed Production Overhead Absorbed = Budgeted OAR x Actual activity (hours or units)
: Closing Inventory - include OAR
: Fixed Overhead (under/over) Absorbed = Actual overhead – overhead absorbed
Gross profit - HEADING 2
Less selling, administration etc costs (non-production) - inclu variable and fixed
variable = variable selling cost per unit x actual sales
fixed = actual fixed selling cost
Net profit - HEADING 3
Topic 1 Costing
SIAM
Profits generated using AC and MC can also be reconciled as follows:
Stocks
Increase
Absorption profit
More
Topic 1 Costing
Periodic weighted average pricing
Periodic weighted average pricing
This average method differs from the cumulative weighted average method. A single average is calculated at the end of the period based on all purchases for the period.
Periodic weighted average price =
(Cost of opening inventory + Total cost of receipts in period)
DIVIDED BY
(Units in opening inventory + Total units received in period)
This average price is used to value all the units issued and the units in the closing inventory.
Unless stated to the contrary, assume the cumulative method is required in an exam question.
Topic 2 Pricing
Mark Up
Applies to Cost
Mark up:
Selling price 120
Profit (20)
Cost 100
Profit/Cost x 100 = Markup %
Topic 2 Pricing
Margin
Applies to Sales
Margin:
Selling price 100
Profit (20)
Cost 80
Profit/Selling Price x 100 = Margin %
Topic 2 Pricing
Cost-plus pricing
Cost-plus pricing
In practice cost is one of the most important influences on price. Some organisations will base their selling price decision on simple cost-plus rules, whereby costs are estimated and then a percentage mark-up is added in order to set the price.
Setting full cost-plus prices
There are two options for calculating a full cost-plus price.
Option 1
Unit sales price = Total production cost per unit + Percentage mark-up
Option 2
Unit sales price = Total production cost per unit + Other costs* per unit + Percentage mark-up
*Other costs include selling, distribution and administration costs.
Topic 2 Pricing
COGS
Cost of goods sold = Purchases + Opening Inv - Closing Inv
Topic 2 Pricing
ROI
ROI = Profit/Investment
or
Return on investment (ROI) = Controllable divisional profit/divisional capital employed x 100%
Topic 3 Budgeting and Forecasting
PRIME
Reasons for preparing budgets
P – R – I – M – E
Planning
Responsibility
Integration and co-ordination
Motivation
Evaluation and control
Topic 3 Budgeting and Forecasting
Linear Graph formula
y = a + bx
- y is the dependent variable
- a is a constant
- b is a constant
- x is the independent variable
Topic 3 Budgeting and Forecasting
Semi Variable Graph formula
TC (dependent var)
This can be adapted to express a relationship between costs in the form TC = FC + (VC/unit × output) where:
* TC is the dependent variable
* FC is a constant
* VC/unit is a constant
* Output is the independent variable
Topic 3 Budgeting and Forecasting
Coefficient of correlation (r) range
The coefficient of correlation, r
The degree of correlation between two variables can be measured using the coefficient of correlation, r.
r has a value between –1 (perfect negative correlation) and +1 (perfect positive correlation).
If r = 0 then the variables are uncorrelated.
Topic 3 Budgeting and Forecasting
Coefficient of determination (r2) range
The coefficient of determination, r2, is a measure of the proportion of the change in one variable that can be explained by variations in the value of the other variable.
Between 0 and 1
Topic 3 Budgeting and Forecasting
Two methods/ formulas to estimate seasonal variations
Seasonal variations can be estimated using:
* The additive model TS = T + SV or
* The multiplicative model TS = T × SV
Where TS = actual time series, T = trend, SV = seasonal variation.
If the trend is increasing or decreasing over time, the multiplicative model produces more accurate forecasts than the additive model. This is because, if the trend is increasing or decreasing, seasonal variations are likely to be increasing or decreasing too. The additive model simply adds an unchanging figure to the trend figures.
Topic 4 Working Capital and Cash Flow
Working Capital
Working Capital = Current Assets - Current Liabilities
Topic 4 Working Capital and Cash Flow
COS
COS = Sales - Gross Profit
Topic 4 Working Capital and Cash Flow
Inventory turnover period - 2 methods
Inventory turnover period = Inventory/cost of sales (or purchases) x 365 days
OR
Inventory turnover period = 1/rate of inventory turnover x 365 days
Topic 4 Working Capital and Cash Flow
Rate of inventory turnover
Rate of inventory turnover = Cost of sales/inventory
Topic 4 Working Capital and Cash Flow
Receivables collection period
Receivables collection period = Receivables/credit sales revenue x 365
Topic 4 Working Capital and Cash Flow
Payables payment period
Payables payment period = Payables/credit purchases (or cost of sales) x 365
Topic 4 Working Capital and Cash Flow
Two ways to calculate liquidity - 2 formulas
Current ratio = Current assets/current liabilities
Quick (acid test) ratio = (Current assets – inventories)/current liabilities
Topic 4 Working Capital and Cash Flow
Current ratio
Current ratio = Current assets/current liabilities
Topic 4 Working Capital and Cash Flow
Quick (acid test) ratio
Quick (acid test) ratio = (Current assets – inventories)/current liabilities
Topic 4 Working Capital and Cash Flow
Cash operating cycle
Cash operating cycle = Receivable days + inventory days – payable days
Topic 4 Working Capital and Cash Flow
Length of Cycle Proforma
Length of Cycle Proforma
Raw materials holding period = (Average inventory of raw materials/Annual usage) × 365
Average production period = (Average inventory of work in progress/Annual cost of sales) × 365
Average inventory-holding period = (Average inventory of finished goods/Annual cost of sales) × 365
Average receivables collection period = (Average receivables/Annual sales revenue) x 365
LESS
Average payables payment period = (Average payables/ Annual purchases) × 365
= Length of cycle
Topic 4 Working Capital and Cash Flow
Raw materials holding period
Raw materials holding period = (Average inventory of raw materials/Annual usage) × 365
Topic 4 Working Capital and Cash Flow
Average production period
Average production period = (Average inventory of work in progress/Annual cost of sales) × 365
Topic 4 Working Capital and Cash Flow
Average inventory-holding period
Average inventory-holding period = (Average inventory of finished goods/Annual cost of sales) × 365
Topic 4 Working Capital and Cash Flow
Average receivables collection period
Average receivables collection period = (Average receivables/Annual sales revenue) x 365
Topic 4 Working Capital and Cash Flow
Average payables payment period
Average payables payment period = (Average payables/ Annual purchases) × 365
Topic 5 Performance Evaluation
Return on investment (ROI)
Return on investment (ROI)
ROI is often used as a measure to monitor the performance of an investment centre. It shows how much profit has been earned in relation to the amount of capital invested in the centre. It is a relative measure.
Return on investment (ROI) = (Controllable divisional profit / Divisional capital employed) × 100%
Profit should be before interest and tax.
Capital employed can be the opening value or average value of opening and closing capital employed.
ROI enables performance in different divisions to be compared or a new investment to be appraised.
Topic 5 Performance Evaluation
Residual income (RI)
Residual income (RI)
An alternative way of measuring the performance of an investment centre is residual income (RI).
RI is a measure of the centre’s profits after deducting a notional or imputed interest cost of the capital invested in the centre. It is an absolute measure.
RI can avoid some of the dysfunctional behavioural problems that arise with the use of ROI.
Residual income (RI) = Controllable profit – Imputed interest charge on controllable investment
Topic 7 Breakeven and limiting factor analysis
Breakeven point (BEP) - 3 methods
The breakeven point (BEP) is the number of units sold in order for the business to
Breakeven point (BEP)
= Number of units of sale required to break even
= Contribution required to breakeven / Contribution per unit
= Total fixed costs / Contribution per unit
Topic 7 Breakeven and limiting factor analysis
Contribution ratio
The contribution ratio is a measure of how much contribution is earned from each £1 of sales revenue.
Contribution ratio = (Contribution per unit / Sales price per unit) × 100%
It can be used to calculate the breakeven revenue.
Topic 7 Breakeven and limiting factor analysis
Breakeven revenue - 2 methods
Breakeven revenue is the revenue earned by a business in order for it to break even.
Breakeven revenue
= Contribution required to break even / Contribution ratio
= Fixed costs / Contribution ratio
Topic 7 Breakeven and limiting factor analysis
Margin of safety - 2 methods
The margin of safety is the amount by which sales can fall below budgeted sales without a loss being incurred.
Margin of safety = Budgeted sales – Breakeven sales
or
Margin of safety = (Budgeted sales – Breakeven sales) / Budgeted sales × 100%
Topic 7 Breakeven and limiting factor analysis
Sales volume to achieve target profit
CVP analysis and profit targets
The breakeven formula can be amended to calculate the sales volume required to achieve a target profit.
Sales volume to achieve target profit = (Fixed costs + Required profit) / Contribution per unit
Topic 8 investment appraisal techniques
Accounting rate of return (ARR)
The accounting rate of return (ARR) is the amount of profit, or return, that a business can expect to make based on an investment made.
