Kaplan 8: Preparing Budgets; Control phase Flashcards
A cost centre is
A location; Function; Item of Equipment
In respect of which costs may be accumulated & related to cost units.
For control purposes.
Examples:
Production: Assembly line or Packing machine.
Service dept: Stores; Canteen, QC
Service: Tax dept (accountants); ward (hosp)
A profit centre is
A location; function; Item of equipment
In respect of which costs & revenues may be ascertained for the purpose of controlling the resultant Profit
Prime cost =
Total of direct costs
Production cost =
Prime cost (direct costs) + Indirect PRODUCTION costs
Total cost =
Production cost + Indirect NON-PRODUCTION costs
How would you classify costs for :
Cost control
By nature, materials , OHs labour etc
How would you classify costs for :
Cost accounting purposes
By relationship to cost units - direct, indirect costs etc.
Prime cost, production cost.
How would you classify costs for :
Budgeting, contribution analysis
By behaviour. fixed, variable etc
Think about budgeting electricity - need to know fixed & var costs in order to budget changes
How would you classify costs for :
Decision making
Relevant, non-relevant
How would you classify costs for :
Responsibility accounting
Controllable & uncontrollable
Direct costs are..
costs which can be related directly to one cost unit.
Direct materials
Direct labour
Direct expenses
Another term for Indirect costs
Overheads.
These cannot be identified directly with a cost unit
For inventory valuation purposes need to distinguish between overheads which ..
Are incurred in the production process:
(Factory rent, rates, power)
Are non-production costs involved in converting finished goods to revenue:
(Exec salaries, office costs, marketing, selling & dist)
Fixed costs are also known as … ? costs (why?)
Period costs
They accrue with the passage of time (eg rent)
Hi Lo method remember
Use highest & lowest OUTPUT (not necessarily smae as Highest & lowest cost)
‘Activity’ Variance & ‘Controllable’ varience
This relates to flexed budgeting.
The flexed budget eliminates the activity variance and highlights the controllable variance element
Budgetory control statement
Its the statement with columns for Original Budget/ Flexed budget/ Actuals/ Variances (F or A)
4 situations where an imposed budget might be preferable
- Managers objectives may not be those of the organisations as a whole
- Managers do not have the training, skill or technical knowledge to set budgets
- Managers would prefer not to set their own budgets
- Time constraint whereby full participation is not practical
Discuss whether an imposed requirement to reduce material costs be reduced would have motivated managers
- Setting budget targets that are not achievable can be demotivating. If managers recognise might not even try
- Impossible targets can bring the whole planning process into disrepute and managers may question the validity and usefuless of the budgetary process
- Need to consider whether it is a controllable cost. If there are no ther suppliers it may not be in managers power to reduce this cost. (Maybe even some contract in place?)
The boss thinks the results PROVE that his imposed budget motivated the managers.
Name 3 ways which could have increased profit without additional effort by the managers
1) There may have been increased DEMAND.
2) The only cost less than budget was heat/light… this could be due to INACCURATE FORECAST
3) The reduction in cost could also be due to better weather conditions
What do you use to reconcile the budgeted costs to actua costs
A cost analysis
What to remember when flexing a budget about fixed costs
You flex them also (should be a OAR * units).
Need to work on the Fixed OH variances..
Fairly ok with Ependiture & volume variance.
But volume variance can be broke into efficiency & capacity !!!
.
When working out price var for FO due to indexing
- Work out the price var and usage var as usual and make sure they match the overall variance.
- Work out the per unit price actually paid.
- Work out what the indexed per unit price was.
- Work out the difference between the indexed ppu and the actual ppu and multiply by the ACTUAL usage.
- Work out the difference between the standard ppu and the indexed ppu and multiply by the ACtual usage.
- Results form 4 & 5 should add up to the same as the PRICE variance (not the overall variance.
- You now have the Usage variance and the Price variance … with the Price variance now split into the change due to the index (uncontrollable) and due to other factors (maybe controllable)