Lecture 8 Flashcards
What is the info required to answer the question of “Shall I invest in manufacturing more soap powder, or do I switch resources into toothpaste?”
Relative demand for each product
Actions of competitors
Costs of inputs (materials, labour)
Availability of suitable labour
What is the info required to answer the question of “shall I continue offering a television repair service as support for my sales of televisions?”
Market research on demand
Sales with/without repair service
What competitors are doing
Cost of repairs
Profit margin
What is the info required to answer the question of “is it cost effective to have three separate locations at which my tenants can pay their rent?”
Cost of maintaining offices, staff
Cost of reducing staff
What is the info required to answer the question of “will this investment in a new factory pay for itself over the next ten years?”
Cost of investment
Cost of capital (borrowing/raising equity)
Future cash flows
Management functions - tell me about planning
Maximise short term profit to long term and market share
Add value to business (e.g. sales, production, capital expenditure)
Establish goals -> specify how goals will be achieved -> develop budgets
Management functions - tell me about decision making
Involves making a selection among competing alternatives
About resources
About activities
Financial matters (particularly cost)
Impact on employees
Impact on competitors
What should we be selling?
Who should we be serving?
How should we execute?
Management functions - tell me about control
Gathers feedback to ensure that plans are being followed
Feedback in form of performance reports that compare actual results with the budget are an essential part of control function
Is outcome in accordance with initial plans and objectives?
Costs
Profit
What does control require?
Timely, relevant and accurate info
Cost measurement
Effective communication
Organisational structure
Responsibility and authority
Cascade down
Flow upwards
Role of management accounting - tell me about directing attention
Who should take action?
Whose responsibility is this loss?
Who is to be congratulated on this favourable result?
Highlight those costs which have departed from expectations
Fairness and timeliness
Responsibility
Recognise achievements
Demonstrate accountability
Role of management accounting - tell me about keeping the score
How much?
How many?
Record keeping
- monitoring accounting records against physical quantities and measures
Completeness and fairness
- matching costs to a time period
- matching costs to an item of output
- matching costs against revenue of the period
Role of management accounting - tell me about solving problems
Why did that plan go well?
Why did that action fail?
Which of these three choices is the best to take?
Relevance
Choices
Basis for understanding the problem
What is the standard set of wording of management accounting?
There is none
CIMA guidance and definitions
What is the definition of a cost?
A physical quantity measurement multiplied by a price measurement
E.g 100 units at £6 = cost of £600
What are the classifications of costs?
Fixed costs and variable costs
Direct costs and indirect costs
Product costs and period costs
What is the meaning of activity?
Generally, any physical operation that takes place in an organisation
What is the meaning of output?
Product or service provided by the organisation
What is a variable cost?
A cost with varies directly with changes in the level of activity over a defined period of time
What is a fixed cost?
A cost which is not affected by changes in the level of activity over a defined period of time
What is a semi-variable cost?
Fixed costs + variable costs
What is a step cost?
Fixed cost that increases by steps
What are some examples of variable costs?
Materials used to manufacture a unit of output or to provide a type of service
Labour costs of manufacturing a u it if output or providing a type of service
Commission paid to a salesperson
Fuel used by a haulage company
What are examples of fixed costs?
Salary paid to a supervisor
Advertising in the trade journals
Business rates paid to the local authorities
Depreciation of machinery calculated on the straight line basis
What are examples of semi-variable costs?
Office salaries where there is a core of long term secretarial staff plays employment of temporary staff when activity levels rise
Maintenance changes where there is a fixed basic charge per year plus a variable element depending on the number of call-outs per year
What’s an example of a step cost?
Rent storage space until full capacity is reached then expand by renting second storage space
What is a direct cost?
Directly traceable to an identifiable unit, such as a product or service or department of the business
What’s an indirect cost?
Spread over a number of identifiable units of the business, such as products or services or departments for which costs are to be determined
Also called overhead costs!!!!!!
What are product costs?
Costs associate with goods or services purchased, or produced for sale to customers
What are period costs?
Costs which are treated as expenses in the period in which they are incurred
What are some examples of product costs?
Direct materials
Direct labour
Manufacturing overhead
- indirect materials
- indirect labour
- other indirect costs
What are some examples of period costs?
Selling expenses
Admin expenses
What is the cost impact of a change in levels of production over a period of time?
Fixed & variable
What is the cost effect of planning to expand operations by a new outlet in a particular location?
Direct & indirect
What is the cost impact of remaining open for longer hours to improve on existing client services?
Fixed & variable
What would the classification of costs be for the question of whether the company should produce components in this country or overseas?
Fixed & variable
What would the classification of costs be for the question of if a company should continue to provide a service when demand is falling?
Fixed & variable
Costs for control, what is the classification of cost for - How closely do the costs of each product match the targets set?
Direct & indirect
Costs for control, what is the classification of cost for - how closely do the costs of a service department match the budget set for the department?
Direct & indirect
Costs for control, what is the classification of cost for - is the value of the inventory (stock) of unsold goods stated correctly?
Product & period
What is cost centre?
A unit of the organisation in respect of which a manager is responsible for costs under his or her control
What is profit centre?
A unit of the organisation in respect of which a manager is responsible for revenue as well as costs
What is investment centre?
A unit of the organisation in respect of which a manager is responsible for capital investment decisions as well as revenue and costs
