LO1 - 2 Flashcards
When must a business register for VAT?
When it reaches the HMRC turnover limit of £85,000.
What must VAT-registered businesses do regarding sales?
Charge VAT on sales at the relevant percentage.
What can VAT-registered businesses reclaim?
VAT on business-related purchases and expenses.
What are Zero-Rated VAT items?
Items with a VAT rate of 0%, still recorded on VAT returns.
Give examples of Zero-Rated goods.
Basic foods (e.g., bread, milk), children’s clothing, passenger transport, books, magazines, and newspapers.
Example sentence: Children’s clothing is one of the Zero-Rated goods.
What is a VAT Return?
A form submitted to HMRC showing the VAT charged on sales and reclaimed on purchases.
What are VAT Rates?
Different percentages of VAT applied depending on the type of goods or services.
What are VAT Exemptions?
Items or services not subject to VAT, still recorded in VAT returns if the business is VAT-registered.
What is a job quotation?
A job quotation is a price estimate provided to a potential customer that includes the required level of profit.
What is included in a customer quotation?
Trade or volume discounts, job costing statements, and profit margin or mark-up.
What is job costing used for?
Job costing is used to calculate the total cost of producing a specific job or product, including all direct and indirect costs.
What elements of cost are included in a job cost statement?
Labour, materials, and expenses.
What are trade discounts?
Reductions in price offered by sellers to buyers, usually based on volume purchases or long-term relationships.
What are volume discounts?
Discounts given when a customer buys a large quantity of products, encouraging bulk purchases.
Why is profit included in a job quotation?
To ensure the business covers its costs and achieves a desired level of profitability.
What is a direct cost?
A cost that can be directly traced to a specific product or job, such as direct materials, direct wages, and direct expenses.
Give examples of direct costs.
Direct materials (e.g., wood, steel), direct wages (e.g., labor costs for workers directly involved in production), and direct expenses (e.g., specialized machinery hire).
What is the prime cost?
The sum of all direct costs, including direct materials, direct wages, and direct expenses.
What is an indirect cost?
A cost that cannot be directly traced to a specific product or is too small to measure individually, commonly known as overheads.
How are indirect costs categorized?
Indirect costs are categorized into production, selling, distribution, administration, and financial overheads.
Give examples of production overheads.
Factory rent, factory rates, salary of factory foreman.
Give examples of selling overheads.
Advertising costs, salespeople’s salaries.
What are distribution overheads?
Costs associated with delivering a product to customers, such as depreciation of delivery vans and fuel costs.
What are administration overheads?
Costs related to the general administration of the business, such as bookkeeper’s wages and stationery.
What are financial overheads?
Costs related to financial management, such as loan interest and bank charges.
What is absorption costing?
A method of costing that involves absorbing all overheads into the cost of a product or service to ensure full cost recovery.
What is the main aim of absorption costing?
To recover overheads in a way that fairly reflects the time and effort spent on making a product or service.
What are the stages of absorption costing?
Allocation and apportionment of overheads, reapportionment of service cost centre overheads, and absorption of overheads.
What does overhead allocation mean?
Assigning overheads to specific cost centres based on their actual usage.
What does overhead apportionment mean?
Distributing overheads to different cost centres based on a predetermined basis, such as floor area or number of employees.
What is the purpose of reapportionment in absorption costing?
To reallocate service department costs to production departments.
What is an absorption base?
A method used to assign overhead costs to products, such as units produced, machine hours, labour hours, or percentages of prime costs or direct wages.
When is a machine-hour rate used as an absorption base?
When production is machine-intensive.
When is a labour-hour rate used as an absorption base?
When production is labour-intensive.
How does absorption costing affect pricing?
It ensures that the selling price covers both direct costs and overheads, helping the business achieve profitability.
What is profit mark-up?
Profit mark-up is the percentage of profit added to the cost price of a product to determine its selling price.
How is profit mark-up calculated?
Profit mark-up is calculated by multiplying the cost price by the mark-up percentage.
Give an example of calculating profit mark-up.
If the cost price is £12 and the profit mark-up is 25%, the
Example sentence: The selling price would be £15.
Give an example of calculating profit mark-up.
If the cost price is £12 and the profit mark-up is 25%, the profit is £3. The selling price is £15 (£12 + £3).
What is profit margin?
Profit margin is the percentage of profit made on the selling price of a product.
How is profit margin different from mark-up?
Profit margin is based on the selling price, while mark-up is based on the cost price.
How do you calculate profit margin from cost price?
Profit Margin = (Profit ÷ Selling Price) x 100%.
Provide an example of calculating profit margin from cost price.
If the profit margin is 20% and the cost price is £20, the profit made is £5. The selling price is £25 (£20 + £5).
What is the formula to find profit using the margin method?
Profit = (Margin % ÷ (100% - Margin %)) x Cost Price.
Why is understanding mark-up and margin important?
It helps businesses price their products correctly to cover costs and achieve desired profit levels.
What is VAT?
VAT, or Value Added Tax, is a tax that must be paid when buying goods or services.
How many VAT rates are there currently in the UK?
There are three VAT rates: standard rate, reduced rate, and zero rate.
What is the standard rate of VAT in the UK?
The standard rate of VAT in the UK is 20%.
What is the reduced rate of VAT in the UK?
The reduced rate of VAT in the UK is 5%.
What types of items are typically charged at the reduced VAT rate?
Items such as children’s car seats and home energy (e.g., gas and electricity for domestic use).
What does zero-rated VAT mean?
Zero-rated VAT means a 0% VAT rate applies, but these items are still included in VAT returns.
Give examples of zero-rated items.
Children’s clothing, some food items, newspapers, and magazines.
How do you add VAT to the net cost of a product?
Multiply the net cost by the VAT rate (e.g., 20% for the standard rate).
Provide an example of adding VAT to a net price.
Net price £30, VAT at 20%: VAT = £6. Selling price inclusive of VAT = £36 (£30 + £6).
Why is it important for businesses to understand VAT?
Understanding VAT ensures businesses comply with tax laws, accurately calculate prices, and reclaim VAT on eligible purchases.
