Management Account - Chapter 2 Flashcards
In a manufacturing business what costs are classified as direct materials?
Classifies the cost of materials from which the finished product is made up of (i.e raw materials)
What are the 3 types of materials held by a manufacturing business?
Raw Materials and Components
Work-in-Progress (part finished goods on the production line)
Finished Goods
What type of materials are held by a trading business?
Goods for Sale/Re-sale
What type of materials are held by a service business?
Consumable materials - these are materials that are either for use in the organisation or for sales the customers as part of the service provided
What is perpetual inventory?
Is where businesses records the receipt and issues of inventory as the items pass in and out of the business and re-orders are made accordingly
What is Just in Time (JIT)
A method favoured by manufacturing business where supplies of components are delivered to the production line just as they are needed. For JIT to operate effectively quality suppliers are needed!
What is the Fixed Quantity Method?
Is a method used by business when re-ordering materials in set amounts
What are the 5 parts to the fixed quantity method?
Maximum inventory level
Inventory Buffer
Re-Order Level
Lead-time
Re-Order Quantity
What is an inventory buffer and how is it calculated?
This is the minimum level to be held in order to meet unexpected sales/emergencies
Re-Order Level - (average usage x average lead time)
What is a re-order level and how is it calculated?
The re-order level is calculated so that replacement materials will be delivered just as the inventory level reaches the level of the inventory buffer
(average usage x average lead-time) + inventory buffer
What is the re-order quantity and how is the maximum and minimum quantities calculated?
At the re-order level a purchase for new inventory is made to the supplier (usually via purchase order)
Maximum re-order quantity is calculated
Maximum inventory level - inventory buffer
The minimum re-order quantity is calculated
Re-Order level - inventory buffer
What is the Economic Order Quantity (EOQ)
A method of minimising ordering costs and inventory holding costs to calculate the most efficient level of order to place
How to do calculate the EOQ ?
SQUARE ROOT of 2 x annual usage x ordering cost DIVIDED by inventory holding cost
How do you calculate the Valuation of Inventory
number of items held x cost per item = inventory value at cost
Inventory is generally valued at either…
What the cost is to the business to replace/buy that item (including any additional costs to get the product into the current condition or current location i.e delivery costs)
OR
Net Realisable Value - which is the actual or estimated selling price (less any extra costs such as selling & distribution)
Valuation of Inventory is taken from where entitled Inventories
International Accounting Standard (IAS) No. 2
When valuing inventory a business would usually take either the…
The lower of either the cost and net realisable value
How do you calculate the weighted average cost when valuing inventory?
Total cost of inventory held DIVIDED by number of items held
What are the 3 methods of inventory valuation?
FIFO (First In First Out)
LIFO (Last in First Out)
AVCO (Weighted Average Cost)
Why carry out costing?
Part of management accounting helps managers to:
Record, Monitor & Control Costs
Plan for the future
Make both short-term and long-term decisions
What are the 5 types of specific costing methods?
Job Costing
Batch Costing
Process Costing
Unit Costing
Service Costing
Why would you use Job Costing
Is used where each product or service that is produced is a ‘one off’ Job, it collects together all the costs for that particular job. Used for items that are specific to each customers individual requirements
When would you use unit costing?
To calculate the cost of each individual unit and is more suited for businesses that produce several different products in large quantities
What is Batch Costing ?
Is a variation of unit costing that is used when items are produced in batches. The items in the batch are identical and the costs are calculated for the whole batch
What is service costing?
Is a costing method that is used in the service industry, useful where there is continuous activities that can be thought if as multiples of a simple measure of output
What is process costing?
Is used where manufacture involves a continuous process which may never (or rarely often) stop and the costs are worked out for a specific period of time.
How do you calculate the cost per unit with process costing method?
Cost per cost unit = total costs of the process for the period ÷ total cost units for the period
What is work-in-progress
At the end of the period there will be part-completed items and these will then be calculated as work-in-progress
How do you calculate the work-in-progress?
- You will need to work out the degree of completeness of these unfinished products so then you can calculate the number of EQUIVALENT units for costing purposes
Number of part completed units x percentage of completeness = number of equivalent units
What is the definition of a FIXED BUDGET?
A fixed budget will remain the SAME whatever the level of activity
What is the definition of a FLEXIBLE BUDGET?
A flexible budget changes with the level of activity and takes into account different cost behaviour patterns
What is the process for monitoring budget reports
- Set Budgets
- Compare budgeted figures to actual figures
- calculate VARIANCES
4, ANALYSE variances - EXPLAIN reasons for variances
- take necessary action
How do you calculate the Variances?
Budgeted costs or revenue MINUS the ACTUAL costs or revenue = variance
What are the 2 types of Variances?
FAVOURABLE OR ADVERSE
Favourable variances are…
IF the actual costs are LOWER than budgeted
IF the actual revenue is HIGHER than budgeted
IF the actual profit from operations is HIGHER than budgeted
Adverse variances are…
IF the actual costs are HIGHER than budgeted
IF the actual revenue is LOWER than budgeted
IF the actual profit from operations is LOWER than budgeted
What is management of exception in terms of variances in budgeting
The control systems of a business will set down procedures for acting on variances but only for significant variances known as management by exception (ie acting on variances that are significant)
Managers will work to tolerance limits for variances (tolerance limit is an acceptable percentage variance on the budgeted amount).
Where are the variances accounted for in management accounts?
In budget reports
What does a budget report account for ?
Budget reports reconcile the budgeted costs and actual costs for each cost element (direct materials, labour, expenses and overheads) and the budgeted revenues and show the variances (figures and account for if the variances are favourable or adverse)
What are relevant costs?
Relevant costs are those costs that are changed by a decision
What are irrelevant costs?
Irrelevant costs are those costs that are not affected by a decision.
What are the 3 types of Short-term decisions?
Break-even analysis
Marginal Costing
Limiting Factors
