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ENEL301 - Accounting > Management Accounting > Flashcards

Management Accounting Flashcards

1
Q

What is Cost Accounting a technique or method for?

A

determining the cost of a project, process or thing

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2
Q

What are the four types of cost classifications?

A
  1. by behaviour
  2. by traceability
  3. for external reporting
  4. for decision-making
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3
Q

What are manufacturing costs comprised of?

A
  1. raw materials
  2. work-in-progress
  3. finished goods
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4
Q

What is a Fixed Cost (FC)?

A

any cost that does not vary in proportion to the quantity of output

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5
Q

What are examples of Fixed Cost (FC)?

A

rent, depreciation, lighting, supervisor saleries

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6
Q

What is the range of production that a Fixed Cost of fixed for?

A

relevant range

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7
Q

How are successive relevant ranges often represented graphically?

A

step function

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8
Q

Define relevant range

A

The level of units at which the costs of production remain constant (flat line). Once the level of output exceeds this range, then it is no longer safe to assume costs are constant as the business may need to upgrade production resources eg. rent bigger warehouse, pay more overtime etc.

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9
Q

What is a Variable Cost (VC)?

A

cost that varies in proportion to the quantity of output

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10
Q

What are common examples of Variable Cost (VC)?

A

direct materials

direct labor

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11
Q

How are Variable Costs (VC) often represented?

A

as a linear function of output

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12
Q

What is the eqn for Variable Cost (VC)?

A

VC(x) = unit rate * x;

where x is the level of production (volume of output)

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13
Q

What is the Total Costs (TC)?

A

total of variable and fixed costs

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14
Q

What is the eqn for Total Costs (TC)? What does this meant that it will look like graphically?

A

TC(x) = VC(x) + FC

Linear

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15
Q

How can we find Total Costs (TC)?

A
  1. Job costing
  2. process costing
  3. standard costing
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16
Q

What is job costing?

A

one off jobs

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17
Q

What is process costing?

A

mass production line, consistent product

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18
Q

What is standard costing?

A

large manufacturer, changing product

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19
Q

What do job, process and standard costing fit under?

A

CVP (Cost - Volume-Pofit) methods

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20
Q

What are the margins that are added that contribute to the price to consumer?

A
  1. C + profit margin -> price to wholesaler
  2. C + PM + wholesaler margin -> price to retailer
  3. C + PM + WM + retailer margin -> price to consumer
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21
Q

What is standard cost?

A

Cost per unit of output, established in advance of production or service delivery

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22
Q

How do you determine the cost of a unit using Total Costs (TC)?

A

determine TC and then do TC/unit to get cost per unit

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23
Q

What is the selling price (SP)?

A

price at which each unit is sold

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24
Q

What is total revenue (TR)?

A

TR(x) = SP.x

where x = # units sold

Note that not all units produced are necessarily sold (difference = stock in inventory)

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25
Q

What is profit (P)?

A

the amount of revenue left over after deducting all relevant costs

P = TR - TC

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26
Q

What is the selling price made up of?

A
  1. direct material
  2. direct labor
  3. indirect material
  4. indirect labor
  5. fixed and miscellaneous
  6. general and administrative
  7. selling (marketing)
  8. profit
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27
Q

What are the conversion costs made up of?

A
  1. direct labor
  2. indirect labor
  3. indirect material
  4. fixed and miscellaneous
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28
Q

what is the prime cost made up of?

A
  1. direct material

2. direct labor

29
Q

what is factory overhead made up of?

A
  1. indirect material
  2. indirect labor
  3. fixed and miscellaneous
30
Q

what is the non-factory overhead made up of?

A
  1. general and administrative

2. selling (marketing)

31
Q

what is the cost of goods sold made up of?

A
  1. direct material
  2. direct labor
  3. indirect material
  4. indirect labor
  5. fixed and miscellaneous
  6. general and administrative
  7. selling (marketing)
32
Q

what do we do if we cannot sell all the units at any given price?

A

use breakeven (BE) technique

33
Q

What is demand (D)?

A
  • the demand for a product or service is directly related to its price
  • inverse price-quality relationship (as price rises, the quantity demanded falls (Laws of Demand))
34
Q

what does total revenue (TR) depend on?

A

price (SP) and demand (D)

35
Q

What is the formula for total revenue (TR)

A

TR = SP.D = (a-bD)D = aD - bD^2

for a,b >0; 0≤D≤a/b

36
Q

What is the formula for sale price (SP)?

A

SP = a bD

Idealised affine function: a and b are constants thatdepend on the particular product or service.

Not necessarily alinear relationship

37
Q

What are the 5 limitations of the CVP (cost volume profit) analysis?

A
  1. Short term decision making model (no recognition of time value of money)
  2. Assumes constant unit variable cost and revenue, not valid in practice
  3. Assumes clear separation of fixed and variable costs.
  4. Suitable for analysis of small deviations from the current production and sales
  5. Long-term analysis should consider entire life-cycle of the product (activity-based costing etc.)
38
Q

What is Break-Even Analysis used for?

A

evaluating whether the organisation will be able to cover costs (break even) at particular price

39
Q

What does Break-Even Analysis indicate?

A

The break-even point, i.e., sales (units or dollars) needed to break even

40
Q

At break-even what two things are equivalent?

A

TR = TC

41
Q

What does TR = TC at break-even apply about Sp.x?

A

SP.x = VC(x) + FC

where x is the BE(units)

42
Q

How can this be modified to incorporate a target return?

SP.x = VC(x) + FC

A

SP.x = VC(x) + FC + P where x is the BE(units) and P is the target profit

43
Q

What are the assumptions for Break-Even Analysis?

A
  1. assume any quantity can be sold at a given price

2. total cost curve is assumed to be a straight line

44
Q

Explain the cost volume profit graph on slide 23 set 2

A

TODO

45
Q

What happens if production (sales) is less than break-even,

A

a loss will occur.

46
Q

What happens if production (sales) is greater than break-even?

A

profit will occur

47
Q

Are lower values of the break-even quantity generally desired?

A

YES

48
Q

How can lower values of the break-even quantity be achieved?

A
  1. increase the revenue rate (the slope of the revenue line)
  2. decrease the variable cost rate (the slope of the total cost line)
  3. reducing the fixed cost (the intercept of the total cost line)
49
Q

How do we determine the number of units sold to achieve break even?

A

TODO - think my notes on slide 26 are wrong :(

50
Q

How do you determine the break-even revenue?

A

TODO - think my notes on slide 26 are wrong :(

525 = 35 * 15 -> cost to student * x

51
Q

What is average cost (AC)?

A

total cost divided by total number of units produced

52
Q

What is average cost (AC) a basis for?

A

normal pricing

53
Q

What does average cost (AC) lead to?

A

idea of economies of scale.

54
Q

What is the idea of economies of scale?

A

As production volume (x) increases, average cost decreases

55
Q

What does the idea of economies of scale result from?

A

spreading the fixed cost (FC) over a larger and larger number of units

56
Q

Because of the idea of economies of scale, what is happening to the fixed cost per unit (FC/x) and variable cost rate? What does this result in?

A

The fixed cost per unit (FC/x) is decreasing while the variable cost rate remains constant resulting in lower average cost per unit

57
Q

What is marginal cost (MC)?

A

the incremental (variable) cost of one more unit of additional production

58
Q

What is marginal cost (MC) a basis for?

A

last minute pricing

59
Q

In the discrete case, what is marginal cost?

A

cost of producing one more discrete unit

  • the incremental cost increase of going from x units produced to (x+1) units produced
  • it is usually determined through difference equations; TC(x+1) - TC(x)
60
Q

What is the contribution margin (CM)?

A

Contribution of product to profitability once variable costs are accounted for

61
Q

What is the eqn for contribution margin (CM)

A

CM = TR - VC

62
Q

What is the eqn for contribution margin per unit?

A

CM/unit = TR/unit - VC/unit

=>

CM/unit = SP - VC/unit

(since SP = TR/unit)

63
Q

What is the difference between the unit sales price and the unit variable cost known as?

A

unit contribution margin

64
Q

What is the contribution margin ratio (CMR)?

A

CMR = (CM/unit)/SP

65
Q

Explain break-even (BE) in units

A

The point in production where the company breaks even (number of units produced that, if sold, will be sufficient to cover costs)

BE (units) = FC/CM per unit = FC / (SP - VC per unit)

66
Q

Explain break-even (BE$) in dollars

A

The amount of total dollar sales need for the company to break even

BE$ = FC / CMR = FC.SP/ (SP-VC)

67
Q

How do you calculate service costing?

A
  1. calculate direct materials used (if any)
  2. calculate labor costs
  3. calculate overhead costs

THEN

price of service = materials cost + hourly charge-out rate (labour + overheads)

NOTE: price not cost

68
Q

What is direct labor?

A

Charge out rate

e. g. Employee works nominal 40 hours a week
- > 8 hours a day for 5 days40 x 52 = 2080hrs/year

ENEL301 - Accounting (4 decks)

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