Management Accounting Flashcards
Activity Based Costing
Management Accounting
Activity based costing (Management Accounting)
* Costs are allocated to activity cost pools and activity rates are calculated
* Costs that are not driven by activities are not allocated to cost pools
Contribution margin
Management Accounting
Contribution margin (Management Accounting)
* Contribution margin (CM) is the determination of how much variable profit is available to cover fixed costs and generate a profit.
* CM is highly dependent on the industry and type of business.
* In general, the higher CM, the better.
* To determine CM, calculate the variable revenues per unit (hour, day, year, quantity) offset by the variable costs of the same.
* CM is A – B where:
o A is the total variable revenue per unit;
o B is the total variable expenses per unit.
Break-even analysis
Management Accounting
Break-even analysis (Management Accounting)
* Break-even is the determination of sales volumes necessary to generate a zero-profit.
* Break-even can be expressed in number of units, total revenues, or a percentage of expected revenues.
* To determine, calculate the fixed costs per period, and divide them by the contribution margin (CM) per unit, to determine the necessary sales volumes to generate zero-profit.
o Break-even is A / B where:
A is the total fixed costs;
B is the CM per unit.
Efficiency variance
Management Accounting
Efficiency variance (Management Accounting)
* Efficiency variance is the difference between the actual unit usage of something and the expected amount of usage. The expected amount is usually the standard quantity of direct materials, direct labour, machine usage time, and so forth that is assigned to a product.
* Efficiency variance = standard price × (actual quantity − standard quantity)
* Using the above formula, positive result is unfavourable; negative result is favourable.
Price variance
Management Accounting
Price variance (Management Accounting)
* Price variance is the difference between the actual cost and standard cost of materials or labour.
* Price variance = actual quantity × (actual price − standard price)
* Using the above formula, positive result is unfavourable; negative result is favourable.
Flexible budget
variance
Management Accounting
Flexible budget variance (Management Accounting)
* A flexible budget variance is the difference between the actual costs and standard costs based on the actual production levels.
* Flexible budget variance = actual costs − flexible budget costs (that is, standard quantity of an item for actual units produced × standard price)
* Using the above formula, positive result is unfavourable; negative result is favourable.
Performance measurement of responsibility centres
Management Accounting
Performance measurement of responsibility centres (Management Accounting)
* A responsibility accounting system can improve goal congruence by assigning decision-making rights to responsibility centres, which are then held accountable for achieving organizational goals.
* Common types of responsibility centres are:
o Revenue centre – e.g., actual vs. budgeted revenue, revenue growth
o Cost centre – e.g., actual vs. budgeted costs, cost per unit
o Profit centre – e.g., actual vs. budgeted profit, growth in net income
o Investment centre – e.g., return on assets, growth in return on assets
Key performance measures (for-profit)
Management Accounting
Key performance measures (for-profit) (Management Accounting)
For-profit performance indicators can be grouped into five key areas:
* Financial indicators – revenue growth, productivity, asset utilization
* Customer indicators – customer selection, customer acquisition, customer service and retention, customer growth
* Internal business process indicators – supplier management, production management, distribution management
* Learning and growth indicators – innovation, human capital, information capital
* Regulatory indicators – environmental observance, legal compliance, community observance
Variance Analysis
Management Accounting
Variance analysis (Management Accounting)
* Part of an organization’s performance measurement system, variance analysis and interpretation of variances allow management to identify issues and recommend corrective or other actions
* Actual performance is compared against a static or flexible budget or other relevant benchmark
* Variances are used to assess both effectiveness and efficiency
* Sales revenue variances:
o Sales Price Variance = (Actual price – Standard price) x Actual quantity
o Sales Volume Variance = (Actual quantity - Standard quantity) x Standard price
* Direct and variable cost variances:
o Price/Rate Variance = (Actual Price-Standard Price) x Actual quantity
o Quantity/Efficiency Variance = (Actual Quantity-Standard Quantity) x Standard price
