Management Accounting Flashcards
Name the steps in the High-low method
Identify the high and low output + associated costs
Deduct the lowest output/ costs from the highest output/ costs
Calculate the variable cost per unit
Find the fixed costs at one of the output levels
*Total cost = sum
How to calculate variable cost per unit
(High cost - low cost) / (high output - low output)
How to find the fixed cost
Choose either the highest or lowest output level
Multiply the cost per unit by number of units
Deduct this from total cost at same output level
Define prime cost
Total of direct material and labour
What is a cost card
a document or record that summarizes the total cost of producing a product or service, typically detailing direct materials, direct labor, and overhead expenses.
What is the prime cost & how to calculate it
Total of direct costs
Direct materials + Direct labour
Define marginal cost + how to calculate it
Not including fixed overheads, only variable (non-production)
What is the full absorption cost
All production costs - fixed and variable
Explain the High-Low method
(Used to split semi-variable costs)
- Take the highest pair of data and the lowest pair of data and calculate the differences betwen them
- Use these differences to calculate the variable cost per unit by dividing the increase in cost by the increase in output
- Identify the fixed cost using the equation using the equation:
Total cost = Fixed cost + (variable cost per unit x volume of output)
4.Use knowledge of the cost behaviour to predict the cost for the given output in the question
What is the FIFO method
When the first items bought or made are sold or used first. This means the oldest costs are used up first, and the newest costs are left in the inventory.
What is the AVCO method
Values inventory by using the average cost of all items available for sale. This means the cost of goods sold and the cost of inventory are based on the average price of all items, not the oldest or newest.
Formula for Economic Order Quantity (EOQ)
(square root) 2cd / h
c = the fixed cost incurred every time an order is placed
d = the annual demand for the material being ordered
h = the cost of holding one unit for one year*
*Question may give figure for one month
What is the reorder level?
Tells you the inventory amount at which you should reorder more stock. It ensures you don’t run out of items while waiting for a new delivery.
Reorder level formula
= Maximum usage x Maximum lead time
Minimum inventory level formula
= Reorder level - (Average usage x Average lead time)
Maximum inventory level formula
= Reorder level - (Minimum lead time) + Reorder quantity
Show journals for Receipt into inventory of raw materials that are paid for immediately
Dr - Inventory (to show the asset of the inventory we now own)
Cr - Bank (reduce the asset as we have paid for the inventory)
Advantages of FIFO
- logical and likely represents what’s physically happening: oldest inventory being used first
- easy to understand and explain to managers. Also complies w IAS 2 accounting standard so can be used for inventory valuation
- the closing inventory value will likely be similar to its replacement cost
Disadvantages of FIFO
- can be cumbersome to operate because of the need to identify each material separately
- managers may find it difficult to compare costs and make decisions when they are charged w continuously changing pricing for the same materials
Disadvantages of FIFO
- can be cumbersome to operate because of the need to identify each material separately
- managers may find it difficult to compare costs and make decisions when they are charged w continuously changing pricing for the same materials
Advantages of AVCO
- fluctuations in prices are smoithes iut, easier to use data for decision making
- easier to administer than FIFO, no need to identify each batch separately
Disadvantages of AVCO
- issue price is rarely an actual price that has been paid and can run to several decimal
- prices tend to lag a little behind current market values when there is rapid inflation
How to calculate EU and WIP
- Completed units + WIP = EU
- Cost of production / EU = £ p/ equivalent units
Completed units × £ p/equivalent units
Closijg WIP x £ p/equivalent units
When are the 2 exceptions for overtime being treated as an indirect cost
- if it’s worked at the specific request of a customer for a specific job
- if it’s worked regularly, may be treated as a usual occurrence and incorporated into an average hourly rate
Explain the 3 steps for the labour double entry (with regards to the wages control account)
A) Payment to staff
DR Wages
CR Cash
B) Transfer of direct labour to production for use in WIP
DR Direct costs/ Production
CR Wages
C) Transfer of indirect labour to production overheads for use in WIP
DR Indirect costs/ Production overheads
CR Wages
How to calculate the overhead cost per unit
- Allocation
Where toral overheads are charged to the relevant cost centres in full - Appointment
Overheads are shared across each cost centre using a fair basis - Reapportionment
All service cost centre overheads are shared out between the production cost centres - Absorption
Production cost centre overheads are ‘absorbed’ into cost units using a suitable basis
Define over-absorption
More overheads are absorbed than have actually been incurred
Define under absorption
Fewer overheads are absorbed than have actually been incurred
Advantages of absorption costing
-inventory valuation using this complies with IAS2 (which requires that cost includes a fair share of production overheads based on normal activity)
-fixed costs must he covered in the long run this takes fixed costs into account (unlike marginal costing)
-production cannot be divorced from fixed costs since without them production could not occur
Disadvantages of absorption costing
Unit costs includes costs which are not relevant for magical decision making
The nature of cost behaviour is obscured
The method of absorption is to soke extent arbitrary
How to account for overhead absorption
1)
Dr Production overheads
Cr Cash (or payables)
2)
Dr Production
Cr Production overheads
Under-absorption double entry
Dr Statement of profit or loss
Cr Production overheads
Over-absorption double entry
Dr Production overheads
Cr Statement of profit or loss
