Management accounting Flashcards
Manufacturing overhead
All costs of manufacturing except direct materials and labour
Conversion cost
Manufacturing overheads and direct labour
Prime cost
Direct labour and direct materials
Balanced scorecard
Strategic, holistic view of organisation.
- Financial
- Customer
- Internal business
- Innovation and learning
Cash budget
- Forces managers to plan
- Find out immediately if sufficient cash for plans or is surplus cash
- Negotiate loans in advance
Limiting factor
Products to make first are the ones which generate the most contribution per limiting factor
Absorption costing
- Overhears charged to cost centres that use them
- Departments charge overheads to cost units they work on
- Calculate an absorption rate: budgeted expenditure / budgeted activity
BUT/ not very applicable to service industries
Activity based costing
Each overhead is absorbed using its own basis (cost driver).
Focuses attention on nature of cost behaviour, more accurate allocation therefore helps more with pricing
Materials variance - Total material for actual output
Should cost: SQ * SP
Did cost: Actual cost
Materials variance - Material price for actual output
Have we paid too high a price for the materials that we have bought?
Should cost: AQ * SP
Did cost: Actual cost
Materials variance - Material quantity variance
Have we used too much material in producing our output?
Should use: SQ
Did use: AQ
* SP X
Sales price variance
Have we sold our output at the right price?
Effect of selling product at a different price from that expected
(SP - AP) * AQ
OR
Actual should have raised: AQ * SP
But did raise: Actual revenue
Sales volume variance
Effect on profit of volume not being as expected
Effect on profit of sales volume not being as expected
Should sell: Budgeted units
Did sell: Actual units
* Std cont. per unit: X
Labour variance - Total labour variance
Should have cost: SP * SH * AQ
Did cost: AP * AH * AQ
Labour variance - Labour rate variance
Have we paid too high a rate for the labour we have employed?
Should cost: AH * SP
Did cost: AH * AP
Labour variance - Labour efficiency variance
Have we used too much labour in producing our output?
Should have used: AO * SH
Did use: AO * AH
* SP X
Fixed overhead variance
Budgeted overheads
Actual overheads
Payback period
Cumulative cash inflows against cumulative cash outflows.
Doesn’t take into account the time value of money and ignores cashflows after the payback period.
Accounting rate of return
Average annual profit / capital invested
Doesn’t take the time value of money into account
NPV
Discounts future expected cashflows at todays monetary values using an appropriate cost of capital.
Takes the time value of money into account.
Uses all cashflows.
Absolute measure.
Need to estimate the cost of capital.
Assumes cashflows are at the end of the year.
Discount rate
1 / (1+r)^n
Internal rate of return
Discount rate required for NPV of zero.
Takes the time value of money into account.
Readily understood, doesn’t require exact cost of capital.
Relative measure
Difficult calculation, cannot cope with changing discount factor.
IRR methodology
Take 2 discount rates - one which results in NPV > 0 and one NPV < 0 then use the formula:
IRR = A + [ ( a / (a + b) ) * (B - A) ]
A = lower discount rate / a = NPV using this rate B = higher discount rate / b= NPV using this rate
