Management Accounting Flashcards

Question

Distinguish between variable costs and fixed costs.

Answer 1

A variable cost is one which varies directly with changes in the level of activity, over a defined period of time. A fixed cost is one which is not affected by changes in the level of activity, over a defined period of time. Semi-variable = fixed + variable. Step cost = fixed cost increases by steps.

Answer 2

materials used to manufacture a unit of output or to provide a type of service. labour costs of manufacturing a unit of output or providing a type of service. commission paid to a salesperson. fuel used by a haulage company.

Answer 3

Salary paid to a supervisor. Advertising in the trade journals. Business rates paid to the local authority. Depreciation of machinery calculated on the straight-line basis.

Answer 4

office salaries where there is a core of long-term secretarial staff plus employment of temporary staff when activity levels rise. maintenance charges where there is a fixed basic charge per year plus a variable element depending on the number of call-outs per year.

Answer 5

A fixed cost that increases in steps. For example, rent storage space until full capacity reached, then expand by renting second storage space. Year 1 £1,000; Year 2 £1,100 etc.

Answer 6

Relevant Costs / Revenues future costs / revenues that will be changed by a decision Irrelevant Costs / Revenues will not be affected by a decision Example: Going to Glasgow to watch the football and do some shopping. Do I take my own car or go by train? Relevant costs – fuel for car, car parking Irrelevant costs – car tax, car insurance

Answer 7

Avoidable Costs may be saved by adopting a given alternative Unavoidable Costs cannot be saved regardless of the alternative adopted

Answer 8

Costs created by a decision made in the past and cannot be changed by any future decisions. Sunk Costs are irrelevant costs (not all irrelevant costs are sunk costs)

Answer 9

A cost that measures the opportunity that is lost or sacrificed when the choice of one course of action requires that an alternative course of action is given up. Example: Student due to graduate in summer would like to have a gap year to go travelling before starting work but gets offered a job upon completion of their studies. If chooses to travel and have gap year: Opportunity Cost – lost salary

Answer 10

difference between costs and revenues for the corresponding items under each alternative being considered example: What are the incremental costs of increasing output from 1,000 units to 1,100 units per week? The additional costs of producing 100 units

Answer 11

Also known as Variable Costing A cost accumulation system All variable costs are product costs All fixed costs are period costs Used as a basis for decision making

Answer 12

Amount that remains after deducting the variable costs from the sales revenue, which will contribute towards meeting the Fixed Costs of the business. Contribution Analysis shows which products contribute the most to the fixed running costs of the business

Answer 13

short –term decision making make or buy decisions internal profit statements used as a basis for measuring managers performance pricing

Answer 14

A systematic method of examining the relationship between changes in activity and changes in total sales revenue, expenses and net profit. (Usually a period of one year or less)

Answer 15

How many units must be sold to break-even? What would be the effect on profits if we reduce our selling price and sell more units? What sales volume is required to meet the additional fixed charges that may arise? To achieve a target profit, how many units must we sell?

Answer 16

This is the point at which no profit and no loss is made Using the formula from the contribution analysis: Sales – Variable Costs = Fixed Costs + Profit We remove the profit element as this is nil and get the following: Sales – Variable Costs = Fixed Costs Contribution = Fixed Costs Break-even point in units = fixed costs Contribution per unit Break-even point in sales value: Break-even point in units x selling price per unit

Answer 17

once we have sufficient contribution to cover all the fixed costs of a business, the remaining amounts contribute to profit. using the break-even formula we can look at how many units we would need to sell to achieve a target profit. Target sales in units = Fixed Costs + Target Profit Contribution per unit

Answer 18

the excess of planned or actual sales above the break-even point can be expressed as number of units, the sales value or as a percentage of the budgeted sales Margin of Safety (units) = planned sales – break-even sales Percentage Margin of Safety = expected sales – break-even sales expected sales

Answer 19

Outside the relevant range the unit selling price and the variable costs are deemed no longer constant per unit Example: If ticket sales below 4000 then caterers cost will be higher per ticket sold If ticket sales higher than 12000 then caterers cost will be lower per ticket sold Relevant range – ticket sales of 4000 up to 12000

Answer 20

Costs and revenue patterns are known and can be represented in a straight line. A single product or constant sales mix Total costs and total revenue are linear functions of output (volume) Analysis applies only to relevant range Analysis applies only to a short-term period Assumes no build up of stocks

Answer 21

“is a plan expressed in money. It is prepared and approved prior to the budget period and may show income, expenditure and the capital to be employed. May be drawn up showing incremental effects on former budgeted or actual figures, or be compiled by zero-based budgeting.”

Answer 22

``` profit making enterprises government schools health trusts charities individuals ```

Answer 23

Planning annual operations – long term plans encourages managers to anticipate problems Coordination activities of various parts of organisation managers to examine relationship between own operations and those of other departments

Answer 24

``` Communication plans & policies & constraints ensure appropriate individuals accountable top management – lower management during budget preparation Motivation can influence managerial behaviour participation assists managing departments provides a target ```

Answer 25

``` Control compare actual with budgets management by exception: investigating significant deviations identifying inefficiencies take appropriate action Performance Evaluation assess managers performance against targets ```

Answer 26

``` Usually one year 12 months or 13 x 4 week periods Continuous / Rolling budget continuous 12 months encourages regular planning Seasonal variations may be reflected ```

Answer 27

Communicate details of budget Determine the functions that restricts output Prepare the sales budget Initial preparation of various budgets Negotiate budgets with senior management Co-ordinate & review of budgets Final acceptance of budgets Ongoing review of budgets

Answer 28

Shows the overall planned performance for the budget period, once all budgets have been prepared Profit & Loss Account Balance Sheet Cash Budget

Answer 29

One of the most important budgets Objective – to ensure sufficient cash to meet the organisations needs Rolling Budget Cash Flow Management to manage cash to achieve maximum interest and cash availability plan for deficits plan for cash surplus

Answer 30

Receipts include: Cash sales, receipts from debtors, sale of assets, dividends received, interest received, new share issue etc. Payments include: Payments to creditors for stock, and material purchases, wages, dividend payments, loan repayment Some receipts/payments are not in Profit & Loss e.g. purchase of fixed assets, cash from new share issue Some payments in P/L are not in cash budget – non-cash e.g. depreciation

Answer 31

Demotivational budgets Setting unrealistic targets Budgetary Slack Incremental approach – budget ratcheting Use it or lose it – budget lapsing Name, Blame & Shame Time consuming Unethical behaviour A yearly rigid ritual Cost