Management Accounting Flashcards
1
Q
Explain what is meant by Costs.
A
Amount that has to be paid in order to get something.
2
Q
Explain what is meant by Revenue.
A
Income generated from normal business operations
3
Q
Explain what is meant by Profit.
A
Money that is earned in trade or business after paying the costs of producing and selling goods.
4
Q
Explain what is meant by Total Costs.
A
Is the sum of all expenses paid to produce a product.
5
Q
Explain what is meant by Average Costs.
A
Total costs divided by the number of units produced.
6
Q
Explain what is meant by Fixed Costs.
A
Costs do not vary with the level of output.
7
Q
Explain what is meant by Variable Costs.
A
Costs that change in proportion to the level of goods / services a business produces.
8
Q
Explain what is meant by Total Revenue.
A
total receipts from sales of a given quantity of goods or services.
9
Q
Explain what is meant by Average Revenue
A
the revenue generated per unit of output sold.
10
Q
Explain what is meant by Price.
A
The monetary value of a good, service or resource established during a transaction.
11
Q
Explain what is meant by Direct Costs.
A
Costs that are directly attributed to a unit output
12
Q
Explain what is meant by Indirect Costs/ Overheads.
A
Costs that can not be attributed (caused by) to a particular unit of output.
13
Q
How do you calculate Total Costs?
A
Fixed Costs + Variable Costs
14
Q
How do you calculate revenues?
A
Number of products sold X Sale price
15
Q
How do you calculate profits?
A
Total Revenue - Total Expenses
16
Q
How do you calculate Total Costs?
A
Fixed Costs + Variable Costs
17
Q
How do you calculate Variable Costs?
A
Labour + Materials
18
Q
How do you calculate Direct Costs?
A
The costs of labour
19
Q
Explain the importance of Overheads/Indirect Costs to a business.
A
- It ensures that all overheads are evenly covered somewhere in the business, can understand which sectors of the business are performing.
20
Q
Explain the importance of Direct Costs to a business.
A
- Is useful because a business can allocate overheads/indirect costs in relation to direct costs.
21
Q
Evaluate the impact of costs and revenue on business decisions.
A
- A business may want to make a profit so it tries to maximise revenue in order to exceed its costs, business may reduce profit to reduce price in order to gain market share. - A firm may want to be more competitive in the market so it will reduce its costs, it also may do this to increase profit margins.
22
Q
Advantages of Cost Centres.
A
- The information will help to highlight those departments that are performing well and those that are not - The information can be used to help motivate the workforce
23
Q
What is a Cost Centre?
A
Cost centre is a specific part of a business where costs can be identified and allocated with responsible ease.
24
Q
Disadvantages of a Cost Centre.
A
- Collecting and separating information into different cost centres can be EXPENSIVE - Can be overlaps in the production process, so it cannot allocate information correctly.
25
What are Profit Centres?
Profit centre is a specific part of a business where profits can be identified and allocated with responsible ease.
26
Disadvantages of Profit Centres.
- Sometimes a department (eg. marketing) which mat generate costs for the business but not receive profit directly, so this will not be possible.
27
What is the Effect of Cost and Profit Centres for stakeholders?
- Shareholders - will look at the level of profit as it affects their dividends - Employees - may be affected by the accuracy of the method, this will affect sales and therefore the likelihood the employees retain their job. - Management - Decisions may be made that affect a managers reputation - Suppliers - Will be affected by how much the business is willing to pay for its supplies
28
What is Absorption Costing?
All the indirect costs/overheads of a business are absorbed by different cost centres.
29
How do you calculate absorption costing?
Example - Electric Kettle Output per annum - 60,000 Direct Costs - £200,000 Electric Hob Output per annum - 20,000 Direct Costs - £100,000 OVERHEADS = £250,000 (you should be given the overheads information) Calculate the % output of each product Electric kettle Kettle Output / Total Output 60,000 / 80,000 x 100 = 75% Electric Hob Hob Output / Total Output 20,000 / 80,000 x 100 = 25% Calculate the allocated overheads Calculate 75% of the Overheads £250,000 Electric Kettle = 0.75 x 250,000 = £187,500 Electric Hob = 0.25 x 250,000 = £62,500
30
How do you calculate Marginal Costing?
Difference in total Costs for a year / Difference in output for a year
31
Evaluate the usefulness of different costing methods to a business and its stakeholders.
- Can be disastrous if the figures are inaccurate as some parts of the business may be allocated in correct overheads - Can lead to demotivation.
32
Explain what is meant by Break-Even.
Is the point where total revenue covers (is equal to) the total costs
33
Explain what is meant by Contribution.
Is a method whereby fixed costs or overheads are ignored and the business considered only the variable costs of production. (Marginal Costing)
34
Explain what is meant by margin of safety.
The amount of sales that are above the break-even point.
35
Explain what is meant by Target Level of Profit.
The expected amount of profit that the managers of a business expect to achieve by the end of a designated accounting period
36
Explain what is meant by Stepped Fixed Cost.
Is when there is an increase in fixed costs so the firm can cope with an increase in production.
37
Show a Break Even Graph.
38
How do you calculate the margin of safety?
Total sales - Break Even Point
39
How do you calculate Contribution?
Total Contribution = Sales x CPU
Contribution per unit (CPU) = Price - Variable Cost per unit
40
What is the Target Level of Profit equation?
fixed costs or overheads + (Target Profit / Contribution per unit)
41
What is the Target Level of Profit?
Is when a business exceeds its break-even point it can decide on a target level of profit.
42
Evaluate the impact on the target level of profit to a business.
- Its value is debatable about its value this is because there are so many variables that can change while achieving this level of output.
43
What are the Benefits of Break-Even Analysis?
- Tables that show break-even analysis are easy to view, comprehend and interpret.
- Is a beneficial management tool to aid decision making in business.
44
What are the disadvantages of Break-Even Analysis?
- Based on predicted figures, no certainty that the actual values will stay constant.
- As the level of production increases, the opportunities to gain the benefits of economies of scale will have an effect on unit costs.
45
What is the Margin of Safety?
The difference between the actual level of output and the break-even level.
46
Disadvantages of Margin of Safety.
- A higher margin of safety may lead to greater risks being taken by the business, inappropriate use of funds.
47
Disadvantages of Contribution / Marginal Costing Analysis.
- Unrealistic Assumptions - Eg. you have to presume the selling price is constant, this means you dont offer discounts or anything!
-
48
Evaluate the impact of break-even analysis on a business and its stakeholders.
- Based on assumptions - the model assumes that costs such as oil will stay constant, which is bad for owners, shareholders and employees because they will have confidence in the business which doesnt exist!
- Because direct or variable costs may change, such as economies of scale which will affect the variable costs and therefore the break-even diagram, this means a new break-even analysis will have to be drawn taking a long time!
49
Recommend and justify how a business could lower its break-even point.
1 - reducing the amount of fixed costs,
2 - reducing the variable costs per unit
3 - Increase products selling price
50
What are Special Order Decisions?
involve situations in which management must decide whether to accept unusual customer orders. These orders typically require special processing or involve a request for a low price.
51
Evaluate Special Order Decisions.
- May lead to a reduction in profits made from selling the product
- Special orders may lead to a business having to produce more products which may lead to a business having to increase its fixed and variable costs in order to facilitate the increase in demand.
52
Explain the nature and purpose of investment appraisal.
Is how a business can decide whether to undertake a particular capital investment.
53
Interpret Payback.
- Measures how quickly a cost of an investment can be paid back.
- Faster the payback the better the investment
- Payback is sometimes seen as a wal of measuring the amount of risk involved in an investment.
- Longer the payback period, the greater degree of risk involved.
54
Important Payback terminology.
EOY - End of year
EOY 0 - The year the investment started
EOY 1 - One year after the investment
Net Cash Inflow - The likely return on an investment in a given year
55
..... How do you calculate the Payback for this example?
..
56
What is Average Rate of Return (ARR)?
Measures the profitability of any investment
57
How is Average Rate of Return expressed?
As a % of the COST OF INVESTMENT
58
What value is a good value for Average Rate of Return?
The HIGHER THE VALUE the better the investment
59
What are the 3 different terms that mean Average Rate of Return?
- Average Rate of Return
- Annual Average rate of Return
- Accounting Rate of Return
60
How do you calculate the Average Rate of Return?
Average Annual Profit = Profit / Lifetime of investments use
Average Rate of Return = Annual Average Profit / Cost of investment
61
Why is Net Present Value better to use than Payback or Average Rate of Return?
Because Net Present Value takes into account INFLATION (value of money over time) whereas Average Rate of Return and Payback dont!
62
What is Net Present Value?
Considers the value of money over time, converts all monetary calues into todays values to allow for a realistic assessment of return in the year ahead.
63
What do the Different Net Present Values tell you?
- A positive NPV for a project suggests that the investment project should go ahead.
- A negative NPV would suggest that a project should be rejected
64
How do you calculate the Net Present Value?
Money made each year X Discount factor = Present value that year
Add up all the present values you get for each year
Take the total present value and minus the initial investment!
This is your NET PRESENT VALUE POSITIVE IS GOOD NEGATIVE IS BAAAAADDDD
65
66
What are the Advantages and Disadvantages of Net Present Value (NPV)
**Advantages**
- It takes into account inflation
- All cash inflows are accounted for (unlike payback)
**Disadvantages**
**-** More complicated to work out then ARR or Payback
- Because it is more complicated takes longer to make a decision and therefore is more expensive
67
What are the Benefits of Budgeting?
- Helps identify cash flow problems
- Provides information for shareholders
- Gives managers information they need to manage their departments
68
What is the difference between Cash Flow and Profits
- Cash Flows is the money entering and leaving the business
- Profit is the difference between revenues and costs
69
What is meant by the term Favourable Budget Variance?
indicates that an actual result is better for the company (or other organization) than the amount that was budgeted.
70
What is meant by the term Adverse Budget Variance?
Worse than expected...
- Costs were higher than expected
- Revenue/profits were lower than expected
71
What does the significance of a Variance / Budget depend upon?
- Whether it is positive or negative – adverse variances (negative) should be of more concern
- How big was the variance - absolute size (in money terms) and relative size (in percentage terms)?
72
What is meant by Delegation?
Is the passing on of responsibility, usually to someone at a lower level in the organisation
73
Evaluate the usefulness of Budgets and Variances.
- Cannot be used in isolation and businesses needs to take into account the wider economy
- Only useful if there is a contingency plan
- It’s a PREDICTION
74
Define Cash Flow.
the total amount of money being transferred into and out of a business
75
Cash Flow - What are Inflows?
Is money coming into the business as a result of sales and borrowing
76
Cash Flow - What are Outflows?
Money leaving the business to pay for factors of production.
77
What are Cash Flow Forecasts?
Are estimates of the likely inflows and outflows is cash into and out of the business, over a given time period.
78
What do CashFlow Forecasts show?
Shows the amounts of cash that will flow in and out and the timings of such inflows and outflows.
79
What is the purpose of conducting a CashFlow forecasts?
- Great for planning, it allows the business to put in place strategies to deal with negative forecasts
- Useful for the business to set its prices
- Looked at by potential investors
80
Show an example of a CashFlow forecast.
81
CashFlow statements - Explain Opening Balance.
The opening balance for the next months will be the closing balances of the previous months
82
Cashflow Statements - Explain Bank Loan.
Remember a bank loan is an inflow but there will be outflows to pay back the loans with interest payments
83
Cashflow statements - Explain Total Inflows
Is the addition of all inflows into the business
84
Cashflow statements - Explain Utilities.
Costs for gas, electricity etc,
Keep in mind these can be paid quarterly
85
Cash flow statements - Explain Total Outflows
Sum of all the outflows of the business (negative)
86
Cashflow statements - Explain Net Cash Inflow
Cash Inflow - Cash Outflow
87
Cashflow statements - Explain Closing Balance
Is the final figure that is carried forward to be the opening figure next month
88
What do brackets mean in a Cashflow statement?
They mean the number is negative
89
Interpret Cashflow forecast data.
- Only the first 6 months have been shown, if the product is seasonal these could be the bad months and don’t accurately show the whole year business performance
- Doesn’t give an indication of how long the business has been trading.
90
What are the Limitations of CashFlow forecasts?
- Changes in interest rates ( means interest payments are a lot less )
- Changes in economic policy ( changes in taxation can affect cash flow forecasts)
- They are estimates
- Forecasting seasonal demand
91
What is the difference between CashFlow Statements and Forecasting?
A cash flow statement is an actual representation of transactions that has already taken place.
A cash flow projection is a look into the future to predict what future cash flow will be.
92
What are the impacts of CashFlow forecasts and statements on a business?
- Used to measure performance
- Management are able to monitor by comparing the statements to the forecasts
- Can correct any clear problems
93
What are the causes of CashFlow problems?
- Level of Sales ( sudden fall in level of sales and heavy period of payments will cause a negative CashFlow)
- Business Environment ( Legislation, confidence + political factors)
- Excess stock ( holding stock causes costs without gaining revenue )
- Late payments from debtors
94
How can a business improve its CashFlow?
- Increase Sales
- Reduce stock levels by selling off stock or buying less stock
- Factoring
- Loans
95
Evaluate the usefulness of methods of improving a CashFlow of a business.
- Increasing Sales ( depends on the state of the economy as it is harder during periods of economic downturns)
- Factoring ( business losses money when they sell the debt in the first place)
- Loans ( more costly in the long run )
96
Define Working Capital.
the capital of a business which is used in its day-to-day trading operations.
97
Define Working Capital Cycle.
is the amount of time it takes to turn the net current assets and current liabilities into cash.
