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Business Studies > Management Accounting > Flashcards

Management Accounting Flashcards

1
Q

investment appraisal

A

an evaluation of the attractiveness of an investment

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2
Q

give examples of investment appraisals

A

ARR,NPV,payback

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3
Q

budgets

A

A detailed plan of income and expenses expected over a certain period of time.

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4
Q

why are budgets set

A

monitor performance
control expenditure
provide direction
communicate targets

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5
Q

what is laid out in an effective budget system

A

plan of action

managerial responsibilities clearly defined

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6
Q

what is a variance

A

difference between actual and budget figures

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7
Q

what is a favourable/positive variance

A

better than expected

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8
Q

what is an adverse/unfavourable variance

A

worse than expected

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9
Q

what factors affect the significance of a variance

A

whether its positive/negative
was it forseen
how big was the variance

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10
Q

disadvantages of budgets

A

only as good as the data being used to create them.
inflexibility in decision-making
changed as circumstances change
time consuming process
short term decisions to keep within budget rather the right long term decision which exceeds the budget

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11
Q

how can budgets affect employees

A

unrealistic-demotivation
department rivalry
name+blame culture is someone goes over budget

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12
Q

advantages of payback

A

Simple easy to calculate + easy to understand results
Focus cash flows – good for businesses where cash is a scarce
compare competing projects

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13
Q

disadvantages of payback

A

Ignores cash flows which arise after the payback has been reached
May encourage short-term thinking
Ignores qualitative aspects of a decision
Doesn’t create a decision for the investment

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14
Q

payback

A

The length of it takes for an investment to recover the initial expenditure

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15
Q

ARR

A

looks at the total accounting return for a project to see if it meets the target retur

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16
Q

advantages of ARR

A

ARR provides a percentage return which can be compared with a target return
looks at the whole profitability of the project
Focuses on profitability – a key issue for shareholders

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17
Q

disadvantages of ARR

A

Doesn’t account for cash flows – only profits

time value of money

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18
Q

NPV

A

net present value

calculates monetary value now of projects future cash flow

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19
Q

what does a positive NPV suggest

A

the investment project should go ahead

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20
Q

what does a negative NPV suggest

A

project should be rejected

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21
Q

advantages of NPV

A

Takes account of time value of money
Looks all the cash flows involved through life of project
Use of discounting reduces the impact of long-term, less likely cash flows
Has a decision-making mechanism – reject projects with negative

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22
Q

disadvantages of NPV

A

More complicated method
Difficult to select the most appropriate discount rate
The NPV calculation is very sensitive to the initial investment cost

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23
Q

cash flow

A

the movement of cash into and out of the business

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24
Q

net cash flow

A

difference between the total cash inflows and the total cash outflows.

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25
Q

opening balance

A

balance in the bank at the start of a period

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26
Q

closing balance

A

this is the amount in the bank at the end of the month.

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27
Q

reasons for cash flow problems

A

too much stock (stock is cash tied up)
low profits
seasonal demand

28
Q

how does a change in cost and revenue affect cash flow

A

more revenue-more inflows

more costs-more outflows

29
Q

how can a business improve its cash flow

A 
cut costs 
cut stock 
delay payments to suppliers 
reduce credit period 
delay expansion plans
30
Q

how would reducing credit period help cash flow

A

pay for purchase quicker

means revenue comes it quicker

31
Q

how does cutting stock help cash flow

A

reduce the amount of cash tied up by buying and holding raw materials or goods for resale

32
Q

benefits of cash flow

A 
helps adjust(know your cashflow position see if you need to change anything) 
see if you'll be able to make payments
33
Q

drawbacks of cash flow

A

forecasts are only a prediction

don’t show profit and loss

34
Q

working capital

A

Working capital = current assets less current liabilities

provides a strong indication of a business’ ability to pay is debts

35
Q

working capital cycle

A

uses cash to acquire (stocks)
stocks put to work- goods+ services produced.
sold to customers
Some customers pay in cash but others buy on credit. Eventually they pay and these funds used to settle any liabilities of the business

36
Q

overhead costs

A

Costs not directly involved in the production process.

37
Q

revenue

A

Money made from the sale of goods and services

38
Q

costs

A

Amounts incurred by a business as a result of its trading operations

39
Q

profit

A

Profit measures the return to risk when committing scarce resources to a market or industry

40
Q

average cost

A

Total cost per unit of output

41
Q

fixed cost

A

dont vary with level of output

42
Q

variable costs

A

vary with level of output

43
Q

direct cost

A

directly attributable to a unit output

44
Q

price

A

quantity of payment given by one party to another in return for one unit of goods or services

45
Q

what are fixed costs also know as

A

indirect or overheads

46
Q

importance of costs to a business

A

influence price

influence level of profit

47
Q

how do costs effect decision making

A

will want to remain competitive

may have think about cutting costs

48
Q

cost centre

A

specific part of business where costs can be identified and allocated

49
Q

benefits of cost centres

A 
highlight departments that are performing well 
motivate workforce (reduction in costs in a certain department might give bonus payment)
encourage managers to look for more efficitent production techniques bring costs down
50
Q

drawbacks of cost centres

A

expensive
overlap in production process can’t easily allocate costs
some costs are external e.g 2008 oil prices
conflict between departments

51
Q

profit centres

A

see which parts of business profits are coming from

see which are most profitable

52
Q

absorption costing

A

all indirect cossts are absorbed by different cost centres

output of each

53
Q

how do you work out absorption costings

A

amount of output from 1 department/product divided by total output of all departments/ products
gives a percentage
find amount of this percentage from total overheads

54
Q

marginal costing

A

overheads are ignored only variable costs considered /

55
Q

how do you work out marginal costing

A

contribution per unit=price-variable cost per unit

total contribution=salesXcpu

56
Q

benefit of absorption costing

A

ensures all overheads are covered

57
Q

usefulness of costing to stakeholders

A

shareholder look at level of profit for dividends
employees affected by accuracy, gain a bonus or lose job
suppliers-see how much willing to pay

58
Q

break even

A

fixed costs/ (revenue-variable costs)

59
Q

margin of safety

A

(actual sales-break even point)/ selling price (PU)

60
Q

break even

A

when revenue and costs are equal

61
Q

stepped fixed costs

A

fixed costs in the short term

e.g new machine increased fixed cost, purchasing machine stays same regardless of output

62
Q

strengths of break even

A

how long it will take before a start-up reaches profitability
Helps entrepreneur understand the viability of a business proposition,
Helps entrepreneur understand the level of risk involved in a start-up
Calculations are quick and easy

63
Q

limitations of break even analysis

A

Sales are unlikely to be the same as output, wasted output
sell more than one product, so break-even for the business becomes harder to calculate
should be seen as a planning aid rather than a decision-making too

64
Q

special order decision

A

businesses need to decide if to accept orders that are on special terms

65
Q

what does a business need to consider with special orders

A

Calculate any extra variable costs associated with the order
Assess if sufficient capacity to meet order
Decide if it increases contribution and profit

Business Studies (14 decks)

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