Management Accounting Flashcards
investment appraisal
an evaluation of the attractiveness of an investment
give examples of investment appraisals
ARR,NPV,payback
budgets
A detailed plan of income and expenses expected over a certain period of time.
why are budgets set
monitor performance
control expenditure
provide direction
communicate targets
what is laid out in an effective budget system
plan of action
managerial responsibilities clearly defined
what is a variance
difference between actual and budget figures
what is a favourable/positive variance
better than expected
what is an adverse/unfavourable variance
worse than expected
what factors affect the significance of a variance
whether its positive/negative
was it forseen
how big was the variance
disadvantages of budgets
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
how can budgets affect employees
unrealistic-demotivation
department rivalry
name+blame culture is someone goes over budget
advantages of payback
Simple easy to calculate + easy to understand results
Focus cash flows – good for businesses where cash is a scarce
compare competing projects
disadvantages of payback
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
payback
The length of it takes for an investment to recover the initial expenditure
ARR
looks at the total accounting return for a project to see if it meets the target retur
advantages of ARR
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
disadvantages of ARR
Doesn’t account for cash flows – only profits
time value of money
NPV
net present value
calculates monetary value now of projects future cash flow
what does a positive NPV suggest
the investment project should go ahead
what does a negative NPV suggest
project should be rejected
advantages of NPV
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
disadvantages of NPV
More complicated method
Difficult to select the most appropriate discount rate
The NPV calculation is very sensitive to the initial investment cost
cash flow
the movement of cash into and out of the business
net cash flow
difference between the total cash inflows and the total cash outflows.
opening balance
balance in the bank at the start of a period
closing balance
this is the amount in the bank at the end of the month.
reasons for cash flow problems
too much stock (stock is cash tied up)
low profits
seasonal demand
how does a change in cost and revenue affect cash flow
more revenue-more inflows
more costs-more outflows
how can a business improve its cash flow
cut costs cut stock delay payments to suppliers reduce credit period delay expansion plans
how would reducing credit period help cash flow
pay for purchase quicker
means revenue comes it quicker
how does cutting stock help cash flow
reduce the amount of cash tied up by buying and holding raw materials or goods for resale
benefits of cash flow
helps adjust(know your cashflow position see if you need to change anything) see if you'll be able to make payments
drawbacks of cash flow
forecasts are only a prediction
don’t show profit and loss
working capital
Working capital = current assets less current liabilities
provides a strong indication of a business’ ability to pay is debts
working capital cycle
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
overhead costs
Costs not directly involved in the production process.
revenue
Money made from the sale of goods and services
costs
Amounts incurred by a business as a result of its trading operations
profit
Profit measures the return to risk when committing scarce resources to a market or industry
average cost
Total cost per unit of output
fixed cost
dont vary with level of output
variable costs
vary with level of output
direct cost
directly attributable to a unit output
price
quantity of payment given by one party to another in return for one unit of goods or services
what are fixed costs also know as
indirect or overheads
importance of costs to a business
influence price
influence level of profit
how do costs effect decision making
will want to remain competitive
may have think about cutting costs
cost centre
specific part of business where costs can be identified and allocated
benefits of cost centres
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
drawbacks of cost centres
expensive
overlap in production process can’t easily allocate costs
some costs are external e.g 2008 oil prices
conflict between departments
profit centres
see which parts of business profits are coming from
see which are most profitable
absorption costing
all indirect cossts are absorbed by different cost centres
output of each
how do you work out absorption costings
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
marginal costing
overheads are ignored only variable costs considered /
how do you work out marginal costing
contribution per unit=price-variable cost per unit
total contribution=salesXcpu
benefit of absorption costing
ensures all overheads are covered
usefulness of costing to stakeholders
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
break even
fixed costs/ (revenue-variable costs)
margin of safety
(actual sales-break even point)/ selling price (PU)
break even
when revenue and costs are equal
stepped fixed costs
fixed costs in the short term
e.g new machine increased fixed cost, purchasing machine stays same regardless of output
strengths of break even
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
limitations of break even analysis
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
special order decision
businesses need to decide if to accept orders that are on special terms
what does a business need to consider with special orders
Calculate any extra variable costs associated with the order
Assess if sufficient capacity to meet order
Decide if it increases contribution and profit
