MI Flashcards
Material price variance
(SP - AP) * AQ
Materials usage variance
(SQ-AQ) * SP
Labour rate variance
(SR - AR) * AH
Labour efficiency variance
(SH - AH) * SR
VOH expenditure variance
= (SR - AR) * AH
VOH efficiency variance
(SH - AH) * Standard OH absorption rate
Sales price variance
(AP - SP) * AQ
Sales volume variance
(AQ-SQ) * contribution
Break even point (units)
Total fixed cost/contribution per unit
MI information enables management to:
Assess profitability (product, service, department, whole organisation)
determine appropriate selling prices (with regard to costs and margins)
put a value on inventory (COS and inventory held at year end)
who Deals with issues such as costs of goods/services last months, costs of operating a department, revenues earned
Cost accountant
Cost accounting concerned with info to hlep
value inventory, P/L and BS
planning (forecasts)
control (actual and standard costing)
decision making
Performance over defined period (inc CF and affairs at end)
UK must be prepared by law
Format determined by law (CA and FRS) to aid comparison
looks at business as whole
often monetary by nature
historic
Financial accounts
help management record plan and control activities and decision making
Not required legally
format is at management discretion (no rules)
can focus on specific areas of organisation
information produced to help decisions, not just end product of a decision
incorporate non-monetary measures
historical record and future planning tool
Management accounts
Cost object
anything for which we are trying to ascertain the cost
basic measure of product or service for which costs are determined
cost unit
Direct cost
can be identified with a cost object
Indirect cost
cannot be identified with particular cost object
Prime Cost
sum of all the direct costs
Production overhead
all indirect materials, wages and expenses incurred from receipt of order until completion
Administration overhead
indirect materials, wages and expenses incurred in the direction, control and administration of an undertaking
Selling overhead
indirect materials, wages and expenses costs incurred in promoting sales and retaining custmoers
Distribution overhead
indirect materials wages and expenses incurred in making packed product ready for despatch and delivering it to the customer
Cost behaviour
way in which costs are affected by changes in the level of activity
Fixed costs
Costs that do not change with level of activity within the relevant range (period cots)
Variable cost
cost that changes as level of activity changes, cost per unit is constant
Semi-variable cost
part fixed and part variable, so affected by changes in level of activity
Relevant range
range of activity levels in which assumed cost behaviour patterns occur
Step fixed cost
Cost fixed for certain range of activity but increases to new fixed level once critical level reached
Responsibility accounting
segregate revenue and cost into areas of personal responsibility to monitor and assess performance in each part of an organisation
Responsibility centre
department/function whose performance is the direct responsibility of a specific manager
FIFO advantages
logical, easy to understand and explain to managers, inventory valuation can be near to valuation based on replacement costs
FIFO disadvantages
Can be cumbersome to operate because of the need to identify each batch of material separately
Managers may find difficult to compare costs and make decisions when they are charged with varying prices for same materials
In period of high inflation, inventory issue prices will lag behind current market value
LIFO advantages
Inventories are issued at price close to current market value
Managers are continually aware of recent costs when making decisions, as costs being charged to their department or products will be current costs
LIFO disadvantages
Can be cumbersome to operate as it sometimes results in several batches being only part-used in the inventory records before another batch is received
LIFO is often opposite of what is actually happening and can be difficult to explain to managers
Decision making can be difficult with variations in prices
Weighted average advantages
Fluctuations in prices are smoothed, so the information is easier to use for decision making
Easier to administer than FIFO and LIFO as don’t have to identify each batch separately
weighted average disadvantages
Resulting issue price is rarely an actual price paid, and can run to several dp
Prices tend to lag a little behind current market valuation when there is gradual inflation.
Over absorption
OH charged greater than that incurred
Under absorption
insufficient OH included in costs of production
under/over recovery of OH will occur when (absorption)
actual OH differs from budget
actual activity differs from budget
Costing appropriate where each separately identifiable cost unit is of relatively long duration
Contract Costing
Costing appropriate where work undertaken to specific requirements and each order is comparatively short in duration
Job costing
Costing method where group of identical items is treated as a cost unit
Batch costing
Costing method where process is continuous and output of one becomes input of the next
process costing
Costing method taking account of costs and revenues of product over life, from design to launch production sales and withdrawal
life cycle costing
Costing process that begins with determining price customers willing to pay, determining desired profit margin and the remainder is the cost
target costing
JIT requires
FRESH
Flexible
Reliable sales forecasting
Efficient production planning
Speed
High quality
JIT leads to cost reduction due to
Warehouse costs - hold less inventory
improved capacity utilisation
reduced waste
reduce write off due to obsolesces
Marginal Costing v absorption costing closing inventories
MC - closing inventories measured at variable production cost, no FC included in inventory valuation
Absorption costing - closing inventories measured at full production cost including a share of fixed costs. COS therefore includes some FC from PY (Opening) and excludes some from CY (closing)
MC / AC
Inventory increases during period
AC will report higher profit (FC cf)
MC/AC
Inventory decreases during period
AC will report lower profit (FC bf)
MC/AC
Opening inventory = closing inventory
Profit AC = Profit MC
advantages of absorption costing
fixed production costs are incurred to make output, it is fair to charge all output with a share of these
Closing inventory valued on the principal required by accounting standards for external reporting purposes
Can’t tell from contribution if fixed costs covered
Advantages of marginal costing
simple to operate No arbitrary apportioning of OH
Fixed costs are period cost, so sensible to charge to the period.
The cost to produce an extra unit is the variable production cost, it is realistic to value closing inventory at this directly attributable cost
Under/over absorption avoided
Can be more useful for decision making
Who bears inflation risk if price is determined before goods / services delivered
seller
Who bears inflation risk if buyer agrees to cost + markup
buyer
Who bears inflation risk if credit period offered
supplier from date price agreed to date payment received
Cost plus pricing advantages
price quick and easy to calculate and can be delegated to junior employees
prices in excess of full cost should ensure organisation at capacity will cover all costs
price increases can be justified as costs rise
Cost plus pricing disadvantages
Demand may determine price (profit maximisation combination)
Reduces incentives to control costs
requires arbitrary absorption of OH into product costs
if applied strictly organisation in cycle of-rice set using total cost - may be too high, reduced output volume increases fixed cost meaning higher selling price and around
Marginal cost plus pricing advantages
simple, no arbitrary apportionment of FC
more useful for short term decisions
Marginal cost plus pricing disadvantages
full cost may not be recovered long term
Size of markup can be varied with demand, does to ensure sufficient attention paid to demand conditions, competitors prices, profit maximisation
Profit expressed as a percentage of cost
markup
Profit expressed as percentage of sales price
margin
Aims of transfer pricing
Give realistic measurement of divisional profit
Provide supplier with realistic profit and receiver with realistic cost
Give autonomy to managers
Encourage goal congruence (individual managers goals are same as company goals)
Ensure profit maximisation
Methods of transfer pricing
Market price
cost plus pricing
two part transfer price
dual pricing
Transfer price - market price
in perfectly competitive market
Cost plus pricing issues
predetermined standard cost used rather than actual cost, if not used, all efficiencies and inefficiencies are transferred from one division to another and it distorts divisional profit measurement
To ensure OH are recovered, the supplying division will wish to base TP on total cost, however supplying divisions fixed costs will then be perceived as variable from receiver decision, could lead to sub-optimal decisions
Reasons for preparing budgets
PRIME
Planning
Responsibility
Integration and coordination
Motivation
Evaluation and control
Reasons for preparing budgets
compel planning,
communicate ideas and plans
coordinate activities
allocate resources
authorisation
framework for responsibility accounting
establish system of control
performance evaluation
motivate employees
Problems with budgeting
cumbersome and too expensive
Out of kilter with competitive environment and no longer meets needs of exec or operating managers
Extent of gaming the numbers has risen to unacceptable levels (Hope and Fraser 2003)
Budgets traditionally produced annually, on spreadsheets takin gup times and resources. They are time consuming and inflexible and quickly out of date. Modern business requires frequent reliable budget forecasts to inform decision making.
beyond budgeting leadership principals
PAVTOC
Purpose
autonomy
values
transparency
organisation
customers
Beyond Budgeting management process
RRRTPP
Rhythm
resource allocation
rewards
targets
plans and forecasts
performance evaluation
budget
quantified plan of what the organisation intends should happen in the future
based on forecast
Forecast
prediction of what is likely to happen in the future given a certain set of circumstances.
Budget committee
coordinating body in preparation and administration of budgets. Usually headed up by MD who is helped by budget officer (usually FD or accountant), every part of the organisation should be represented.
Budget committee functions
Coordination and allocation of responsibility for preparing budgets
Issue budget manual
Timetabling
Provide information to help prepare budgets
Communicate final budget to appropriate managers
Monitor budget process comparing actual and budget
collection of instructions governing the responsibilities of persons and the procedures forms and records relating to the preparation and use of budgetary data.
budget manual
what contains
Explanation of objectives of budgetary process
organisational structures
outline of principal budgets and relationships
administrative details on budget prep
procedural matters
budget manual
Steps in budget preparation (sales principal budget factor)
SET OBJECTIVE
1. Sales budget, Finished goods inventory budget
2. With information from sales and inventory budgets, production budget can be prepared
3. Leads to materials use budget, machine usage budget, labour budget
4. Materials inventory budget - raw materials budget
5. Overhead costs
6. Budgeted income statement
7. Several other to arrive at budgeted SFP - capital expenditure, wc budget, cash budget
Disadvantages of high low method of calculating linear relationship costs
only takes two data sets into account, which doesn’t represent all data available and one could be a rouge set
Correlation
degree to which one variable is related to another
Coefficient of determination R^2
Proportion of change in one variable that can be explained by variations in another
Time series analysis components
Trend
seasonal variation
cyclical variations
random variations
movie averages
Time series additive model
TS = T + SV
Time series Multiplicative model
TS = T * SV
Assumptions of time series analysis
Assumes what happened in past will continue in future
assumes there is a linear relationship
seasonal variations are assumed to be constant/proportional to the trend line
Importance of accurate forecasting
relying on incorrect forecast can lead to poor decision making
forecasts should be insightful, accurate and timely
businesses should use data from a variety of sources and apply ML
Data analytics
process of collecting organising and analysing large datasets to discover patterns and other info on which an organisation can base future decision mkaing
data mining
Sorting through data to identify patterns and relationships between different items
Benefits of big data
Forecasting demand
Identify customer preferences
Problems with big data
lack of forecasting tools
privacy and security
incorrect data
lack of skilled data analysts
Incremental budgeting
Basing CY on PY with adjustment for changes and inflation, reasonable if operations are effective efficient and economic
Incremental budgeting problems
Inefficiencies perpetuated
slack encouraged
set without allowing budget holder to participate
often effective in new organisation, small businesses, during periods of economic hardship, when operational managers lack budgeting skills, when different units require precise coordination
imposed budget
Advantages of imposed budget
strategic plans incorporated
Enhance coordination between plans and objectives of different divisions
Use senior management awareness of total resource availability
Decrease input from inexperienced/uninformed lower level employees
quick
Disadvantages of imposed budget
lack of motivation if unrealistic
no team spirit feeling
Acceptance of organisational gaols and objectives may be limited
Could be viewed as punitive device
Managers who are performing operations likely to have better understanding of what is achievable
Unachievable budgets could result if consideration not given to local operating and political environment
Lower level management initiative may be stifled
Participative budgeting advantages
based on information from employees familiar with department
Knowledge spread among several levels of management pulled together
Morale and motivation improved
Management more committed to organisational objectives
More realistic
Better coordination between units
Specific resource requirements included
Senior managers overview mixed with operational level details
Individual managers aspiration levels more likely to be taken into account
Participative budget disadvantages
Takes lots of time
Changes implemented by senior management may cause dissatisfaction
May be unachievable or too soft If managers not qualified to participate
Introduce slack/budget bias
Support empire building by subordinates
Earlier start may be required
zero based budgeting advantages (+ Disadvantage)
Ensures inefficiencies not concealed
Increments of expenditure compared with expected benefits received to ensure efficient allocation of resources
Particularly useful when applied to marketing and training cost
But time consuming and lots of work
Rolling budget benefits
educe element of uncertainty
Force managers to reassess regularly and up to date budgets
Planning and control based on recent plan
Always a budget for several month ahead
rolling budget disadvantages
Routine preparation - more expensive, more effort, more money
May put off managers who doubt the value of preparing so many budgets
Working capital
total current assets of business less current liabilities
Receivables + inventories + cash - payables
Inventory turn over ratio
Inventory / COS * 365
Receivables collection period
receivables / revenue * 365
Payables turn over ratio
payables/purcahses * 365
rate of inventory turn over
COS/Average inventory (should be as high as possible
Current ratio
Current assets/current liabilities
quick ratio
(CA - Inventory)/CL
Cash operating cycle
time between point cash begins to be spent on production of product and collection of cash from the customer who purchases it
Cash operating cycle calculation
Raw materials holding period + average production period + average inventory holding period + average receivables collection period - average payables payment period = length of cycle
Raw materials holding period
annual inventory of raw materials / annual usage * 365
Average payables payment period
Average TP / annual purchases * 365
Average production period
Average inventory of WIP / Annual COS * 365
average inventory holding period
Average inventory of finished goods / annual COS * 365
Average receivables collection period
average receivables / annual sales revenue * 365
Limitations of woking capital performance measures
Balance sheet values at one point may not be typical
Balances used for seasonal business will not represent average
Such measures concern past not future
Therefore measures shouldn’t be considered in isolation, trends and industry averages are important
Indications of overtrading
amount of cash to fund cycle will increase as it gets longer and sales increase
Inventory control systems
re-order level - optimum order quantity ordered if inventory falls below set level
periodic review schedule - inventory reviewed at fixed intervals
ABC - Categorise inventory into levels
Economic order quantity - how much to order
JIT
Economic order quantity system
= square root (2cd/h)
C = cost placing order
d = estimated inventory useage
h = cost of holding inventory
limitations of EOQ
cumbersome to apply
Simplifying assumptions are made about usage and constant purchase price that may be unjustified
Ignores potential benefit of taking advantage of bulk discount as doesn’t consider whether best price is obtained
Can be difficult to estimate holding costs and cost of placing each order
Key features of JIT
- flexible suppliers and workforce
guaranteed quality of raw materials
close working relationship between suppliers and users geographically
willing workforce to increase/decrease hours as needed
rationalised factory layout
Credit terms must be communicated on
orders
invoices
statements
Receivables factoring
accounting and collection
business is paid by the factor as customers settle invoices / after settlement period, factor maintains sales ledger accounting function
receivables factoring
credit control
factor responsible for chasing customers and speeding up debt collection. Recourse factoring means any bad debt are passed back to client, non-recourse factoring provides 100% bad debt insurance, that is the client does not suffer the cost
Receivables factoring - finance against sales
factor advances a % of the value of sales immediately on invoices
Issues with factoring
loss of contact with customer, who may view factoring as a sign of financial problems
ROI / ROCE
Profit / capital employed * 100%
RI
= operating income - *(required return * assets)
Break even point units
Total fixed cost / contribution per unit
contribution ratio
how much contribution is earned from each £1 of sales = contribution / price
wages paid for idle time of direct workers within a production department is classified as
factory overhead - overtime is always classed as factory overhead unless worked at specific request of a customer or regularly as part of production department during normal course of operations
Overtime premium and idle time are…
indirect labour costs
T/F FIFO - inventory valuation will be replacement cost
True
T/F - LIFO - inventories are issued at price close to current MV
True
T/F decision making can be difficult with FIFO and LIFO due to price vatiations
True
T/F Disadvantage of WA is resulting issue is rarely actual price paid and may have several decimal places
True
Overhead apportionment process is carried out so that…
Common costs are shared among cost centres
T/F
There is no need for a single product company to allocate and apportion OH in order to determine OH cost per unit
True
T/F
In process and batch costing, the cost per unit of output is found indirectly by dividing total cost by number of units producted
True
T/F
in process and job costing the unit cost is found directly by accumulating costs for each unit
False
In MC inventory is valued at…
Variable production cost
Profit difference on MC v AC
Inventory reduction in units * fixed OH per unit
Who coordinates preparation and administration of budgets
Budget committee
What contains instructions governing the preparation of budgets
Budget manual
What is the principal budget factor
A factor which limits the activities of an undertakign
What is a functional budget
the budget for various functions of the business (production, marketing, sales, purchasing)
What includes budgeted BS/IS prepared on accruals basis and includes cash budget, is prepared from information in functional budgets and is prepared last
Master budget
T/F the high low method of cost estimation is useful for calculating budgeted cost for the actual activity
True
What is the reason for seasonally adjusting data in a time series
to find the trend
