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
