Mid-Term Flashcards
Accounting
process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.
Why managers use accounting information
assists with decision making and control activities.
Why shareholders use accounting information
knowledge on investment value and income earned.
Why employees use accounting information
knowledge on firm ability to meet wage demands.
Why creditors/suppliers use accounting information
knowledge on firm ability to meet financial obligations
Why government agencies use financial information
details on sales activity, profits, investments, stocks, dividends, proportion of profits absorbed by taxation. this is used to determine polices to manage economy.
Model of decision making process (7 steps)
1 - clarify problem
2 - specify decision criteria
3 - identify alternative courses of action
4 - collect information about cost and benefits
5 - compare alternative cost and benefits
6 - select course of action
7 - evaluate decision effectiveness
Tactical decisions
short-term and don’t require significant changes in capacity related resources.
Long-term decisions
more strategic in nature and involve changes in capacity related resources.
Impacts of changing business environment on management accounting (5)
- global competition
- changing product life cycles
- advances in technology (manufacturing and information)
- environmental and sustainability issues
- greater pressure for higher standards of ethical behaviour
Competitive advantage in today’s environment (4)
- cost efficiency
- quality control
- time management
- innovation and continuous improvement
Functions of management accounting (3)
1 - allocate costs between goods sold and fully/party goods unsold.
2 - provide relevant information on profitability analysis, product pricing, make or buy product mix and discontinuation.
3 - provide information for planning, control and performance measurement and continuous improvement. (periodic performance reports)
Cost object
any activity for which a seperate measurement of cost is required.
Cost collection system (2)
1 - accumulated costs by classifying them
2 - assigns costs to cost objects
Direct costs
Indirect costs
Direct - specifically and exclusively identified with a given cost object
Indirect - cannot be specifically and exclusively identified with a given cost object
Cost allocation
process of assigning costs to cost objects that involve the use of surrogate rather than direct measures.
Product costs
Period costs
Product costs - those attached to the products and included in the stock.
Period costs - not attached to the product and included in the inventory valuation.
Variable costs
vary in direct proportion with activity.
Fixed costs
remain constant over wide ranges of activity.
Semi fixed costs
fixed with activity levels but increase or decrease by some constant amount at critical activity levels.
Semi variable costs (mixed costs)
include both a fixed and variable component.
Relevant revenues/costs
Irrelevant revenues/costs
future costs and revenues that will be changed by a decision.
irrelevant costs/revenues which will not be changed by a decision.
Opportunity costs
a cost that measures the opportunity that is lost/sacrificed when the choice of one course of action requires that an alternative course of action be given up.
Unavoidable/avoidable costs
costs that can be saved by not adopting a given alternative, whereas unavoidable costs cannot be saved.
Incremental revenue/costs
additional costs/revenues from production or sale of a group of additional units.
Marginal revenues/costs
Additional costs/revenues of one additional unit of output.
Cost and management information system requirements (3)
1 - inventory valuation for internal and external profit measurement
2 - provide relevant information to help managers make decisions
3 - provide information for planning, control and performance measurement
Cost assignment
The allocations of costs to the activities or objects that triggered the incurrence of the cost.
Allocation bases that are not significant determinants of costs are…
Arbitrary allocations
*traditional costing systems use this
Overhead application
The assignment of factory overhead costs to the unit based on a predetermined overhead rating.
Allocation basis:
Things to consider (5)
Basis upon which an entity allocates its overhead costs.
- direct labour hours
- machine hours used
- direct labour cost
- kilowatt hours consumed
- square footage occupied
Overhead rates
A blanket overhead is only justified if all products consume departmental overheads in similar proportions. If not, seperate departmental costs should be established.
Two stage allocation process
1 - assign overheads initially to cost centres
2 - allocate cost centre overheads to cost objects
4 steps required for the 2 stage allocation process
1 - assigning manufacturing overheads to production & service cost centres
2 - reallocating costs assigned to service cost centres to production cost centres
3 - computing seperate overhead rates for each production cost centre
4 - assigning cost centre overheads to products or other chosen cost objects
Why we use budgeted overhead rates?
- delay in product costs if actual annual rates are used
- fluctuating overhead rates that will occur if actual monthly rates are used
Accounting for manufacturing overhead
close under applied/ over applied overhead to cogs
OR
allocate to cogs, work in process inventory and finished goods inventory
Support departments
Help production departments provide products/services.
Allocation methods
- direct costs
- specified order of closing
- repeated distribution
Direct method
Allocate support costs only to operating departments.
Sequential (step down) allocation
Allocates support department costs to other support departments and to operating.
Reciprocal (matrix) allocation
Allocates support department costs to operating departments by fully recognising the mutual services provided among all support departments.
Which allocation method is best?
- each provides different outcomes
- cost vs benefit decision
- where reciprocal relationships strong use reciprocal
What does job costing involve? (2)
- manufacturing costs traced to individual jobs
- products produced are significantly different and may be produced in distinct jobs/batches
Pricing the issue of raw materials (3)
- cost flows process
- recorded in control account at cost
- issued to production department
Costing issues
continuous purchasing means not all inventory will have the same historical cost.
Types of accounting systems (2)
- integrated cost accounting system
- interlocking accounting system
Integrated cost accounting system
An accounting system in which the cost and financial accounts are combined in one set of accounts.
Interlocking accounting system
An accounting system in which the cost and financial accounts are maintained independently.
Control account
An account in the general ledger for which a corresponding subsidiary ledger has been created.
Unit cost formula =
total cost/number of units
Job order production - step 1
Prepare source documents
- the job order sheet
- materials requisition form
- time sheet
Materials requisition form
Cost of direct materials is assigned to a job by the use of a source document.
Includes:
- type, quantity and unit price direct materials
- number of job
Just-in-time production features (7)
- materials purchased as needed
- simplified production processes
- purchases are in small lots
- quick and inexpensive setups
- high quality levels for raw materials, components and finished products
- preventative maintenance
- flexible work terms
Just-in-time purchasing (4)
- reduced number of suppliers
- long-term contracts with suppliers
- quality targets in supplier contracts
- use of e-commerce applications
Cost and benefits of JIT
costs:
- substantial investment to change production facilities
- increased risk of inventory storage
- adverse impacts on small suppliers
benefits: - saving in inventory costs
- eliminates non-value added activities
Backflush costing
Costing system that delays recording some or all of the journal entries relating to the cycle from purchase of direct materials to the sale of finished goods.
Contract costing
Applied to relatively large cost units which takes a long time to complete.
- no profit taken if contract early stage
- prudence concept applied
In contract costing, if the contract is near completion…
a proportion of profit should be recognised based on:
(Cash received to date/ Contract price) x Estimated Price
Process costing
A system where the unit cost of a product or service is on tainted by assigning total costs to many identical or similar units of output.
Job costing
Individual jobs use different quantities of resources so it would be incorrect to cost each job at some average production cost.
Process costing cost categories
*seperate according to when costs are introduced
1 - direct materials are added at the beginning of the production process or at the start of work.
2 - conversion costs are generally added equally along the production process.
Process costing three ways
1 - no beginning or ending work in process inventories
2 - no beginning work in process inventory and some ending work in process inventory
3 - both beginning and ending work in process inventories are present
Equivalent units
A derived amount of output units that:
1 - takes quantity of each input in units completed end in unfinished units WOP
2 - converts the quantity of input into the amount of completed output units that could be produced with that quantity of input
Weighted average process costing method
Calculates cost per equivalent unit of all work done to date. Then assign this cost to equivalent units completed and transferred out of the process and to equivalent units in ending work in process inventory.
First in first out method
Assigns the cost of the previous accounting periods equivalent units in beginning work in process inventory to the first units completed and transferred out of the process.
Transferred in costs
Costs incurred in previous departments that are carried forward as the products cost when it moves to a subsequent process in the production cycle.
Normal vs Abnormal losses
Normal losses - cannot be avoided, cost is absorbed by good production
Abnormal losses - can be avoided, cost is recorded separately and treated as a period cost
Types of costing systems
- direct costing systems
- traditional costing systems
- ABC systems
Generating relevant cost information
1 - cost of many joint resources fluctuate according to demand, costs of support functions difficult to trace to cost objects
2 - an attention directing system is required to identify potentially unprofitable products
3 - many product related decisions are not independent
Comparison of traditional vs ABC
- both use 2 stage allocation process
- ABC only cause and effect drivers, traditional rely on arbitrary allocation bases
- ABC tends to seperate cost driver rates for support departments, whereas traditional merges support and production
Problems with traditional product costing systems (4)
- calculation of manufacturing overhead rate using a volume based cost driver
- non-manufacturing costs are not assigned to products
- failure to adapt to the changing business environment
- cause of changes in cost structures
In a product costing system - inaccurate product costs are likely when… (4)
- proportion of direct labour decreases
- proportion of related and unrelated manufacturing overhead costs increases
- non-manufacturing costs that are product related become substantial
- product diversity increases
When are traditional systems appropriate? (5)
- direct costs dominant
- indirect costs small
- information costs high
- lack of global competition
- limited range of products
Activity driver
Cost driver used to estimate cost of an activity consumed by cost object.
Cost driver
Factor/activity in that causes a cost to be incurred.
Resource driver
Cost driver used to estimate cost of resources consumed by an activity.
Root cause cost driver
Underlying factors that cause activities to be performed and their costs to be incurred.
Classification of activities
Unit level - performed each time unit of product is produced
Batch related - performed each time batch of goods is produced
Product/service sustaining - performed to enable individual product production
Facility sustaining - performed to support organisation as a whole
Time driven activity based costing (TDABC)
A management methodology that provides detailed info about the cost to serve and profitability for all products, services and customers.
Cost of resources supplied =
cost of resources used + cost of unused capacity
Implications of spare capacity
- ABC estimates the cost of resources used to perform activities to produce and sell products.
- committed resources are those supplied in advance of being used in production.
- when budgeted costs are used to estimate activity costs, the committed costs supplied will not always equal resources used.
It must be selected the correct denominator activity level …
This is the level of capacity supplied.
Costing view
Considers how ABC can be used to estimate the cost of cost objects.
Activity management view
Assists management by identifying and analysing the characteristics of business activities.
Limitations of ABC (4)
- facility level costs
- use of average costs in decision making
- complexity
- resistance to change by employees
Joint costs
the costs of a production process that yields multiple products simultaneously.
Split-off point
the juncture in a joint production process where two or more products become separately identifiable.
Separable costs
all costs incurred beyond the split-off point that are assignable to each of the specific products identified at the split-off point.
Categories of joint process outputs (2)
1 - outputs with a positive sales value
2 - outputs with a zero sales value
Product
any output with a positive sales value or an output that enables a firm to avoid incurring costs.
Main product
output of a joint production process that yields one product with a high sales value compared to the sales values of any other outputs.
Joint products
outputs of a joint production process that yields two or more products with a high sales value compared to the sales of any other outputs.
By-product
outputs of a joint production process that have low sales values compared to the sales values of the other outputs.
Two approaches to allocating joint costs
1 physical measure - allocate using tangible attributes of products
2 market based - allocate using market-derived data (NRV, sales value at split-off, constant gross-margin percentage NRV)
Physical measure
Allocates joint costs to joint products produced during the accounting period on the basis of a comparable physical measure (weight, quantity)
Sales value at split-off
Allocates joint costs to joint products produced during the accounting period on the basis of the relative total sales value at the split-off point.
Net realisable value method
Allocates joint costs to joint products produced during the accounting period on the basis of relative NRV.
NRV =
Final sales value - separable costs
Constant gross margin percentage NRV method
Allocates joint costs to joint products produced during the allocating period in such a way that each individual product achieves an identical gross-margin percentage.
Constant gross margin percentage NRV method 3 steps
1 - compute overall gross margin percentage
2 - compute total production costs for each product
3 - compute the allocated joint costs
Choosing an allocation method
Selling price at split-off - use sales value at split-off
If selling price at split-off not available - use NRV
Reasons why selling price at split-off is the best method
- best measure of benefits received
- independent of further processing decisions
- common allocation basis (revenue)
- simplicity
Sell-or-process further decisions
- joint costs = sunk costs
- don’t assume separable costs in joint-cost allocations are always incremental costs
- some separable costs may be fixed costs
- separable costs need to be evaluated for relevance individually
Two methods of accounting for by-products
production method - recognises byproduct stock as it is created and sales and costs at sale
sales method - recognises no byproduct stock and recognises only sales at time of sales
Choosing an accounting method for by-products
- production method consistent with matching principle and is preferred
- sales method is simpler, but allows a firm to manage reported earnings by timing the sale of by-products
Absorption costing
traces all manufacturing costs to products and treats non-manufacturing overheads as a period costs.
Variable costs
traces all variable costs to products and treats fixed manufacturing overheads and non-manufacturing overheads as a period cost.
Absorption and variable costing systems
- traditional systems includes all overhead costs into the cost of stock
- variable treats all fixed overhead costs as period costs
Inventory costing
operating income will differ between absorption and variable costing. the amount of difference represents the amount of fixed manufacturing costs capitalised as stock under absorption costing and expensed as a period cost under variable costing.
If inventory levels change…
operating income will differ between the two methods because of the difference in accounting for fixed manufacturing costs.
Reasons why variable costing is good
- provides more useful information for decision making
- removes from profit the affect of stock change
- avoids fixed overheads being capitalised in unsaleable stocks
Reasons why absorption costing is good
- does not understate the importance of fixed costs
- avoids fictitious losses being reported
- theoretically superior to variable costing
Choosing which method; variable or absorption
choice depends on circumstances
- volatile sales and changing stock = variable costing
- seasonal sales where stocks are built up in advance = absorption costing
- choice only for internal reporting, AASB requires absorption
Capacity levels
The choice of the capacity level used to allocate budgeted fixed manufacturing costs to products can greatly affected operating income.
4 capacity levels
- theoretical capacity
- practical capacity
- normal capacity utilisation
- master-budget capacity utilisation
Theoretical capacity
level of capacity based on producing at full efficiency all the time. does not allow for any slowdowns due to plant maintenance shutdown periods or interruptions.
*not attainable
Practical capacity
level of capacity that reduced theoretical capacity by considering unavoidable operating interruptions like maintenance and holiday shutdowns.
Theoretical and practical measure capacity levels in terms of…
what a plant can supply
Normal and master budget measure capacity levels in terms of…
demand for the output of the plant
Normal capacity
level of capacity utilisation that satisfies average customer demand over a period that is long enough to consider seasonal, cyclical and trend factors.
Master-budget capacity
level of capacity utilisation that managers expect for the current budget period.
Choice of capacity based on purpose
- product costing & capacity management
- pricing
- performance evaluation
- external reporting
- tax requirements
Product costings and capacity management
using practical capacity as the denominator level sets the cost of capacity at the cost of supplying the capacity, regardless of demand for capacity.
Pricing decisions practical capacity
stable measure calculates fixed cost rate based on capacity available.
Other issues with planning and control of capacity costs
- difficulty of obtaining demand-side denominator level concepts
- difficulty of forecasting fixed manufacturing costs
- capacity issues for non-manufacturing parts of the value chain
- in ABC, a capacity level must be chosen for each cost driver
Cost volume profit analysis (CVP)
calculates how changes in an organisation’s sales volume affect its costs, revenue and profit. it provides information for management decision making, as i can be determined the impact on revenue and costs quickly.
Assumptions underlying CVP analysis (5)
- behaviour of total revenue is linear
- behaviour of total costs is linear over a relevant range
- sales volume is only cost driver for both variable and fixed costs
- sales mix remains constant over relevant range
- in manufacturing firms, stock levels beginning and end of period are the same
Is CVP analysis a short-term or long-term decision tool
CVP is a short-term tactical term decision tool, as classification of costs as variable or fixed is usually based on cost behaviour over the short-term.
Linear CVP relationships (2)
- constant variable cost and selling price is assumed
- only one break-even point, as profit increases as volume increases
Relevant range
Range of activity over which a particular cost behaviour pattern is assumed to be valid.
*outside relevant range cost behaviour pattern may not hold
Cost volume profit equation
Revenue - Variable Costs - Fixed Costs = Operating Income
Contribution margin
CM = Revenue - Variable Costs
Contribution margin percentage
(Contribution Margin)/Revenue
Break-even point
volume of sales where the total revenues and costs are equal, and the operation breaks even
Break-even point formula
(Fixed Costs)/(Unit Contribution Margin)
Sales mix
relative sales proportions of each type of product sold by the organisation.
Weighted-average contribution margin
average of the products unit contribution margins, weighted by the sales mix.
Break-even point in units
(Fixed Costs)/(Weighted Average Unit Contribution Margin)
Operating leverage
Describes the effect that fixed costs have on changes in operating income as changes occur in units sold and contribution margin.
Operating leverage formula
(Contribution Margin)/(Operating Income)
Change in operating income
Operating Leverage x % Change in Sales
Relevant information characteristics (2)
- occurs in the future
- differs among the alternative courses of action
Types of information (2)
Quantitative - outcomes that can be measure in numerical terms
Qualitative - outcomes difficult to measure accurately; such as satisfaction
Features of relevant information (4)
- historical costs (irrelevant) helpful for making predictions
- alternatives can be compared by examining differences in expected future revenues and costs
- not all future revenues and costs are relevant; ones that do not differ among alternatives are irrelevant
- appropriate weight must be given to qualitative factors and quantitative non-financial factors
Relevant costs and revenues (5)
1) special selling price decisions
2) product mix decisions when capacity constraints exist
3) decisions on replacement of equipment
4) outsourcing decisions
5) discontinuation decisions
Qualitative factors (5)
- quality requirements
- reputation of outsourcer
- employee morale
- logistical considerations
- for make/buy decisions, buying can be risky
Types of decisions need to be made (6)
- one time only special orders
- short-run pricing decisions
- insourcing vs outsourcing
- product mix with capacity constraints
- branch: adding or discontinuing
- equipment replacement
One time only special orders
Accepting or rejecting special orders have no long-run implications.
One time only special orders decision rule
Does the special order generate additional operating income?
Yes - accept
No - reject
Problems with relevant cost analysis
1) avoid incorrect general assumptions; possible irrelevant variable marketing costs
2) be aware that unit-fixed cost data can be potentially mislead managers in two ways
Ways unit-fixed cost data can be misleading (2)
- fixed costs per unit may include costs that are irrelevant to a particular decision or may be irrelevant in total for a particular decision
- unit fixed costs are accurate only for that particular level of output, hence managers often use total fixed costs rather than per unit data
Short-run pricing decision
Special order decision
Make or buy decision
Decisions about whether to insource or outsource.
Outsource vs Insource
Outsource - purchasing goods and services from outsider vendors
Insource - providing the goods from within the organisation
Make or buy decision rule
Select the option that will provide the firm with the lowest cost and therefore the highest profit.
Why are opportunity costs not recorded in financial accounting systems?
Historical record keeping is limited to transactions involving alternatives that managers actually selected rather than alternatives that they rejected.
Carrying cost of inventory
Operating income forgone by tying up money in inventory and not investing it elsewhere.
Product mix decisions
Decisions managers make about which products to sell and in what quantities.
Product mix decision rule
Choose the product that produces the highest contribution margin per unit of the constraining resource.
Bottle-neck
A phenomenon where the performance or capacity of an entire system is limited by a single or limited number of components or resources.
Theory of constraints (TOC)
Describes methods to maximise operating income when faced with some bottleneck and some non-bottleneck operations.
3 measures of theory of constraints
- throughout margin
- investments
- operating costs
Theory of constraints (TOC) objective
To increase throughout margin while decreasing investments and operating costs. The TOC focuses on managing bottleneck operations. 4
4 Steps to manage bottleneck operations
1) recognise that bottleneck operations determine the contribution margin of the entire system.
2) identify the bottleneck operations.
3) subordinate all bottleneck operations to the bottleneck operation
4) take actions to increase the efficiency and capacity of bottleneck operation
Bottleneck operations decision rule
Does adding or discontinuing a branch or segment add operating income to the firm?
Yes - add or don’t discontinue
No - discontinue or don’t add
* decision based on incremental income of branch
Equipment replacement decisions
Difficult decision due to amount of information at hand that is irrelevant: cost, accumulated depreciation, book value of existing equipment, any potential gain/loss on the transaction.
Equipment decision rule
Select the alternative that will generate the highest operating income.
Cost function
A mathematical description of how a cost changes with changes in the level of an activity relating to that cost.
Managers estimate cost functions based on two assumptions
- variations in level of a single activity explain the variations in the related total costs
- cost behaviour is approximated by a linear cost function within the relevant range
Regression equation (cost function)
Measures past relationships between a dependent variable and potential independent variables.
y (dependent variable) = a (fixed costs) + b (variable cost per unit) multiplied by x (cost driver)
Cost estimation methods
1) engineering method
2) inspection of accounts method
3) graphical or scatter graph
4) quantitative analysis methods
- high-low method
- regression analysis
Engineering method (work-measurement method)
Estimates cost functions by analysing the relationship between inputs and outputs in physical terms.
- includes time and motion studies
- very through and detailed when there is a physical relationship between inputs and outputs
- costly and time consuming
Account method
Estimates cost functions by classifying various cost accounts as variable, fixed or mixed with respect to the identified level of activity.
- managers use qualitative when making these cost-classification decisions
- reasonably accurate, cost-effective and easy to use
- subjective
Quantitative analysis
Uses a formal mathematical method to fit cost functions to past data observations.
- objective results, most rigorous approach to estimate costs
- requires more detailed info about costs, cost drivers and cost functions and therefore is more time-consuming
Steps in estimating a cost function using cost quantitative analysis
1) choose dependent variable
2) identify independent variable
3) collect data on the dependent variable and the cost driver
4) plot the data to observe the general relationship
5) estimate the cost function, using two common forms of quantitative analysis: high-low method or regression analysis
6) evaluate cost driver of the estimated cost function
High-low method
Fits a line to data points which can be used to predict costs. Uses only highest and lowest observed values. Simplest method of quantitative analysis.
Steps in high-low method
1) calculate variable cost per unit of activity
2) calculate total fixed costs
3) summarise by writing linear equation
Regression analysis
A statistical method that measures the average amount of change in the dependent variable associated with a unit change in one or more independent variables.
*more accurate than high-low method because regression equation costs uses info from all oberservations
Types of regression
simple - estimates relationship between dependent variable and one independent variable
multiple - estimates relationship between dependent variable and two or more independent variables
Inventory management
Includes planning, coordinating and controlling activities related to the flow of industry into, through and out of an organisation.
Holding stock can (4)
- help cope with uncertainties in customer demand and production processes
- access quantity discounts
- avoid future price rises
- avoid ordering costs
Goods for sale (types of costs) (4)
- purchasing costs
- ordering costs
- holding costs
- stockout costs
Purchasing costs
costs of goods acquired from suppliers including incoming freight costs.
Ordering costs
costs of preparing and issuing purchase orders, receiving and inspecting the items included in the orders and matching invoices received, purchase orders and delivery records to make payments.
Holding costs
costs that arise while goods are being held in stock, these include opportunity cost of the investment tied up in inventory and costs considered with storage.
Stockout costs
costs that arise when a company runs out of a particular item for which there is customer demand. company must act quickly to meet the demand or suffer the costs of not meeting it.
Costs of quality
+ four categories
costs incurred to prevent and appraise or the costs arising as a result of quality issues. four categories: - prevention - appraisal - internal failure - external failure
Shrinkage costs
costs that result from theft by outsiders, embezzlement by employees, misclassifications and clerical errors, shrinkage is measured by the difference between the cost of inventory on the books vs the cost of the physical count.
Total costs for period formula
cost of placing orders + cost of holding stock
Conventional approaches to inventory management focus on balancing
ordering costs, carrying costs and shortage costs
Economic order quality (EOQ)
decision model calculates the optimal quantity of inventory to order under a given set of assumptions.
Economic order quality assumptions (6)
- only ordering and carrying costs
- some quantity is ordered at each reorder point
- known with certainty; demand, purchase-order lead time, ordering costs and carrying costs
- purchasing costs per unit are unaffected by quantity ordered
- no stock-outs occur
- managers consider costs of quality and shrinkage costs only to the extent that these costs affect ordering or carrying costs
Reorder point
Number of units sold per unit of time x purchase order lead time
Safety stock
Inventory held at all times regardless of the quantity of stock ordered using the EOQ model.
What is a budget? (5)
- detailed plan of future operating activities
- financial model of future operations
- core component of an organisations planning and control system
- way of providing info to managers
- short term planning
What is the purchase of a budget? (5)
- planning
- facilitating communication and coordination
- allocating resources
- controlling profit and providing incentives
- evaluating performance
Master budget
Comprehensive set of budgets that cover all aspects of a firms activities includes operating and financial budgets.
ABB
Aims to authorise only the supply of those resources that are needed to perform activities required to meet budgeted production and sales volumes.
Zero based budgeting
Method of budgeting in which all expenses must be justified for each new project.
Standard costs
Target costs for each operation that can be built up to produce a product standard cost.
Variance
Difference between actual result and corresponding budgeted amount.
F - favourable variance
U - unfavourable variance
Standard material quantity
Total amount of direct material normally required to produce one unit of product.
Standard material price
Total delivered cost of one unit of direct material
Direct labour efficiency variance
The effect on cost of using different number of direct labour hours compared with the standard hours that should have been used for the actual production output.
= SR (AH - SH)
Direct labour rate variance
Measure of effect on cost of paying a different labour rate, compared with standard.
= AH(AR - SR)
Purposes of standard costing (5)
- prediction of future costs
- challenging target: motivated to achieve
- settling budgets & evaluating performance
- control device by highlighting those activities
- simplify tracing costs for products
Material usage variance
(SQ - AQ) x SP
Material price variance
(SP - AP) x AQ
Fixed overhead budget variance
Difference between actual fixed overhead and budgeted fixed overhead.
= actual fixed overhead - budgeted fixed overhead
Fixed overhead volume variance
Difference between budgeted fixed overhead and fixed overhead applied to production.
= budgeted fixed overhead - applied fixed overhead
Stages in the budgeting process (8)
1 - communication details of budget policy to people responsible for preparing the budget
2 - determine factor that restricts output
3 - preparation of sales budget
4 - initial preparation of budgets
5 - negotiation of budgets with higher management
6 - co-ordination and review of budgets
7 - final acceptance of budgets
8 - ongoing review of budgets
Criticisms of budgeting (6)
- rigid planning and incremental thinking
- very time-consuming
- produce inadequate variance leaving how and why questions unanswered
- ignores key drivers of shareholder value by focusing too much on short-term numbers
- commits company to a 12 month commitment
- based on low targets
What is the difference between financial and management accounting?
Financial accounting refers to the aggregation of accounting information into financial statements for external parties. While, managerial accounting refers to the internal processes used to account for business transactions for better decision making and improve operation effectiveness (internal).
Sunk costs
costs of resources already acquired and are unaffected by the choice between the various alternatives (depreciation).
