Mock Assessments 1&2 Flashcards
Index numbers explanation
Why is it useful
An index number series measures the relative change in the volume or the value of an item over time
It is a way of allowing us to easily see changes occurring over time; it might be harder to interpret those changes when looking at the raw data
Using index numbers requires a ‘base year’; this is the ‘starting point’ for the index numbers and the year that we compare every other year to
The base year should be a typical time period with no unusual or extreme circumstances
Index numbers explanation
How to calculate
Current period figure / base period figure * 100
Problems with relying on forecasts
Historic data - The data is always going to be old. There is no guarantee that the conditions in the past will continue into the future.
Unexpected events - It is impossible to factor in unexpected events or externalities that might change sales demand or material prices.
Focus - There is a danger that management becomes a slave to historical data and trends rather than focusing on what the business is doing now
How much data do you have? This will also help to decide which technique you will use
How reliable is the data? A forecast can only be as reliable as the data used to determine it
Is there any data missing? This can distort the true pattern within the data
Is there any change in the definition of the data? If the data collected changes across the period this makes the analysis of patterns and trends less reliable
Ways to reduce the impact of uncertainty
Flexible budgets – this involves preparing a variety of different budgets for several levels of activity. For instance, we could draw up a budget based on very strong sales demand (a ‘best case’ scenario), another budget based on weak demand (a ‘worst case’ scenario) and a more middleof-the–range budget somewhere in between the other two
regular re-forecasting – since conditions in the market are likely to change as the year develops, we could regularly revisit our budgets and update them as likely outcomes become more certain. For instance, if the economy starts to move into recession during the year, we could reduce our
expectations for demand levels for the later months of the year.
Planning models – various software and spreadsheet models could enable us to more accurately predict a range of possible outcomes
Rolling budgets – as we saw in an earlier chapter (chapter 2) rolling budgets help us to deal with uncertainty with the regular refreshing and updating of the budget to account for uncertainties as they change or become more certain
market research as well
Challenges they may face introducing ABC costing into the business
Time consuming so costly
Lack of understanding – ABC is not fully understood by many managers and therefore is not fully accepted as a means of cost control.
Difficulty in identifying appropriate cost drivers – for example, property costs are often significant and yet a single driver is difficult to find.
Lack of appropriate accounting records – ABC needs a new set of accounting records; this is often not immediately available. The setting up of new cost pools is time consuming
The advantages of using an activity based costing approach
Overhead absorption into units is based on their use of resources
Enables more accurate costing information to be generated.
Easy to see where high levels of cost occur and their causes which will help to control them to improve profit.
Encourages improvement in processes by considering how the business can operate more efficiently
How costs can behave or change through the product life cycle;
Costs can change through the life of the product:
Introduction – Higher marketing and promotional costs are incurred and the costs to produce are higher because there are no economies of scale yet. Winterburn has a new product so investing in new production processes and getting the market awareness.
Growth – During the growth phase costs for marketing are high whilst gaining market share and additional investment being made in changes to design and production processes to make sure the hip heat product is meeting the customer needs. Production costs will fall per unit as benefit from economies of scale and production efficiencies begin.
Maturity – costs of production are lower as the production is stabilised, there may be a steady cost for advertising to keep the brand visible.
Decline – The product costs may increase as volumes decline and lose benefits of economies of scale, there will be much less spent on promotion. Costs may be incurred to sell off at a lower price and to shut down part of or all of the operations producing the product
A suggestion on how these costs could be managed - product life cycle
Costs can be managed at the design phase by designing out costs, considering what does/doesn’t need to be in the design to meet the customer needs.
Setting a promotional strategy – is investment made early in introduction to gain market share meaning it can be reduced later.
Forecasting decline to ensure over production costs of scrapped items are reduced.
The transfer price is set at variable cost, and each period a lump sum fixed fee is given to the factory by Head Office as a contribution towards its fixed costs, and potential profit.
Cost-plus, Dual Pricing, Two-part tariff, Market price
Two-part tariff
Advantages of target costing
It shows management’s commitment to process to gain competitive advantage.
* The product is created from the expectation of the customer and therefore the cost is also based on similar lines.
* The approach to designing and manufacturing products becomes market-driven.
* Seeking to achieve new market opportunities for the best value for money rather than just the lowest cost.
Disadvantages of target costing
- A lengthened development cycle, missing opportunities through delay to launching a
new product. - Closing the gap can mean reducing the quality of inputs and processes to reduce the manufacturing cost.
- Not suitable to the service industry given much of the cost is labour driven and important in the delivery of the service.
- A large amount of cost cutting can have a detrimental effect on staff
Benefits of cloud accounting
Access to accounts anywhere and in real time, this means it is up to date and flexible to access.
Access can be provided to others to collaborate, for example individuals from various areas of the business can be accessing the data at the same time for their purpose or to share and collaborate on a task.
Access to App Eco-Systems – there are cashflow forecasting apps, online invoicing apps, industry specific management tools.
Live bank feeds with automatic posting and matching of transactions to simplify the posting and reconciliation process.
Always up to date with latest software, removing the need to instal updates.
Enable data to be securely shared, for example a business providing access to their accountant.
Can connect to online payment apps enabling a simplified process for collecting funds or making payments to suppliers or staff.
Drawbacks of cloud accounting
Software updates are out of your control and things may appear differently without warning which can be confusing and disruptive.
It requires a commitment to a monthly cost which can increase with user numbers.
Responsibility must be assigned to control users and their access to prevent anyone accessing live
data who shouldn’t.
With anytime access staff may end up working additional hours at home which is not good for work life balance/well being
