P1 Flashcards
The hierarchy of activities
Classification of activities by level of organisation, for example, unit, batch, product, sustaining, and facility, sustaining 
Advantages of marginal costing
Better for decision-making
Fixed costs are treated as period costs which is exactly what they are.
Profit depends upon sales and enables clearer performance evaluation.
Disadvantages of marginal costing
Does not comply with financial reporting standards.
All costs must be split into the fixed and variable parts.
Fixed costs have been incurred and so cannot be ignored. 
Cost driver
A factor influencing the level of cost 
ABC
A method of assigning, overheads and indirect costs to products and services.
Uses activities (which are considered any event) and cost pools the grouping of costs for each cost centre.
Allocated to individual units by using the cost driver rate, which is the cost pool divided by the total number of cost driver incidents.
What if analysis?
Sometimes referred to as a sensitivity analysis, involves changing the variables within your analysis to see what impact it has on the results.
The benefit is you get a better feel for how sensitive a part of the business is to change in key variables.
Factors that make a budget, motivational and successful
Achievability and participation 
Dysfunctional behaviours in budgeting
Managers may resort to tactics which are non-goal congruent to the business if targets are unachievable or unrealistic.
Ethical aspects of bottom up budgeting
Budgetary slack – budget holders over/under estimate requirements to enhance their own position.
Budgeted requirements, being determined by budget holders personal goals, rather than organisational objectives.
Ethical aspects of top-down budgeting
Excessive pressure from above on budget holders to meet targets they have not set
Giving budget holders misleading impression that they are influencing budgets, resulting in demotivation when they realise what is happening.
Pass into budget holders responsibility for costs that they do not control.
Benefits of beyond budgeting
Faster response time
More innovative
Lower costs
Performance targets are more flexible.
Great motivation for managers, due to decentralisation
Greater motivation for frontline staff
Better relations with customers and suppliers.
Disadvantages of beyond budgeting
More complex planning and coordination needed between different departments.
Difficulties in performance evaluation and hence reward determination
Emphasis on external focus resulting in lack of clarity on internal goals.
Cost of investment in better information systems
Difficulties in changing to decentralised models.
Deprival value
The amount a business would lose if an asset was no longer in use (lost/damaged)
The lower of the replacement costs and the higher of the net realisable value and economic value in the business
Opportunity cost
An example of a relevant cost where an organisation faces a choice over what to do. The opportunity cost is the benefit foregone by choosing one course of action instead of the next best alternative.
Other factors to consider with relevant costing or opportunity costs
Impact on staff?
How are customers going to react?
How are suppliers going to react?
Do you have the resources to implement the decision?
What is the likely response of competitors
Political and legal factors
Consideration for discontinuation
Are there inter dependencies between the products that have been considered for discontinuation
Cost patterns are likely to change if they stop the manufacturing one product – will there be a loss of economies of scale or discounts?
Drawbacks of a sensitivity analysis
Only one variable at a time can be analysed when a practice a number of variables may change.
Making a decision based on analysis will be difficult. If you do not know the probabilities of the variables changing.
The value of perfect information
The difference between the EV with perfect info, and the EV without perfect info
Standard deviation
A statistical measurement of volatility.
It measures how widely values range from the average value (expected value).
Since it is a measure of volatility, it gives us a good indication of overall risk in decision-making.
The coefficient of variation
Used to compare the relative risks of products by calculating the ratio of the standard deviation to the EV
Using big data and technology to analyse product mix
Information becomes more transparent and more assessable.
It is possible to minimise risks by testing scenarios.
There is more potential for customer segmentation, targeted marketing and customisation of products.
Better decisions can be made by revealing new insights into customer thinking
It can help develop future products faster.
You can help develop appropriate performance indicators. You will have a better idea of nonfinancial performance, which indicates better long-term direction.
Assumptions of a break even analysis
Fixed costs are constant at any output level (no stepped costs)
Constant variable cost per unit and constant selling price. This leads to straight lines on the graphs.
No change in inventory levels.
The model can only be applied to a single product or constant product mix scenario.
Single, limiting factor steps
Identify what the limiting factor is
Calculate the contribution per unit of limiting factor
Rank the products, according to the contribution per unit of limiting factor
State, the optimal production plan
Key points of linear programming graph
The feasible reason – the area within which all the possible combinations of output are contained. Constraint lines form the boundary for the feasible region. Production will only be possible for outputs that fall within the feasible region.
The ISO contribution line - represents the contribution that can be earned from all the possible combinations of the two products. If this line is moved as far to the right as possible at the same angle are still remaining within the feasible region, it will indicate the maximum contribution that can be earned.
