P2 Flashcards
ABC use?
Used to cost a product
ABM use?
Uses ABC information to control or reduce cost drivers and reduce overheads.
ABB def
Activity based budgeting
Uses cost determined by ABC to prepare budgets
CIMA: “…. Cost driver data in the budget-setting and variance feedback process”
ADA activity driver analysis?
What is is?
Functional analysis
What is it?
It is the analysis of the relationship between product functions, perceived customer value and their cost.
Functional analysis
What is it part of?
Part of value analysis
What value analysis is applied during the development phase?
Functional analysis.
Conditions for learning curves?
- Mostly Manual work
- Repetitive
- Early stage of product
- Consistency in workforce (not a high staff turnover)
- Breaks cannot be too long-or they will forget
- Workforce is motivated.
- Complex
- Small quantities for special orders
Theory of constraints
Maximising throughput
What is
marginal cost plus pricing
Otherwise know as?
Mark-up pricing
What is full cost pricing?
It is where the price includes VC + FC (that is FC related element of overhead)
What is
Full cost plus pricing ?
Pricing is the same as full cost pricing but includes a profit margin also.
Two part tariff transfer pricing.
What is it?
Pricing where variable costs are covered at time of transfer and an annual fixed fee. Which is payment towards fixed costs.
What is minimum pricing based on? +why?
Based on relevant costing because it is the VC + the opportunity cost of not selling at the market price.
What is a contribution?
Sales value less VC
What is Marginal costing as a system?
System where cost of one unit is just VC.
Profit/Loss is calculated by taking FC away from Contribution for the period.
Diff Marginal costing of inventory vs absorption costing?
Inventories are valued at VC in marginal costing
In abs costing they are valued at full production cost.
What is the optimal selling price?
When MC = MR
Marginal cost = marginal revenue.
Gradient of Revenue vs quantity graph?
Marginal revenue
Change in rev/change in quantity
What price maximises profit? (If price affects demand?)
Marginal cost = Marginal revenue.
How is MR linked to price and revenue?
MR is the gradient of Revenue vs volume.
Revenue is price*volume.
Ways of cutting costs to achieve target cost?
Reduce number of components
Cheaper staff
Using standard components
Acquiring new more efficient tech
Training staff to use more efficient techniques
Cutting out non-value add activities
Using different materials
Target cost formula
Target cost= selling price at capacity - desired profit
Four aspects of value analysis?
Cost Value (of creating and selling)
Esteem value (what the customer feels about he product)
Exchange value (price customer is prepared to pay)
Use value (purpose a product fulfils.)
Target costing purpose
To set a cost target for a new product at the product design stage.
Life cycle costing aim?
Increase return and reduce cost over the entire lifetime of the product.
5 stages in product life cycle?
Development Introduction Growth Maturity Decline
Conditions for learning theory to work?
- Significant manual element
- The task must be repetitive
- Production at early stage (room for improvement)
- Consistent workforce (low staff turnover)
- No/few breaks/gaps in production
- Motivated workforce
ROCE os otherwise known as …
ARR- Accounting rate of return.
Average investment
(Initialoutlay + scrap value )
/2
ROCE formula
PBIT/Capital Employed
- 100%
What is capital employed?
CE= nca + ca - cl
Capital employed =
Non current assets + current assets
- current liabilities.
Ie
All assets - current liabilities.
(Just nc liabilities + equities?)
Operating Profit Margin
Formula
PBIT/Sales. *100%
Asset Turnover formula
Sales/Capital Employed
ROI formula
ROI =
Controllable divisional profit
/
Divisional Investment
- 100
Residual Income formula (2ways)
PBIT
-(divisional investment*Cost of capital)
PBIT - (capital employed*Cost of Capital)
When is Value engineering done?
During the development phase.
Before production
Applied to new products
When would price skimming be appropriate?
- new and different
- strength and sensitivity of demand to price is unknown.
- high prices may help with cash flow problems
- short life cycle, so need to recover costs quickly.
When would market penetration be useful?
- to discourage new entrants
- to shorten initial period of product life cycle in order to reach growth and maturity as soon as possible.
- if possibility of economies of scale due to high output.
- if demand is highly elastic so would respond well to low price
Beyond budgeting is also known as?
Participative budgeting
EVA formula
Economic profit - capital charge
Economic profit. What adjustments to profit?
- Use replacent Value not depreciation. (Add dep, minus economic depreciation)
- Advertising spend/development spend charged to periods that benefit.
- Lease charges capitalised
- Interest excluded. (Already included)
Capital Charge formula
Cost of Capital *
replacement cost of net assets
Or
Cost of capital *
(NCA+working capital)
Net assets
Assets minus liabilities
Same as net worth
Working capital
CA - CL
EVA
Absolute or relative?
Absolute measure. Positive means yes
Negative means don’t do it!
Capital employed?
Assets -current liabilities
Or
Working capital + NCA
How is replacement cost calculated in EVA?
Replacement cost of net assets plus any capitalised costs
Eq of sensitivity
NPV of project
/
NPV of variable
%
ARR formula
Yearly profits
/
Initial investment
P(A|B) =
Formula
P(A|B) =
P(A)*P(B|A)
/
P(B)
Value of perfect information formula
Value of perfect information=
Expected profit with the information
- expected profit without
ARR formula
ARR =
Average annual profit
/
Initial/average investment
Profit/Investment
Cash flow names when they are already inflated
Money, actual, nominal
Cash flows that are not inflated
Current or real
Fisher equation
(1+r) * (1+i) = (1+m)
Profitability Index Eq
NPV/Capital Invested.
Not PV
When does uncertainty exist?
When decision maker has no past experience on which to base decision.
When does risk exist?
When decision maker knows there are multiple outcomes due to past experience.
Sensitivity analysis -what is it?
It is finding out he percentage change of a variable in order to reach an NPV of zero.
What is risk mapping?
A technique for assessing risk for frequency and severity (think TARA)
What performance measure should be used for an investment centre?
ROI/ROCE would be the most appropriate.
Characteristics of a good performance measure for an investment centre?
Goal congruent-decisions will be favoured that benefit overall company
Responsibility accounting- only include factors which can be controlled by manager.
Recognise long term objectives
What is an investment centre?
It’s a profit centre where manager has responsibility to make decisions on capital investments.
Disadvantages of market based transfer pricing?
Market price may be temporary because of market conditions or might be affected by the volume
May act as a disincentive to use up spare capacity
Product may not exist on the open market
Due to imperfect external market-(if increase output, price needs to be reduced as buyer wants discount)
Problems with full cost and VC transfer pricing?
Leads to either no profit or loss as FC are not covered. So selling division may not transfer unless they have spare capacity.
What is dual pricing?
Seller receives external market price.
Buyer buys at variable cost.
Group take hit.
Two part tariff-what is it?
Variable costs plus annual fixed fee
How should the transfer price be set between parts of a group in different tax countries?
It should not look like either side is manipulating.
So it would be good to avoid either making an artificial loss.
So a middle ground “arms length” transfer price should be set.
Aims of transfer pricing?
Goal congruence
An even and fair goal performance evaluation
Retain divisional autonomy(they decide and agree)
Motivate divisional managers-(?)
Optimum resource allocation.
Default ARR
Ave profit / Ave investment
Non default ARR
Ave investment / initial investment
Characteristics of re-engineering?
Often:
Several jobs merged into one
Workers often make decisions
The steps in the decision are made in a logical order.
Work is performed where it makes sense
One single point of contact
Joins adv of both central and decentralised.
Profitability index.
PI=
NPV/initial cash outflow
But when limited capital
PV of inflows /initial outflow
Cost of prevention- what is it and examples
It’s like setting stuff up. TRAINING / designing
What is an appraisal cost? Example
Doing stuff during the process, anything “checking” related.
Acceptance testing
Inspection of goods inwards/outwards
Throughout contribution equation?
Throughout contribution= Sales-direct material cost
Conversion costs equation?
Throughput
Conversion costs=
All operating costs - direct material costs
