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CIMA > P2 Flash Cards > Flashcards

P2 Flash Cards

1
Q

8/77777777777777777777777ABC is….

A

Cost pools, cost drivers, OH per unit

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2
Q

Absorption costing is….

A
  • Based on no. units/hours
  • Arbitrary allocation of OH
  • not always suitable for modern businesses, so use ABC instead
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3
Q

Advantages of ABC

A

more accurate costing
more detailed insight
better forecasting/planning

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4
Q

Disadvantages of ABC

A

No evidence it improves profit
Historic and internally focused
hard to identify cost drivers

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5
Q

Activity Based Management is…

A
  • Classifying activities as value adding / non value adding
  • Applying principle of ABC to business management
  • Doesn’t reduce costs, but helps managers understand their costs better
  • Best in orgs with high overheads e.g. NHS

(ABC emphasis tracing costs to cost objects, ABM emphasises tracing costs & managing processes & work)

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6
Q

Disadvantages of ABM

A
  • too inwardly focused
  • not all OH costs are variable
  • complicated & expensive to implement
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7
Q

Just-In-Time is

A
  • no inventory
  • pull system
  • produce when needed
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8
Q

To succeed with JIT you need:

A
  • quality, reliable production
  • speed & flexibility
  • versatile labour force
  • reliable suppliers in close proximity
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9
Q

Advantages of JIT

A

no cash tied in inventory
less storage space needed
fewer bottlenecks, better coordination

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10
Q

Disadvantages of JIT

A
  • relies on predictable demand
  • no buffer inventory if issues
  • harder to switch suppliers
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11
Q

Total Quality Management (TQM)

A
  • get it right first time
  • cost to prevent less than cost to correct
  • continuous improvement, no waste
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12
Q

Types of Quality costs

A

Conformance: prevention & appraisal
Non-conformance: internal failure & external failure

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13
Q

Kaizen is

A

small, incremental improvements
all encouraged to make suggestions, bottom up

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14
Q

Business process re-engineering is

A
  • radical redesign of processes to achieve cost reduction, improved quality & customer satisfaction
  • not a cost cutting exercise, though long term savings may result
  • not a one-off
  • strategic outlook required
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15
Q

TPAR=

A

return per factory hour (TP cont/time needed on bottleneck)
______________________________________________________________
Cost per factory hour (total factory costs/total time on bottleneck)

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16
Q

Target costing 5 steps

A
  1. market research for pricing
  2. calc required profit per unit
  3. subtract profit from price to find target cost
  4. cost gap between actual & target costs
  5. close cost gap
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17
Q

Standard costing vs target costing

A

Standard VS target
reactive proactive
cost control cost reduction
internal forces external forces
price pushed to market price pulled from market

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18
Q

4 types of value

A
  1. cost value (production cost)
  2. exchange value (purchase price)
  3. use value (functionality value)
  4. Esteem value (increase in status)
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19
Q

Porters value chain
Primary activities (5)
Support activities (4)

A

Primary activities
- inbound logistics
- outbound logistics
- operations
- marketing & sales
- service

Support activities
- infrastructure
- technology development
- HR
-Procurement

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20
Q

The capital investment process (3 phases)

A
  1. creation phase - objective opportunities, assess environment
  2. Decision phase - initial proj. screening, examine alternatives, financial analysis
  3. Implementation phase - review investment decisions, post-completion audit
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21
Q

Compound interest formula

A

end total = initial invesment x (1 + interest rate)^no. periods

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22
Q

Present value formula

A

present value = end total x 1 / (1 + r)^n

Discount factor = 1 / (1 + r)^n

(assumes initial investment at T=0 and other cashflows start at T=1)

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23
Q

Advantages of NPV

A
  • time value of money
  • considers cashflows, rather than subjective profits
  • considers whole proj. life
  • accounts for risk
24
Q

Disadvantages of NPV

A
  • fairly complex
  • not well understood by non-finance managers
  • difficult to determine cost of capital
  • does not consider short-term
25
Q

Annuities

A

constant annual cash flow for set no. of years

PV of annuity = annual cashflow x annuity factor

Annuity factor = 1- (1+r)^-n / r

26
Q

Perpetiuities

A

annual cashflow for the forseeable

PV of perpetuity = annual cashflow / r

27
Q

Advanced / delayed annuities / perpetuities (when cash flows don’t start at T=1)

A

Advanced
- cash flows start at T=0
- ignore the T=0 cashflow and add 1 to the discount factor

Delayed
- cashflows start later than T=1
- apply discount factor as usual
- then discount back to T=0 using appropriate discount factor

28
Q

Internal rate of return (IRR)

A
  • the rate of return at an NPV = 0
  • IRR > cost of capital = accept

IRR = R1 + (R2 - R1) x NPV1 / NPV1 - NPV2

29
Q

Advantages of IRR

A

time value of money taken into account
understood by managers
don’t need to know cost of capital
if IRR > cost of capital then shareholder wealth increase

30
Q

Disadvantages of IRR

A

no consideration of size of initial investment
interpolation - only an estimate
complex
may conflict with NPVs
not a measure of absolute profitability

31
Q

MIRR formula

A

(terminal value of inflows / present value of outflows)^1/n - 1

32
Q

Capital Rationing steps (when insufficient funds for all beneficial projects)

A
  1. calc profitability index for each proj.
    PI = NPV / initial investment
  2. Rank according to PI
  3. Allocate funds
33
Q

Discounted payback profitability index =
(measures no. times proj. recovers initial funds invested)

A

PV of net cash inflows / initial cash outlay

34
Q

Accounting Rate of Return (ARR) =

A

ARR = ave. annual profit (net cash flow - depn / no. yrs)
_____________________________________________________________
ave. value of investment (initial inv + residual value / 2)

35
Q

3 pros & 3 cons of ARR

A

+ simple to understand
+ widely used & accepted
+ considers whole proj. life

  • ignores time value of money
  • not measure of absolute profitability
  • uses subjective accounting profits, not cash flows
36
Q

Inflation on cashflows
(assume values inflated unless told otherwise)

A

current / real = excludes inflation
money / nominal = includes inflation

to convert cost of capital between money & real:
(1 + money cost of capital) = (1 + real rate of return)(1 + inflation rate)

37
Q

Capital asset replacement decisions - Equivalent Annual Cost (EAC)

A

EAC = PV of costs / annuity factor for year n

(calc PV of costs for each replacement cycle, divide PV by annuity factor to find annual cost, select replacement cycle with lowest annual cost)

38
Q

Price Elasticity of Demand (PED)

A

PED = % change in demand / % change in price

39
Q

PED equation of line =

A

price = maximum price - (% change price / % change quantity) x (quantity demanded)

P= a - bQ

40
Q

Profit maximisation model/ optimum price (6 steps)

A
  1. find a and b (a = max. price) (b = %change price / % change demand)
  2. determine marginal cost
  3. MC = MR
  4. MR= a-2bq so q = MR-a / -2b
  5. P(optimum price) = a - bq
  6. total contribution = (p-MC) x q
    profit = total contribution - fixed costs
41
Q

Limitation of profit maximisation model

A
  • demand unlikely to be determined with certainty
  • usually aim to achieve target profit, not maximum
  • difficult to determine accurate marginal cost (likely to vary with demand e.g. bulk discounts)
42
Q

Total cost-plus pricing ,how to calc

A

marginal costs + fixed costs = total prod. cost
+ non-production cost = total cost
+ profit = selling price

43
Q

3 pros & 3 cons of total cost-plus pricing

A

+ profit achieved if sales volumes are as budgeted
+ good for contracting industries with low fixed costs
+ can be used to justify price increases

  • arbitrary calc of fixed cost element
  • profit not achieved if sales volumes lower
  • ignores life cycle stages, customers & competition
44
Q

Marginal cost-plus pricing, how to calc

A

variable cost + % contribution margin

45
Q

3 pros and 2 cons of marginal cost-plus pricing

A

+ can cut price to below total cost
+ good for relevant costing decisions
+ good for scarce resource situations

  • no guarantee costs will be covered
  • price wars lead to loss making decisions
46
Q

4 objective of decentralisation

A
  1. ensure goal congruence
  2. increase manager motivation
  3. reduce head office bureaucracy
  4. better training for junior managers
47
Q

Profitability Indicators formulas
1. operating profit margin
2. asset turnover
3. return on capital employed

A
  1. operating profit margin = operating profit / turnover x100%
  2. Asset turnover = turnover / capital employed
  3. ROCE = operating profit / capital employed x100%
48
Q

3 pros & 3 cons of ROCE (Or ROI)

A

+ widely used & accepted
+ relative measure, enables comparison
+ can be broken down for more detailed analysis

  • dysfunctional decision making (e.g. wouldn’t accept project with a good ROI if it is less than the depts current ROI)
  • different accounting policies confuse comparisons
  • manipulation for ROI related bonuses
49
Q

Residual income =

A

residual income = controllable profit - (capital employed x cost of capital)

50
Q

3 pros and 4 cons of residual income

A

+ resolves dysfunctional aspect of ROI
+ risk can be incorporated
+ cost of financing brought home to divisional mangers

  • doesn’t facilitate comparison
  • can mislead, as increases over time
  • subject to manipulation
  • does not relate size of profits to assets employed
51
Q

Economic Value Added (EVA) =

A

EVA = economic profit - (economic capital employed x cost of capital)

(measures performance of company in terms of value that’s been added during a period, directly linked to shareholder wealth)

52
Q

Steps to calc EVA

A
  1. profit after tax
    ADD BACK: accounting depn, provision for doubtful debts, interest paid, goodwill amortised, development costs
    TAKE OFF: economic depn, impairment to goodwill
    = economic profit
  2. capital invested = opening cap. employed + net replacement cost
  3. EVA = economic profit x (capital invested x cost of capital)
53
Q

Transfer Pricing 6 objectives

A
  1. goal congruence
  2. performance measurement
  3. record movement of goods
  4. maintain divisional autonomy
  5. minimise global tax liability
  6. fair profit allocation between divisions
54
Q

minimum price selling division will accept =

maximum price buying division will pay =

A

minimum price selling division will accept = marginal cost + opportunity cost

maximum price buying division will pay = final selling price - additional variable costs

55
Q

Standard Deviation =

A

SD = square root of: sum of (x - x mean)^2 / n

56
Q

Expected values 3 pros & 4 cons

A

+ takes risk into account
+ easier decisions with single number
+simple calc

  • probabilities are subjective
  • little meaning for one-off project (as is a long-run average)
  • answer may not exist
  • ignores risk attitudes

CIMA (9 decks)

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