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AAT - Lvl 2 > Principles of Costing > Flashcards

Principles of Costing Flashcards

1
Q

Different costing systems?

A
  • Financial accounting
  • Management accounting
  • Cost accounting (Large part of Management accounting)
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2
Q

Aspects of Financial accounting?

A
  • External groups - Business owner, Investors & HMRC.
  • Insufficient for management decision making.
  • Produced once a year.
  • Historic records -> presented in a standard format laid down in law:
    - Statement of financial position (Balance sheet)
    - Statement of Profit & Loss (Income statement/P&L account)
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3
Q

Aspects of Management accounting?

A
  • Internal groups.
  • Actual results vs. predicted results -> Future predictions.
  • Produced frequently in any format.
  • Financial & non-financial information.
  • Assist management with planning, control and decision making.
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4
Q

Aims of management accounting?

A
  • Planning - Preparing annual budgets.
  • Co-ordinating - All departments to work together.
  • Controlling - Actual vs budget -> Issue -> Investigate -> Acting on results.
  • Communicating - Preparing budgets to assist department managers to explain aim of business.
  • Motivating - Targets to improve performance
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5
Q

Management fundamental functions?

A
  • Planning
  • Control
  • Decision making
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6
Q

What is a cost unit?

A

Costs that can be separately identified.

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7
Q

Responsibility centres

A
  • Cost centre - Only occurs cost
  • Revenue centre - Selling activity generating income
  • Profit centre - Cost and Revenue
  • Investment centre - Profit and
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8
Q

Purpose of cost classification?

A
  • Function - Preparing financial accounts.
  • Element - Cost control.
  • Nature - Cost accounting.
  • Behaviour - Budgeting and decision making.
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9
Q

Classification by function?

A
  • Cost of sales - Production cost & depreciation of machines.
  • Selling & distribution - Selling, advertising, distributing, sales teams commission, delivery cost and depreciation of delivery vehicles.
  • Administrative cost - Head office cost, IT support, human resources management cost and depreciation of printer.
  • Finance - Bank charges and interest charged on loans.
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10
Q

Classification by element?

A
  • Materials - Go into what is made
  • Labour - Paid to staff
  • Overheads - other expenses
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11
Q

Classification by nature?

A
  • Direct: (Total direct cost = Prime cost)
    • Direct materials - Used in production
    • Direct labour - Manufacturing staff wages
    • Direct expense - product royalty
  • Indirect: Overheads
    • Indirect material - Oil for production machine.
    • Indirect labour - Supervisor salaries.
    • Indirect expense - Rent & power.
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12
Q

Classification by behaviour?

A
  • Fixed - Total cost doesn’t change with activity, but unit cost decrease with increase of activity.
  • Variable - Total cost change with activity, unit cost doesn’t change.
  • Semi-Variable - Fixed & Variable cost.
  • Stepped - Fixed for certain level of activity, rises and then fixed for another certain level of activity.
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13
Q

Benefits of coding?

A
  • Facilitate data processing
  • Logical arrangements of records
  • Comparisons of similar expenses
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14
Q

Product cost vs. Period cost?

A

Product: (Incurred to the product)
Direct materials, direct labour and absorbed production overheads.

Period: (Financial year)
Admin cost, selling & distribution cost and finance cost.

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15
Q

Two aspects of valuing raw materials?

A

1) Costing - Cost of materials issued to production centres. (Include on cost card for the unit)
2) Financial reporting - Value the inventory of materials left. (Include in the financial statement)

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16
Q

Methods of inventory valuation?

A
  • FIFO - First In, First Out (e.g. Perishables)
  • LIFO - Last In, First Out (e.g. Stationery)
    Not acceptable by HMRC or International Accounting Standard 2 for inventories.
  • AVCO - Weighted average (e.g. New oil mixed with old oil)
    Average price per unit = Total inventory value / Total inventory units
17
Q

Advantages/Disadvantages - FIFO

A

Advantages:
* Up to date inventory value at SOFP.
* When prices rise -> Highest profit

Disadvantages:
* Out of date valuation on issue - if prices change or using old prices.
* Slow record keeping
* Similar jobs have different cost.

18
Q

Advantages/Disadvantages - LIFO

A

Advantages:
* Up to date valuation on issues.

Disadvantages:
* Out of date closing inventory - old purchases.
* Slow record keeping
* Similar jobs have different cost.

19
Q

Advantages/Disadvantages - AVCO

A

Advantages:
* Compromise on inventory valuation and issues.
* Simpler record keeping.

Disadvantages:
* Calculating is slow on every receipt/issue
* Average price rarely reflects purchase price.

20
Q

The five main sections in a manufacturing account?

A

1) Direct materials used
Opening + Purchase - Closing

2) Direct cost (Prime cost)
Stock used + Direct Labour

3) Manufacturing cost
Direct cost + Manufacturing Overheads (Indirect cost)

4) Cost of goods manufactured
Manufacturing cost + Opening WIP - Closing WIP

5) Cost of goods sold
Cost of good manufactured + Open inventory of goods sold - Closing inventory of goods sold

21
Q

Inventory control

A
  • Cost of carrying inventory
  • Buffer inventory
  • Reorder quantity
  • Reorder timings
22
Q

Direct vs. Indirect Labour

A
  • Direct labour - Related to goods/service
    e.g. Production workers
  • Indirect labour - Not related to goods/service
    e.g. Supervisor/cleaning staff
23
Q

Two methods calculating wages

A

1) Time related - Time at work
* Salary - (Fixed cost)
* Hourly - paid per hour (Variable cost)

2) Output related - Work produced
* Piecework
* Piecework with guarantee

24
Q

2 types of overtime

A
  • Overtime
    Overtime * 1.5
  • Overtime premium
    Overtime * 0.5
25
Q

Types of bonuses

A

1) Individual bonuses
* Basic wage - Hours worked or output produced.
* Bonus - Quantity produced or time saved.

2) Group bonuses
* Group output produced

3) Bonus caps
* Bonus for certain level of output

26
Q

Different overhead absorption rates?

A
  • Unit basis (Only one product) =
    Budgeted overheads/budgeted units produced
  • Labour hour basis (Labour intensive) =
    Budgeted overheads/budgeted labour hours (Multiply with the labour hours used to complete a unit)
  • Machine hour basis (Highly automated) =
    Budgeted overheads/budgeted machine hours (Multiply with the machine hours used to complete a unit)
27
Q

What is a budget?

A

Financial plans relating to the future.

28
Q

Why budgeting?

A
  • Planning: Plan for the future, set targets and anticipate problems.
  • Control: Calculate variances (Actual vs. Budget), investigate any issues and take appropriate action.
  • Communication: Communicate plans budget holders and employees.
  • Co-ordination: All functions works towards the same goal.
  • Motivation: Budgets set targets that related to the reward system.
  • Evaluation: Unit and managers performances are evaluated via variance analysis.
29
Q

Types of budgets?

A
  • Fixed budget:
    Single activity level. Not useful for control purposes due to not making like-for-like comparison.
  • Flexible budget:
    Changes as volume of activity changes. Flexible budget vs Actual will provide more useful info.
30
Q

Difference between Favourable/Adverse variances?

A

Favourable variance:
* Actual cost < Budgeted cost
* Actual revenue > Budgeted revenue
* Effect of increasing profit.

Adverse variance:
* Actual cost > Budgeted cost
* Actual revenue < Budgeted revenue
* Effect of reducing profit.

31
Q

When is a variance significant?

A

A variance can only be reported or investigated when it goes above a set criteria. (Exception reporting)

32
Q

Causes of variances?

A
  • Sales variance - Price or volume
  • Material variance - Price or usage
  • Labour variance - Rate or efficiency
  • Overhead variance - Expenditure
  • All - Poor planning
33
Q
A

AAT - Lvl 2 (8 decks)

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