Reminders

Question 1

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Answer 1

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Question 2

Direct labour efficiency adverse..

Answer 2

Labour is connected to machine efficiency. So if a machine is going slow this affects labour efficiency. (Osorne 2.13)

Question 3

For idle time variance use…

Answer 3

idle hours x standard cost p/h.

shd be able to check by doing total variance and productive-time variance (using hours worked) and checking the difference which should match the calc above

Question 4

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Answer 4

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Question 5

when dealing with Marginal Costing variances for Fixed Overheads it’s simpler because only need to deal with differences arising due to Cost…(activity/volume is irrelevant)

..whereas when dealing with Absorption Costing variances for fixed Overheads it’s more complicated because need to deal with differences arising due to Cost and also differences arising due to Volume

Answer 5

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Question 6

when giving reasons for variances don’t forget not obvious one reason…

Answer 6

…poor budget setting!

Question 7

When doing variance analysis … how to value closing inventory ??

Answer 7

..at Standard cost
(not actual cost… as you would if doing Financial accounts)
Variance analysis normally done monthly so don’t revalue inv every month which would be silly.. we assume it evens out.

Question 8

Use ‘Improved/Deteriorated’

Rather than ‘Increased/Decreased’

Answer 8

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Question 9

The cash cycle shows the circulation of working capital.

Answer 9

-> Cash -> Payables -> Inventory -> Sales (AR) -> Cash..

Question 10

When analysing making comments what basics to look at?

Answer 10

Eg comparing 2 years P&L (Osborne 5.1)

GP % had decreased by 2%

Because the GP as a % had reduced I should have recognised that either selling price had gone down or purchase costs had gone up, or a combination.
(Because there was no info on units sold/unit price I could not have determined which)

There were 2 expenses .. they changed and I correctly commented about the reduction % in Admin was due to it likely being a fixed cost .. but I missed the fact that overall they totalled the same % of Sales both years

So I should have deduced that the 2% reduction in NP was solely due to the 2% reduction in GP
(Net Profit % = Gross Profit % - Expenses %) (I think)
(It worked in this example)

Also the Selling expense went up and I should have ‘Linked’ this to Sales eg. as ‘possibly’ due to increased advertising to generate the extra sales.

Question 11

How to basic / ‘headline’ analysis ?

whats a good check to use?

Answer 11

If there’s a change in Gross Profit % it must be due to either a change in selling price or a change in cost or a combo. (If price p/u is given and the same it must be due to a change in costs)

Look at:
Net Profit % = Gross Profit % - Expenses %
Gross Proft % = Net Profit % + Expenses %

Should be able to work out whether a change in Net Profit is due to a change in Gross Profit or Expenses or a combo.

Question 12

Need to nail down which indicators/ratios for which area

eg Efficiency/Productivity/Profitability

Answer 12

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Question 13

something to remember about ‘Contribution’

Answer 13

It can be per unit or per period.

Can also be calculated as a % of the Sales Rev (PV ratio, profit,volume)

Question 14

when calculation for example manufacturing a new product which cannibalises another product … what to remember (eg. Baked beans in osborne 6.2)

Answer 14

If you deduct lost Revenue for the cannibalised product you must also deduct variable costs..

If you deduct lost Contribution for the cannibalised product you do not also deduct its variable costs

Question 15

It looks like if given fixed costs based on 7K units but told capacity is 8K units .. it means you do not include fixed costs in the ‘incremental’ calc (Osborne 6.3)

Answer 15

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Question 16

Margin of safety % (units)

Answer 16

(Budget sales units - Units to cover Fixed costs)
_________
Budgeted sales units

This is the % sales can DROP before loss.
(Say so if explaining!)

Question 17

margin of safety % - what not to forget?

Answer 17

One you work out the break even point in units don’t forget to deduct that from the bugeted sales in units (to get the MofS units!!!) and then use that figure divided by the budgeted sales in units …

Margin of Safety units / Budgeted units
(Budgeted units - Breakeven units) / Budgeted units

I have sometimes just done:
Breakeven units / Budgeted units

Question 18

when evaluating 2 departments using Fixed OHs and MofS % what to point out

Answer 18

• First of all check whether the question mentions another figure not already calculated - PROFIT !!

Things to mention:

• That the higher MofS % is because of lower fixed costs (must be paid anyway) and higher variable costs (which are discarded if vulume decreases)
• That the higher MofS means it is in a safer / less risky position .. if sales of both fell the other dept/prod would become loss-making more quickly.
• However - for every unit sold above break-even the other product would generate greater CPU generating more profit.
• In other words other product more sensitive to volume changed … extra bad if drop , extra good if increase

Look at which generates most PROFIT (probably the safer one??) and point out that if sales increased the other product could overtake in terms of profit..

Question 19

when doing closure of a business segment and making the operating statement into marginal costing format

Answer 19

Watch ot for tricky bits in the narrative .. examples I have come across:

1. Fixed factory costs except supervision costs which have been apportioned differently per segment (need to include that bit as marginal)

Question 20

Ref my confusion about flexing Fixed OHs in flexed budgets (absorption costing)

see OT lecture MA Variances - part 1 @ 13min in

Answer 20

Its because management look at the profit per unit and expect that to be the same at diff volumes…

Question 21

With OHs really watch out for…

Answer 21

Is it:
Variable OHs in which case treat like direct Labour
Use PAUS

Fixed OHs in which case:
Exp Vr = Buget cost - Actual cost
Vol Vr = (Actual Output * OAR) - (Budget Output * OAR)

Remember could swap
Actual Output to ‘Standard Hours for Actual Output’
Budget Output to ‘Standard Hours for Budgeted OP’

Its just a different way of measuring output

Question 22

When calculating NPV for a mechanisation project for example - do you include depreciation?

Answer 22

No.
Think logically … if the whole purchase was in year zero … you wouldn’t include dep’n every year otherwise the machinery cost would have effectively been duplicated

Question 23

influences on performance indicators

Answer 23

Economies of scale

The learning effect

What gets measured gets done. If mgrs are being appriased & given feedback on an aspect of performance they will pay attention to these areas.

However must pay careful attention to choice of PI. Selection of the wrong measure wd lead to individs. & depts. trying to achieve it and it could detrimentally impact the overall biz perf.

Prioritising personal gains over biz objective - known as dysfunctional behaviour and usually means a lack of goal congruence too.

Question 24

What info is needed to determine a standard price per kg

Answer 24

1) Type and quality of material (spec.)
2) Quantity & timing of purchases (for bulk disc)
3) Past and future trend in prices
4) Any carriage cost
5) Type of standard to be set (eg ave for yr / incr w/infl)

Question 25

what cost behaviour?

machinery depreciation based on machine hours used (bpp)

Answer 25

variable

Question 26

If creating an index (or some other calc) …. use plenty decimal places all the way through and only round at the end according to instruction…. This is because there might be more than one way at calculating and this will give best chance of not being wrong due to rounding

Answer 26

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Question 27

when being asked about controllability of FO … think in terms of apportionment and if theres another department… mgr only has control his dept

Answer 27

.see BPP QB 6.9

Question 28

Analysing financial performance

Answer 28

1. Look at relationship Sales v GP
   EG “Sales Rev is up but at the ‘cost’ of GPM.”

I think if I don’t have volume figs it’s not possible to say whether the change in rev/gp is due to price change or costs but might be worth saying so to make clear I know the elements / relationship?
- SP could have increased but V down. V down might mean FC proportionally higher per unit (CoS includes Fixed production costs in absorption costing) so if SP hasn’t increased enough this will hit GP.

2. Look at expenses as % of sales v OPM
   If Exp:Sales is steady then sny change in OPM must be ‘fed down from GPM.

3.

Question 29

Inventory Turns:
COS / Inventory

Inventory holding period (days):
Inventory / COS * 365

Answer 29

Don’t confuse with asset turnover & net asset turnover (those are the ones that fit the ROCE/RONA equation… eg.
ROCE = AT * OPM
RONA = NAT * OPM

Question 30

Delay fulfilling orders (Days). Use which figs?

Answer 30

Basically: Unfulfilled (delayed) orders / Total orders.

Should be given something eg. £Orders received. Or shipped or something..so can work out the ‘unfulfilled’ part of the equation.

Might not be £ but if it’s not in £ then must also be given the ‘total’ in the same unit (eg. litres)

£Orders fulfil’d (£net sales) - £Orders received *365
_______________
£Orders fulfil’d (ie. £Net sales)

Question 31

Breakeven

You can work out Contribution to Sales ratio (contribution/SP) … should be point something.
eg Var cost £5 , selling price £20. ration would be 0.75 (£15/£20)

Then you can use this to calculate breakeven sales:
£Fixed Costs / C:S ratio = £BE sales

Answer 31

I think easier just to multiply BE sales in units by SP!