Reminders Flashcards
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Direct labour efficiency adverse..
Labour is connected to machine efficiency. So if a machine is going slow this affects labour efficiency. (Osorne 2.13)
For idle time variance use…
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
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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
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when giving reasons for variances don’t forget not obvious one reason…
…poor budget setting!
When doing variance analysis … how to value closing inventory ??
..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.
Use ‘Improved/Deteriorated’
Rather than ‘Increased/Decreased’
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The cash cycle shows the circulation of working capital.
-> Cash -> Payables -> Inventory -> Sales (AR) -> Cash..
When analysing making comments what basics to look at?
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.
How to basic / ‘headline’ analysis ?
whats a good check to use?
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.
Need to nail down which indicators/ratios for which area
eg Efficiency/Productivity/Profitability
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something to remember about ‘Contribution’
It can be per unit or per period.
Can also be calculated as a % of the Sales Rev (PV ratio, profit,volume)
when calculation for example manufacturing a new product which cannibalises another product … what to remember (eg. Baked beans in osborne 6.2)
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
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)
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Margin of safety % (units)
(Budget sales units - Units to cover Fixed costs)
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Budgeted sales units
This is the % sales can DROP before loss.
(Say so if explaining!)
margin of safety % - what not to forget?
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
when evaluating 2 departments using Fixed OHs and MofS % what to point out
- 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..
when doing closure of a business segment and making the operating statement into marginal costing format
Watch ot for tricky bits in the narrative .. examples I have come across:
- Fixed factory costs except supervision costs which have been apportioned differently per segment (need to include that bit as marginal)
Ref my confusion about flexing Fixed OHs in flexed budgets (absorption costing)
see OT lecture MA Variances - part 1 @ 13min in
Its because management look at the profit per unit and expect that to be the same at diff volumes…
With OHs really watch out for…
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
When calculating NPV for a mechanisation project for example - do you include depreciation?
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
influences on performance indicators
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.
What info is needed to determine a standard price per kg
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)
