SU4 - Profit Planning and Control

Question 1

Management accounting has three broad objectives:

Answer 1

1. To provide information for costing out products and services.
2. To provide information for planning, controlling and continuous improvement
3. To provide information for decision making

Question 2

Explain Cost object.

Answer 2

A cost object refers to anything for which cost data are desired - including:

• Products
• Product lines
• Customers
• Jobs
• Organisational sub units

Question 3

What does the inventory in a manufacturing firm consist of?

Answer 3

1. Raw Material
2. Work in Progress
3. Finished Goods

Question 4

How is the cost of inventory determined?

Answer 4

1. Direct materials - cost of materials
2. Direct labour - salaries paid to employees working directly on the manufacturing of said product
3. Indirect costs - manufacturing overheads
4. Marketing and administrative costs of the firm are regarded as period costs.

Question 5

In order to aid decision making it is important to distinguish between the following cost classifications:

Answer 5

1. Opportunity cost
   * Potential benefit foregone in choosing a different option.
2. Sunk Cost
   * Cost already incurred (done and dusted) and cannot be changed by any decision made
   * Ignore sunk cost when making a decision

Question 6

Cost may be classified as

Answer 6

1. Fixed Cost
2. Variable Cost
3. Semi-variable cost

Question 7

What is the purpose of the Breakeven Analysis

Answer 7

It provides a framework for understanding the interrelationship between:

• Variable costs
• Fixed costs
• Sales volume
• Selling price

Question 8

There are 6 formulas for the breakeven analysis. Name them and provide the formula

Answer 8

1. Marginal income = sales - variable cost
2. Marginal income per unit = selling price per unit - variable cost per unit
3. Profit = sales - variable cost - fixed cost
4. Breakeven point (measured in units) = Total fixed cost / marginal income per unit
5. Breakeven point value (measured in rand) = BE point units x selling price per unit
6. Margin of safety ratio = (expected sales volume - break even volume) / Expected sales volume x 100
   * This ratio indicates the extent to which sales volume may decrease before profits reach nil

Question 9

An integrated budgeting system for a manufacturing business consists of two main types of budgets. Name them.

Answer 9

1. Operating budgets

2. Financial budgets

Question 10

There are two types of cost types of cost budgets within the operating budget. Name them:

Answer 10

1. Manufacturing cost budget

2. Discretionary cost budget

Question 11

Explain the manufacturing cost budget within the operating budget.

Answer 11

1. outputs can be measured accurately
2. It includes estimated overhead costs
3. In is designed to measure efficiency - if the budget is exceeded, it means that manufacturing cost were higher than what it should have been.

Question 12

Explain the discretionary cost budget within the operating budget.

Answer 12

1. Output cannot be measured accurately - eg administration and research
2. They are not used for efficiency since it is difficult to devise the expenses

Question 13

What are the components of the Operating Budget?

Answer 13

1. Cost
2. Income
3. Profit plan or budget

Question 14

What does the financial budgets consists of?

Answer 14

1. Capital budget
2. Cash budget
3. Pro forma income statement
4. Pro forma balance sheet

Question 15

What are 3 major purposes of the financial budgets?

Answer 15

1. They verify the viability of the operational planning (operating budgets)
2. They reveal the financial actions that the business must take to make execution of its operating budget possible.
3. They indicate how the operating plans of the business will affect its future financial performance and position

Question 16

What are the purpose of the capital budget?

Answer 16

The capital budget indicates the expected (budgeted) future capital investment in physical facilities(building, equipment, etc) to maintain the firm’s present productive capacity or expand its future productive capacity.

Question 17

What are the purpose of the Cash budget?

Answer 17

It indicates:

1. The extent, time and sources of expected cash inflows.
2. The extent, time and purpose of expected cash outflows
3. The expected availability of cash in comparison with the expected need for it

Question 18

Provide the 7 principles of budgeting

Answer 18

1. Management involvement
2. Adaptability
3. Accountability according to responsibility
4. Effective communication
5. Realistic expectations
6. Acknowledgement
7. Follow-up and feedback