SU4 - Profit Planning and Control Flashcards
Management accounting has three broad objectives:
- To provide information for costing out products and services.
- To provide information for planning, controlling and continuous improvement
- To provide information for decision making
Explain Cost object.
A cost object refers to anything for which cost data are desired - including:
- Products
- Product lines
- Customers
- Jobs
- Organisational sub units
What does the inventory in a manufacturing firm consist of?
- Raw Material
- Work in Progress
- Finished Goods
How is the cost of inventory determined?
- Direct materials - cost of materials
- Direct labour - salaries paid to employees working directly on the manufacturing of said product
- Indirect costs - manufacturing overheads
- Marketing and administrative costs of the firm are regarded as period costs.
In order to aid decision making it is important to distinguish between the following cost classifications:
- Opportunity cost
* Potential benefit foregone in choosing a different option. - Sunk Cost
* Cost already incurred (done and dusted) and cannot be changed by any decision made
* Ignore sunk cost when making a decision
Cost may be classified as
- Fixed Cost
- Variable Cost
- Semi-variable cost
What is the purpose of the Breakeven Analysis
It provides a framework for understanding the interrelationship between:
- Variable costs
- Fixed costs
- Sales volume
- Selling price
There are 6 formulas for the breakeven analysis. Name them and provide the formula
- Marginal income = sales - variable cost
- Marginal income per unit = selling price per unit - variable cost per unit
- Profit = sales - variable cost - fixed cost
- Breakeven point (measured in units) = Total fixed cost / marginal income per unit
- Breakeven point value (measured in rand) = BE point units x selling price per unit
- 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
An integrated budgeting system for a manufacturing business consists of two main types of budgets. Name them.
- Operating budgets
2. Financial budgets
There are two types of cost types of cost budgets within the operating budget. Name them:
- Manufacturing cost budget
2. Discretionary cost budget
Explain the manufacturing cost budget within the operating budget.
- outputs can be measured accurately
- It includes estimated overhead costs
- In is designed to measure efficiency - if the budget is exceeded, it means that manufacturing cost were higher than what it should have been.
Explain the discretionary cost budget within the operating budget.
- Output cannot be measured accurately - eg administration and research
- They are not used for efficiency since it is difficult to devise the expenses
What are the components of the Operating Budget?
- Cost
- Income
- Profit plan or budget
What does the financial budgets consists of?
- Capital budget
- Cash budget
- Pro forma income statement
- Pro forma balance sheet
What are 3 major purposes of the financial budgets?
- They verify the viability of the operational planning (operating budgets)
- They reveal the financial actions that the business must take to make execution of its operating budget possible.
- They indicate how the operating plans of the business will affect its future financial performance and position
