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AAT Level 4 > Synoptic 2 > Flashcards

Synoptic 2 Flashcards

1
Q

What the three different methods of costing?

A
  • Absorption
  • Marginal
  • Activity Based Costing (ABC)
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2
Q

What is absorption costing?

A

Absorption (or recovery) costing ensures the cost of overheads is charged to the cost units which pass through a particular production department.

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3
Q

What is a direct cost?

A

A cost that can be traced in full to the product, service or department where the costs are being identified.

It can be identified directly with each unit of output.

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4
Q

What is a indirect cost?

A

A cost that is incurred whilst making a product but which cannot be traced directly to the product, service or department.

Costs that cannot be directly identified with specific units of output, i.e. the overheads.

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5
Q

What is a cost centre?

A

Incurs and records costs only

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6
Q

What is a profit centre?

A

incurs costs and earns revenue

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7
Q

What is an investment centre?

A

incurs costs and earns revenue and accounts for its own capital employed.

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8
Q

What is reappotionment?

A

The charging of overheads to production cost centre

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9
Q

What is direct apportionment?

A

Where the service department provides services to production departments ONLY.

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10
Q

What is step-down apprortionment?

A

Where the service departments provide services to production department AND some other service departments as well.

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11
Q

What is marginal costing?

A

Marginal Costing only attracts variable production costs into the unit cost.
Fixed costs are treated as a cost for that particular period.

Marginal Cost is the cost of producing one extra unit of output

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12
Q

When does stepped costs occur?

A

Stepped costs occur when costs do not increase in a smooth manner at higher levels of activity.

A series of clearly defined cost thresholds exist, and as each is passed costs increase instantly.

They then remain constant until activity levels trigger the next cost threshold.

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13
Q

How do you work out contribution per unit?

A

selling price per unit less variable cost per unit

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14
Q

How do you calculate break even?

A

fixed costs/contribution

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15
Q

How do you calculate target profit?

A

fixed costs + target profit/contribution per unit

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16
Q

How do you calculate margin of safety?

A

current output - break even output/ current output x100

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17
Q

What is activity based costing (ABC)?

A

This method involves examining indirect costs to determine what causes them, and using this information to charge the costs to the units of output in an appropriate manner.

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18
Q

What are the features of absorption costing?

A 
Good for small companies
Takes fixed costs into account
Stock is not under valued
Good for constant demand products
Can not use CVP  such as breakeven, margin of safety for decisions
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19
Q

What are the features of ABC?

A

Good for companies that make multiple products
Allocates overhead costs where the activity happens
Defines product margins with accuracy
Good for planning and decision making
Very Time consuming and requires skill and expensive to manage
No good for companies with small overheads

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20
Q

What is a budget?

A

A budget is a financial plan for a business or organisation that is prepared in advance.

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21
Q

What does PIMC stand for?

A

Plan, Implement, Monitor, Control

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22
Q

Who would normally be involved in the budgeting process?

A 
Directors
Managers – payroll, sales, production, marketing etc..
Budget holders
Budget officers or finance staff
All staff
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23
Q

What is a budget committee?

A

A group of managers and employees drawn from a range of departments within the organisation with the responsibility for the budgetary process.

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24
Q

What is the budget committee responsible for?

A 
Agreeing policy with regards to budgets.
Co-ordinating budgets.
Suggest amendments to budgets.
Approve budgets after amendments.
Examine comparisons of budgeted and actual results and recommend corrective action.
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25
Q

What is the budget manual?

A

A document which sets out standing instructions governing the responsibilities of persons, and the procedure, forms and records relating to the preparation and use of budgets.

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26
Q

What is primary data?

A

Data which is collected for a specific purpose. e.g. the mileage submitted by staff to pay travel costs

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27
Q

What is secondary data?

A

Data that has been collected by another organisation or by your organisation for another purpose.

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28
Q

How do we calculate average annual change?

A

last years figure-first years figure/ number of years-1

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29
Q

What is an independent variable?

A

the measurement which is at a fixed interval.

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30
Q

What is a dependent variable?

A

the figure that will depend on the independent variable

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31
Q

What is a moving average?

A

A moving average is the term used for a series of
averages calculated from a stream of data so
that:
every average is based on the same number of pieces of data
each subsequent average moves along the data stream by one piece of data.

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32
Q

What are seasonal variations?

A

This term refers to the regular, predictable cycles in the data.

The cycles may or may not be seasonal in the normal use of the term, i.e. predictable cycles days of the week or hours of the day.

The underlying trend is adjusted by the seasonal variation.

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33
Q

What is retail price index?

A

The Retail Price Index (RPI) is a measure of general price changes which is published each month by the government.

A business can use the RPI as a form of indexing, to determine the extent to which its income and its costs have changed in line with general inflation.

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34
Q

What is a forecast?

A

A forecast is an estimate of what might happen in the future, based on certain assumptions.

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35
Q

What is a budget?

A

A budget is a plan of what the organisation is aiming to achieve.

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36
Q

How do you set a budget?

A

To set a budget, forecasts are made of sales volumes and prices, wages rates, overheads, inflation etc.

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37
Q

How can you overcome limited resource - material ?

A 
Utilise raw materials inventory.
Utilise finished goods inventory.
Finding an alternative supplier.
Substitute materials.
Buying in finished goods.
Reformulating the product.
Alternative  product using different materials.
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38
Q

How can you overcome limited resource - labour?

A 
Overtime.
Utilise finished goods inventory.
Sub-contracting.
Buying in finished goods.
Improve labour efficiency.
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39
Q

What is a limiting factor?

A

When output is affected by limited availability of material, labour or m/c hours.

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40
Q

What is a contractual commitment?

A

Where a business is committed to sell product A under contract.

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41
Q

What is a fixed budget?

A

a budget for one specific level of activity.

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42
Q

What is a flexed budget?

A

a budget adjusted for a change in the level of activity.

A flexed budget is used to ensure that a comparison is made on a ‘like with like’ basis.

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43
Q

What are the four different types of cost behaviours?

A
  • Variable
  • Fixed
  • Stepped
  • Semi-Variable
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44
Q

What is a material price variance?

A

the difference

between the expected and actual price.

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45
Q

What is a material usage variance?

A

the difference

between the expected and actual quantity.

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46
Q

What are some performance indicators?

A 
Financial ratios.
   Indicators specific to a particular 
    industry.
   Standard costing data.
   Qualitative data.
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47
Q

What is a top down budget?

A 
lack of local management knowledge.
only managers have overview.
lack of budgeting skills
where precise co-ordination is required
short timescale
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48
Q

What is a bottom up budget?

A

local specialised knowledge.
improved awareness of goals.
acceptance of budgets and motivated to achieve them.
improved coordination and cooperation.
broadens experience and develops new skills.
leads to positive attitude and better performance.

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49
Q

What is a standard cost?

A

A standard cost is the planned unit cost of a product or service, whereas budget setting is concerned with the costs of sections of the organisation.

This is usually documented in a standard cost card.

Standard costs are used to create budgets.

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50
Q

What is an advantage of a standard cost?

A

It is used in the managing and
measuring of financial performance.

Decision making
Planning
Monitoring and controlling

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51
Q

How do you calculate idle time variance?

A

Actual idle time x standard rate

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52
Q

What is an Overhead absorption rate?

A

OAR is a pre-determined rate used to absorb overheads.

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53
Q

What are the three types of standards?

A
  • Ideal
  • Attainable (Target)
  • Basic
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54
Q

What are the advantages of ideal standards?

A

No Waste
No inefficiencies
Everything is perfect

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55
Q

What are the disadvantages of ideal standards?

A 
Seldom attained
Variances generally always 
adverse
Managers come to expect 
adverse variances
Informal dual standards can 
appear
Unattainable = Demotivates
No room to offer a bonus 
scheme
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56
Q

What are the advantages of attainable (target) standards?

A 
Fair and achievable if set 
correctly.
It challenges and motivates 
managers.
Manager involvement 
increases motivation.
Favourable variances can 
be achieved.
Bonus schemes can be 
introduced.
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57
Q

What are the disadvantages of attainable (target) standards?

A 
Different people have 
different views on what is 
attainable.
Can be time consuming.
Needs to be constantly 
reviewed.
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58
Q

What are the advantages of basic standards?

A

Can be used to identify
trends.
Can be used to make
comparisons.

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59
Q

What are the disadvantages of basic standards?

A 
Set on old historical 
information – out of date.
Large variances will be the 
norm.
Not comparable with current 
conditions.
Meaningless variances
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60
Q

What does Total Quality Management (TQM) mean?

A

TQM means the quality management becomes the aim of every part of an organisation.

Get it right first time – the cost of prevention is less than the cost of correction

Continuous improvement – it is always possible to improve

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61
Q

What is the foundations on TQM?

A

Involvement of everyone
Leadership by example
Quality is not a cost
Customer focused

62
Q

What is the TQM control system?

A

Establish standards of quality.
Establish procedures or production methods which will ensure standards are met.
Monitor actual quality.
Take control action when actual quality fall below standard.

63
Q

What does TQM achieve?

A 
Continuous improvement to product / service
Continuously reduced cost
Increased customer satisfaction
Greater profitability
Improved job satisfaction and motivation
64
Q

What are Explicit Costs?

A

Costs which can be identified and quantified.

65
Q

What are Implicit Costs?

A

Costs which cannot be quantified, only estimated.

66
Q

What is life cycle costing?

A

Lifecycle costing is the term used to describe the process of identifying all the costs associated with a particular project, product or service from the start of its development to the end of its life.

67
Q

What are the 5 stages of product life cycle costs?

A 
Development
Introduction
Growth
Maturity
Decline
68
Q

What are the key aspects of life cycle costing?

A 
minimise time to market
minimise break-even time.
maximise length of life span.
all the revenues and costs are considered.
Industries may vary in life cycles
69
Q

What are the problems involved with life cycle costing?

A

Lifecycle costing requires a number of assumptions to be made, and
relies on accurate forecasting of a number of factors.

Predicting the life of the project.
Estimating future demands and selling prices.
Estimating future costs.
Other factors
Interest rates
Inflation
Competitors
70
Q

What are some non-financial indicators?

A

A performance indicator measured in non-money terms.

Indicators to monitor:
product quality – rejects per 1000
delivery - % delivered on time
telephone helpline – average time to take call
absenteeism – employee-days absence
customer satisfaction – number of repeat orders

71
Q

What are some advantages of non-financial indicators?

A

easy to calculate
easy to understand
anything can be used if it is meaningful
tailored to circumstances

72
Q

What is quantitative data?

A

Quantitative Data is data which can be stated

in numbers, financial or non-financial.

73
Q

What is Qualitative data?

A

Qualitative Data is data which can not be put
in numerical terms, opinions, judgements &
attitudes.

74
Q

How do you calculate value added?

A

Value added = turnover - cost of materials and bought in services

75
Q

What is productivity?

A

measures output relative to input (per hr, per employee, per unit)

76
Q

What is efficiency?

A

as productivity but measured in financial gains or value (ROCE, operating profit %)

77
Q

What is effectiveness?

A

meeting targets & objectives

78
Q

What is the efficiency ratio?

A

standard hours for actual production / actual hours worked x 100

79
Q

What is the capacity ratio?

A

Actual hours worked/ budgeted hours x100

80
Q

What is the activity ratio?

A

standard hours of actual production / budgeted hours x100

81
Q

What is a relevant cost?

A

Costs that occur as a result of the decision made.
If the cost happens anyway then it NOT considered a relevant cost and should not be part of the decision
For example: rent on an additional building need because of the decision IS a relevant cost BUT existing rent should not be considered

82
Q

What is a opportunity cost?

A

Lost profit or income from picking another decision (but still a relevant cost)
For example:
Material you had in stock that is no longer going to be used can be sold for £500 but we paid £1000
The £1000 is a sunk cost but £500 is an opportunity cost

83
Q

What is a sunk cost?

A

Costs that can never be recovered during a decision making process and irrelevant of the decision

Examples being: rent or adverts

84
Q

What is economies of scale?

A

Times when costs can be reduced due to increase in activity

Example being: a bulk discount or fixed costs being spread over more units of production

85
Q

How do you accrue for an expense?

A 
DR Expense (SPL)
CR Accruals - current liabilities (SFP)
86
Q

How do you accrue for income?

A 
DR Receivables - Current assets (SFP)
CR Revenue (SPL)
87
Q

How do you journal for a expense prepayment?

A 
DR Pre-payments - Current assets (SFP)
CR Expense (SPL)
88
Q

How do you journal for a income prepayment?

A 
DR Revenue (SPL)
CR Payable - Current Liability (SFP)
89
Q

How do you journal for a irrecoverable debt?

A

DR Irrecoverable/ bad debts (SPL)

CR Receivables - Current Assets (SFP)

90
Q

How do you allow for a bad debt?

A

DR Allowance for Doubtful debts: adjustment (SPL)

CR Receivables - Current Assets (SFP)

91
Q

What are the two methods for calculating depreciation?

A

Straight Line Method

Reducing Balance Method

92
Q

How do you journal depreciation?

A

DR Depreciation Expense (SPL)

CR Accumulated Depreciation (SFP)

93
Q

What is mark-up calculated on?

A

Costs (Cost of sales)

94
Q

What is margin calculated on?

A

Sales

95
Q

What is the formula for Net Current Assets?

A

Current Assets - Current Liabilities

96
Q

What is the formula for net assets?

A

Total Assets - Total Liabilities

97
Q

What is a sole trader?

A

Businesses owned and manager by one person

98
Q

What is a partnership

A

businesses owned and managed by two or more people together, sharing profits and losses.

99
Q

What is a company?

A

businesses that are a separate legal entity from their owners.

100
Q

What are some examples of not-for-profit organisations?

A

Charities, clubs and societies

Public Sector Organisations

101
Q

What are the two types of limited companies?

A

Public Limited Companies

Private Limited Companies

102
Q

What are some features of a public limited company?

A

The general public can be invited to invest in their shares.
These shares may be traded on a Stock Exchange.
They have ‘plc’ at the end of their name.
Generally very large businesses.

103
Q

What are some features of a private limited company?

A

The general public cannot be invited to invest in their shares.
They have ‘limited’ at the end of their name.
Most UK companies are private limited companies.
The managers and owners are often the same people, but not always.

104
Q

What are two main forms of raising finance?

A

Loans (Debt)

Shares (Equity)

105
Q

What is one advantage of a loan?

A

Quick

106
Q

What is one disadvantage of a loan/

A

We have to pay interest

107
Q

What are two forms of loans?

A

Bank Loan

Debentures

108
Q

How do you journal the initial bank loan?

A 
DR Bank (SFP)
CR Loan (Non-Current Liabilities - SFP)
109
Q

How do you record the annual payment of a bank loan?

A 
DR Loan (N-C Liabilities - SFP)
DR Interest Charges - Finance Costs (SPL)
CR Bank (SFP)
110
Q

What is a debenture also known as?

A

Loan Stock

111
Q

Who issues debentures?

A

company to raise finance

112
Q

How are debentures split?

A

into units which have a nominal value

113
Q

What are some features of a debenture?

A

Debentures carry a fixed rate of interest which is paid every year.
Described as ‘10% debenture loan’ so interest payable is 10% of the capital amount.
The debenture is issued for a fixed period and is repaid at the end of this period.
Debentures may also be known as loan stock, debenture stock, loan capital or loan notes.

114
Q

What is share capital?

A

capital invested in a company by its owners

115
Q

What are the two types of value we need to be aware of with shares?

A

Nominal Value

Market Value

116
Q

What is nominal value?

A

Set when share are initially issued and Never changes.

Shares are stated in the SFP at their nominal value.

117
Q

What is market value?

A

The value at which they are currently trading.
This value can fluctuate significantly.
This value is irrelevant for the purpose of preparing financial statements.

118
Q

What is authorised share capital?

A

This is the maximum share capital that the company is allowed to issue. This only applies to companies formed prior to the Companies Act 2006.

This does not have to be shown on the statement of financial position.

119
Q

What is issues share capital?

A

These are the shares that have been issued. The class and number of shares will be shown and identified on the statement of financial position with the equity section.

120
Q

Why would some directors choose not to pay dividends?

A

They do not have the funds (cash) or they made a loss.

The directors have decided to reinvest to meet the long term objectives.

121
Q

How is corporation tax recorded?

A

DR Tax Expense (SPL)

CR Tax Payable (Current Liability - SFP)

122
Q

What is the purpose of financial statements?

A

To provide useful information about an
organisation’s:

Financial position (assets & liabilities)
Financial performance (its profit or loss)
Changes in financial position (its cash flow)
To make economic decisions
To assess the STEWARDSHIP of the organisation’s management

123
Q

What is a stakeholder?

A

someone who has an interest in the company.

124
Q

What does the regulatory framework comprise of?

A

Company law (the Companies Act 2006)
Accounting standards
Conceptual Framework for Financial Reporting

125
Q

What is the requirements of the companies act 2006?

A

The directors must prepare and approve annual accounts and circulate them to the shareholders.
The accounts must be filed with the Registrar of Companies, i.e. published.
Quoted companies must prepare and file IAS accounts, i.e. follow IAS’s and IFRS’s
Directors have a legal duty to keep proper accounting records.
Published accounts must show a true and fair view (In IAS 1 called fair presentation).

126
Q

What are the two types of international accounting standards?

A

International Financial Reporting Standards (IFRS’s): issued
by the International Accounting Standards Board (IASB) since 2001.

International Accounting Standards (IAS’s): issued before 2001 by
the IASB’s predecessors, the International Accounting Standards
Committee (IASC).

127
Q

What does the conceptual framework set out?

A

The Conceptual Framework sets out the principles and concepts
that the IASB believes should underlie the preparation and
presentation of financial statements.

128
Q

What are the five classes of items on financial statements?

A 
ASSETS
LIABILITIES
EQUITY
INCOME
EXPENSES
129
Q

What is an asset defined as?

A

A present economic resource controlled by the entity as a result of a past event.
An economic resource is a right that has the potential to produce economic benefits.

130
Q

What is a liability defined as?

A

A LIABILITY is a present obligation of the entity to transfer
an economic resource,
as a result of past events.
An obligation is a duty or responsibility that the entity has
no practical way to avoid.

131
Q

What is equity?

A

residual interest in the assets of the entity after deducting all its liabilities

132
Q

What are the two types of reserves?

A

Distributable Reserves

Non-Distributable Reserves

133
Q

What are the features of a distributable reserve?

A

Can be paid out as dividends

Include retained earnings and general reserves

134
Q

What are the features of a non-distributable reserves?

A

Reserves which the company are legally obliged to set up
Cannot be used to pay dividends
Include share premium and revaluation reserves

135
Q

How do you journal for an increase in the value of non-current asset?

A

DR Non-Current Assets

CR Revaluation Reserve

136
Q

What is the definition of a PP&E?

A

P, P&E are tangible items that:

are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes: and
are expected to be used during more than one period.

They do not include:

items which are classified as held for sale & investment properties

137
Q

What is an impairment?

A

reduction in the recoverable
amount of an asset (tangibles or intangible) below
its carrying amount.

138
Q

What is the problem if the recoverable amount is

below the carrying amount?

A

The asset is overstated on the SFP

You are not providing a true & fair view – faithful representation.

139
Q

When is an annual impairment review required?

A

An intangible asset with an indefinite useful life.

Purchased goodwill acquired in a business combination (group accounts).

140
Q

What is the recoverable amount?

A

higher of the fair value less cost to sell (market value) and its value in use (the value the business can earn by continuing to use it).

141
Q

What is goodwill?

A

Goodwill is where the value of a business as a whole is greater than the total value of its individual assets and liabilities.

142
Q

What does IAS 2 defines inventories?

A

IAS 2 defines INVENTORIES as assets:

Held for sale in the ordinary course of business
In the process of production for such sale
In the form of materials or supplies to be consumed in the production process or in the rendering of services.

143
Q

What is a provision?

A

liability of uncertain timing or amount.

144
Q

What is cash defined as?

A

Cash consists of cash in hand and deposits repayable upon demand, less overdrafts. This includes cash held in a foreign currency.

145
Q

What is a cash equivalent defined as?

A

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

146
Q

What is a cash flow defined as?

A

Cash flows are inflows and outflows of cash and cash equivalents.

147
Q

What is leasing?

A

Leasing is a source of financing, where a company obtains the right to control the use of a non-current asset.

148
Q

Who is involved in leasing?

A

The lessor, usually a finance company, provides the right to use the asset for a period of time in exchange for consideration.
The lessee obtains the right to use the asset for a period of time, in exchange for consideration.

149
Q

Is a short term lease included in the SFP?

A

No

150
Q

What can ratios be used to access?

A

Profitability
The relationship between profit and revenue, assets, equity and capital employed.

Liquidity
The stability of the company on a short-term basis.

Use of resources
The effective and efficient use of assets and liabilities.

Financial position
The way in which the company has been financed, it compares equity finance against debt (loan) finance.

151
Q

What are two forms of raising finance?

A

Loans (debt)

Shares (Equity)

152
Q

What is gearing a measurement of?

A

Risk

AAT Level 4 (7 decks)

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