test 2 Flashcards
what is horizontal analysis
comparing two companies in one year
what is vertical analysis
comparing one company within two years
what are the limitations on financial and ratio analysis
historical based information, timeliness, limited information and perspective (bias), limited comparability, quality of information
what are the 4 profitability ratios
gross profit margin, operating profit margin, return on equity, return on capital employed
what information has to be averaged for ratios and how do you do this
average the balance sheet information where there is a mix of income statement and balance sheet information, do this by adding this year and last year and dividing by 2
what is capital employed
every dollar contributed by the owners or lent to the business
what is ‘equity’ for ratios
every dollar of owners equity
what are the 3 efficiency ratios
average inventory turnover, average debtors settlement, average creditors settlement
what are the two liquidity ratios
current ratio and acid test ratio (quick ratio)
what does the quick ratio represent
only cash and cash equivalents are left from current ratios to pay current liabilities
what is a good current ratio
2:1
what is a good quick ratio
1:1
what are the two gearing ratios
gearing ratio and interest cover
what does the gearing ratio show
how much the company is borrowing
what does the interest cover ratio show
tells you about the companies ability to borrow even more
what is management accounting needed for
planning, controlling and decision making
what are the three types of organisations
service, retail and manufacturing
what is a service organisation
ones that perform a task or activity for the customer
what are retailers
buy products and sell them on
what are manufacturers
buy raw materials and components to make products
define a cost
cash or cash equivalent value that we give up to get some future benefit
define a cost object
an item for which costs are measured
what is included in a classification of costs by traceability
direct costs, cost driver and indirect costs
what classifications are there when we classify by function
production and non-production costs
what are production costs
direct materials, direct labour and overhead
define a prime cost
the sum of direct materials cost and direct labour cost
define conversion cost
direct labour and overhead costs
what classifications do non-production costs have
selling costs (market and distribute) and administrative costs (all costs that are associated with general admin or that can’t be assigned to marketing or production)
what is the job environment
there is a variety
what job order costing source records
materials requisition, job time record, job time records or record of activity driver for overhead cost, job order cost record for total cost
what is actual costing
using the actual cost of everything and putting it into the job - we don’t use this
what is normal costing
using the actual cost of direct materials and direct labour, but using normal costing for overhead by determining a rate
what are the main problems with using actual overhead
non-uniform occurence, non-uniform production, can’t wait till the end of the year, activities included in overhead benefit all jobs
what does non-uniform occurence mean
overheads aren’t incurred evenly during the year eg: yearly insurance, quarterly rates etc. so the same job could cost different at different times if actual costing was used
how do we treat overheads
work out a predetermined rate at the start of the year based on estimated overheads/expected activity and then use this and the actual overhead that is incurred on the job to allocate overheads
what do you need to put after the number when you work out an overhead rate
per ___
what is a prime cost
direct materials and direct labour
what is over-applied overhead
the actual amount is less than the applied amount
what cost driver is best
use the one that causes the most, don’t choose one that is too complicated or too costly to maintain
what are the problems with estimated overhead rates
based on estimates, uncertainties, what capacity level to use 0 expected or maximum
what are the uses of job costing
calculating inventory and cost of goods sold on financial statements, calculating costs of services, estimating costs for decision making, comparing actual to estimated costs
what are non-production costs
period costs - selling costs (necessary to market and distribute a product or service) and administrative costs (all costs associated with general administration of the organisation that can’t be assigned to marketing or production costs)
what do we classify costs as when we are classifying by behaviour
variable, fixed or mixed
what are variable costs
costs which vary in direct proportion to output
what are fixed costs
costs that don’t change with activity level
what are mixed costs
costs with both variable and fixed components
what is the relevant range concept
fixed costs behave weird on graphs (eg: step fixed costs, learning curve, economies of scale) so we approximate it to a straight line by just looking at a small range value on the graph
what is the high low method
helps to find the equation of a line through two points
to work out variable costs with the high-low method what do you do
highest cost - lowest cost / highest activity - lowest activity
what is the overarching formula for high-low method that you can rearrange to get fixed costs
TC = F + VX
what is the regression method
identifies the line that best fits the points and tells us how good this line is by how close to 1 the R square value is
what do we do for managerial judgement
use past experience, confirm results with operating personnel, use common sense to confirm statistical studies
what is the order of the traditional/functional income statement
sales - production costs = gross margin/profit - non-production costs = net income/profit
what is the middle line of the traditional/functional income statement
gross margin
what is the middle line of the behavioural income statement
contribution margin
what is the order of the behavioural income statement
sales - variable expenses = contribution margin - fixed expenses = net income
what is the basic CVP analysis formula
I = PX - VX - F
what do the letters stand for in the CVP formula
I = Net income/profit before taxes
P = selling price
X = units sold
V = variable cost per unit sold
F = total fixed costs
what is the formula for sales units from the CVP formula
X = (I+F)/(P-V)
what formula gives the contribution margin
P - V
what is the CVP formula for after-tax profit
i(1-t)
what gives the contribution margin ratio
contribution margin/selling price
to work out breakeven in dollars what formula should you use
fixed costs/contribution margin ratio
apart from the formula with contribution margin ratio, how else can we work out the breakeven in dollars
work out the units and multiply by the price
