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70 Cards in this Set
- Front
- Back
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Defintion of Accounting? |
The process of identifying, measuring and communicating financial information |
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Name 2 types of accounting |
1) financial 2) management |
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What is financial accounting? |
- For external uses, reporting past events - happens yearly basis based on judgements and estimates - Financial data - Need to be produced for legal reasons |
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What is management accounting? |
- Producing information for management - Can be strategic, detailed information - Happens on a monthly/daily basis - Helps business to constantly improve - Optional to produce & used internally - Non-financial data |
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What is the reason for management accounting? |
- increased quality emphasis - increased complexity and size of firm - keep eye on environmental contribution - competition - development of technology |
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Why is the service industry becoming more important? |
- Services account for 80% of businesses - Provides new challenges and opportunities - Competitive success |
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What is changing in the public sector with regards to management? |
- Gov demand for new measures of performance - More contracting out/more decentralised - Greater awareness of cost and performance management |
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What are the 3 motives of environmental sustainability? |
- Compliance motive - Eco-efficiency motive - Strategic motive (the firm wants to appear more ethical) |
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What is ethical accounting? |
- Building trust and promoting loyal relationships with users of accounts |
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Who writes codes of ethics for employees? |
- The Chartered Institute of Management Accountants (CIMA) |
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Definition of fixed costs? Name an example |
Costs that are not affected by changes in the level of output over a period of time E.G. Machinery, rent, salary |
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Definition of variable costs? Name an example |
Costs that vary directly with changes in level of output E.G. Wages |
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Definition of semi-variable costs? Name an example |
Costs that have both a fixed and a variable element. E.G. A salesperson has a salaried component (fixed) and a commission (variable) |
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Definition of Contribution Margin? |
The amount remaining from sales revenue after variable expenses have been deducted. It is used to cover fixed costs. |
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What is the equation for Contribution Margin? |
CM = Sales Revenue - Variable Costs |
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a) What is another word for net profit? b) How do you work out net profit? |
a) Net Income b) Net profit = contribution margin - fixed costs |
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How to work out break-even point? |
a) Total Sales = Total Expenses b) Total Contribution Margin = Total Fixed Expenses |
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What is the Contribution Margin Ratio? |
The contribution margin ratio is the difference between a company's sales and variable expenses, expressed as a percentage |
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How to work out Contribution Margin Ratio? |
Contribution Margin/Sales |
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If the figure of the CM was 60% what does this show? |
That a company has 60% to cover it's fixed costs with. |
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How to work out break-even analysis? |
1) Contribution margin method: Break even point in units sold = fixed expenses/ unit contribution margin OR Break-even point in total sales = fixed expenses/contribution margin ratio |
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How do we know when we have achieved a profit? |
Any extra unit sold above break even is profit. |
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How to work out Units sold to attain target profit? |
Units sold to attain target profit = Fixed expenses + target profit/ unit contribution margin |
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Definition of margin of safety? |
the margin of safety indicates the amount by which a company's sales could decrease before the company will become unprofitable. |
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How to calculate margin of safety? |
Total Sales - Break Even Sales |
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Name the 3 methods of semi-variable costs? |
1) High-low method 2) Scatter Graphs 3) Regression Analysis |
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What is the high low method of semi-variable costs? |
Where costs varies from one month to another. There is a fixed element that needs to be removed - not entirely a variable cost. |
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How do you work out the high-low method? |
1) Highest month - lowest month 2) See the difference between units and the cost (you will be left with the variable section) 3) Work out how much per unit variable cost] |
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Definition of Absorption Costs |
Absorption costing means that all of the manufacturing costs are absorbed by the units produced. In other words, the cost of a finished unit in inventory will include direct materials, direct labor, and both variable and fixed manufacturing overhead. |
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How to work out Absorption Costs? |
Absorption cost = direct cost + indirect cost |
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Definition of a direct cost? |
The price that can be completely attributed to the production of specific goods or services. E.G. direct material, direct labour, direct expenses - It is measurable |
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Definition of an indirect cost? |
Not directly accountable to a cost object. E.G. Facility/product - may be fixed or variable. It is included in the cost of the product. E.G. Completion of installation, electricity, office costs, machine hour basis, a % of direct labour costs - It's an estimation - COSTS THAT ARE DERIVED FROM OVERHEADS |
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What is the process of the three stages of Absorption costing? |
1) Allocation 2) Apportionment 3) Absorption |
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What does
1) Allocation 2) Apportionment 3) Absorption |
1) Functions/departments are charged with the costs they incur 2) Overheads need to be shared out between the cost centres using a fair bases of apportionment 3) To undertake the absorption of the allocated and appointed overhead costs into product costs |
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Name examples of direct costs (measurable) |
- ALLOCATED - raw materials used in product - custom duties paid on imported raw materials |
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What is a) direct materials b) direct wages c) direct expenses d) production overhead |
a) all material becoming part of the product b) all wages paid to employees engaged in making the products or services c) any expenses incurred on a specific product other than material or wage costs d) production or factory overhead includes all indirect material costs, indirect wages and indirect expenses |
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Name examples of indirect costs (estimated) |
- APPORTIONED - Electricity used to power factory - employees liability insurance premium - salaries of production department managers - depreciation of machinery - advertising the product |
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How do you allocate the costs? |
Direct costs - allocate directly Indirect costs = allocate to specific departments and total overheads in each section IF THERE IS A SERVICE DEPARTMENT = REAPPORTION |
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How to work out the rate per machine hour? |
Overhead costs/machine hours |
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How to work out the rate per labour hour? |
Overhead costs/labour hours |
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What is a cost driver?
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A cost driver is the unit of an activity that causes the change in activity's cost |
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Why may the calculations be incorrect? |
Under or over absorption. - Rates can only be known once the months ended. |
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What is an overhead?
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All non labour expenses required to operate your business |
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What is a cost centre? What can it be classified into?de |
Where a managers responsible for expenses under his or her control. a) Production or manufacturing costs b) Administration costs c) Marketing costs |
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Definition of a profit centre |
Where a manager is held responsible both for their costs and the revenues they generate |
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How to work out the absorption rate? |
Overheads/cost driver |
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Why is absorption costing important? |
- For medium term pricing decisions, budgeting and forecasting. - less useful for short-term decision making as many elements are unavoidable in the short term. - Based on elements of estimation and judgement in choices of: cost driver, allocation of costs and estimated activity levels |
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What are future costs? |
Decisions made related to the future affecting future costs and revenues. - leads to opportunity costs |
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What are relevant costs? |
- Costs which change as a result of a decision. They're always: 1) Avoidable (caused by the decision) 2) Future (past costs can't be altered) 3) Impact on CASH opportunity costs must be considered |
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What are irrelevant costs? |
Sunk costs - costs that incurred prior to decision Committed costs - costs arise when proposal goes ahead Non-cash adjustments - accounting adjustments that don't affect cash (e.g. depreciation) |
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What is an avoidable cost? |
Will be incurred only if a particular course is taken E.G. to add a product or to drop a product - is it worth it in the long run? |
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How do you know whether to keep a product or not? |
If the lost contribution exceeds the avoidable fixed costs, then we should keep the product in the short term, even if the products making a loss. Need to look at the entire life cycle and see whether to discontinue it. Can make decisions by eliminating sunk costs and future costs |
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Define opportunity costs |
The economic benefits that are taken as a result of pursuing another route of action. |
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Definition of contribution? |
Short term decisions made purely based on
volume of activity |
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Definiton of absorption? |
Helpful in medium term pricing decisions that cover overheads, budgeting and forecasting |
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Definition of relevant costing? |
One-off short term decisions |
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What are administration overheads? |
All indirect material, costs, wages and expenses incurred in the direct control of administrative e.g. rent and rates |
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What are selling overheads? |
All indirect materials, cost wages and expenses incurred in promoting and retaining customers. E.G advertising |
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What are distribution overheads? |
All indirect material and costs in getting finished products to the customer. e.g. vehicle costs |
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Definition of target costing? |
An approach to determine a products life cycle cost. Involves setting a target cost by subtracting a desired profit margin from a competitive market price. |
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What is the process of setting target costs? |
1) Identify the price that buyers are willing to pay 2) Estimate the sales volume at that price 3) Complete market research 4) Deduct the profit required 5) Identify a cost gap |
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How to work out total costs |
Total costs = market price - profit |
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What are the issues with target costing? |
1) Conflicts 2) Stress 3) Expensive Negotiation |
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What is stepped cost? |
A fixed cost for a certain amount of time then 'steps up' |
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What is life-cycle costing? |
A tool used to determine the most cost-effective option among different competing alternatives to purchase, own, operate, maintain and dispose of an object. |
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What is good about life-cycle costing? |
Provides more accurate feedback Used to maximise the profit generated overthe life |
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What is bad about life-cycle costing? |
Only considers the current accounting year. Need to know the costs before and after a product is born or withdrawn from market |
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What are the 3 phases a product has? |
1) Pre-production phase = R&D of the product 2) Production phase = product is made and sold 3) Post-production phase = after sales service and dismantling |
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What are the 5 stages of the product life cycle? |
1) Development 2) Introduction 3) Growth 4) Maturity 5) Decline |
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How to work out revenue? |
sales x selling price |
