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| Frage | Antworten |
| What is the official CIMA terminology for Management Accounting? | The application of the principles of accounting and financial management to creat, protect, preserve and increase value for the stakeholders or for profit and not for profit enterprises in the public and private sectors |
| What is cost accounting? | *gathering of cost information and its attachment to codt objects, the establishment of budgets, standard costs and actual costs of operations, processes, activities or products and the analysis of variances, profitability or the social use of funds Calculation of the costs of a product or service Techniques for doing so designed to provide financial information about performance of an organisation. Focus is often short term improvements and decisions - useful for operational and tactical decisions Cost accounting key part of management accounting and uses quantitative data but adds qualitative data (e.g. impact on customer satisfaction) |
| What is meant by operational and tactical and strategic decisions ? | Operational = decisions made by managers at the lower level of an organisation (how many staff needed, how much raw material to purchase and which machines to use) Tactical = middle level managers medium term in scope. Staff training and recruitment, changing suppliers, purchase of new machine. Implementation of strategic decisions. Strategic = highest level of decisions. Management accountant informs decisions with a longer view |
| What is the comparison between management and financial accounting? | MANAGEMENT - no rules, just in format to suit managers. Any type of information (financial and non financial). Intenal use. FINANCIAL - more clearly defined. Legal requirement about true and fair view of financial position. Governed by rules and regulations. Historical financial information. External use. Statutory requirement. |
| What is CIMA’s deification of financial accounting? | Classification and recording of the monetary transactions if an entity in accountancy with established concepts, principles, accounting standards and legal requirements and their presentation but means of statement of profit or loss, statements of financial position and cash flow statements during and at the end of an accounting period |
| What are the main elements of management accounting? | 1) planning - establishing objectives and goals of organisation- what it is trying to achieve and relevant strategies both long and short term. Budgets created to explain potential impacts of different courses of action. 2) decision making - considers information provided to make informed decisions, often comparing potential outcomes of risk and reward 3) CONTROL - monitoring, measuring, evaluating and correcting results to ensure organisations plans (budgets) are being achieved. Considers variances to help realign to goals. |
| What roles of a management accountant do CIMA give? | 1) formulation of policy and setting corporate objectives 2) formulation of strategic plans derived from corporate objectives 3) formulation of shorter term operational plans 4) acquisition and use of finance 5) design of systems, recording of events and transactions and management of information systems 6) generation, communication and interpretation of financial and operating information (such as product costs) for management and other stakeholders 7) provision of specific information and which decisions are based 8) monitoring outcomes against plans and other benchmarks and the initiation of responsive action for performance improvement 9) derivation of performance measurement and benchmarks 10) improvement of business systems and process through risk management and internal audit review |
| What is meant by ‘cost’? | As a noun - reference to cost of an item As a verb - in the sense of costing an item In financial accounting - costs recorded so profit can be calculated In management accounting - understanding of cost required to carry out three main functions Consider: 1) record costs in financial statements 2) cost per unit to value inventory in SOFP 3) cost information to inform decisions 4) knowledge of profit can help determine products and services to supply and in what quantity 5) cost as a benchmark for future performance |
| What is meant by a cost unit? | *Unit of product or service in relation to which costs are ascertained* Cost unit can be anything for which it is possible to ascertain a cost Anything measureable and useful for cost control purposes Not all cost units will be for tangible items (e.g. chargeable hour for an accountancy purpose) |
| What is meant by a cost centre? | *production or service location, a function, an activity or an item of equipment for which costs are accumulated* - a type of responsibility centre (a collecting place for costs) - total costs is related to the cost units that have passed through the cost centre |
| What are cost objects? | *s product, service, centre, activity, customer or distribution channel to which costs are ascertained* All cost units and cost centres are therefore types of cost object |
| How can costs be classified? | - costs arranged in logical groups. Classification selected and the level of detail used in the classification groupings will depend on the purpose of the classification excercise 1) by behaviour 2) by element 3) by function 4) by nature |
| How are costs classified by behaviour? | *understanding of cost behaviour patterns Essex entails for management tasks (in short term budgeting purposes) 1) FIXED COSTS - cost doesn’t change in total as activity level changes 2) VARIABLE COSTS - costs which change in total in direct proportion to changes in activity level 3) SEMI VARIABLE COSTS - costs have both fixed and variable elements Nb level of activity in terms of units produced/ miles travelled/ hours worked etc |
| What is CIMA definition of a fixed cost? | *a cost incurred for an accounting period that, with a certain level of output or turnover limits, tends to be unaffected by fluctuations in the levels of activity (output or turnover) E.,g rents, rates, insurance and executive salaries Costs are constant for all levels of activity. NB a fixed cost per unit reduces as activity level increases (same amount of fixed cost spread over increasing number of units) - only within relevant range of cost |
| What is meant by stepped fixed costs? | If activity expanded to the critical point where further premises/ machinery etc needed then then fixed cost jumps out of the relevant range and is ‘stepped’ —> the cost is constant within a relevant range of activity but when critical level of activity reached, total costs incurred increases to the next step (NB never attempt to predict costs for activity levels outside the range for which the cost behaviour patterns have been established) |
| What is a variable cost? | *cost that varies with a measure of activity* E,g, direct material, direct labour and variable overheads. Variable costs assumed to be linear In graphical form has a straight line through the origin as at nil the cost is 0 When activity increases, total variable cost increases in direct proportion - if production increases by 10%, cost increases by 10% (so long as cost is within relevant range) |
| What are curvilinear variable costs? | *Non-linear variable costs* Although many variable costs do approximate to a linear function, curvilinear variable costs can occur with economies of scale (each successive unit of activity adds less to total variable cost than the previous unit - e.g. direct costs with discount available) or disceconomies of scale where each successive unit adds more to the total variable cost than the previous unit (e.g. direct labour cost where employee paid accelerating bonus for achieving higher level of output) Managers should be aware of assumptions made in estimating cost behaviour patterns |
| What is meant by a semi variable cost? | *cost containing both fixed and variable components and thus partly affected by a change in the level of activity* E.g. gas and electric Cost could remain constant up to a certain level of activity and then increase as the variable cost element is incurred ( eg. rental cost of a photocopier where fixed rent is paid and once number of given copies exceeeded constant charge applied to each copy taken) |
| What is the high low method? | Used to analyse semi variable costs into their fixed and variable elements This information can be used to predict total semi variable costs at other output levels Picks highest and lowest activity levels from the available data and investigates the change in cost which has occurred between them USE THE STEP BY STEP PROCESS DRAWN OUT |
| What needs to be considered when using the high low method for stepped fixed costs? | Need to choose two activity levels where the fixed costs remain unchanged (e.g. highest and lowest activity levels ae be,ie the stepped increase or above the stepped increase) Adjustments are then needed to be made for the fixed costs based on the activity level under consideration |
| How can costs be classified according to element? | *grouped whether they are 1) labour - wages, salaries, bonuses, overtime and other related employment cost 2) material - components brought in by the company which are used in manufacturing the product. Includes cost of obtaining materials and receiving them within the organisation 3) expense - regularly incurred costs of running the business (rent, utility, insurance etc) (Can be further subdivided into e.g. raw materials, components, consumables, maintenance materials) |
| How can costs be classified by function? | 1) production costs - costs that relate to the manufacture of a product or a provision of service (direct materials, labour, expenses and production overhead) - found in cost of sales section of the SOPL 2) non production costs - while not directing involved in production, required to support overall activity of the organisation (admin costs, selling and distribution and finance costs) |
| How can costs be classified by nature? | Broadly 1) direct costs - costs directly traced to the cost object that we are trying to cost. Total of direct costs = PRIME COST 2) indirect costs - costs which cannot be directly traced to a single cost object (overheads) Whether a cost is classified as direct or indirect depends on the cost object e are trying to cost |
| What are indirect costs split into? | 1) production overheads - rents, rated, insurance etc 2) non production overheads - admin, selling and distribution, finance costs |
| What is meant by the cost transformation model? | GCMA COST TRANSFORMATION MODEL *development to provide a framework to help businesses achieve and maintain cost competitiveness where businesses need to continually look for opportunities to improve cost structures while continuing to generate value for customers *6 suggested changes for organisations aimed to achieve cost competitiveness 1) cresting cost conscious culture - be a competitive benchmark and everyone to help reduce costs 2) understanding cost drivers - investigating costs to determine why the change and how variables impact cost 3) managing risk that come from cost conscious culture 4) connecting products with profitability - every product or service to make a positive contribution to overall organisational profit 5) maximising value from new products - potential profitability to be determined before production begins 6) considering environmental impact of products - e.g. waste and damage to reputation |
| What is the aim of absorption costing? | To determine the full production cost per unit - allows business to make decisions on pricing and value inventory - in accordance with IAS2 “inventories” for the financial statements - includes production costs (both direct and indirect) and overhead costs *If using to determine inventory cost per unit, focus on production costs only *if using to determine a selling price, can include non-production costs to determine a full cost |
| What is key to product costs and period costs? | PRODUCT COSTS - are included in the unit cost when inventory is valued. Full production cost (direct materials, expenses and labour as well as absorbed production overheads (both fixed and variable)). Charged to individual product and matched against the sales revenue they generate in the period they are sold. PERIOD COSTS - never considered in valuation of inventory. Non- production overheads (admin, sales and distribution, finance etc.). Charged in full to SOPL in period which they incurred. |
| What is the difference between marginal and absorption costing? | Main difference = treatment of fixed production overheads: ABSORPTION - fpo considered product costs (included in full production cost per unit) MARGINAL - fpo considered period costs and not included in full production cost but charged in full to SOPL in period they occurred |
| What types of overhead are there? | -can be classified by function incurring the cost (e.g. production overhead (cab be divided further eg to production cost centres or service cost centres) selling and distribution overhead, administration overhead, finance overhead) |
| What is the process for accounting for overhead costs in an absorption costing system? | 1) ALLOCATION AND APPORTIONMENT - select the appropriate cost centres (some will be production, some service) - split the overhead cost between these: *overhead allocation- wholly attributing value to one cost centre *overhead apportionment - share costs across cost centres if overhead related to more than one in fair and suitable basis 2) REAPPORTIONMENT- apportion costs from service cost centres to production cost centres. Aim to get all production overheads within a production cost centre to calculate full production costs 3) ABSORPTION - production overheads absorbed into units of production via a suitable basis (e.g. units produced, machine-hour rate, labour-hour rate) |
| What different absorption bases can be used? | E.g. 1) UNITS PRODUCED - in theory the most simple, but only valid when all cost units produced in the period are identical 2) DIRECT LABOUR-HOUR RATE - most appropriate in labour intense cost centres, less common where lots of production automated 3) MACHINE-HOUR RATE - most appropriate where machine activity dominates 4) PERCENTAGE RATES - where absorption rate calculated as a percentage of the cost. Cost may be direct material cost etc. This method is less common |
| What is key to OAR. | *production overheads usually estimated at beginning of accounting period to determine how much overhead to assign to a unit before calculating selling price *the Overhead Absorption Rate can be calculated - used where all products produced use same type of labour or machines so the absorption rate can be charged to all products based on e.g, number of machine hours used |
| What is key to predetermined absorption rates? | *it is normal practice to absorb production overhead costs at a predetermined rate based on budgeted overhead expenditure and budgeted production volume *this is because it is usually inconvenient to wait until end of period to work out actual absorption rates * predetermined rate can enable price to be established *overhead costs may vary through. OAR smooths variations |
| What is key to over/ under absorption when using predetermined OARs? | *actual overheads for absorption base likely to be different from estimate, must therefore calculate the difference at the end of the period 1) amount of overhead could be more/ less than budgeted 2) quantity of absorption base could be more/ less than budgeted *NB budgeted OAR and activity level will be based on chosen absorption basis (units produced/ labour hours/ machine hours etc) *if at end of period overheads absorbed are: 1) more than actual overheads = over absorption 2) less than actual overheads = under absorption |
| What are the advantages of absorption costing? | ADVANTAGES 1) fixed production overhead costs can be large portion of costs incurred. Unless they are absorbed to product costs large proportion missing 2) absorption costing follows accruals content by carrying forward a proportion of fixed production overhead cost inventory value can be matched against sales value when items sold 3) necessary to include fixed production overhead in FSs (IAS 2) 4) identifying under/ over absorption can help to identify inefficient utilisation if production sources 5) argument that long term all costs are variable and its appropriate to identify fixed production overhead costs with products and services that cause them (key to ABC costing, a form of absorption costing) |
| What are the disadvantages to absorption costing? | 1) apportionment and absorption of fixed production overhead costs is arbitrary- subjective and many methods of cost allocation may be deemed appropriate 2) profits will vary with changes in production volume - profits can be increased or reduced by changes in inventory levels (by increasing output, fixed production overhead is absorbed to production costs and if extra output not sold the fixed production overhead costs are carried forward in closing inventory value. Can encourage overproduction to inflate profit) |
| What is key to absorption costing in the SOPL? | Key in 1) valuation of inventory - opening and closing inventory valued at full production cost 2) under/ over absorption overhead - adjustment for over or under absorbed overheads necessary in absorption costing statements 3) absorption costing statements are split into production costs in the cost of sales and non-production costs after gross profit |
| What is meant by marginal costing? | - a costing method that charges products or services with variable costs alone - marginal the extra cost is therefore cost due to producing one more unit or providing one more service - includes direct matieral, direct labour and variable overheads - no fixed production overheads included in the inventory valuation as these will not increase with one additional unit - fixed costs are period costs and written off in full at period - PRINCIPAL TECHNIque IN DECISION MAKING |
| What is the contribution concept? | *key to marginal costing* Contribution per unit = selling price - all unit variable costs Total contribution = contribution per unit x sales volume - called contributing where it contributes to fixed cost and profit. Once contribution calculated can deduct fixed costs to determine profit for the period |
| What are the advantages to marginal costing? | 1) simpler costing system - no requirement to apportion and absorb overheads 2) reflects behaviour of costs in relation to activity (when sales increase, cost of sales increases only by additional variable costs) 3) since most deduction making involves changes to activity, marginal costing relevant and appropriate for short term decision making 4) marginal costing avoids disadvantages of absorption costing |
| What are the disadvantages to marginal costing? | 1) when fixed costs are high relative to variable costs (and when production overheads high relative to direct costs) the marginal cost of production and sales is only a small proportion of total costs. Costing system focuses on marginal cost and contribution might provide insufficient and inadequate information about costs/ product profitability 2) marginal costing good for short term, but not so good for long term profitability and product cost measurement 3) arguement treatment of direct labour costs as a variable cost item is unrealistic (when direct labour staff paid fixed wage/ salary, their cost is fixed not variable) |
| What is key to marginal costing in the statement if profit or loss? | 1) VALUATION OF INVENTORY - opening and closing inventory valued at marginal (variable) costs 2) fixed costs incurred are deducted from contribution earned to find the net profit (no under/ over absorption) 3)marginal costing statements split into all variable costs before contribution and all fixed costs after contribution (NB only the variable production costs are included in the costs of sales and valuation of inventory. If there are variable non production costs (e.g. selling costs) these are deduced before contrition but not included in cost of sales) |
| When reconciling profits, how can the use of absorption/ marginal costing make a differec to profit? | *when inventory levels increase/ decrease during a period profits differ under absorption and marginal costing* 1) if inventory increases, absorption gives higher profit (some fixed overhead is included in valuation of closing inventory and is carried forward to next accounting period instead of being written off as a period cost) 2) if inventory deceases, absorption gives lower profit (because fixed overhead brought forward in opening inventory is released thereby increasing cost of sales and reducing profit) 3) if inventory levels remain constant, both methods the same NB over the longer term, profit will be same whichever method used as all costs incurred eventually charges against sales. Timing of sales is what causes profit differences period to period |
| What considerations are there for pricing strategies are there based on cost? | 1) COSTS - need to ensure price is sufficient to cover cost of production/ service 2) COMPETITORS - to ensure in line with organisations competitive goals 3) CUSTOMERS - value placed on product by customers often determines sale pricing - consider how much customer willing to pay 4) CORPORATE OBJECTIVES - overall strategic objective |
| What is cost plus pricing? | Where cost is key determining factor on price (NB cost could be determined by marigianl or absorption costing) - full cost plus pricing uses full cost of production to determine selling price (using absorption costing principles) and some companies also add sales, distributor and admin costs - see formula - profit mark up is percentage of costs - cost always equal to 100% plus profit mark up so can use this to determine selling price by 100 - typically the more costs included in the full cost, the lower the percentage mark up used is) |
| What are advantages of using full cost plus pricing (absorption costing)? | 1) required product wikk be made if budgeted sales volumes achieved 2) useful in contract costing industries where few large individual contracts can consume majoring if fixed costs and fixed costs low in relation to variable costs (building industry) 3) assuming organisation knows its cost structures, quick and cheap to roll out, so save management time 4) ful cost plus pricing useful in justifying selling prices to customers - if costs have increased easier to justify increase selling price |
| What are disadvantages of using full cost plus pricing (absorption costing)? | 1) always problems associated with selection of suitable basis to charge fixed costs to individual product or service (selling prices can show greater variation depending on approptionment basis chosen) - can be over or under priced compared to competitors or lead to unitneiosl loss 2) if prices based on expected valued and not met, overheads not fully recovered from sales and predicted profits not attainable 3) mark up can be arbitrary snd not properly account for other factors in pricing (competitors/ customers) |
| What is key to marginal cost plus pricing? | - see formula - selling price uses markup percentage added because both fixed costs and profit to be covered - particularly useful for determining minimal acceptable selling price |
| What are benefits to using marginal cost pricing (rather than full cost)? | 1) just as accurate as full cost plus. Larger mark up percentage added because both fixed costs and profit must be covered, but uncertainty over fixed costs per unit remains in both pricing methods 2) knowledge of marginal costs give management option of pricing below full cost when sales demand lower than expected to fill capacity 3) particularly useful for specific one off contracts as only accounts for costs likely to change because of new contract 4) recognises existence of scarce/ limiting resources (aim to maximise tkts, contributing from the limiting factor) |
| What are the criticisms of marginal cost pricing.. | 1) ignores other factors (competition/ customers) 2) mark up becomes even more arbitrary that that used in full cost plus pricing as must include a subjective element to allow for selling price to cover fixed costs - many accountants argue marginal should in,y be sued for marginal (short term/ one off) decisions |
| What is meant by profit margin? | See formula *calculation as a percentage return of sales (rather than cost as in profit mark up) * selling price is always = to 100% with a profit margin - decision as to what gets included in the total costs (eg marginal or absotoomtion cost) and associated calculations required to get to the total cost will be the same as when using a mark up on cost |
| What is absorption costing based on and why is it a problem in modern production environments? | *based on principle that production overheads driven by volume *activity level in the OAR all increase as level of production increases *modern production is now 1) more machinery/ computerised - production overheads now larder proportion of costs in comparison to direct costs 2) smaller batch sizes and increased diversity in product ranges 3) less use of direct labour (higher use of computerised systems) This = more overhead and less direct labour costs |
| What issues are there with absorption costing in modern business environments? | 1) overheads charged to products/ services in arbitrary way (costs cards may be inaccurate) 2) too little detail on most significant cost - largest production cost is overheads but these are lumped as one figure based on volume related maeasuer (labour hours e.g.) which less useful to management 2) cost control more difficult - where management doesn’t know largest production cost (overheads) 3) allocation of overheads unrepresentative- costs often allocated on basis of direct labour hours despite this becoming smaller portion of product cost 4) poor pricing and decision making can result - where costs could be inappropriately or inaccurately shared between products |
| What are the issues with marginal costing in a modern business environment? | *products/ services valued as marginal cost and fixed costs treated as period costs - can be useful when variable costs a large proportion of costs but in modern environments 1) variable costs may be small in relation to fixed costs 2) fixed costs might be fixed in relation to product volume but may vary with activities that are not volume or production related (inappropriate to treat overhead costs as fixed period costs and should be charged more meaningfully) |
| What is key to ABC (Activity Based Costing)? | - developed to solve problems of traditional costing methods in modern environments - a form of absorption costing but overheads first allocated to COST POOLS before absorbing into units using COST DRIVERS (rather than absorbing overheads in production volume basis) E.g. instead of machine hours for all would be machine related activity as one pool, floor space for rental costs and staff numbers for personnel costs Flexibility if ABC reduces incidence of arbitrary apportionment |
| What is a cost pool (for ABC)? | An activity that consumes resources and for which overhead costs are identified and allocated For each cost pool there should be a cost driver |
| What is a cost driver (for ABC)? | A unit of activity that consumes resources A factor influencing (/driving) the level of cost |
| How can activities be identified for ABC? | - a large number of different activities may occur but best to select a few so to prevent task of allocating from being complex, costly and time consuming - for any activity there may be one or several cost drivers but need to pick just one for ABC - can consider different categories of activity/ transaction to identify suitable activities I.e. 1) logistical transactions - moving material/ people and tracking progress through system 2) balancing transactions - ensuring resource required for operation are available (procurement team ensuring stock for meeting production requirement) 3) quality transactions - ensuring output meets ervice quality requirment and customer expectation (inspections/ handling complaints) 4) change transactions- activities required to respond to change in customer demand/ spec/ scheduling etc |
| How can cost drivers be identified? | *for each activity there must be a cost driver* Needs to be 1) relevant - connection between cost driver and consumption of resources for the activity 2) easy to measure - measurement of units of cost driver and identifying products/ services which they relate 3 TYPES OF COST DRIVER 1) Transaction drivers - cost of activity affected by number of times action is undertaken (start ups, batches, number POs) 2) Duration drivers - length of time to perform the action (set up time etc.) 3) intensity drivers - Effort directed to determine resources used (e.g. overseas orders are more work than internal) |
| How do you calculate the full production cost per unit using ABC? | 1) Group production overheads by activity according to how they are driven - cost pool groups costs relating to activity which consumes resources 2) Identify cost drivers for each activity (what causes cost to be incurred) 3) calculate cost driver rate for each activity - same way as absorption costing OAR (but separate rate calculation for each activity 4) absorb activity costs to the product - by applying cost driver rate to individual products 5) calculate full production costs and or profit/loss |
| What is key to the relevance of ABC? | - more expensive to operate than transitional costing due to time involved so only use when appropriate - can produce more meaningful information when; 1) overheads high relative to direct costs 2) products/ services complex 3) products/ services tailored to customer spec 4) diversity in product range 5) some products/ services sold in large numbers others in small (In these situations, ABC will result in significantly different overhead costs than traditional absorption costing) |
| What is meant by the makeup of overhead costs in ABC? | *difference between traditional costing and ABC dependent on makeup of overhead cost* Cooper (1992) - 4 levels of activity ‘hierarchy of cost’ 1) Unit- level activities - consumption of resources very strongly correlated with number of units produced (e.g. direct costs) 2) batch- level activities - consumption of resources very strongly correlated to number of batches produced (e.g. machine set up/ material handling etc) 3) product- level activities - where consumption of resources related to existence of particular products (e.g. purchasing/ production spec) 4) Facility-level activities - where cost cannot be related in any way to production if any particular product line (even within ABC accepted some costs just for simply being in business (e.g. ground maintenance and property tax) |
| What are the advantages of ABC | - important for ‘attention-directing’ in cost management & decision making 1) improved accuracy of product costs - pricing, sales strategy and decision making improved 2) better understanding of overhead costs and factors that drive them 3) fairer allocation of costs to products and services 4) facilitates better cost control 5) can be used in complex situations 6) can be applied beyond production 7) can be used in service and digital industries |
| What are the disadvantages of ABC? | - ABC product costs are full absorption costs so suffer the same deficiencies as traditional full absorption costs (they’re historical, based in current organisation methods and can contain joint costs at product level) 1) not always relevant - limited benefit if overhead costs are primarily volume related or if overhead is small proportion of cost 2) still need arbitrary cost allocations 3) need to choose appropriate drivers and activities 4) complex 5) expensive to operate 6) little value if only have one product 7) ABC cost per unit is not a variable cost and caution should be taken when using it to make short term decisions |
| What is the CIMA definition of ABC? | An approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs Resources are assigned to activities and activities to cost objects based on consumption estimates The latter utilises cost drivers to attach activity costs to outputs |
| What are the implications of switching to ABC? | *potentially significant commercial implications* 1) pricing can be based in more realistic cost data 2) sales strategy more soundly based - can target customers that appeared unprofitable using absorption costing but more profitable under ABC 3) improved decision making - research, production and sales efforts towards products which ABC shows highest profit margins 4) improved performance management- enhanced due to focus in selling most profitable products through control of cost drivers. Use ABC as basis of budgeting and longer term forward planning of overhead costs |
| What are the methods of joint cost apportionment? | You can apportion joint costs to products by 1) physical measurement 2) market value at point of separation 3) net realisable value/ net relative sales value NB however these all give different inventory valuations and therefore different recorded profits |
| What is key to costing systems? | - calculating cost per unit - each cost gathered and recorded in costing system Either 1) Specific order costing - work done by organisation in separately identifiable jobs/ batches 2) Continious costing- series of similar products/services produced as a direct result of a sequence of continuous operations/ processes |
| What costing methods are there for costing systems? | 1) Job costing - form of specific order costing. The job is effectively the cost unit (e.g. ship builders/ accountancy services) 2) Batch costing - form of specific order costing. Total cost of a batch of production calculated and divided by number of units in the batch for cost per unit (e.g. a baker producing loaves of bread) 3) Service costing - form of continuous costing. Total cost of providing service includes same costs as manufacturing but likely greater overheads than direct cost (e.g. for a university cost unit as cost per student) 4) Process costing - form of continuous costing. Suitable where goods/ services likely mass produced on continuous line (e.g. chemical, refinery, paint industry) 5) costing in the public sector - key especially in times of austerity. Tend to use ABC costing |
| What is meant by joint product costing? | - process costing means the process incurs joint costs and produces more than one product before being separated for sale/ further individual processing - joint products/ by-products (joint products the main products, by products incidental to main products) - joint process costs occur before any split off point (common cost) - joint costs cannot normally be attributable to individual joint products/ by products so arbitrary allocations may be needed instead |
| What is meant by a joint product compared to a by product? | JOINT PRODUCT - two or more products separated during processing. Each has sufficiently saleable value to merit recognition as a main product (E.g. paraffin in petrol refinery, where petrol and paraffin equally important products) BY-PRODUCT - outputs of some value incidentally manufacturing something else (e.g. saw dust and bark in timber industry where they have relatively low sales value compared to timber) NB treatment of joint and by-products differs |
| What are the methods for joint cost apportionment? | 1) physical measurement - units of output per product. When unit of measurement different (L vs KGs etc) must find way to express in common unit. May need to consider apportionment using weighting factors 2) market value at point of separation - effect to make each product appear equally profitable 3) net realisable value/ net relative sales value - where certain products processed after point of separation further processing costs may be deducted from market values before joint costs apportioned NB methods will result in different inventory valuations and therefore different recorded profits |
| How can by-products be accounted for when looking at joint products? | *proceeds from the sale of the by-product may be treated as pure profit Or *proceeds from the sale less ant and long/selling expenses may be used to reduce the cost of the main products NB if a by-product needs further processing to improve marketability the cost needs to be deducted in arriving at net revenue. Recorded profits will be affected by the method adopted if inventories of the main product are maintained |
| What is meant by throughput accounting? | *a modern management technique offering alternative view to traditional costing methods - technique where the primary goal is to maximise throughout while simultaneously maintaining inventory and decreasing operating costs* Therefore based on 1) THROUGHPUT 2) INVENTORY/ INVESTMENT 3) OPERATING EXPENSES |
| What is meant by throughput? | *a measure of profitability (see equation)* ASSUMES: 1) only cost deemed to relate to volume of output in short term snd totally variable is the purchase cost of raw materials. All other costs (inc. labour) not variable 2) Direct labour costs are not variable in short term where guaranteed minimum weekly wage/ salaried 3) total of all other costs (bar direct materials) considered Total Factory Costs Aim of throughput accounting to maximise measure of throughput contribution (Throughput essentially like contribution) |
| What is meant by investment? | All the money a business invests to buy things it intends to sell and all money tied up in assets so business can make make the throughput (Unused raw materials, WIP, unsold finished goods as well as non- current assets if used for buying or creating materials) |
| What is meant by operating expenses? | All the money a business spends to produce the throughput (to turn inventory to throughput) Costs that are not totally variable (Total Factory Costs/Conversion Costs) |
| What is key to profit reporting and throughput? | A business makes money through throughput so management accounting systems should focus on value of throughput created -see diagram of how to report profit in these terms- |
| What is meant by super variable costing? | *throughput accounting considered super variable costing where concept of throughput similar to concept of cintrubtion* - not accurate as throughput doesn’t look at product cost where no attempt to charge operating expenses to products considered |
| What impacts does throughput accounting have on a management accounting system? | 1) inventory valuation - when using throughput accounting, inventory to be valued only at purchase cost of raw materials and brought in parts (no labour etc). No value added in production process until item is sold. 2) decision valuation - considers if the business has more capacity than customer demand it should produce to meet the demand in full, if there is a constraint to this it should make the most profitable with the constraining resources (give priority to products earning highest throughput contribution per unit) |
| What is meant by a bottleneck? | Determining which factors prevent the throughput being higher Aim to identify and remove bottlenecks or ensure they are fully utilised at all times if they cannot be removed Non- bottleneck resources should be scheduled and operated based on constraints within system and not be used to produce more than bottleneck can absorb |
| How should you approach a multi-product decision making problem? | 1) Identify bottleneck constraint 2) calculate throughput contribution per unit for each product 3) calculate throughput contribution per unit of the bottleneck resource for each product (return per factory hour) 4) rank products in order of throughput contribution per unit of the bottleneck resource (highest to lowest) 5) allocate resources using ranking to answer question |
| What throughput accounting measures? | Where there is bottleneck resource, performance can be measured by comparing returns generated by a product with costs incurred during production SEE INTERRELATED RATIOS |
| What is key to the throughput ratios? | *return per factory hour shows value added by organisation. Managers encouraged to maximise this (increasing thruoughput or decreasing time taken in process) *cost per factory hour shows cost of operating factory in terms of overheads/ labour costs etc *Througput accounting ratio (TPAR) measures return from a product against cost of running the factory |
| How can throughput accounting ratios be interpreted? | TPAR OVER 1 - suggests return exceeds operating costs so product should make profit TPAR UNDER 1 - suggests return is insufficient to cover operating costs so result in a loss |
| What is a criticism of throughput accounting? | *concentrated on short term where business has fixed supply of resources and operating expenses largely fixed - more difficult to apply throughput accounting concepts to longer term when all costs variable and vary with volume of production, sales or another cost driver - in all throughout could be suitable for profit and performance measurement in short term but longer term ABC or other could be more appropriate |
| How can digital products be costed? | *costs differ compared to tangible products - digital products sometimes seems as gathering of individual product features which can be added/ changed by each customer therefore giving a bespoke experience - individual features therefore may need costing to determine selling prices (e.g. additional downloadable content on games) |
| What is meant by a digital product? | Typically refers to a product that is stored, delivered and consumed in an electronic format (ebooks, graphics, online courses, apps) - digital products can be offered in various forms e.g. a game played in a website and app |
| Why are digital products often more difficult to cost than traditional products? | 1) marginal costs may be virtually zero - expensive to product but typically inexpensive to reproduce as cost unit for reproduction negligee 2) often no standard time or cost making traditional costing inappropriate 3) drivers for overheads can be difficult to determine 4) timing of costs can be difficult to estimate - could extend over number of accounting periods. Many costs pre-launch and upfront. Royalties and marketing then post launch 5) lifespan of digital product can vary greatly - e.g. weather app vs ebook. Need to get total costs over lifetime and compar this to expected benefits of increased revenue 6) many features/ functions might be shared amongst number of products - finance function to determine how to absorb per product |
| What types of costs associated with maintaining and operating apps post development need considering? | 1) functional services - those needed to execute facilities and features e.g. subscription to delivery mechanism 2) administrative services - hard to anticipate as largely depend on the app. Administration dashboards allow management of content, updates, user profiles, collection and analysis of user behaviour 3) infrastructure services - where app hosted, data stored and data delivery. Cost of servers, storage content delivery network (CDN) 4) IT support services - ongoing technical support for iOS/ android etc updates, bug fixes, maintenance etc |
| What typical costs and cost patterns may there be in digital product costing (1-5 of 9) | 1) staff costs - staff may be employed for specific project and paid a fixed fee/ fee per day. Once e.g. app developed staff no longer needed. Majority’s staff costs therefore upfront and pre launch 2) infrastructure, platform and payment types - many organisations will launch to one platform on trial then others. Costs therefore both immediate and predictable for initial target platform then potential further costs if launched in other platforms.ame for payment times 3) functionality - individual product functions may be costed separately e,g, push notifications, SMS or emails. Functions may be reused e.g. payment option for game on an app could be used across a number. 4) design and development - may be shareable design elements (e.g. engines for games shared across many) cost may be absorbed as an overhead. If product thrn has its own design costs these likely direct pre launch costs 5) marketing - majority incurred post launch |
| What typical costs and cost patterns may there be in digital product costing (6-9 of 9) | 6) IT support services and testing - ongoing technical support crucial, servers data storage, CDN, image data all require some ,even of monitoring and maintenance. Testing will be key before launch and ongoing e.g. bugs so some costs post launch too 7) royalty and license costs - royalties often based on sales therefore difficult to budget for post launch possibly over number of periods. License tend to be fixed amount paid on production of product pre launch 8) inventory costs - major advantage is there are no inventory costs - eliminates inventory holding costs and avoids inventory valuations 9) administration services - needs dashboard to manage app. Hard to anticipate costs as based on each app |
| What is key to a digital costing system? | - developed to cost all parts - links internal digital systems with suppliers, customers and external market - data gathered and gives up to date costing information reflecting current information on complements and product parts - can provide automation on total, marginal and average product costs - these systems can ‘read’ product designs and plan to find best components to achieve goals - operational and strategic benefits to organisations using them |
| What are the features of digital costing systems (1-4 of 7)? | 1) real time up to date information- taken from internet by linking systems with suppliers and marketplaces. Automatically compares prices and suppliers to ogives cost savings 2) acces to wider variety of resources - can be expensive, but do give savings through reduced lead times and access to resources, can alleviate scarcity problems 3) reduced operational costs - process fully automated and gives time saving 4) better understanding of costs - digital systems have build in analytics and intelligence- can give more detail if semi variable splits. Costs per anything you want so better profitability evaluation. Allows granular costing and some advanced systems can make suggesting to buying behaviour. |
| What are the features of digital costing systems (5-7 of 7)? | 5) more accurate costing - better, more up to date costing with better knowledge of drivers and absorption, detailed breakdown of overheads 6) improved communication/ faster decision making - fully integrated system less beaurcracy as done digitally 7) improved cost control - standards regularly updated, important to reflect current market conditions which this does. Should be no planning variances and any operational variances due to manager not acting in accordance with current environment |
| What is meant by a system of ‘target costing’? | Used when selling price less controllable so profit depends on meeting target cost rather than adjusting selling price NB a digital costing system can determine whether (and how) a target cost can be achieved in order to reach a target level of profit |
| What is meant by standard costing? | *a technique which establishes predetermined estimates of the costs of products and services and then compares these with actual costs as they are incurred. Predetermined costs known as standard costs and they represent target costs for planning, control and decision making* - from CIMA - a standard is a benchmark measurement of resource usage or revenue or profit generation set in defined conditions |
| What is key to standard costing and prices? | STANDARD COST - predetermined unit cost based on standard specification of resources needed to supply it and the costs of these resources. Based on technical specifications for labour, time and materials (can be based on marginal or absorption costing) STANDARD PRICE - expected price for selling the standard product/ service. NB - when there is a standard cost and standard sales price per unit there can be a STANDARD PROFIT PER UNIT (absorption costing) or STANDARD CONTRIBUTION OER UNIT (marginal costing) - the product doesn’t have to be identical but standardised costs (e,g, a plumbing job is price time) *standard cost cards can be made once measurable cost unit’s costs are set |
| What are the four types of standard? | 1) ATTAINABLE STANDARDS 2) BASIC STANDARDS 3) CURRENT STANDARDS 4) IDEAL STANDARDS |
| What is meant by an attainable standard? | *based on efficient (not perfect) operating conditions * includes allowances for normal material loss, fatigue, machine breakdowns frequently used type of standard *can motivate employees to work harder as provide a realistic but challenging target |
| What is meant by a basic standard? | *long term standards which remain unchanged over a period of years *sole use to show trends over time (e.g. material prices, labour rates, efficiency and effect of changing methods) *cannot be used to highlight current efficiency * may demotivate employees if over time they become too easy to achieve |
| What is meant by a current standard? | *standards based in current working conditions (inc. current inefficiencies and wastages) * do not attempt to motivate employees on current working conditions so may lack motivation |
| What is an ideal standard? | *based on perfect operating conditions * no wastage, scrap, breakdowns, idle time etc * say have adverse motivational impact if employees feel standard impossible to achieve * some Japanese companies use ideal standards to pinpoint areas where close examination may upyield large cost savings |
| What is key to standard costing in modern business environments? | *recent criticism of appropriateness of standard costing 1) was developed when business environments more stable - ow harder to set a standard cost which remains appropriate over time 2) attainment of standard used to be considered satisfactory now CI the aim 3) emphasis on labour variance less appropriate with automation |
| What is meant by variance analysis? | *comparing actual cost with the standard* From CIMA: evaluation of performance by means of variance whose timely reporting should maximise the opportunity for managerial action - can be calculated for both costs and sales - variance analysis important for (sales variances, variable cost variances and fixed overhead variances) performance measurement and control where standard costing used * a form of feedback control |
| What is key to sales variances? | 1) SALES PRICE VARIANCE - the effect on profit of a change in revenue caused by the actual selling price differing from budgeted 2) SALES VOLUME VARIANCE - measure of the contribution/ profit of not achieving the budgeted volume of sales. Difference of actual and budgeted sales volumes valued at either standard profit (absorption costing) or standard contribution (mariginal costing) |
| How can sales volume variance (in units) be measured? | 1) at standard profit per unit - if using absorption costing 2) at standard contribution per unit - if using marginal costing 3) at standard revenue per unit - rarely used and only do so if specifically asked in an exam NB variance is favourable if actual sales volume greater than budgeted and adverse if lower than budgeted |
| What could cause sales price variances? | 1) higher than expected discounts to customers to persuade them to buy in bulk (A) 2) Lower than expected discounts perhaps due to strength of sales demand (F) 3) the effect of low-price offers during a marketing campaign (A) 4) market conditions forcing industry wide price change (prices forced down = A, prices forced up = F) |
| What could cause sales volume variances? | 1) successful (F) or unsuccessful (A) direct selling efforts 2) successful (F) or unsuccessful (A) marketing efforts 3) unexpected cashed in customer need and buying habits (increased demand =F, reduced demand = A) 4) failure to satisfy demand due to production difficulties (A) 5) higher demand due to cuts in selling rice (F), lower demand due to increase in sales price (A) |
| What is key to materials variances? | DIRECT MATERIAL TOTAL VARIANCE *not very useful in its own, so further split into as below 1) materials price variance - paying more or less than expected for materials 2) materials useage variance - using more or less materials for the output - direct material total variance is the difference between actual direct material costs and standard direct material cost of actual production |
| What are CIMA definitions for the material variances? | 1) total direct material variance - measurement of the difference between the standard material cost of the output produced and the material cost incurred 2) material price variance - difference between the actual price paid for purchased materials and their standard cost 3) material useage variance - a variance which measures efficiency in use of material by comparing standard material useage for actual production with actual material used (the difference is valued at standard cost) |
| What is meant by direct material price variance? | *Difference between actual purchase price and standard purchase price (e.g. per kilo/ litre) MULTIPLIED by actual quantity purchased or used (Material price variance calculated either at time of purchase or at time of useage) NB if raw material inventory valued at standard cost price variance is calculated based on materials PURCHASED (whether they are used or not). If raw material inventory valued at ACUTAL cost price variation based on materials USED |
| What is the direct material useage variance? | *difference between using a different quantity of material than expected *actual quantity used and standard quantity of material specified for actual production x standard purchase price |
| What are potential causes of material variances? | MATERIAL PRICE 1) using different supplier who is cheaper (F) or more expensive (A) 2) buying in larger orders for bulk purchase discounts (F) or missing these (A) 3) unexpected increase in price for supplier or buying costs (higher delivery) (A) 4) efficient (F) or inefficient (A) buying procedures 5) change in material qualitiy resulting in higher or lower purchase prices (increased quality = higher price = A) MATERIAL USEAGE 1) higher (A) or lower (F) than expected rate of scrap/ wastage 2) using different quality of material affecting wastage rate (higher quality = less waste = F) 3) defective material (A) 4) better quality control (F) 5) more efficient work practices (F) 6) changing labour mix impacting wastage if more errors made (higher grade labour = less error = F) 7) changing material mix (more expensive = better quality = F) |
| How can inventory valuation impact material variances? | *Situations where all material purchased is not used and inventory remains at the end of the period needs to be considered *if inventory valued at standard cost, calculation should be performed using quantity of materials PURCHASED (variance will be accounted for as soon as purchase made). Commonly used method *if inventory valued at ACUTAL cost calculation should be performed using quantity of material USED. Variance calculated and accounted for each item as it is used up. Not recommend as |
| What are the labour variances? | 1) Direct labour total cost variance (split into 2) labour rate 3) labour efficiency 4) labour idle time variance |
| What is the direct labour total variance? | Difference between 1) actual cost of direct labour 2) standard direct labour cost of the actual production Can split the variance into 1) a direct labour rate variance (I.e. paying more or less than expected per hour for labour) 2) a direct labour efficiency variance (I.e. using more or less labour hours per unit than expected) |
| What are the official CIMA definitions for the labour rate variances? | 1) total direct labour variance - difference between standard direct labour cost of the output produced and actual direct labour cost incurred 2) direct labour rate variance - indicates actual cost of any change from the standard labour rate of renumeration 3) standard labour cost of any change from the standard level of labour efficiency |
| What is key to the direct labour rate variance? | Difference between 1) actual rate per hour 2) standard rate per hour MULTIPLIED by actual hours that were paid for |
| What is key to the direct labour efficiency T vairance? | Difference between 1) actual hours worked 2) standard hours specified for the ACUTAL production MULTIPLIED by the standard hourly rate |
| What is key to idle time and idle time variances | *if idle time is recorded efficiency variance should be separated into 1) idle time variance and 2) an efficiency variance during active working hours *if there is no standard idle time in the budget then idle time variance is always adverse as represents money wasted CIMA DEFINITION - direct labour idle time variance = occurs Wayne hours paid exceeds hours worked and there is extra cost caused by this idle time. It’s computation increases the accuracy of the labour efficiency variance |
| What is meant by expected idle time? | *if demand is seasonal or irregular but the organisation wishes to maintain and pay a constant number of workers there will, be a certain level of expected idle time * standard labour rate may then include an allowance for the cost of the expected idle time. Only impact of any unexpected or abnormal idle time would be inc,heed in the idle time variance * the only impact of h expected or abnormal idle time would be included in the idle time variance |
| What are possible causes of labour variances? | LABOUR RATE 1) unexpected increase in basic pay (A) 2) payments of bonuses where recorded as direct labour costs (A) 3) using labour that is more or less expensive than standard 4) change in composition of the workforce meaning change in rate of pay LABOUR EFFICIENCY 1) more or less time taken to complete work considering efficiency of work 2) using labour mode/ less experienced than the standard 3) change in composition or mix of work force giving change in efficiency 4) improved working processes (F) 5) industrial action (A) 6) poor supervision (A) 7) improvements to efficiency due to unexpected ‘learning effect’ amongst workforce (F) 8) unexpected loss of time due to production bottlenecks/ resource shortages (A) |
| What are meant by variable overhead variances? | *similar to direct labour variances* - in standard costing variable production overhead total variance can be calculated - with service costing a variable overhead total variance can be calculated, but might not be analysed further - if variable production overheads Cary with labour hours use hours worked (same as direct labour efficiency variance) where it varies with machine hours use this |
| What can variable production overhead total variance be split into? | 1) variable production overhead expenditure variance - I.e. paying more or less per hour for variable overheads 2) variable production overhead efficient variance - I.e. lore or less variable overheads per unit than expected |
| What is the variable production overhead expenditure variance when there is idle time? | *difference between Standard variable overhead cost of active hours worked (not all - considers only incurred during active hours) AND actual variable overhead cost |
| What is the fixed production overhead cost variances? | Split into: 1) fixed overhead expenditure variance 2) fixed overhead volume variance (further split into 1) fixed overhead capacity variance and 2) fixed overhead efficiency variance |
| What is key to the fixed production overhead total variance? | *amount of overhead absorbed for each unit of output is the standard fixed overhead cost per unit - total cost variance therefore difference between 1) actual fixed production overheads incurred 2) standard fixed production overhead cost absorbed by the ACUTAL production (I.e. fixed overhead actually absorbed into production using standard absorption rate) |
| How is under/ over absorption considered with standard costing Systems? | - relates to labour hours to number of units produced - in standard absorption costing system, the fixed overheads are related to cost units by using absorption rates e.g. if absorption basis is labour hours, the fixed overhead absorbed per unit will be standard labour hours per unit x OAR per labour hour - total cost variance for fixed production overhead variances is the amount over or under absorbed (over absorption = F, under absorption = A) *over/ under absorption occurs where OAR is based on 1) budgeted fixed overhead 2) budgeted level of activity (if either these predictions wrong it will give a fixed overhead total variance) |
| What is meant by the fixed production overhead expenditure variance? | Difference between 1) actual fixed production overhead 2) budgeted fixed production overhead |
| What is key to fixed production overhead volume variance? | Difference betweeen 1) ACUTAL output in units 2) budgeted output in units x standard ficed overhead absorption rate (FOAR) per unit (NB FIXED IVERHEAD VOLUME VARIANCE DOES NOT OCCUR IN A MARGINAL COSTING SUSTEM) - margins, costing no overheads absorbed with amount spent treated as a period cost and written off in SOPL. for marginal only need to consider fixed overhead variance I.e difference beteeen what budgeted to be spent and what actually spent |
| What are fixed overhead capacity and efficiency variances? | In absorption costing systems if fixed overhead absorbed based in hours fixed overhead volume variance can be split into 1) CAPACITY variance - measures whether or not workforce worked more or fewer hours than budgeted. 2) EFFICIENCY variance - whether workforce took more or less time than standard in producing their output for the period |
| What are potential causes for fixed and variable overhead variances? | 1) fixed overhead expenditure adverse variances caused by spending in excess of budget (needs detailed analysis of expenditure variance to establish why actual expenditure higher or lower than budgeted 2) Fixed overhead volume variance (therefore capacity and efficiency variance) caused by changes in production volume 3) variable production overhead expenditure variances can often be caused by changes in machine running costs (e.g. if electricity rate changed) 4) fixed and variable production overhead efficiency variances - causes are similar to those for direct labour efficiency variance |
| What are the possible independence’s between variances? | *may be interrelations so good to try to look at variances together rather than in isolation - 1) using cheaper materials results in F for material price variance but could be A in material wastage and cause a fall in labour productivity (worse variable overhead efficiency) 2) using more experienced labour to do the work will result in adverse labour rate variance but productivity may be higher (F for labour and variable overhead efficiency) 3) workers improving productivity (F for efficiency variance) to win bonus, but then adverse rate variance |
| What is key to operating statements? | *A top level variance report reconciling budgeted and ACUTAL profit for the period *u usual and unexpected items can be brought to managements attention - there may be a hierarchy of control reports to mangement, in reporting variances concept of responsibility accounting should be followed so variance report to an individual managers should only include figures relating to their own area of responsibility (consider is variance controllable, is there expected benefit from control action, is variance significant) |
| How can ABC costing be used for variacne analysis? | * as pat of variacne analysis managers need to spestablish standard costs *ABC can help to determine costs and hence has some implications of the variances calculated * compared to transaction absorption costing, ABC likely to impact overhead variances * typically standard costs can be compared to actual and an overhead expenditure and efficiency variance calculated |
| What is key to sales mix and quantity variances? | *take sales volume variance and split it into sales mix and quantity NB needs products to be related I.e. markets for the products are similar 1) calculate standard mix 2) valuation |
| What is meant by the standard mix? | - comparing changes in the proportion of sales made by each product - what the actual sales for each product would’ve been if sales proportions remained unchanged *The actual total sales (in units) split between products based on originally planned proportions* |
| What is key to valuation when looking at sales mixes? | *this step determines impact change from standard mix has had on profits* - mix and quantity variances valued at standard margin (when marginal costing used this is standard contribution, when absorption costing used this is standard profit) Can be done through either 1) individual units method 2) weighted average contribution method 3) sales quantity variance |
| What is the individual unit method? | Each products variance in the mix is multiplied by the standard margin (Either the standard contribution (marginal costing) or the standard profit (absorption costing) Size if impact on profits then useful to management |
| What is the weighted average contribution method? | 1) calculate a weighted average contribution for the products - based on budgeted sales and contribution (total budgeted contribution divided by the total budgeted sales) 2) to value the sales mix variance , weighted average contribution deducted from the standard contribution per unit for each product(this shows difference between contribution being generated by each product and the average contribution) NB - if difference is positive, product generates higher contribution than average (good thing) *this method considered superior to individual units method as easier to see impact of individual product against the average margin |
| How is the sales quantity variance calculated? | *ignores change in mix and focuses on impact on profit selling more or less than budgeted *difference between total actual sales and total budgeted sales valued at weighted average margin per unit Sales quantity variance = (actual sales quantity- budgeted sales quantity) x weighted average margin Useful information for manager as explains the impact on profits for the change in volume (assuming mix is unchanged) |
| What are benefits of mix and quantity variances? | 1) sales mix variance can allow identification of trends in sales of individual elements of total product sales 2) sales quantity variance can be used to indicate changes in size of the market/ market share for an organisation 3) sales mix variance may indicate future directions for sales strategies (aim to repeat any favourable variances by identifying and exploiting their causes) 4) sales mix variance can be used to gauge success or failure of new marketing campaigns 5) responsibility accounting is improved when sales volume variance is split between sales mix and quantity variance as different managers may be responsible for different elements of sales |
| What are the problems of mix and quantity variances? | 1) important for user to consider control ability of the variance before making performance review decisions based on the output (e.g. a strategy to change the mix has caused a quantity variance) 2) variances need to be considered as a whole rather than on individual basis due to interdependence 3) sales mix variance is only relevant if products have some kind of relationship between them 4) can be difficult to apply techniques in organisations which have very broad product ranges (difficult to determine which products are complementary/ substitutes etc) |
| What is key to planning and operational variances? | *standards are set and budgets created at beginning of period (ex ante) * forecasts predicted over time, but variances that occur may be due to unrealistic budget not solely organisation factors *budget may need to be revised to enable actual performance against a standard that reflects changed conditions so managers only held accountable for element of budget they have control * traditional variacne can be further split into 1) planning variacne 2) operational variance |
| What is key to planning variances? | *measures difference between budgeted and ACUTAL profit that has been caused by external changes in original standard cost nit known or acknowledged by standard setters at time of planning *F if revised standard cost lower than original standard cost *A if revised standard cost higher than original standard cost (original standard underestimated cost and overstated profit) NB - planning variance usually regarded as uncontrollable as orang due to original standard not being attainable |
| What is key to operational variances? | *variances assumed to occur due to operational factors *ACUTAL results compared with the revised standard rather than original *NB operational variance is controllable by operational managers and they should be held accountable |
| What causes are there of planning variances? | *there must be good reason for deciding the original standard cost is unrealistic Could be 1) change in one of the main materials used to make product or provide a service 2) unexpected increase in the of materials due to rapid increase in world market prices 3) change in working methods and procedures that alters expected direct labour time for product/ service 4) unexpected change in rate of pay to the work force *these situations don’t happen often occur reporting planning and operational variances should be occasional - planning variances could be split between individual elements making up the variance |
| What are the benefits and problems of planning variances? | BENEFITS 1) more useful - especially for volatile and changing environments 2) up to date information for levels of efficiency 3) better for motivation - operational variances likely to. Are standard costing system more acceptable 4) assesses planning - emphasises importance of planning in standard setting PROBLEMS 1) subjective - in determining ex-post standards 2) time consuming - large amount of labour time involved in continually establishing up to date standards and calculating additional variances 3) can be manipulated - tendency to want to put as much as possible against planning variances 4) can cause conflict - conflict between operational and planning staff blaming each other |
| What is the purpose of budgets? | *budgets are quantitative or financial plans for the future usually for a year or less* 1) PLANNING - forces management to set targets anticipate problems and gives purpose and direction 2) CONTROL & EVALUATION - budget provides plan where ACUTAL results can be compared, those out of line can be investigated and corrected 3) CO-ORDINATION - budget brings areas together to a common plan 4) COMMUNICATION- communicates targets to managers 5) MOTIVATION - useful to influence manager behaviour and in line with organisation objectives 6) AUTHORISATION - formal authorisation to spend, hire etc |
| What are advantages of budgeting? | 1) ensure organisations actions are matched to goals 2) creating a budget focuses management to consider future and internal and external factors on business 3) organisations better placed to cope with change and acts as early warning for problems 4) force management to consider cost and profitability and therefore value add 5) improved decisions making on resource, cash allocation and financing 6) faciliatates performance evaluation (e.g. variacne analysis) |
| What are disadvantages of budgeting? | 1) can be time consuming and distract from core operations 2) predicting future changes v. Subjective and relies on preparer of budget 3) can create conflicts/ barriers between budget holders rather than knowledge sharing and coordination 4) can encourage short-termism 5) budgets focuse on financial outcomes rather than broader measurements of success (e.g. customer satisfaction/ quality of products) 6) can encourage managers to spend what is in the budget even if not needed just to keep it in next years budget 7) can deter innovation and enterprise as staff focused on meeting targets rather than responding to the market |
| What challenges are the for budgeting in global companies? | 1) different currencies - currencies may not be suitable and could regularly fluctuate 2) plans may need changing for different laws and regulations e.g. sources of supply different for some areas 3) differences in customer taste in culture can force adaptations to products/ services 4) business units may operate in different political climates and give future complexity to budget preparers |
| What is meant by the master budget and the functional budgets and the budget period? | MASTER BUDGET - entire business and brings together departmental/ activity budgets FUNCTIONAL BUDGETS - could be e.g. different service areas but will start with sales budgets BUDGET PERIOD - time for which the budget is prepared (e.g. 1 year) but can be longer shorter. Too short and constantly in evaluation cycles, too long means it’ll likely be out of date |
| What is meant by the principal budget factor? | When a key resource is in short supply and affect planning decisions *usually assumed sales demand will be key factor so is often the starting point for budget setting NB other limiting factors may be shortage of resource (limiting factor analysis, linear programming and throughput accounting can be used to determine production plans) |
| What are the stages for budget production? | 1) sales budget 2) production budget (plit into raw materials, labour and factory overheads) *this gives a cost of goods budget* 3) selling and distribution expenses budget and general/ administration budgets 4) master budget generated (includes budgeted statement of profit, cash budget (uses capital expenditure budget) and statement of financial position) |
| What is key to the different budgets? | 1) SALES BUDGET - how many units can be sold (revenue terms or units sold) 2) PRODUCTION BUDGET- how many units must be produced to meet the budgeted sales level (Nb difference between sales and production budget is the movement in inventory of finished goods) 3) RAW MATERIALS/ LABOUR/ OVERHEADS BUDGETS - to express production budget in financial terms (production cost) needs these considering 4) NON-PRODUCTION BUDGETS - budgets for non production costs (selling/ distribution) needs to be considered 5) MASTER BUDGETS - master budget can be summarised as budgeted statement of profit and loss, cash budget and statement of financial position (if these unsatisfactory need to revise functional budgets until they are) |
| What is key to the raw materials budget? | 1) materials required in production 2) materials purchases *different between these will be movement in inventory of raw materials * - there may be material losses during the production process itself, wastage/losses may need to be adjusted in the materials useage budget *purchases budget should include purchase costs of indirect materials |
| What is the key to the direct labour budget? | *if direct labour is variable, production pudges (in units) x direct labour cost per unit *idle time would need to be incorporated into the budgeted labour hours for the period *if labour is a fixed cost it can be calculated by estimating the payroll costs |
| What is the key to overhead budgets? | *when system of absorption costing is used overheads are allocated and apportioned using budgeted overhead absorption rates |
| What is the cash budget? | *will show periods varying between a single day etc expected inflows and outflows of cash through the company *can identify cash surpluses and decifits *accuracy of cash budgets depends on forecasts which it is based Used to 1) assess and integrate operating budgets 2) plan for cash shortages and surpluses 3) compare with actual spending |
| What is a cash forecast? | Estimate of cash receipts and payments for a future period under existing conditions NB * not all cash receipts or payments affect SOPL (e.g. issue of new shares) *some SOPL derived from accounting conventions are not cash flows (depreciation) *timing of cash receipts and payments fires not conpincide with SOPL accounting period *irrecoverable debts never received in cash and an allowance for irrecoverable debts may not be received at alll |
| What should a cash budget typically include? | 1) clear distinction between cash receipts and cash payments for each control period (Needs to be logically arranged with a subttoalcdor receipts and a subtotal for payments) 2) a figure for net cash flow for each period - not essential, but helps to draw attention for the cash flow implications of their actions during the period 3) closing cash balance for each control period, closing balance for each period will be the opening balance for the following period (To fill in the cash budget, fill in the simple figures first (wages and salaries, fixed overhead expenses, dividend payments and purchase of non current assets - then work out more complex figures (variable overheads may require information about production levels, timings for both sales and purchases must be found from credit periods) calculating closing cash balance - subtotal the receipt and payment information to calculate net cash flow for each period |
| How can forecasts be prepared from planned receipts and payments? | *every type of cash inflow and receipt should be forecast along with their timings *cash receipts and payments differ from sales/ cost of sales in SOPL 1) consider the layout 2) fill in the simple figures - eg wages and salaries, fixed overhead expenses, dividend payments and purchase of non current assets 3) work out more complex figures - need to consider sales and purchases from credit period, variable overheads considering production and purchases requiring calls based on production schedules and inventory balances 4) calculate closing cash balance - subtotal receipt and payment information to calculate net cash flow for each period and use this with the opening cash balance to generate closing cash balance per period |
| Why do cash recipes and payments differ from sales and cost of sales in SOPL? | 1) not all cash receipts/ payments affect SOPL (eg issue of new shares) 2) some SOPL items derived from accounting conventions and are not cash flows (e.g. depreciation) 3) timing of cash receipts and payments |
| How should planned receipts and payments be laid out when preparing forecasts? | No definitive layout should be used for a cash budget but can include 1) clear distinction between cash receipts and cash payments for each control period and should be logically arranged with subtotal for receipts and subtotal for payments 2) figure for the net cash flow for each period - not necessarily needed, but helpful to managers 3) closing balance for each control period - closing balance for each period will be the opening balance for the following period (See pro for a diagram) |
| How can cash budgets be interpreted? | Consider: 1( is balance at end of period acceptable/make sense 2) does the cash balance come in deficient at any time in a period 3) is there sufficient finance (overdraft) to cover deficit 4) what are key causes of cash deficits 5) can discretionary expenditure (asset purchases) be made in another period to stabilise pattern of cash flows 6) can/ should asset purchases be leased 7) is there a plan for cash surpluses (e.g. reinvestment?) 8) when is the best time to make discretionary expenditure? |
| What is meant by the master budget? | *summary of all function budgets - usually comprises budgeted SOPL budgeted SOFP and the cash budget *it’s submitted to senior management for approval and designed to give summarised information |
| How can budgets undergo sensitivity analysis and stress testing? | *budgets are based on assumptions and could be wrong - better to test what happens if assumptions change SENSITIVITY ANALYSIS - change one assumption at a time to determine impact of overall budget (e.g. sales knock on to profits cash flow etc) STRESS TEST - substantial examination of his budget would cope under pressure from difficult conditions (severe/ unexpected pressures) |
| What can be considered sources of business stress? | 1) sudden economic changes (recessions or booms) 2) cybersecurity attacks 3) loss of major customer 4) foreign exchange risk 5) advancements in technology (any products at risk of being obsolete or unproductive) 6) changes in customer taste 7) workforce strike/ industrial action *stress testing can identify correlations between events. Stress testing also allows quantification/ helps to create and identify warning signs and triggers for stress events * can be time consuming and expensive and can use a range of software to do stress testing (e..g simulations in computers) Stress testing is an element of budgetary control |
| What is key to budget data? | *many useful sources for budgeting and should consider the principal budget factor 1) general economic data - information in changes to the economy (expected growth in economy/ RPI etc) 2) public announcements - competitors and customers may publicaly announce plans which could feed into sales and pricing 3) historic sales trends 4) market research 5) business unit consultation - where budgets set centrally, important to understand insight into local conditions and expectations (Can use big data!) |
| What is key to big data? | *structured and unstructured data to be analysed to provide insights to lead to better decisions *can be taken from media, the web, machine generated data (e.g. Alexa suggestions), databases *for budgeting, can use big data to try to reduce uncertainty in sales etc *using big data can lead to gains in competitive advantage, driving innovation and improved productivity through better and faster data *can help with stress testing through identifying stress events, quantifying effects of stress events, testing validity of assumptions, identifying correlations and creating warning signs/ triggers for stress events |
| What is key to big data and AI? | Big data captured information about consumer habits not previously available and AI can help organisations answer unanswerable wuations *AI key as it is free from human biases and a lot faster than humans |
| What problems are there in using big data? | 1) volume - hard for someone to decide what to do with it all 2) variety - no consistent way of presenti Big data meaning needs to be organised and interpreted before analysis 3) velocity - uploaded and updated on second by drone bases (software needed to help sort through it) 4) veracity - need to determine whether data is accurate representative and can be trusted Also, as data often freely available competitive advantage may be short lived if competitors also use it. May require significant IT investment and data can be distorted by data outliers |
| What is meant by a periodic budget? | A periodic budget shows the costs and revenue for one period of time (e.g. a year) and updated |
| What is meant by a rolling budget? | A budget continuously updated by adding further accounting period (e.g. month/ quarter) when the earliest accounting period has expired Particularly beneficial where future costs/ activities cannot be forecast accurately |
| What are the reasons for rolling budgets? | *Key reason is to deal with uncertainty in budget where greater accuracy and reliability is required 1) Accurate forecasts cannot be made - e.g. fast moving environments where budgeting conditions subject to rapid financial change (e.g. changes to exchange rate) 2) Any area of business needing tight control - e.g. cash budgeting - essential to have reasonably reliable forecasts of cash flows |
| What are the advantages and disadvantages of rolling budgets? | ADVANTAGES 1) reduce uncertainty in budgeting 2) they can be used for cash management 3) force managers to look ahead continuously - cannot get complacent 4) When conditions subject to change comparing actuals with rolling budgets is more realistic than comparing actual results with a fixed annual budget DISADVANTAGES 1) preparing new budgets regularly is time consuming 2) can be difficult to communicate frequent budget changes |
| What is meant by incremental budgeting? | *Traditional approach to budgeting takes previous year's budgets and adds on percentage to allow for inflation and other cost increases (e.g. new machine)* - fairly small changes made to the current year budget and a check is made to ensure budget produced in the way meets performance targets of the organisation (company might have target to keep the operating costs to sales ratio) |
| What are advantages and disadvantages of incremental budgeting? | ADVANTAGES *Simple and low cost *Quick to administer *Suitable in stable environments *Most practical for certain items of cost, such as telephone expenses etc. DISADVANTAGES *Backward looking in nature - unsuited to changing environments *Assumes all levels of activities should be continued at current level of operations and the same allocation of resources (hence builds on previous inefficiencies and not looking to reduce waste) *Can encourage over-spending - managers know they will fail to spend the budget it will likely be reduced next time *Targets often unchallenging based on past performance (does not encourage managers to look for ways of improving the business) *Consideration not given to justification for each activity - will be undertaken merely because they were undertaken the previous year |
| What is meant by zero based budgeting (ZBB)? | *Method of budgeting where all activities re-evaluated each time a budget formulated* NB - each functional budget starts with the assumptions the function does not exist at zero cost - increments of cost considered in terms of increment of benefits *Radical alternative to incremental budgeting - inessential activités and costs identified and eliminated and removed |
| What is ZBB suitable for? | 1) Allocating resources in areas where spend is discretionary (R&D, training etc) 2) Public sector organisations 3) New functions (e.g. new department or service) in an organisation |
| How is ZZB implemented adopted? | IMPLEMENTATION *all activités to be scrutinised - should activity be undertaken at all/ if company undertakes activity how should it be done/ performed (in-house/ subcontracted) and how much would various alternative levels of service cost *4 step process to ZBB: 1) Determine activities that are to be used in decision packages (either mutually exclusive or incremental packages) 2) Managers to prepare alternative decision packages 3) Rank decision packages in order of contribution to organisations objectives 4) Fund decision packages according to ranking established in 3 until all funds exhausted |
| How is ZBB adopted? | *Adopted more widely in public than private sectors *Full-scale ZBB is very resource intensive - critics claim its advantages outweighed by implementation costs *Not necessary to implement across who organisation - could be done for certain departments/ on rotational basis |
| What are the advantages and disadvantages of ZBB? | ADVANTAGES *creates organisational environment where change is accepted - more responsive to change in business *Promotes better focus on organisational goals - moves budgeting away from numbers and into analysis and decision making *Forces managers to consider activities and the priorities *Establishes measure of performance for each decision package (can compare with actuals) *Managers always involved with the process *Focused on future rather than past DISADVANTAGES *Time consuming exercise and therefore costly - unlikely to be able to be carried out every year *Temptation to concentrate on short term saving *Might require budgeting skills management teams do not possess *Budgeting process may become too rigid and organisation may not be able to respond to threats *Ranking process can be difficult - hard to quantify *Less wasteful when budgeting for standard costs where costs and efficiency levels should be well controlled |
| What is meant by activity based budgeting? | *Similar approach to activity based costing - 'a method of budgeting based on an activity framework and utilising cost driver data in the budget-setting and variance feedback processes' *Where ZBB based on budgets (decision packages) prepared by responsibility centre managers - ABB is based on budgeting for activities 1) cost driver for activity is established - forecast made for number of units of the cost driver that will occur in the budget period 2) Given estimate of activity level for cost driver, activity cost is established (cost per unit of activity - cost driver rate) |
| What are the advantages and disadvantages of ABB? | ADVANTAGES 1) draws attention to the costs of the overhead activities - can be important where overhead costs are large proportion of total operating costs 2) Recognises activités drive costs - if managers can control drivers then costs should be better managed and controlled 3) Can provide useful information for TQM programmes DISADVANTAGES 1) Expensive to implement - new information systems required and mangers need to be trained in its use 2) Relies on use of ABC as the standard costing system |
| What is meant by beyond budgeting? | An approach that tries to resolve weaknesses and limitations of traditional approaches to budgets 'an idea companies need to move beyond budgeting because of inherent flaws (especially when setting contracts) - argued range of techniques such as rolling forecasts and target related costs can take place of traditional budgeting' *BB approaches used where regular environmental changes or where continuous improvement critical to the organisations success Uses 1) Rolling budgets as flexible and do not rely on obsolete figures - budgets also changed with environment 2) Wider range of performance measures assessed such as customer satisfaction, production times, innovation and staff utilisation 3) Targets often set on benchmarks observed externally 4) There is greater focus on determining and explaining what might happen in the future rather than what has happened in the past 5) Innovation encouraged and rewarded 6) Budgets set at local level rather than being prepared centrally based on organisational goals |
| What are advantages and disadvantages of beyond budgeting? | ADVANTAGES 1) Planning continuous and organisation more likely to be proactive rather than reactive to the environment 2) Targets more challenging and more market focused - stretch staff and encourage CI while making organisation more customer focused 3) More innovation 4) Managers more involved in decision making process 5) Managers can make decisions more quickly 6) Creates information systems which provide fast and open information throughout the organisation DISADVANTAGES 1) Planning, coordination and performance evaluation become more complicated (rewards systems more complex) 2) If benchmarks and targets seen as being unachievable then effort to achieve them is reduced rather than improved 3) Organisational goals less clear and not communicated throughout the organisation (key stakeholders lose out as the organisation focuses on customers and innovation) 4) Organisations moving into a beyond budgeting structure can often face lots of resistance from staff |
| What is key to forecasts? | *Budgets are based on forecasts *Forecases could be used for volume of sales/ output/ sales revenue/ costs *Forecasts may be used for feedforward control reporting *Forecast may be based on simple assumptions or using more complicated forecasting models (1) high low method (2) linear regression analysis (3) techniques of time series analysis *Scatter graphs could also be used (y axis the dependent variable) using line of best fits - as based on judgment less accurate than other statistical methods |
| What is the high-low method for forecasting? | *Can be used for semi-variable costs where total semi-variable cost = fixed cost + (variable cost per unit x activity level) *Considered as a straight line where (y = a +bx) y= total semi-variable cost a= fixed cost b= variable cost per unit x= number of units produced NB high low method can only take account of two observations in a given data set (predicted relationship could be distorted if random variations) |
| What is key to linear regression (in terms of a forecasting model)? | *Useful to take account of random variations (which high low method can't) *Estimates the relationship between two variables y = a + bx, where: y = dependent variable a = intercept (on y axis) - a = mean of y - mean of box b = gradient x = independent variable (SEE FORMULA) *To interpret the line, consider what happens at 0 *For forecasting, can use the equation for predicting values of y from a given x value |
| What is key to correlation (particularly for regression analysis)? | *Regression analysis attempts to fine linear relationship between two variables which can then be used to make forecasts at given value *Reliablity of the forecasts will need to consider the strength of the relationship between the two variables DEGREES OF CORRELATION: 1) perfectly correlated - all pairs of values lie on a straight line. There is an exact linear relationship between the variables. 2) partially correlated - no exact relationship, but vaguley match 3) no correlation - two variables seem completely unconnected |
| What is meant by the correlation coefficient? | *Where there is no perfect correlation in regression analysis, cannot rely on the predictions *Pearson's correlation coefficient (r) can measure the strength of the correlation (see exam for formula) *If r = +1 there is a perfect positive linear correlation *If r = 0 there is no linear correlation *If r = -1, there is a perfect negative linear correlation NB if r is more than 0.8, typically means there's a strong positive correlation (or negative if under -0.8) |
| What is the coefficient of determination? | r2 *Measures how good the estimated regression equation is - higher the r2 value, more confidence there is in the regression equation *Statistically the coefficient of dertmination represents proportion of total variation in the y variable explained by the regression equation e.g. if r2 = 0.8, 80% of x can be explained by y the 20% is then known as the error term |
| What are the limitations to simple linear regression? | 1) assumes linear relationship between variables 2) only measures relationship between two variables - in reality dependent variable affected by many independent variables 3) only interpolated forecasts tend to be reliable (equation not to be extrapolated) 4) regression assumes historical behaviour of the data continues into foreseeable future 5) interpolated predictions only reliable if significant correlation between the data 6) ignores inflation |
| How can forecasts be adjusted for inflation? | *Accuracy of forecasting affected by need to adjust historical data and future forecasts to allow for price/ cost inflation *When historical data used to calculate trend line/ line of best fit, should ideally be adjusted to same index level for costs/ prices (if actual cost/ revenue data used without inflationary adjustments, line of best fit will include inflationary differences) *when forecast made form line of best fit, adjustment to be made for anticipated inflation in the forecast period |
| How can index pricing adjust costs/ revenues? | Multiply by (index level to which costs/ revenue will be adjusted / actual index level of costs/ revenues) *The base year is the year chosen as the common price level *Layout as year// total revenue// x adjustment factor// and show as 'revenue at X year price level |
| How can the high low method be used with inflation considered? | *To remove the potential for distortion in the presence of inflation, perform technique as usual (stripping out inflation if needed) and then re-apply inflation* |
| What is key to time series analysis? | - A series of values for a variable which changes over time where variable is subject to seasonal variations -Measured at regular intervals (e.g. daily closing price of a share on the stock exchange/ monthly sales/ daily production output) - Often shown graphically as a histogram *There are 4 components to a time series: 1) Basic trend (T) - long term (general direction over time once short term variations smoothed) 2) Seasonal variations (S) - short term (in time of year/ part of day etc (e.g. more ice cream in summer/ traffic in rush hour). If there is a straight line trend, seasonal variations will cancel out and should be zero across each cycle 3) Cyclical variations (C) - medium to long term (around basic trend and rarely a consistent length and do not necessarily follow similar patterns (e.g. in the economy, boom, decline, recession and recovery) 4) Residual variations (R) |
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