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Ratios/performance Indicators > Other Parts Of Decision And Control > Flashcards

Other Parts Of Decision And Control Flashcards

1
Q

What can be done once the cost of producing a unit is calculated? (5)

A

1) Setting selling prices
2) Valuing items in inventory
3) Identifying ways to reduce costs
4) Setting cost targets for production staff and managers
5) Using the cost targets set to review and improve actual performance

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2
Q

What are the three ways to classify costs?

A

By nature
By function
By behaviour

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3
Q

What is classifying by nature?

A

This is categorising by direct or indirect costs.

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4
Q

What is classifying by function?

A

Categorising by production and non production.

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5
Q

What is classifying by behaviour?

A

Categorising by variable or fixed.

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6
Q

How do costs by nature and costs by function link?

A

Direct costs are always production cost
Indirect costs can be production costs e.g. factory rent
Indirect costs can be non production costs e.g. admin costs

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7
Q

What is a cost card?

A

Summary of costs involved in producing a unit. Direct and indirect, production and non production.
Helpful in setting the price of that product.

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8
Q

What is a cost unit?

A

Product or service for which costs are being allocated

Can be done in batches if individual units are to difficult to allocate.

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9
Q

What is a cost centre?

A

Division or department where costs can be allocated e.g. administration

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10
Q

What is a revenue centre?

A

Departments where managers only control revenues. E.g. selling departments

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11
Q

What is a profit centre?

A

Departments that control revenues and costs and so can be held accountable for profits

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12
Q

What is an investment centre?

A

Control costs, revenues and also capital invested. Could be judged on return on capital employed. E.g. selling and distribution

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13
Q

What does absorption costing include?

A

Both variable and shared fixed costs to give full production cost

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14
Q

Steps to absorption costing

A

1) Allocation of direct costs
2) Allocation and apportionment of indirect costs
3) reapportionment of service cost centres
4) absorption of indirect costs into cost units (overhead absorption rate)

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15
Q

What is marginal costing?

A

Only includes variable costs and variable overheads

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16
Q

What is contribution?

A

Selling price- variable costs

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17
Q

When inventory levels are rising absorption costing profit is ________ than marginal costing profit.

A

More

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18
Q

When inventory levels are decreasing absorption costing profit is ________ than marginal costing profit.

A

Less

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19
Q

Advantages of marginal costing

A

Simpler
Suitable for short term decisions
Treats fixed costs as they behave
Profit is influenced by sales not by production

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20
Q

Disadvantages of marginal costing

A

Does not comply with IAS 2 so can’t be used in financial statements
In long term fixed costs cannot be ignored
All costs have to be split between fixed and variable elements

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21
Q

What does activity based costing look at?

A

Cost pools and cost drivers

22
Q

Advantages of ABC

A

Overhead absorption into units is based on their use of resources
Enables more accurate costing info to be generated
Easy to see where high levels of cost occur and their causes which will help to control them to improve profit.
Encourages improvement in processes by considering how the business can operate more efficiently.

23
Q

Disadvantages of ABC costing

A

It is complex to set up and run which may be difficult for staff to cope with
More time consuming then traditional absorption costing and therefore costly
May give too much detail and be confusing for users

24
Q

Formula for break even

A

Fixed costs
——————————
Contribution per unit

25
Q

Formula for margin of safety

A

Budgeted units- break even units
——————————————— x 100
Budgeted sales volume

26
Q

Formula for units to reach targeted profit

A

Fixed costs + profit
————————————
Contribution per unit

27
Q

Steps to calculate optimal production plan (5)

A

1) identify limiting factor
2) calculate contribution per unit
3) calculate contribution per limiting factor
4) rank the products according to contribution per limiting factor
5) follow ranking to work out optimal plan

28
Q

Advantages of outsourcing (4)

A

1) Cost savings if other business can make units more efficiently
2) it releases capital that may have been spent on production machinery
3) other business May have expert skills in production that we lack
4) it frees up time for our managers to focus on other aspects of the business

29
Q

Disadvantages of outsourcing

A

It may demotivate staff who do not have any work to do
Lack of control over production process which could impact quality
Increased reliance on outsourcing as skills lack
Supplier may not be reliable with delivery dates
Product may not be tailored to our specific needs

30
Q

What are the three criteria for a cost to be a relevant cost?

A

1) Must be a future cost (takes place in future as result of a decision)
2) Must be a incremental cost (avoidable if the decision is not implemented)
3) must be a cash cost (causes outflow of cash)

31
Q

What is net present value?

A

The time value of money relates to the fact that when money received it could be invested and gain interest on it

32
Q

What does net terminal costs mean?

A

The actual cost at the end of the project.

33
Q

Line of best fit also known as

A

Least squares regression line

34
Q

What is the additive model?

A

TS= Trend + Seasonal variation

35
Q

What is multiplicative model?

A

TS = T x SV

36
Q

How to deseasonalise data

A

Remove effect or seasonal variance

Do opposite of seasonal variation

37
Q

How to inflate using index’s

A

Index in later period
Cash flow x ———————————
Index in earlier period

38
Q

How to deflate using index numbers

A

Index in earlier period
Cash flow x ———————————
Index in later period

39
Q

What are the 4 types of standards?

A

Ideal standard - no defective units, no idle labour and no wastage
Attainable standard - realistic level of efficiency, some expected wastage
Basics standard - nothing has changed (normally out of date)
Current standard - current level (no motivation to improve

40
Q

How do you calculate overhead cost variance?

A

Actual production units should cost - what they did cost

41
Q

How do you calculate variable overhead expenditure variance?

A

Actual hours worked should cost - actual hours did cost

42
Q

How to calculate variable overhead efficiency variance?

A

Actual production units should take hours - did take hours = variance hours x standard hourly cost

43
Q

How to calculate fixed overhead variance?

A

Fixed overhead absorbed - actual fixed overhead

44
Q

Fixed overhead expenditure

A

Budgeted fixed overhead - actual fixed overhead

45
Q

Fixed overhead volume variance

A

Budgeted production volume - actual production volume = unit variance x OAR per unit

46
Q

What 6 things do you consider when deciding whether to investigate a variance?

A 
The size of the variance 
Controllability of the variance 
Cost of investigation 
Type of standard cost used 
Trends in variance 
Interrelationship between variance
47
Q

4 stages of product life cycle

A

Introduction stage
Growth stage
Maturity stage
Decline stage

48
Q

What is value analysis?

A

Each aspect of the production process can be investigated to determine whether it can be achieved at a lower cost without compromising on quality, increasing wastage or creating low staff morals. Encourages continuous improvement.

49
Q

What is value engineering?

A

The same process as value analysis, but takes place at the planning stage of the product. Significant costs can be eliminated by thinking carefully about what is going to happen.

50
Q

When is target costing used?

A

When selling price is determined by the market and there is a desired profit

51
Q

Advantages of target costing (4)

A

1) Shows commitment to gain competitive advantage
2) Product created from expectation of the customer and therefore the cost is also based on similar lines
3) Approach to designing and manufacturing products becomes market driven
4) Seeking to achieve new market opportunities for the best value for money rather than just the lowest cost

52
Q

Disadvantages of target costing (4)

A

1) A lengthened development cycle, delayed launch of product
2) Closing the gap can mean reducing quality of inputs to reduce production costs
3) Not suitable for service industry as it is labour driven
4) large amount of cost cutting can have a detrimental effect on staff

Ratios/performance Indicators (7 decks)

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