Improvments Flashcards
(92 cards)
1
Q
High-Low budgeting process?
A
- Note highest and lowest activity levels
- Work out variable cost per unit
- Work out fixed cost per unit
2
Q
High-Low: Variable cost per unit
A
(Ch-Cl)/(Ah-Al)
3
Q
High-Low: Fixed cost
A
Total cost (at activity level) minus variable cost (at activity level)
4
Q
Time series analysis
A
- Calculate trend
- Calculate seasonal variation
5
Q
Time series analysis: Ways to calculate trend
A
- High-Low
- Linear regression
- Moving averages
6
Q
Time series analysis: Ways of calculating seasonal variation
A
- Additive (diff)
- Multiplicative (%)
7
Q
Time series analysis: Moving averages
A
- Select appropriate cycle length
- Note cycle one total
- Note cycle one average
- Repeat , moving one PERIOD
8
Q
What is linear regression?
A
Line of best fit
9
Q
Payback period
A
Initial payment/Annual cashflow
10
Q
Initial ARR
A
Average annual profit/Initial investment
11
Q
Average ARR
A
Average annual profit/Average investment
Average investment = (initial + Final/Scrap)/2
12
Q
Terminal value
A
X(1+r)^n
13
Q
Present value
A
X/(1+r)^n
14
Q
PV of annuity
A
(X/r)(1-(1/(1+r)^n))
15
Q
PV of perpetuity
A
Cashflow/Rate
16
Q
Delayed annuities
A
- Annuity for no. years
- Then discount
17
Q
Discounted NTV =
A
NPV
18
Q
Discounted payback period
A
Time for NPV to be positive.
Use trial and error or table.
19
Q
What is IRR?
A
The discount rate where the NPV is zero
20
Q
When should you accept a project using IRR?
A
When the discount rate is lower than the IRR.
21
Q
IRR by linear interpolation
A
- Calculate NPV at 2 DRs
- IRR = L + Ln((H-L)/(Ln-Hn))
22
Q
IRR with even cash flows
A
- Cumulative DF = Initial investment/Annual Cashflow
- Look at year column of life of project for closest value to cumulative DF
23
Q
IRR of perpetuity
A
Annual inflow/Initial investment
24
Q
What will pay rises improve?
A
Performance, so efficiency.
25
ZBB
1. Managers may not have skills
2. Discretionary spending at risk
3. Every manager included
4. Only discretionary spending budgeted
26
Is transfer pricing related to consumer cost of capital?
No - Unrelated to customers.
27
Receivables days at period end
(Closing receivables/Sales)x365
28
When calculating amount extra to buy of a material, what do you need to look at?
Contribution MINUS that material
29
What is the difference between marginal and absorption COS?
The ABSORPTION cost of the CHANGE in inventory
Absorption will be higher
Because it is attached to the unit
30
What is the difference in profit between marginal and absorption costing?
Change in inventory * overhead cost per unit
31
Which costing method includes non-production costs?
None
32
Production costs are based on what?
Based on amount PRODUCED, not sold.
33
Markup
% of COST
34
Margin
% of SALES
35
Expenditure
PER hour
36
Efficiency
NUMBER of hours
37
Sales volume variance
Units sold x CONTRIBUTION
38
Coefficient of determination
(Correlation coefficient)^2
39
Changing a flexed cost’s sales
You need to work you the part that is fixed costs first
40
Prime costs
Materials and labour
Doesn’t include production costs
41
Can IRR be calculated without knowing cost of capital?
Yes
42
Is IRR a measure of absolute profitability?
No
43
Equal Annual Cost (EAC)
NPV/Annuity factor (for no. years of investment)
44
By what % would it have increased by? 140% or 40%?
140%
45
Undiscounted cash flows =
When DF is zero
46
IRR Graph
Y: NPV
X: DF/ROR
47
2 IRRs
Assume either a u or n shaped graph
Accept if DF gives +ve NPV
(Normally when less than IRR)
48
Is absorption rate based on production or sales?
Completely based on production. Because absorption = absorbed fixed PRODUCTION overheads.
49
Is closing inventory proportional to absorption or marginal profit?
Absorption profit
50
What to not forget when calculating profit with absorption costing?
Under/Over absorption
51
How to calculate something increasing by 0.5 a month
The second month ISNT 1, it’s 0.5^2 because it’s 0.5 of next month.
52
ABC
Based on ONE factor LIKELY to drive that cost.
53
Are financial or non-financial measures ultimately more important for an established business?
Financial
54
May non-financial measures discourage dysfunctional behaviour?
Yes
By staff AND managers
55
Is no. sales a good measure of satisfaction?
No
56
Is resignation a good measure of morale?
No
57
Equations to maintain the rank A,B,C
1. A>B
2. B>C
Just 2 equations
Can then be added e.g. 5>x>10
58
Supplier payment
Opening cost + Cost - Closing cost
59
What does a creditor mean in terms of payments?
They AREN’T paid that period
So the REST IS
1. This is my trade creditors at the start
2. This is my trade creditors at the end
3. This is the extra cost in the month
4. So this is what I must have paid
60
Absorption cost
The TOTAL cost, including marginal/variable costs, not just the absorption rate.
Rate v Cost
61
Rate variance
How much SHOULD actual production cost at BUDGET RATE
Minus: How much it actually costs
62
Efficiency variance
(How many hours that SHOULD take at BUDGET NO. HOURS minus how many hours it actually took) times BUDGET RATE
63
NTV
Works BACKWARDS from end time (in the future)
But is still x(1+r)^n (not x/(1+r)^n)
64
Is NPV based on cash flow or profit?
Cash flow
Not (pre-depreciation) profit
65
Using limiting factor analysis, should you still produce units even when the contribution per limiting factor is less than the cost of buying the limiting factor?
Yes
66
Does contribution include absorbed fixed costs?
No
67
How to work out profit from contribution
Contribution - Fixed overheads
I.e. Selling price - Variable costs - Fixed overheads
68
“40% of sales of £3m”
Are the sales £3m or 40%?
The sales are £3m
69
Does bad debt provision go on a cash budget?
No
Neither does depreciation etc.
70
If a company receives a loan of £10k on 30 Jun, and their bank balance on 1 Jul is £5k, what is their opening balance in Jul?
£5k
71
If batch size is x, how many batches will you need?
Total/x
72
What output is relevant to planning rate variance?
Actual output (still)
Budgeted hours (and rate), but actual production
73
What unit is margin of safety in?
No. units
Not £
74
What are direct expenses related to?
A single unit sold
75
Working out actual profit compared to budget with marginal costing
1. Work out budgeted profit (for actual sales)
2. Adjust for under/over absorption (fixed overhead variance). For each fixed cost so if there are 2 (e.g. sales and production) work out the under/over absorption separately for each)
76
How to work out actual absorption costing profit from budget
1. Work out marginal costing profit
2. Adjust for change in inventory * OAR
77
What three things does marginal costing take into account?
1. Relevant costs
2. Opportunity costs
3. Scarce resources
78
Is marginal costing useful in times of scarce capacity?
Yes
Because it is good at short term one-off decisions
79
Return On Capital Employed (ROCE)
Profit margin x Asset turnover
80
Profit margin
Profit/Turnover (revenue)
I.e. How much turnover is profit
81
Asset turnover
Turnover/Capital employed
82
Calculating margin of safety
1. Work out (total) contribution per (total) sales
2. Work out break even point in terms of sales
3. Work out margin of safety: Budgeted sales - Break even point (in terms of sales)
83
Does transfer pricing based on marginal cost +10% prevent dysfunctional behaviour?
No
84
Are transfers based on opportunity cost unduly complicated in practice?
Yes
85
Are transfers based on market price unfair to buyers?
Yes
Because it’s cheaper to sell to internal customers
86
Will transfers at marginal cost alone give the seller an unfair proportion of profit?
No
They will give the buyer and unfair proportion of profit. Because they will take all the fixed costs.
87
What to not forget in cash budgets?
Removing deprecation, even if included in a payment
88
What is rate variance based on?
HOURS
Not units
89
How to work out break even sales
1. Work out break even contribution
Because breakeven point is in terms of contribution to fixed costs
2. Work out sales from contribution
E.g. by contribution ratio
90
How to find out the amount to invest regularly now to reach a certain amount later
1. Discount later amount to now
2. Divide by annuity factor
+1 if first payment is immediate
91
What is sales volume variance in terms of?
CONTRIBUTION
92
What is the goal PV of an alternative investment to achieve the same PV as the first investment?
NPV of first investment plus initial outlay of alternative investment
