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LUBS1245 - Introductory Management Accounting Flashcards

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1
Q

Define accounting

A

The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information

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2
Q

Describe the 6 stages in a decision making process

A
  1. Identify objectives
  2. Alternative actions
  3. Select appropriate actions
  4. Implement decisions
  5. Compare plan with actual outcome
  6. Respond to differences form plan
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3
Q

What are the 3 main roles of management accounting?

A

Score keeping, attention directing and problem solving

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4
Q

What is cost accounting?

A

Cost accounting is an application if management accounting and it is the recording of planned and actual costs of products/services/departments for internal reporting and valuation of inventory for external reporting

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5
Q

Cost object

A

Any activity for which a separate measurement of cost is required

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6
Q

Cost unit

A

A unit of production for which management wishes to collect the costs incurred

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7
Q

Cost drivers

A

Any factors that affect costs

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8
Q

What is a cost collective system? And describe the 2 stages

A

A system that accounts for costs in 2 broad stages.
1. Accumulates costs by classifying them into certain categories
2. Assigns costs to cost objectives

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9
Q

Standard costs

A

Standards costs are target costs that are pre-determined and should be incurred under efficient operating conditions

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10
Q

Direct costs

A

Direct costs are those that can be specifically and exclusively traced to the cost object

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11
Q

Indirect costs (overheads)

A

Costs that cannot be specifically and exclusively traced to the cost object

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12
Q

Product costs

A

Costs associated with goods/services purchased or produced for sale to customers

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13
Q

Period costs

A

Costs that are treated as expenses in the period to which they relate

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14
Q

Relevant costs

A

Future costs that vary with the decision under consideration

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15
Q

Irrelevant costs

A

Costs that are the same irrespective of which deduction is undertaken

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16
Q

Incremental costs (differential costs)

A

Difference in terms of cost between each alternative course of action being considered

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17
Q

Marginal costs

A

Additional cost of one extra unit of output

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18
Q

Incremental revenue

A

Difference in terms of revenue between each alternative course of action being considered

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19
Q

Marginal revenue

A

Additional revenue from one extra unit of output

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20
Q

What is cost behaviour?

A

The response of costs to changes in circumstances and levels of activity or production volumes

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21
Q

4 basic cost classifications

A
  1. Variable costs
  2. Fixed costs
  3. Stepped costs
  4. Semi-variable costs
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22
Q

Variable costs

A

Costs that vary as a function of level of output and level of sales

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23
Q

Fixed costs

A

Costs that are likely to remain constant over a range of output levels and are payable regardless of output produced

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24
Q

Why may curvilinear functions be a better representations of actual cost behaviour?

A
  • Extra unit of production may cause a less than proportional increase in costs
  • Extra unit of output may cause a more than proportional increase in costs
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25
Stepped costs
Costs that are associated with input factors which cannot be increased in very small amount but can be increase only in discrete steps
26
Semi-variable costs
Costs that have fixed and variable components
27
Break even formula
BE = fixed costs / contribution
28
Operating gearing formula
OG = Fixed costs / total costs
29
Give 4 disadvantages of CVP analysis
- Technique is widely used - Need to make assumptions about stepped costs and fixed costs have to be divided between products if selling multiple - It focuses on only one product and not a portfolio - Ignores economies and diseconomies of scale
30
What does CVP stand for?
Cost Volume Profit analysis
31
Give the 3 relevant costing principles
1. The cost varies with the decision 2. It is a future cost 3. It relates to cash-flow
32
What are the 2 types of full costing?
1. Traditional costing method 2. Activity based costing (ABC) method
33
What are 2 ways in which cost assignment of indirect costs can be performed?
- Cause-and-effect allocation - Arbitrary allocation
34
Describe cause-and-effect allocation of indirect costs using an example
For a supervisor who spends 30% of their time supervising production of one product, then we allocate 30% of their labour cost to that product
35
Describe arbitrary allocation of indirect costs using an example. What is the main problem with this type of allocation?
For a supervisor, you could allocate on the basis of the floor space that each production line takes up. However, there is not necessarily a lie between the floor space and the supervisor cost.
36
7 steps of handling overheads on a cost centre basis
1. Allocate specific cost centre overheads to the relevant cost centre 2. Apportion general overheads between cost centres 3. Add allocated and apportioned overheads to find the total for each cost centre 4. Apportion service cost centre cost to product cost centres 5. Sum product cost centre overheads 6. Calculate a cost centre overhead absorption rate for each product cost centre 7. Cost units absorb overheads as they pass through product cost centres
37
Over-absorption of overheads
When overheads charged to products or services are greater than the overheads actually incurred
38
Under-absorption of overheads
When overheads charged to products or services are less than the overheads actually incurred
39
Price taker
A price taker is a firm that has little or no influence over the selling prices of their products/ services
40
Price setter or price maker
A price setter is a firm that has some influence over the selling price of their products or services
41
Is cost plus pricing mainly use by price takers or price makers
Price makers
42
Mark up (%) formula
Mark up (%) = [(SP - cost) / cost] X 100
43
Margin (%) formula for pricing
Margin (%) = [(SP - cost) / SP] X 100
44
What is a budget?
A budget is a financial plan for implementing management decisions
45
What is the budgetary process?
The budgetary process or budgeting is the process by which a business develops and coordinates these plans and monitors the plan against reality
46
9 steps of the planning and control budgeting process
1. Establish mission and objectives 2. Undertake a position analysis 3. Identify and assess the strategic options 4. Select strategic options and set long term plans 5. Prepare budgets 6. Perform and collect information on actual performance 7. Identify variances 8. Respond to variances and exercise control 9. Revise plans and budgets if necessary
47
9 steps of the budgetary process
1. Establish responsibility for the process 2. Communicated budget guidelines to relevant managers 3. Identify key or limiting factors 4. Prepare budget for area of the limiting factor 5. Prepare draft budgets for all other areas 6. Review and coordinate budgets 7. Prepare the master budgets 8. Communicate to all interested parties 9. Monitor actual performance relative to budget
48
Give 4 disadvantages of traditional budgeting
- Rigid - Time consuming - Focuses too much on short term - Disconnected from strategy
49
What are 3 alternatives to traditional budgeting?
Zero-based budgeting Activity based budgeting Beyond budgeting
50
3 reasons for adverse variance of sales volume
- Poor sales staff performance - Deterioration in market conditions - Lack of goods/services to sell
51
2 reasons for adverse variance of sales price
Poor sales staff performance and deterioration in market conditions
52
3 reasons for adverse variance of materials usage
- High waste - Poor quality materials lead to extra waste - Problems with machinery
53
2 reasons for adverse variance of materials price
- Using higher quality material than planned - Changes in market conditions resulting in suppliers charging more
54
2 reasons for adverse variance of labour efficiency
- Poor training - Lower skilled workers than planned
55
3 reasons for adverse variance of labour rate
- Poor HR performance - Higher skilled workers than planned - Change in labour market conditions
56
2 reasons for adverse variance of fixed overheads expenditure
- Poor cost control - Increases in costs not taken account of in budget
57
What are the 4 capital investment appraisal techniques?
1. Accounting rate of return (ARR) 2. Payback period (PBP) 3. Net present value (NPV) 4. Internal rate of return (IRR)
58
Accounting rate of return formula
ARR (%) = (Average annual operating profit / average investment to earn that profit) X 100
59
3 advantages of ARR
- Simple to calculate - Uses readily available information - Considers whole life of project
60
3 disadvantages of ARR
- Uses profit instead of cash flow - Ignores the size and timing of cash flows - Setting target ARR can be judgemental
61
Payback period formula
( - cumulative cashflow at start of payback year / cashflow in payback year) X 12
62
2 advantages of PBP
- Emphasises liquidity - Uses cashflows and thus bypasses the problems with using accounting profits
63
2 disadvantages of PBP
- Ignores cash flows after PBP so not all relevant information is taken into account - Not concerned with wealth maximisation and only is concerned with paying it back quickly
64
Return on investment formula
ROI = Accounting net income / total investment
65
Residual income formula when used to evaluate a department
RI = department pre-tax profit - (department investment in assets X interest charge)
66
Residual income formula when used to evaluate a manager
RI = controllable profit - (investment controllable by manager X interest charge)
67
Economic value added
EVA = Conventional divisional profit based on GAAP ± Accounting adjustments - Interest on divisional assets
68
Materials price variance formula
= (quantity of materials actually used X budgeted price per unit of material) - actual materials cost
69
Materials usage variance formula
= (quantity of materials actually used - quantity of materials in flexible budget) X budgeted price per unit of material
70
Labour efficiency variance formula
= (amount of labour hrs actually used - amount of labour hrs in flexible budget) X budgeted price per hour of labour
71
Labour price variance formula
= (amount of labour hrs actually used X budgeted price per hour) - actual labour cost

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