Management Accounting

Question 1

investment appraisal

Answer 1

an evaluation of the attractiveness of an investment

Question 2

give examples of investment appraisals

Answer 2

ARR,NPV,payback

Question 3

budgets

Answer 3

A detailed plan of income and expenses expected over a certain period of time.

Question 4

why are budgets set

Answer 4

monitor performance
control expenditure
provide direction
communicate targets

Question 5

what is laid out in an effective budget system

Answer 5

plan of action

managerial responsibilities clearly defined

Question 6

what is a variance

Answer 6

difference between actual and budget figures

Question 7

what is a favourable/positive variance

Answer 7

better than expected

Question 8

what is an adverse/unfavourable variance

Answer 8

worse than expected

Question 9

what factors affect the significance of a variance

Answer 9

whether its positive/negative
was it forseen
how big was the variance

Question 10

disadvantages of budgets

Answer 10

only as good as the data being used to create them.
inflexibility in decision-making
changed as circumstances change
time consuming process
short term decisions to keep within budget rather the right long term decision which exceeds the budget

Question 11

how can budgets affect employees

Answer 11

unrealistic-demotivation
department rivalry
name+blame culture is someone goes over budget

Question 12

advantages of payback

Answer 12

Simple easy to calculate + easy to understand results
Focus cash flows – good for businesses where cash is a scarce
compare competing projects

Question 13

disadvantages of payback

Answer 13

Ignores cash flows which arise after the payback has been reached
May encourage short-term thinking
Ignores qualitative aspects of a decision
Doesn’t create a decision for the investment

Question 14

payback

Answer 14

The length of it takes for an investment to recover the initial expenditure

Question 15

ARR

Answer 15

looks at the total accounting return for a project to see if it meets the target retur

Question 16

advantages of ARR

Answer 16

ARR provides a percentage return which can be compared with a target return
looks at the whole profitability of the project
Focuses on profitability – a key issue for shareholders

Question 17

disadvantages of ARR

Answer 17

Doesn’t account for cash flows – only profits

time value of money

Question 18

NPV

Answer 18

net present value

calculates monetary value now of projects future cash flow

Question 19

what does a positive NPV suggest

Answer 19

the investment project should go ahead

Question 20

what does a negative NPV suggest

Answer 20

project should be rejected

Question 21

advantages of NPV

Answer 21

Takes account of time value of money
Looks all the cash flows involved through life of project
Use of discounting reduces the impact of long-term, less likely cash flows
Has a decision-making mechanism – reject projects with negative

Question 22

disadvantages of NPV

Answer 22

More complicated method
Difficult to select the most appropriate discount rate
The NPV calculation is very sensitive to the initial investment cost

Question 23

cash flow

Answer 23

the movement of cash into and out of the business

Question 24

net cash flow

Answer 24

difference between the total cash inflows and the total cash outflows.

Question 25

opening balance

Answer 25

balance in the bank at the start of a period

Question 26

closing balance

Answer 26

this is the amount in the bank at the end of the month.

Question 27

reasons for cash flow problems

Answer 27

too much stock (stock is cash tied up) low profits seasonal demand

Question 28

how does a change in cost and revenue affect cash flow

Answer 28

more revenue-more inflows | more costs-more outflows

Question 29

how can a business improve its cash flow

Answer 29

``` cut costs cut stock delay payments to suppliers reduce credit period delay expansion plans ```

Question 30

how would reducing credit period help cash flow

Answer 30

pay for purchase quicker | means revenue comes it quicker

Question 31

how does cutting stock help cash flow

Answer 31

reduce the amount of cash tied up by buying and holding raw materials or goods for resale

Question 32

benefits of cash flow

Answer 32

``` helps adjust(know your cashflow position see if you need to change anything) see if you'll be able to make payments ```

Question 33

drawbacks of cash flow

Answer 33

forecasts are only a prediction | don't show profit and loss

Question 34

working capital

Answer 34

Working capital = current assets less current liabilities | provides a strong indication of a business' ability to pay is debts

Question 35

working capital cycle

Answer 35

uses cash to acquire (stocks) stocks put to work- goods+ services produced. sold to customers Some customers pay in cash but others buy on credit. Eventually they pay and these funds used to settle any liabilities of the business

Question 36

overhead costs

Answer 36

Costs not directly involved in the production process.

Question 37

revenue

Answer 37

Money made from the sale of goods and services

Question 38

costs

Answer 38

Amounts incurred by a business as a result of its trading operations

Question 39

profit

Answer 39

Profit measures the return to risk when committing scarce resources to a market or industry

Question 40

average cost

Answer 40

Total cost per unit of output

Question 41

fixed cost

Answer 41

dont vary with level of output

Question 42

variable costs

Answer 42

vary with level of output

Question 43

direct cost

Answer 43

directly attributable to a unit output

Question 44

price

Answer 44

quantity of payment given by one party to another in return for one unit of goods or services

Question 45

what are fixed costs also know as

Answer 45

indirect or overheads

Question 46

importance of costs to a business

Answer 46

influence price | influence level of profit

Question 47

how do costs effect decision making

Answer 47

will want to remain competitive | may have think about cutting costs

Question 48

cost centre

Answer 48

specific part of business where costs can be identified and allocated

Question 49

benefits of cost centres

Answer 49

``` highlight departments that are performing well motivate workforce (reduction in costs in a certain department might give bonus payment) encourage managers to look for more efficitent production techniques bring costs down ```

Question 50

drawbacks of cost centres

Answer 50

expensive overlap in production process can't easily allocate costs some costs are external e.g 2008 oil prices conflict between departments

Question 51

profit centres

Answer 51

see which parts of business profits are coming from | see which are most profitable

Question 52

absorption costing

Answer 52

all indirect cossts are absorbed by different cost centres | output of each

Question 53

how do you work out absorption costings

Answer 53

amount of output from 1 department/product divided by total output of all departments/ products gives a percentage find amount of this percentage from total overheads

Question 54

marginal costing

Answer 54

overheads are ignored only variable costs considered /

Question 55

how do you work out marginal costing

Answer 55

contribution per unit=price-variable cost per unit | total contribution=salesXcpu

Question 56

benefit of absorption costing

Answer 56

ensures all overheads are covered

Question 57

usefulness of costing to stakeholders

Answer 57

shareholder look at level of profit for dividends employees affected by accuracy, gain a bonus or lose job suppliers-see how much willing to pay

Question 58

break even

Answer 58

fixed costs/ (revenue-variable costs)

Question 59

margin of safety

Answer 59

(actual sales-break even point)/ selling price (PU)

Question 60

break even

Answer 60

when revenue and costs are equal

Question 61

stepped fixed costs

Answer 61

fixed costs in the short term | e.g new machine increased fixed cost, purchasing machine stays same regardless of output

Question 62

strengths of break even

Answer 62

how long it will take before a start-up reaches profitability Helps entrepreneur understand the viability of a business proposition, Helps entrepreneur understand the level of risk involved in a start-up Calculations are quick and easy

Question 63

limitations of break even analysis

Answer 63

Sales are unlikely to be the same as output, wasted output sell more than one product, so break-even for the business becomes harder to calculate should be seen as a planning aid rather than a decision-making too

Question 64

special order decision

Answer 64

businesses need to decide if to accept orders that are on special terms

Question 65

what does a business need to consider with special orders

Answer 65

Calculate any extra variable costs associated with the order Assess if sufficient capacity to meet order Decide if it increases contribution and profit