Management Accounting Techniques Flashcards

Question

Material Costs (CH2) What is Maximum Inventory Level?

Answer 1

- **The Maximum Inventory Level** - the amount of storage space available.

Answer 2

- **The Inventory Buffer** - the minimum level that inventory should fall to before the new order from the supplier is delivered.

Answer 3

- **The Re-order Level** - the point at which a new order is to be placed.

Answer 4

- **The Lead Time** - how long it takes for new inventory to be delivered after being ordered.

Answer 5

**Inventory Buffer =** Re-order level - (average usage x average lead time)

Answer 6

**Re-Order Level =** Inventory buffer + (average usage x average lead time)

Answer 7

**Max Reorder Qty =** Max Inventory level - Inventory buffer

Answer 8

**Min Reorder Qty =** Re-order level - Inventory buffer

Answer 9

**Maximum Inventory level =** Inventory buffer + Max reorder qty

Answer 10

- **Needs of the business** - e.g, if an inventory item is being used less frequently than before, the calculations will need to be revised to suit current and future needs. - **Obsolescence of inventory** .e.g. if spare parts are kept for a particular make and model of vehicle, inventory levels will need to be run down when the vehicles are being replaced by those of a different make and model. - **Seasonal variations** affecting usage and inventory levels - e.g. a business using oil for heating may be offered a cheaper price when usage is low in the summer which may make it worthwhile to buy; by contrast, when usage is high in the winter, the supplier's price and lead times may increase.

Answer 11

- Production - Selling and Distribution - Administration and Finance

Answer 12

- Materials - Labour - Expenses (Overheads)

Answer 13

- Direct - Indirect

Answer 14

- Fixed - Variable - Semi-Variable - Stepped

Answer 15

- Raw materials and Components - Work-in-progress goods - Finished Goods

Answer 16

- Goods for sale

Answer 17

Consumable Materials

Answer 18

Determined by the amount of storage space available in the warehouse, shop or office stationery cupboard.

Answer 19

The minimum level that inventory should fall to before the new order from the supplier is delivered. Calculated as = Re-order level - (average usage x average lead time)

Answer 20

How long it takes for new inventory to be delivered after being ordered.

Answer 21

**The point at which a new order is to be placed** - this is often the most critical factor to determine. Re-order level = Inventory Buffer + (average usage x average lead time)

Answer 22

* If re-order amounts are **too large**, too much inventory will be held, which will be an **expense** to the business * if re-order amounts are **too small**, the **expense of constantly re-ordering** will outweigh any cost savings of lower inventory levels, and there will be the danger that **the item might run out.**

Answer 23

The economic order quantity (EOQ) - **can be calculated by a mathematical formula** which involves a number of different costs and other figures: * **Ordering cost** - the administration cost of placing each order. * **Inventory Holding Cost** - expressed as the cost of holding one unit of inventory per year. * **Annual usage** - the number of inventory units used per year.

Answer 24

Square Root of: 2 x annual usage x ordering cost ———————————————— Inventory Cost = Economic Reorder Quantity

Answer 25

* The EOQ, helps struck a **balance between the cost of placing an order and the cost of holding inventory** * EOQ **represents the most efficient level of order to place** because it minimises the total cost of ordering and storage. * Once the EOQ has been calculated, it is used as the quantity of inventory to be ordered each time an order is placed.

Answer 26

The lower of Cost and Net Realizable Value.

Answer 27

* **IAS 2** allows inventories to be valued using only two main methods; **FIFO** and **AVCO**. The third, **LIFO** is only use for cost accounting purposes but not permitted for financial accounting (Not examinable). * Once a method is adopted, it has to be consistently applied unless there is a good reason not to do so.

Answer 28

**1. FIFO (first in, first out)** - Inventory is **issued in order that it was bought**, thus valued at the oldest cost price. - Meaning inventory held in stores is valued at the most recent cost price.

Answer 29

**2. LIFO (last in, first out)** - Valuation of inventory issued is **based on the cost of the inventory most recently purchased.** - Hence inventory held in stores is valued at the older cost price.

Answer 30

3. AVCO (average cost) **Overall average cost** (or average weighted cost) is calculated for the inventory held in stores or issued using the formula: Average Cost = **Total cost of goods in store / Number of goods in store** Meaning **a new average cost must be calculated each time a new inventory is purchased.**

Answer 31

When calculating the lower of cost and net realisable value, note should be taken of: - **separate items of inventory**, or - **groups of similar items** This means that **the inventory valuation rule' must be applied to each separate item** of inventory, **or each group** or category of similar inventory.

Answer 32

For raw materials, the **comparison is made between cost** (which can be found using techniques such as **FIFO, LIFO, or AVCO**) and **net realisable value**.

Answer 33

By using the full production cost by including: * **Direct materials** * **Direct labour** * **Production overheads**

Answer 34

• a debit entry records a gain in value, an asset or an expense • a credit entry records the giving of value, a liability or an income item

Answer 35

* Inventory account * Production account * Payables ledger control account * Bank account

Answer 36

Dr Inventory (asset gained) Cr Trade payables (creditors) control

Answer 37

Dr Inventory Cr Bank

Answer 38

Dr Production Cr Inventory

Answer 39

Dr Inventory Cr Production

Answer 40

Direct labour cost is the wages paid to those who work on a production line, are involved in assembly, or are involved in the output of a service business.

Answer 41

The three main methods for direct labour are: 1. **Time rate** (Basic pay) - based on normal time worked 2. **Overtime** - based on extra time worked 3. **Piecework** - based on amount of work carried out 4. **Bonus** - 'add on' pay to normal time rate and overtime

Answer 42

**Time Sheets** - record employees' hours **Clock Cards** - employees 'clock in' at the start of work, and 'clock out' at the end **Piecework Tickets** - completed by employees who work on a batch of output **Job Cards** - where each employee records the amount of time spent on each job **Route Cards** — which are used to follow a product through the production process — on which employees record the amount of time they spend working on the product **Computer Cards** — 'swipe' cards which link direct into the computerised payroll are increasingly being used by employers to record attendance

Answer 43

Time rate is often used **where it is difficult to measure output**, and **where quality is more important than quantity**. Variations include a high time rate, used to motivate employees where a higher standard of work is required.

Answer 44

- **Easy to calculate** - No requirement to establish time allowances and piecework rates - The **employee receives a regular wage**, unaffected by fluctuations in output - **The employer pays a regular amount**, making planning for **cash flows easier** - **Can be used for all direct labour employees** - **Quality does not suffer** as a result of hurried work

Answer 45

Both efficient and inefficient employees receive the **same wage** **No incentive** is given to employees to work harder **Slower working** will not affect basic wage, but may lead to overtime **More supervisors** are needed to ensure that output is maintained.

Answer 46

Piecework rate is used where the quantity of output is important, and there is less emphasis on quality.

Answer 47

Variations include: - Piecework with **guaranteed time rate** - **Differential piecework system**, where **a higher rate is paid for all output beyond a certain level**, e.g. 50p per unit for the first 100 units each day, then 60p per unit thereafter - **Attendance allowances**, paid to **encourage employees on piecework to attend each day**, thus ensuring that the production-line can be staffed and operated every working day

Answer 48

* Payment of **wages is linked directly to output** * More **efficient workers can earn more** than those who are less efficient * Work is done quicker and **less time is wasted**

Answer 49

- **Not suitable for all** direct labour employees - Pay is reduced if there are **production problems**, e.g. machine breakdown or shortage of materials - **Product quality** is likely to decrease - **More inspections** may be needed - Control systems needed to check the amount produced by each worker more **complex pay calculations** - May be difficulty in **agreeing piecework rates** with employees - The employer **cannot plan ahead for wages** costs so easily, as they may be irregular amounts

Answer 50

Bonus systems are used to **encourage employees to be more efficient** in an environment where the work is not so repetitive. Variations include an accelerating premium bonus — which is an increased bonus paid for higher levels of output, and group bonuses paid to groups of employees who achieve increased output

Answer 51

Wages linked to output, but minimum wage is guaranteed Each week **work is done quicker and less time is wasted** more efficient workers can get more bonus Bonus system **can be applied to the entire workforce**

Answer 52

- A bonus is **not paid if circumstances beyond employees control prevent work,** e.g. machine breakdown or shortage of materials - **Quality of finished product may be low** - **More inspections may be needed** and additional control procedures - **Pay calculations may be more complex**

Answer 53

Reward should be **related to effort and fair** to all staff The method should be **easy to manage** and administer, and **cheap and efficient** to run It should be **easy for employees to understand** how pay is calculated Payment should be made **at regular intervals** and soon after the event, e.g. employees on piecework should be paid in the week after the production has been achieved The **principles of the scheme should remain constant**, but there should be **flexibility to deal with changes** in production techniques

Answer 54

Direct costs:, * labour costs of production-line employees Indirect costs:, * labour costs of other employees, such as supervisors, office staff, etc

Answer 55

When production-line employees work overtime they are **usually paid at a rate above the time rate.** However, where a customer requests overtime to be worked to get a **rush job completed**, then the **full overtime rate is charged as direct labour, and passed on as a cost to the customer.**

Answer 56

**Idle time occurs when production is stopped through no fault of the production-line employees**: - for example, a machine breakdown, or a shortage of materials. **Employees paid under a piecework or a bonus system will receive time rate for the period of the stoppage**. Such wages costs are normally charged to **overheads as indirect labour**. Similarly, time spent by direct workers on non-productive work — e.g. attendance on a training course - would also usually be treated as an overhead.

Answer 57

- **When production employees are paid on the basis of output, a calculation of equivalent units may need to be required.** - This happens when **part of the production at the end of the accounting period is work-in-progress** for the labour content. Example: - 10,000 units have been completed during the month and, at the month-end, 2,000 units are work-in-progress and are 50 per cent complete for the labour content. The equivalent units completed for the month will be: 10000 units + (2000 units x 50%) 11,000 equivalent units

Answer 58

A wages control account links to the payroll accounting system. It is used to charge labour costs to the various responsibility centres of a business. 1. **Direct labour costs are charged to production** 2. **Indirect labour costs are charged to production overheads** 3. **Administration labour costs are charged to non-production overheads**

Answer 59

Dr Production Cr Wages Control a/c

Answer 60

Dr Production Overheads Cr Wages Control a/c

Answer 61

Dr Non-Production Overheads Cr Wages Control a/c

Answer 62

Direct Cost can be identified directly with each unit of output.

Answer 63

Indirect Cost cannot be identified directly with each unit of output.

Answer 64

**Direct Materials + Direct Labour + Direct Expenses** = Total Direct Costs (Prime Costs)

Answer 65

**Indirect Materials + Indirect Labour + Indirect Expenses** = Total Overheads

Answer 66

In larger businesses and organisations, overheads are usually classified by function: * **Factory or Production,** e.g. factory rent and rates, indirect factory labour or material * **Selling and Distribution**, e.g. salaries of sales staff, vehicle costs, delivery costs * **Administration**, e.g. office rent and rates, office salaries, heating and lighting of office * **Finance**, e.g. bank interest

Answer 67

Allocation of overheads is **charging overheads that are incurred by a responsibility centre entirely to that centre**. **Used when the cost can easily be identified with a specific cost centre** e.g. a department - with its own canteen. Canteen cost allocated to that department. **The costs are charged to the cost centre that incurred the cost**

Answer 68

* **Apportionment is the sharing of overheads over a number of responsibility centres** to which they relate. * **Each centre is charged with a proportion of the overhead cost**. * **Generally used when overheads cannot be allocated**.

Answer 69

Rent - Flooring space Heating - Hours of use Machinery Depreciation - Hours of use

Answer 70

When apportioning rent by floor area (sq metres) 1. **Calculate total** floor area in sq metres for all relevant cost centres 2. **Divide overhead cost by total** floor area to give the cost of rent per square metre 3. **Multiply** cost per square metre by floor area of cost centre. Check result

Answer 71

* They are **departments which provide services within the business**; e.g., maintenance, transport, stores or stationery. * Do not themselves have any cost units to which their overheads may be charged, **the costs of each service department must be re-apportioned to the production departments**. * **A suitable basis of reallocation must be used**, for example: equipment, or on the basis of time spent in each production department * Production departments help produce the units of output (products) e.g. Assembly, Finishing

Answer 72

* Techniques used to charge overheads of service departments to production centres: 1. **Direct apportionment** is used where **service departments provide services to production departments only**. 2. **The step-down method** is used where **service departments provide services to production departments and to other service departments**.

Answer 73

* This is known as 'Absorption' or Recovery, i.e. **the cost of overheads are charged to the cost units which pass through that particular production department**. * **Overhead Absorption Rate (OAR) is the rate used to charge overheads to costs units** (calculated in advance).

Answer 74

**Cost Per Labour Hour** ``` Total Cost Centre Overheads OAR = —————————————— Total Direct Labour Hours ``` **Cost Per Machine Hour** ``` Total Cost Centre Overheads OAR = —————————————— Total Machine Hours ``` **Always Use Budgeted Figures**

Answer 75

* **Overheads are mostly calculated in advance**, i.e. pre-determined. * It is most **unlikely that everything in an organisation would work exactly to plan**. * Therefore the **actual cost of overheads may differ from what may have been absorbed or recovered using the OAR** (i.e. absorbed amount differ from spent amount). - **Over-absorption or under-absorption (recovery) is the difference between the total amount of overheads absorbed (recovered) in a given period and the total amount spent on overheads**

Answer 76

**Transfer production overheads to production:** *Dr* Production *Cr* Production overheads **Over-Absorbed:** *Dr* Production Overheads *Cr* SoPL **Under-absorbed:** *Dr* SoPL *Cr* Production Overheads

Answer 77

Unit cost is the cost producing a single unit.

Answer 78

Unit Cost = Total Cost of Production / Total Number of Units

Answer 79

1. **Prime Cost** - (Direct material and labour costs) 2. **Marginal cost** - (Add all variable production cost) 3. **Absorption cost** - (Marginal cost + Fixed production cost) 4. **Total cost** - (Absorption cost + Fixed non-production costs)

Answer 80

Specific order costing is where c**ustomers order what they want, before it is made**.

Answer 81

Costing methods used by business to collect costs and to calculate the total cost of their output include: - **Job costing** - **Batch costing** Used **in conjunction with absorption costing** to recover the cost of overheads. Remember that **businesses must recover their overheads in the total price charged to their customers**.

Answer 82

Used when **each job can be separately identified from other jobs** and cost are charged to the job. Usually each job is given a unique identifiable number.

Answer 83

1. Customer asks for estimate 2. Job sheet prepared showing total costs 3. Profit added and estimate sent to customer. 4. Estimate accepted, begin job 5. Actual costs charged to job sheet 6. Job completed and dispatched to customer 7. Variances between estimated costs and actual costs calculated 8. Investigate why variances occurred and how to overcome them.

Answer 84

Batch costing is used **when a number of identical items are needed to be produced together** as a batch, e.g. Ten Night T-Shirts. Companies often use Batch Numbers to identify a particular output, including paint and wallpapers. This is because there may be slight variations in production.

Answer 85

Cost per unit = Total Batch Cost / Number of units of output

Answer 86

Appropriate for businesses where **work may be done continuously** rather than in separate jobs.

Answer 87

Two methods of costing continuous work: - Service Costing - Process Costing

Answer 88

This method of costing applies to service industries.

Answer 89

Used **where production is continuous AND item produced is standard** e.g. Mars Bar. **The total costs of the process for a given time period are collected together**.

Answer 90

``` Total costs of all processes Cost per unit =---------------------------------------- Total units produced ```

Answer 91

When calculating cost per unit convert partly completed units into fully completed units. Example: 150 units are 50% complete = 75 units (Equivalent units)

Answer 92

* Transfer from previous process. * Direct labour * Direct material * Direct Expenses * Production Overheads

Answer 93

* Transfer to next process * Transfer to finished goods

Answer 94

1. **Marginal Costing** - (Helps with short term decision-making) 2. **Absorption Costing** - (Used to calculate Inventory valuations and Profits/Loss in FSs) Both use the same product and period costs, but are treated differently according to their behaviour.

Answer 95

Marginal cost is **the cost of producing one extra unit** of output. Only **concerned with Variable product cost** and not much with fixed period costs. Knowing the marginal cost of a unit of output enables the managers of a business to focus on the **contribution provided by each unit**. The contribution is the sales revenue after marginal/variable product costs have been paid. Contribution = Selling Price minus Variable cost Knowing the contribution, a business can work out its profit Total contribution – Total Fixed Cost = Profit

Answer 96

Sales Revenue *less* Variable Production Costs **equals** Contribution *less* Fixed Production Overheads **equals** Profit From Operations

Answer 97

**Absorption costing absorbs all production costs into each unit** of output through the use of overhead absorption rate (OAR). Absorption costing answers the question, ‘**What does it cost to make one unit of output?**’

Answer 98

Direct Materials *add* Direct Labour *add* Direct Expenses *add* Production Overheads (Fixed and Variable) *equals* Absorption Cost Note that the production overheads comprise of the factory costs of indirect materials, indirect labour, and indirect expenses.

Answer 99

Because of the different ways in which marginal costing and absorption costing treat fixed period costs, **the two techniques produce different levels of profit when there is a closing inventory figure**. Under **marginal costing**, the **closing inventory is valued at variable production cost and fixed overhead** charge in full against period profit; By contrast, **absorption cost includes a share of fixed production costs in the closing inventory valuation**. Part of the fixed production overheads included in the closing inventory will therefore be carried forward to the next period’s statement of profit and loss However, for financial statements, absorption costing must be used for inventory valuation purposes in order to comply with lAS 2.

Answer 100

Charges overheads to production on the basis of activities. Identifies what causes overheads to be incurred Uses cost drivers Cost drivers are activities which cause costs to be incurred. By identifying relevant cost drivers, the cost per unit of a product can be calculated based on its use of activities.

Answer 101

Set ups -> Number of Set ups Quality Control -> Number of Quality Inspections Processing orders to suppliers -> Number of Orders Marketing -> Number of Advertisements Telephone Sales -> Number of Telephone Calls made

Answer 102

The main advantages of using ABC: - **Cost information is more accurate** because cost drivers are used to identify the activity which causes costs to be incurred - **It is more objective** because it is able to identify the overhead costs relating to different products, rather than the overheads of the whole business - With its focus on overhead costs, ABC **gives the management of a business a good understanding of why costs are incurred** and how they will be altered by changes in production - It leads to the **more accurate calculation of selling prices** because overhead costs are attributed to the products which use the activities - It **may identify areas of waste** and inefficiency - **Management decision-making is improved**, e.g. in pricing policy - ABC is **appropriate for capital-intensive industries** where overheads are high and complex in nature

Answer 103

**A Budget is a financial plan prepared in advance for a business**. A budget enables decision-making, planning and control.

Answer 104

Identifying cost behaviour **helps with budgeting and decision making**. A business **may be able to increase profits by altering the balance between fixed and variable** costs. For example, a product could either be made through a labour-intensive process or through expensive machinery. Management will need to examine the relationship between the costs with the sales figures and the availability of finance to buy the machinery to determine which method of production would be best.

Answer 105

This is a technique used in **breaking down Semi-Variable costs into their cost elements**. Variable Cost per unit = Difference in Total Cost / Difference in Activity Level (units)

Answer 106

**Budget - Actual = Variance** **Favourable Variance** - Actual sales higher than budgeted OR Actual costs lower than budgeted **Adverse Variance** - Actual sales lower than budgeted OR Actual costs higher than budgeted

Answer 107

1. Set Budget Amounts 2. Compare Budget with Actual Amounts 3. Calculate Total Variances 4. Analyse Total Variances 5. Explain reason for Variances 6. Take Action

Answer 108

- A Fixed Budget remains the same irrespective of level of actual activity - Easy to calculate and understand - Useful where expected activity levels can be estimated with confidence

Answer 109

- A Flexed Budget changes with the level of activity - Takes into account different cost behaviour patterns e.g. Fixed or Variable Costs.

Answer 110

A Rolling Continuous Budget is **continually kept up-to-date by adding a new budget period once the most recent budget period is completed.** This Rolling process continues so that **the business always has a budgets that extends into the future for the same period**. The **Rolling process is often referred to as the Moving Annual Total (MAT)**.

Answer 111

* There is **always a budget that extends into the future** * The **data for the new budget period is adjusted to take note of the current information** from the period just completed * Management of the business will reassess the budget after each budget period * The **focus of management is on one budget period at a time** instead of the whole year * **Seasonal variations are eliminated** because a full year is compared with a full year's budget which means that developing trends can be seen

Answer 112

* It can be **costly and time-consuming** to keep revisiting the planning process to add a new budget period * The focus of the business may be more concerned with updating the rolling budget than controlling actual costs and revenues - The overall budget totals will vary as one period drops out and a new one is added, leading to a **lack of focus on key issues** from those working with the budget. - Adding a new budget period may become a routine activity without full consideration of changes within the business or the wider economy

Answer 113

- Break-Even Analysis - Marginal Costing

Answer 114

• Breakeven point is the output level at which the sales revenue is just enough to cover all cost. • No profit or loss.

Answer 115

* Identifying **fixed and variable costs** required to make a product, helps business to **make decisions about pricing**.

Answer 116

* To help with decision-making, it is important to **identify relevant (avoidable) costs and irrelevant (unavoidable) costs**. * Relevant costs can changed by a decision, irrelevant costs cannot. * **Expected Future costs and revenues** * **Differential costs and revenues**

Answer 117

• Contribution per unit = Selling Price - Variable cost • Total Contribution = Total Sales Revenue - Total Variable costs • Profit (or Loss) = Total Contribution - Fixed Costs

Answer 118

Sales Revenue less Variable Costs equals Contribution less Fixed Costs equals Profit

Answer 119

Break-even point (units) = Fixed Cost / Contribution per unit Break-even Sales Revenue (£) = BEP units x SP per unit On a graph: Where Total Cost = Total Revenue

Answer 120

• Assumes all output sold • All costs and revenues assumed to be linear (straight line) • Fixed costs do not remain fixed at all levels of production, it may be stepped and in a long term variable. • Profit or loss only accurate at points close to current levels of production/sales

Answer 121

• Indicates how much sales can fall before a loss occurs, i.e. The amount that exceeds breakeven point.

Answer 122

Current output - break even output ———————————————x100 Current Output

Answer 123

No. Of units = Fixed costs + Target Profit / Contribution per unit

Answer 124

* The Profit Volume (PV) Ratio - expresses **the amount of contribution in relation to the selling price**. * PV ratio is also referred to as contribution sales (CS) ratio. * It represents the amount or % of each £1 sale available to cover fixed costs and profit.

Answer 125

Contribution PV Ratio=———————— x100 Selling Price

Answer 126

• Before starting a business • When making changes • To measure profits or losses • To answer what if questions • To evaluate alternative viewpoints

Answer 127

* 'Special order' pricing is where a business uses spare capacity to make extra sales of its product at a lower price than its normal selling price. * Normally used once the business is profitable at its current level of output. * Additional sales - at 'special order' prices — can be made at a selling price above marginal cost, but below absorption cost. * The key is to increase profit from additional sales so as to ensure that a contribution to profit is made from the special order.

Answer 128

* Marginal cost equals additional cost as a result of producing one extra unit. * Focuses on contribution of providing one extra unit * Contribution = Selling price - Variable cost * Can be calculated per unit or per batch * Can be used in special order pricing * Can be used to identify the effect of changes in costs and revenues on profit (Includes variable production overheads but excludes fixed production overheads)

Answer 129

• Fixed period costs must be covered • Separate markets for marginal cost • E.g. not to quote marginal cost to customer A and absorption cost to customer B in the same market. • Effect on customers (i.e. Increasing price later on to cover fixed costs may be unattractive to customers) • Problems at product launch • Special Edition Products (to sell off older products at competitive prices)

Answer 130

Expresses the amount of **contribution** in relation to the value of **sales**.

Answer 131

(Current output - Breakeven Output) —————————————————— Current Output

Answer 132

1. Break Even Units x Selling Price 2. Fixed Cost / PV Ratio x 100

Answer 133

* **The cash budget focuses on the liquidity of a business**, i.e. the ability to have sufficient money in the bank to pay its day-to-day expenses. * From the cash budget, the managers of a business can decide what action to take when a surplus of cash is shown to be available or, as is more likely, when a bank overdraft needs to be arranged.

Answer 134

The difference between cash and profit is: • Cash is money in the bank or held as physical cash (e.g. in the cash till) • Profit is a calculated figure which shows the surplus of income over expenditure for a period: • it takes note of adjustments for accruals and prepayments and non-cash items such as depreciation and provision for doubtful receivables. • It does not include capital expenditure (i.e. the purchase of non-current assets), or owner's drawings/dividends, or loans raised and repaid

Answer 135

1. **Capital Expenditure** - purchase of non-current assets reduces cash but profit will only be affected by the depreciation of the asset. 2. **Increase in Trade Receivables** - more good being sold will increase profit but there is no benefit to the bank balance until the receivables pay. 3. **Decrease in Trade Payables** - if payables are paid earlier than usual there will be no effect on profit but the bank balance will reduce. 4. **Increase in inventory** - if more inventory is purchased there will be an increase in profit as it is sold, but paying for inventory will reduce the money at bank. 5. **Prepayment of expenses** at the year end - as a prepayment is an expense for next year, early payment will have no affect on the current year's profit, but the bank balance will be affected. 6. **Loan repaid** - this has no effect on profits, but the bank balance will be affected by the repayment. 7. **Drawings/dividends paid to owners** - will have no effect on profit, but the bank balance will be affected by the payment

Answer 136

1. **Monitor its cash resources** 2. **Plan future expenditure**, e.g. financing new non-current assets 3. **Control costs and revenues** to ensure that either: a bank overdraft is avoided (so saving interest and charges payable), or a bank overdraft or loan can be arranged in advance 4. **Reschedule payments where necessary** to avoid bank borrowing, e.g. delay the purchase of non-current assets 5. **Coordinate the activities** of the various sections of the business, e.g. the production department buys in materials not only to meet the expected sales of the sales department but also at a time when there is cash available 6. **Communicate the overall aims** of the business to the various sections and to check that the cash will be available to meet their needs 7. **Identify any possible cash surpluses in advance** (and take steps to invest it)

Answer 137

- Receipts - money expected to be received - Payments - money expected to be paid

Answer 138

* Important note: depreciation of non-current assets does not feature in cash budgets because it is a non-cash expense, i.e. no cash flow.

Answer 139

* Because many businesses buy and sell their materials and products on credit terms - the payments and receipts may well not be in the same months as indicated by the purchases and sales budgets.

Answer 140

* Use of resources ratios measures **how efficiently the owners and/or managers control the current aspects of the business** * **Inventories, trade receivables and trade payables**. * Like all accounting ratios, comparison needs to be made either with figures for the previous year, or with a similar business.

Answer 141

(Trade Receivables/Sales) x 365

Answer 142

How long it takes to collect or receive money from trade receivables.

Answer 143

To see how long it takes to **pay trade receivables.**

Answer 144

(Trade Payables/Cost of Sales) x 365

Answer 145

(Closing inventory/cost of sales) × 365

Answer 146

The length of time taken for inventory to be sold.

Answer 147

The length of time it takes to turn the net current assets and current liabilities into cash.

Answer 148

Inventory days + receivables days - payables

Answer 149

To improve Liqidity: - raise additional finance from the owners in the form of capital - raise additional debt finance in the forms of loans, overdrafts, hire purchase - For smaller businesses, family and friends may be prepared to help out with finance.

Answer 150

To improve Cash Flow: - speed up the rate of debt collection (and lower the number of receivable days) - slow down the rate of payment to suppliers (and increase the number of payable days) - reduce inventory (and lower the number of inventory days) - offer prompt payment discount (PPD) to customers dispose of non-current assets

Answer 151

ROI = Profit / Investment

Answer 152

Non-production Costs.

Answer 153

They are **partly fixed costs, partly variable** costs. Therefore they **do not change in direct proportion to output**.

Answer 154

Stepped Costs change after hitting a certain threshold.

Answer 155

From Suppliers to Stores in the factory. Or From Suppliers to Retailers/Wholesalers.

Answer 156

The Stores in the factory or from the Retailers/Wholesalers (warehouse balance).

Answer 157

From Stores in a Factory to the Production line. OR From the Retailer/Wholesaler to the customers.

Answer 158

Opening Inventory + Purchases - Closing balance.

Answer 159

Overtime Pay (or rate)= Basic pay + Overtime Premium

Answer 160

Overtime Pay - Basic Rate. It is the extra pay above the basic rate.

Answer 161

You divide once. E.g. Cost per course £10 / 100 courses

Answer 162

You divide twice. E.g. Cost per student per course £500 / 100 / 20

Answer 163

Profit / investment

Answer 164

Indirect Costs

Answer 165

Non-production costs

Answer 166

Cost of Sales = Opening Inventory + Purchases - Closing Balance

Answer 167

Overtime Pay (or rate) = Basic Pay + Overtime Premium

Answer 168

Total Budgeted Overheads / Total Budgeted Activity Level Activity Level is either labour, machinery or units. If labour and machinery are given, use the highest one.

Answer 169

Overhead Absorption Rate is calculated in advance. It is pre-determined before Actual production.

Answer 170

OAR x Actual Hours

Answer 171

Overhead Absorbed - Actual Overhead

Answer 172

Absorption Cost = Full Production Cost. (Marginal Cost + Fixed Production Cost)

Answer 173

Profit Markup is a % of Cost. Profit Margin is a % of Sales.

Answer 174

(Input cost - Normal wastage) / Expected Output Normal wastage is just Scrap Value.

Answer 175

1. Finished Goods 2. Abnormal Loss 3. Abnormal Gain

Answer 176

Expected output = Input Quantity - Normal Wastage

Answer 177

Cost Pool / Cost Driver Cost pool is the individual overhead Cost driver is the activity that causes the overhead (cost pool)

Answer 178

1. Direct Materials 2. Direct Labour 3. Variable Overheads AND **4. Fixed Production Overheads**

Answer 179

1. Direct Labour 2. Direct Materials 3. Variable Overheads

Answer 180

Absorption costing will value closing inventory higher (as it includes fixed production overheads) leading to lower cost of sales and higher gross profit.

Answer 181

Sales + Opening Inventory + Production or Purchases - Closing Inventory = Cost of Sales = Gross profit - Expenses = Net profit

Answer 182

Difference in total cost / Difference in Activity Level

Answer 183

Total Contribution = Total Fixed Cost Total Revenue = Total Cost

Answer 184

Fixed Costs / Contribution per unit

Answer 185

Break even units x Selling price

Answer 186

Current output - Break even units

Answer 187

Margin of safety in units x Selling Price OR Current output - Break-even units

Answer 188

(Current Output - Break even units) / Current output x 100

Answer 189

(Fixed Costs + Target Profit) / Contribution per unit

Answer 190

Target Profit in units x Selling Price

Answer 191

Absorption Cost = Full production Cost Marginal Cost = Variable Production Cost

Answer 192

**Cash** (current asset) -> **Suppliers** (trade payables) Current liability -> **Inventory** (current asset) -> **Customers** (trade receivables) Current asset -> **back to cash**

Answer 193

Items such as rent which don’t fluctuate with service levels are known as period costs or fixed overheads and are not included in the marginal cost.

Answer 194

Fixed overheads are also known as period costs and they don’t link to the production level. Fixed overheads include the rent of buildings and the power used for heating and lighting.

Answer 195

The COUNT function counts the number of cells within a range that contain numeric values.

Answer 196

The COUNTA function counts the number of cells that are not blank.

Answer 197

It aids short term decision making

Answer 198

Used to calculate Inventory valuations and profits/losses in the financial statements

Management Accounting Techniques Flashcards

(224 cards)