Section 5 Flashcards
(49 cards)
Cost centre
A section/department of a business, to which costs can be allocated
Profit centre
A section of a business to which both costs and revenues can be allocated
Full costing
All fixed + variable costs are allocated to products/services or divisions of a business
Contribution/marginal costing
Allocates direct costs to cost/profit centres only - overheads are not included
Budget
A detailed financial plan for the future
~ Can be used for sales and costs
~ Must account for financial needs = consequences
~ Financial targets facilitate measurement performance of each part of the budget
~ Usually set for 12 months
Purpose:
• Planning - realistic future target
• Effective resource allocation - ensures access to to/afford resources according to priorities
• Set targets - realistic targets to be achieved creates motivation
• Coordination - coordination between departments
• Monitoring + control- check if plans are in place regardless of change in conditions
• Modifying - determine plan change using budget
• Measure/assess performance - Variance analysis can be used to compare
Features:
• Not a forecast - it’s a plan
• Created by budget holder
• Delegated budgets are completed by junior managers
Stages of preparations:
1. Establish objective
2. Identify key factors/considerations
3. Sales budget prepared - sales managers in all branches + divisions in business
4. Subsidiary budgets prepared - budget holder
5. Budgets are coordinated - commitee
6. Prepare master budget + budgeted IS + SFP
7. Present master budget for approval
Budget holder
Individual responsible for the initial setting and achievement of a budget
Variance analysis
Calculating differences between budgets and actual performance, analysing reasons for such differences
Delegated budgets
Giving some delegated authority over the setting and achievement of budgets to junior managers
Incremental budgeting
Uses last years budget as a basis and an adjustment is made for the coming year
Zero budgeting
Setting budgets to zero each year and budget holders have to argue their case to receive any finance
Flexible budgeting
Cost budgets for each each expense allowed to vary if sales or production vary from budgeted levels
Adverse variance
Exists when the difference between the budgeted and actual figure leads to a lower than expected profit
Favourable variance
Exists when the difference between the budgeted and actual figure leads to a higher than expected profit
Intellectual property
The amount by which the market value of a firm exceeds its tangible assets less liabilities (intangible asset)
Market value
The estimated total value of a company if it were taken over
Capital expenditure
Any item bought by a business and retained for more than one year that is a NCA
Revenue expenditure
Any expenditure on costs other than NCA expenditure
Depreciation
The decline in the estimated value of an NCA over time
~Normal wear and tear through use
~ technological change making it obsolete
Net book value - NBV
NBV = original cost of asset - accumulated depreciation
Straight line depreciation
A constant amount of depreciation is subtracted from the value of the asset each year (amount doesn’t change)
Cost of asset - expected residual value
expected useful life of an asset
Net realisable value
The amount for which an asset (usually inventory) can be sold minus the cost of selling it
~ Inventory should be valued in the SFP at the lower of NRV or cost
Return on capital employed - ROCE
Operating profit x100
Capital employed
Improve ROCE:
~> Increase operating profit
• Raise prices
• Reduce variable costs
• Reduce overheads
~> Reduce capital employed
• Sell assets
• Reduce debts
Other:
- ⬆️ amount = ⬆️ invested capital
- Compare with other companies and previous years
- Compare with return with interest + cost of borrowing
- Not used to assess risk
Capital employed
Total value of all long term finance invested in the business
= Total assets - total liabilities + shareholders equity
Inventory turnover ratio
Cost of good sold (COS)
Value of inventories
• In no. Of days
• ⬆️ no. = more efficient sales management
• N/A to service industries
