Flashcards in SU4 - Profit Planning and Control Deck (18):
Management accounting has three broad objectives:
1. To provide information for costing out products and services.
2. To provide information for planning, controlling and continuous improvement
3. To provide information for decision making
Explain Cost object.
A cost object refers to anything for which cost data are desired - including:
* Product lines
* Organisational sub units
What does the inventory in a manufacturing firm consist of?
1. Raw Material
2. Work in Progress
3. Finished Goods
How is the cost of inventory determined?
1. Direct materials - cost of materials
2. Direct labour - salaries paid to employees working directly on the manufacturing of said product
3. Indirect costs - manufacturing overheads
4. Marketing and administrative costs of the firm are regarded as period costs.
In order to aid decision making it is important to distinguish between the following cost classifications:
1. Opportunity cost
*Potential benefit foregone in choosing a different option.
2. Sunk Cost
*Cost already incurred (done and dusted) and cannot be changed by any decision made
*Ignore sunk cost when making a decision
Cost may be classified as
1. Fixed Cost
2. Variable Cost
3. Semi-variable cost
What is the purpose of the Breakeven Analysis
It provides a framework for understanding the interrelationship between:
* Variable costs
* Fixed costs
* Sales volume
* Selling price
There are 6 formulas for the breakeven analysis. Name them and provide the formula
1. Marginal income = sales - variable cost
2. Marginal income per unit = selling price per unit - variable cost per unit
3. Profit = sales - variable cost - fixed cost
4. Breakeven point (measured in units) = Total fixed cost / marginal income per unit
5. Breakeven point value (measured in rand) = BE point units x selling price per unit
6. Margin of safety ratio = (expected sales volume - break even volume) / Expected sales volume x 100
*This ratio indicates the extent to which sales volume may decrease before profits reach nil
An integrated budgeting system for a manufacturing business consists of two main types of budgets. Name them.
1. Operating budgets
2. Financial budgets
There are two types of cost types of cost budgets within the operating budget. Name them:
1. Manufacturing cost budget
2. Discretionary cost budget
Explain the manufacturing cost budget within the operating budget.
1. outputs can be measured accurately
2. It includes estimated overhead costs
3. In is designed to measure efficiency - if the budget is exceeded, it means that manufacturing cost were higher than what it should have been.
Explain the discretionary cost budget within the operating budget.
1. Output cannot be measured accurately - eg administration and research
2. They are not used for efficiency since it is difficult to devise the expenses
What are the components of the Operating Budget?
3. Profit plan or budget
What does the financial budgets consists of?
1. Capital budget
2. Cash budget
3. Pro forma income statement
4. Pro forma balance sheet
What are 3 major purposes of the financial budgets?
1. They verify the viability of the operational planning (operating budgets)
2. They reveal the financial actions that the business must take to make execution of its operating budget possible.
3. They indicate how the operating plans of the business will affect its future financial performance and position
What are the purpose of the capital budget?
The capital budget indicates the expected (budgeted) future capital investment in physical facilities(building, equipment, etc) to maintain the firm’s present productive capacity or expand its future productive capacity.
What are the purpose of the Cash budget?
1. The extent, time and sources of expected cash inflows.
2. The extent, time and purpose of expected cash outflows
3. The expected availability of cash in comparison with the expected need for it