Decision and Control

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Give advantages of Marginal Costing over absorption costing?
Simpler as does not involve any under/over absorption issues/ Suitable for short-term decision making/Treats fixed costs as they behave- Period costs rather than production costs/Profit is influenced by sales and not by production
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Give disadvantages of Marginal Costing over absorption costing?
Does not comply with IAS 2 so cannot be used in year-end financial statements/Fixed costs are still incurred by the business/All costs have to be split between fixed and variable elements.
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What is a prime cost?
The total of all of the direct costs. (Direct Costs are always production costs)
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What are the advantages of activity based costing?
Overhead absorption into units is based on their use of resources/Enables more accurate costing information to be generated/Easy to see where high levels of cost occur and their causes which will help to control them to improve profit. Encourages improvem
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What are the disadvantages of activity based costing?
It is complex to set up and run which may be difficult for staff to cope with/More time consuming than traditional absorption costing and therefore costly/May give too much detail and be confusing for users.
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What is the calculation for target profit?
Fixed costs + target profit/Unit contribution
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What is the calculation for Margin of safety?
Budgeted sales volume - break even sales volume/budgeted sales volume x 100.
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What is the formula for break-even revenue?
Break even point x selling price per unit
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Give advantages of outsourcing?
- Cost savings if other businesses can make the units more efficiently than we can/It Releases capital that may have been spent on production machinery/Other businesses may have expert skills that we lack/It frees up time for managers to focus on other as
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Give disadvantages of outsourcing?
It may demotivate staff who do not have any work to do/We will lack control over the production process which can impact quality/ Supplier may not be reliable with delivery dates/ The product may not be tailored to our specific needs./ There may be an inc
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What is a relevant cost?
- It must be a future cost
- It must be an incremental cost (result of a decision)
It must be cash cost
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Describe Variance Analysis?
We perform variance analysis as part of our control process each period. (point 1) The variance analysis shows the difference between the actual results and the expected performance of the business based on the actual production achieved.(point 2)
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What is the importance of variance analysis?
Variance analysis is important because it enables the management team to identify areas where performance is not as good as expected and allows them to make changes or decisions that will help rectify this.
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What could be a reason for a material price variance?
The variances in the material price per kg could have been due to bulk ordering with suppliers to secure a cheaper cost, lower quality materials used, or changing supplier.
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What could be a reason for a material usage variance?
The material usage variance could be due to less wastage / damage, so taking in to account the material usage is also favourable, (point 20) it is unlikely the price variance is due to cheaper materials as this can lead to more wastage.
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What is the formula for Return on net assets?
Profit from Operations/Net Assets x 100
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What is the formula for net profit margin?
Profit from Operations/Revenue x 100
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How do you calculate cost of sales?
Revenue - Gross Profit
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How do you calculate Receivables collection period in days?
Trade Receivables/Revenue x 365
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How do you calculate Full production cost per unit?
Cost of Sales/Sales Volume
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What is the formula for Labour Efficiency Ratio?
Expected Standard Hours/Actual Hours Worked x 100
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What is the formula for Labour Capacity Ratio?
Actual Hours Worked/Budgeted Hours x 100
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What is the formula for Labour Activity Ratio?
Expected Hours/Budgeted Hours x 100
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Bullet point the advantages of an ABC Coding System?
- More Accurate Product Cost -Fairer allocation of overheads charged - Better understanding for management as to causes and allocation of overheads - Better decision making for pricing and production scheduling
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Bullet point the dis-advantages of an ABC Coding System?
-The system can be complex and difficult to allocate costs to activities. - The system takes time to implement. - There will be costs associated with the system implementation. - Possible resistance to change from management and staff.
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What is the material price variance?
The material price variance looks at whether more or less than the standard price was paid for material purchases.
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What is the material usage variance?
The material usage variance looks at whether more or less than the standard usage of kg were used in production.
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What is the labour rate variance?
The labour rate variance looks at whether more or less than the standard hourly rate was paid for labour time.
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What is the labour efficiency variance?
The labour efficiency variance looks at whether more or less than the standard quantity of hours were required to make each unit.
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What is the fixed overhead expenditure variance?
The fixed overhead expenditure variance looks at whether the actual fixed overhead was higher or lower than budgeted.
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What is the fixed overhead volume variance?
The fixed overhead volume variance compares the budgeted production volume to the actual production volume achieved. It is valued at the standard fixed OAR per unit.
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Define Outsourcing?
Outsourcing is when an organisation chooses to utilise another organisation for the completion of a process or function. This may be for a component of their product they choose to buy in rather than make themselves.
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What are the advantages of ratios?
-They can be easy to understand than absolute numbers - They make it easier to look at changes over time - Can be used to set targets for managers - They put the performance of the business into context.
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What are the disadvantages of ratios?
-Ratios need comparison. - Need to be adjusted for inflation for useful comparison. - Different companies used different accounting policies making comparison difficult. -Ratios focus on past performance and ignore qualitative factors.
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What does Value Added mean?
Value added means the difference between the purchase cost of external goods and services and the selling price of the company's product
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What is benchmarking?
Comparing results to other organisations or to industry as a whole.
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Give advantages of benchmarking?
- It gives a realistic target - We can learn lessons from other businesses. - It encourages a more externally facing culture in the business.
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What is a prime cost?
The total of direct costs
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Give disadvantages of benchmarking?
- It can be hard to get the data, - It can be time consuming to undertake.
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What are the 4 steps of absorption costing?
1. Allocation of indirect costs to indvidual cost centres. 2. Apportionment of indirect costs across several cost centres. 3. Reapportionment of service cost centres to production cost centres. 4. Absorption of indirect costs into cost units.
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Give advantages of using standard costing?
- They can help to achieve more accurate overall budgets. - They assist with setting prices for products at the start of the year. - They can be used to set targets for staff to motivate them. - They can help performance measurement in the business
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Give disadvantages of using standard costing?
- Time consuming to calculate and monitor. - Attainable standards need to be updated regularly which takes time. - They can be de-motivating if the wrong type of standard is used.
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What is standard Costing?
Standard Costing is the expected costs of making products. It is estimated in advance to help with the budgeting and planning process (and to allow prices to be set). In order to determine the standard cost of making each unit a standard cost card is ofte
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How do you calculate asset turnover?
Sales revenue/Capital Employed
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How do you calculate return on capital employed?
Net Profit/Capital Employed x100
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How do you calculate interest cover?
Net Profit/Interest
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What are direct costs?
Costs that can be traced to the production of a single unit.
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Give examples of common direct costs?
Direct Material, Direct Labour.
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Give examples of indirect costs?
Factory rent, Electricity to run machinery, Administration expenses, Indirect material such as office supplies, Indirect Labour e.g. supervisors, security staff.
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What is a production cost?
These are costs incurred in the process of producing units and would tend to be those costs incurred within the factory environment. Direct costs are always production costs.
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What is a cost card?
This is the summary of the costs involved in producing a unit of a product. It will show the various elements of direct and indirect costs involved and can include both production and non-production costs. The cost card of a product will be very important
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What is a cost unit?
A cost unit is a product or service for which costs are being allocated and gathered together in a cost card.
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What is a cost centre?
This is a division or department where costs can be allocated or gathered together. They can be split into production cost centres and service cost centres.
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What is a production cost centre?
Those departments that are directly involved in the production of units, such as the assembly department. Any department through which physical units of production actually flow is likely to be a production cost centre.
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What is a service cost centre?
Those departments that are not directly involved in the production of units, such as staff canteen or the maintenance department.
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What is a revenue centre?
Departments where managers only control revenues.
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What is a profit centre?
Departments where managers control both revenues and costs and so can be accountable for the overall profits generated by their department.
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What is an investment centre?
Departments where managers control revenues, costs and also the level of capital invested and so are responsible for ensuring a satisfactory return on that investment.
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How do you calculate total cost?
Total Cost= Fixed cost + (variable cost per unit x production volume)
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How do you calculate an Overhead absorption rate?
OAR= Production Overhead/ Activity Level
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When inventory levels are rising , is absorption costing profit higher or lower than Marginal costing profit?
Absorption costing profit is higher.
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When inventory levels are decreasing , is absorption costing profit higher or lower than Marginal costing profit?
Marginal costing profit is higher.
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How do you calculate the difference in profit for absorption and marginal costing?
Difference in profit= Movement in inventory x fixed OAR
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Give typical restrictions/limiting factors on production?
- Shortages of raw materials such as precious metals
- Shortages of experienced labour with a particular skill
- Lack of manufacturing capacity
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Give typical restrictions/limiting factors on sales?
- Lots of competitors in the market reducing the market share of the business
- The product being niche that only a few customers need
- Economic recession, reducing general demand levels
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What is the step-by-step approach to limiting factor analysis?
1. Identify the limiting factor. 2. Calculate the contribution per physical unit of each product. 3. Calculate the contribution per unit of limiting factor. 4. Rank the products according to their contribution per unit of the limiting factor. 5. Follow th
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What is a shadow price?
In practice it is likely that organisations will be able to obtain more of a scarce resource if they are willing to pay more. The extra amount an organisation would be willing to pay is called the shadow price. It is calculated by looking at the extra con
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What is a future cost?
A future cost is one that will take place in the future as a result of a decision, and has not already been incurred or paid. For instance, if a company is considering making a component instead of buying it in and already has some of the material needed
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What is an incremental cost?
An incremental cost is one that is avoidable if the decision is not implemented.
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What is a cash cost?
A cash cost is, as its name suggests, a cost that incurs an outflow of cash. Non- cash cost examples are depreciation, allocation or apportionment of head office costs.
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What is a discount factor?
Discount factors are figures that take into account the time value of money.
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What are the steps to calculating the net present value?
1. Identify all the cash flows that are relevant to the investment being considered and group them by year. 2. Add up the total cash flows for each year and multiply them by the relevant discount factor to give the present value for each year. 3. Add up t
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How do you make a decision on the NPV of an investment?
If the NPV is positive the investment should be accepted: if the NPV is negative the investment should be rejected.
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What is the step by step approach for calculating target cost?
1. Start with the sales price per unit that has been determined. 2. Calculate the profit per unit that we want. 3. Deduct the profit from the sales price to give the total target cost that we can afford. 4. If you are given certain elements of cost you ca
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Give 4 examples of cost savings through positive social and environmental ways?
1. Limiting the use of resources and improving efficiencies. 2. Reducing packaging materials. 3. Installing energy-efficient lighting in offices and stores. 4. Minimising transportation costs.
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What is linear regression?
Linear regression is a method which can be used to forecast future costs or sales by looking at what has happened in the past. It assumes that there is a straight line relationship between 2 factors.
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What are the limitations of linear regression?
- Recent historical observations may not be typical of a normal situation. - Using historical data may not be a good indicator of future outcomes. - This technique assumes a linear relationship between the two variables which may not be accurate. - If our
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What is a time series?
A time series is a series of figures that are recorded over a period of time.
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What is a trend?
This is a general, long-run movement of a time series in a consistent direction.
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What is seasonal variation?
This is a recurring and predictable variation over a fixed period of time.
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What are the steps to follow in time series analysis?
1. Calculate the moving average figures based on the time series figures given. 2. Centre the mving averages to establish the trend. 3. Calculate seasonal variatios by comparing the time series to the trend. 4. Calculate predictions for the forecast perio
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What is a price index?
A price index measures the change in the price of an item over a period of time by comparing the current price to the price in the base period.
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What is a quantity index?
A quantity index measures the change in a quantity figure over a period of time.
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What is a base period?
The base period is the point in time when the index was started and to which all future values are compared.
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What is an ideal standard?
This type of standard assumes that our production environment is perfect and that we experience no wastage of materials, no defective units of production and no idle labour time. It is unrealistic and therefore can be de-motivating.
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What is an attainable standard?
This type of standard assumes a realistic level of efficiency in production and will include expected levels of wastage of material and idle time for staff. It is far more motivating.
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What is a basic standard?
This type of standard assumes that nothing has changed since the standard was first set, which may have been many months or even years ago. They tend to be out of date and may not provide a useful target for the current activities of staff.
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What is a current standard?
This type of standard shows you the current level of efficiency in the production process. This will therefore be up to date but does not always act as a motivating target as it does not tell you whether the current level of performance is acceptable or n
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What are the advantages of setting standards?
- They help to achieve more accurate overall budgets. - They assist with setting prices for products at the start of the year. - They can be used to set targets for staff to motivate them to work hard. - They facilitate performance measurement in the busi
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What are the disadvantages of setting standards?
- They can be very time consuming to calculate and monitor. - Attainable standards need to be updated regularly which takes time and effort. They can be de-motivating if the wrong type of standard is used. - It can be difficult to establish an accurate st
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What is a fixed budget?
A fixed budget is a single budget drawn up at the start of the year based on the volume expected at that point.
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What is a flexed budget?
A flexed budget is a budget revised at the end of the year to account for the actual volume achieved but using the original budgeted revenues and costs per unit.
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What is a flexible budget?
A flexible budget is a range of budgets drawn up at the start of the year based on different volumes, showing a number of potential outcomes.
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Give 6 factors to be considered when deciding whether to investigate a variance?
1. The size of the variance. 2. Controllability of the variance. 3. Cost of investigation. 4. Type of standard cost used. 5. Trends in the variance. 6. Interrelationship between variances.
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What is life cycle costing?
Life cycle costing involves looking at the costs of the product over its entire life, from its development through to eventual market withdrawal. If all costs for the entire life-cycle are considered then we can ensure that all of the costs are covered by
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What is the product life cycle?
The stages through which individual products develop over time.
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What is value analysis?
Each aspect of the production process for the product can be investigated to determine whether it can be achieved at a lower cost, without compromising on quality, increasing wastage or creating low staff morale. This encourages continuous improvement in
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What is value engineering?
This is the same process as value analysis but takes place at the planning stage for a product. Often significant costs can be eliminated by thinking carefully about what is going to happen at each stage of the process.
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List some of the benefits of drawing up a cost card for a product?
- A selling price can be set to cover production costs and to ensure that profit will be made. - Inventory can be valued using the cost per unit. - Understanding where costs are incurred makes it easier to control them to improve profit.
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Other cards in this set

Card 2

Front

Give disadvantages of Marginal Costing over absorption costing?

Back

Does not comply with IAS 2 so cannot be used in year-end financial statements/Fixed costs are still incurred by the business/All costs have to be split between fixed and variable elements.

Card 3

Front

What is a prime cost?

Back

Preview of the front of card 3

Card 4

Front

What are the advantages of activity based costing?

Back

Preview of the front of card 4

Card 5

Front

What are the disadvantages of activity based costing?

Back

Preview of the front of card 5
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