# FAF2 management accounting

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- Created by: charlie
- Created on: 24-05-16 12:08

total absorption costing (TAC) definition

total cost of producing a unit, including share of all OHD (fixed + variable) relating to production of that unit

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overhead cost definition

costs not directly attributable to cost units (any type of cost)

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why is absorbing fixed OH into products done ?

inventory valuation and making pricing decisions

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4 methods of fair absorption costing

1) % of prime cost 2) % of direct labour cost 3) % of direct material cost 4) OH cost per labour hour

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FOAR equation

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what do you do with absorbed OHD (actual production)?

(actual base X previous FOAR) charge to profit as expense (SoCI t account)

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what do you do with incurred OHD (what you actually pay)?

(full value) adjust the profit

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departmental absorption 2 steps

1) calculate FOAR for each department 2) calculate OHD to be absorbed by each product

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if asked for product cost what 3 things do you need to include?

1) material cost 2) labour cost (wages) 3) total OH cost

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under absorption

reduces profit

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over absorption

increases profit

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2 types of production OHD

1) OHD that arise solely in department (supervisor) 2) OHD that are factory wide (rent/ heating)

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allocation and appointment of OHDs 7 stages

1)identify production+service dep 2)identify total fixed OHD (leave out direct) 3)allocate fixed OHD 4)apportion remaining on best basis 5)reapportion service to production 6)find production FOAR 7)absorb fixed OHD into products (TAC)

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TAC 3 advantages

1) all costs of production included 2) conforms to requirements of SSAP 9 (guidance on accounting treatment of stocks+long term contracts) 3) useful in cost plus pricing

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TAC 5 disadvantages

1) estimates required in apportion+reapportion 2) decisions on changing levels of activity not correct 3) profit depends on changes in inv levels=misleading 4) more complicated 5) poss incorrect pricing decisions on incremental business

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Marginal costing definition

only variable costs (no fixed costs) charged as COS, fixed costs just w/off on total against contribution for period

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Marginal costing profit equation

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MC 5 advantages

1) VC easily identified (no estimate) 2) profit isn't affected by changing inv levels 3) w/off FC in period occurred reflects reality 4) used for short term decisions on output 5) easier to understand

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MC 3 disadvantages

1) if use for decisions, may fail to recover fixed OH 2) in long term all costs variable 3) cannot use for valuing inv in financial accounts

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profit statement outline using TAC

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profit statement outline using MC

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working with a constraint 2 aims

1) whats best use for limited resource 2) how can we maximise the profit

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working with a constraint 7 steps

1) contn/unit 2) limiting factor (what we need/what we have) 3) contn/limiting factor 4) rank 5) production plan 6) total contn 7) total profit (use equation remember FC ARE FIXED!!)

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contn/limiting factor equation

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further aspects of NPV analysis: capital rationing definition

arises when organisations are restricted in money available for investment and finds itself unable to invest in all worthwhile projects (+ve NPV)

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further aspects of NPV analysis: capital rationing 2 types

1) hard/external capital rationing (people won't lend you money) 2) soft/internal capital rationing (you don't want to borrow money)

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further aspects of NPV analysis: capital rationing 3 other reasons

1) way of getting people to compete for best project to get capital 2) organisation can't cope with change of doing so many projects 3) don't want to give away control (equity/debt)

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further aspects of NPV analysis: divisible projects

either whole project or fraction of project undertaken/ linear returns on investments made

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further aspects of NPV analysis: indivisible projects

either whole project undertaken or not at all

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further aspects of NPV analysis: divisible projects single period 4 stages

1) NPV of each project 2) work out per £ of investment (year 0) 3) rank 4) decide which project make most NPV using capped amount of capital (can use fractions)

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further aspects of NPV analysis: indivisible projects single period 3 stages

1) NPV of each project 2) rank 3) trial and error to get NPV using capped amount of capital (may leave some funds unused)

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working capital management definition

money you need day to day to run a business (CA-CL)

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working capital management objective

reduce time period as less interest

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operating cash cycle definition

days of overdraft where you try to shorten the time period

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3 ways of improving operating cash cycle

1) improve receivables speed 2) make suppliers wait longer 3) reduce amount of inventory carried

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operating cash cycle equation

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operating cash cycle: inventory equation

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operating cash cycle: receivable equation

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operating cash cycle: payables equation

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3 benefits of holding inventory

1) advantage of quantity discounts (more bought=cheaper but have to store) 2) technical reasons (maturing whisky adds value) 3) reduce risk of production shortages (production line flows)

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3 costs of holding inventory

1) deterioration/ wearing out/ stealing (increased risk) 2) costs of storage (build/ rent/ maintaing/ workers/ transport) 3) shifts in market demand (seasons change)

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3 costs of holding too little inventory

1) emergency re-order costs (transport/overtime/out of hours) 2) stock-out costs (delayed sale/ lost customer + production line stopped) 3) missed profits (miss high demand)

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systems of control: JIT definition

increased efficiency and decreased waste by receiving goods when needed

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systems of control: JIT positives/negatives

easily move to different product, less storage, less cost of materials/ relying on one supplier, need accurate demand forecast

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systems of control: ABC definition

class inventory on importance (ABC), each handled in different way

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systems of control: ABC positives/negatives

plans on re-order, alternative stock, frequent checks/ needs definite ranking of importance

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3 things you need to find to minimise overall cost of inventory

1) optimum order quantity (EOQ) 2) quantity of 'buffer' (safety) inventory required 3) optimum time to re-order

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economic order quantity (EOQ) definition

best amount to order at any given price (constant)/ cost is minimised when order costs=holding costs

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EOQ: 2 assumptions

1) order at X inventory = use all up = re-order = arrives just as runs out 2) demand evenly spread

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EOQ equation

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EOQ: total cost equation

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Debtors (TR) definition

element of risk in credit sales, which increase with length of credit period

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Debtors: 7 factors to consider when lending

competitors policies/ credit period/ cost of finance/ discount policy/ credit standards (rating)/ collection policy/ credit control or debt factoring

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ways of turning uncertain cash flows from debtors more certain: debt factoring

sell debts (customer owes you money which you sell to someone else), they give you 80% of the value

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ways of turning uncertain cash flows from debtors more certain: invoice discounting

invoice used as security for loan, company still issues and collects money, however discounting house advances them at 96-97% of full value

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Creditors (TP) definition

credit is used as a source of finance (people lend interest free), ideally want to make period as long as possible without annoying supplier

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3 credit benefits

1) convient and informal (no special process to obtain) 2) low-cost finance (pretty much interest free) 3) discounts made available (if paid before certain date)

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4 credit drawbacks

1) loss of credit status (low priority to future orders) 2) supplier raises prices (compensate for finance he is involuntarily supplying) 3) loss of cash discount (payment not prompt) 4) distrust with supplier (longer you leave payment)

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## Other cards in this set

### Card 2

#### Front

costs not directly attributable to cost units (any type of cost)

#### Back

overhead cost definition

### Card 3

#### Front

inventory valuation and making pricing decisions

#### Back

### Card 4

#### Front

1) % of prime cost 2) % of direct labour cost 3) % of direct material cost 4) OH cost per labour hour

#### Back

### Card 5

#### Front

.

#### Back

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