• Created by: charlie
  • Created on: 26-05-17 11:20
relevant costing accept/ reject behavioural factors (6)
(1) Company (prestige/ reputation) (2) Company strategy (LT vs ST) (3) Company business (affect on other products/ spare capacity) (4) Staff (redundancy costs/ motivation) (5) Supplier (relationship/ reliability) (6) Customer (quality/ relationship)
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CVP assumptions (6)
(1) all other variables cst (only volume changes) (2) single product/ cst. sales mix (3) TC+TR linear functions (4) profits MC (5) costs separable (6) analysis only ST relevant range
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margin of safety + equation
% sales can fall before loss is occurred
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profit-volume ratio (contribution ratio) + equation
proportion of £1 of sales able to cover FC and provide for profit
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Mark up
relationship between profit and cost (market driven + doesn't take into account fixed costs)
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relationship between profit and selling price (takes into account all costs)
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MC vs TAC: manufacturing costs (direct and indirect)
MC: VC (direct) FC (period)/ TAC: VC (direct) FC (direct = FOAR)
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FOAR equation
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MC vs TAC: overheads
MC: Fixed + variable/ TAC: production, administrative, selling + distribution
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MC vs TAC: profitability
MC: function of sales vol change/ TAC: function of sales + production (inventory) vol change
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MC (3) +ves
(1) useful for decision making (ST projections) (2) smoothes profits when stable sales + fluctuating inventory (doesn't increase profit with increased inventory) (3) avoids FC being capitalised in unsaleable inventories (not being deducted in period)
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TAC (4) +ves
(1) consistent with IFRS (2) ensures decisions based on full cost (3) fixed OH essential for production (4) avoids reporting false losses (FC only expensed when sold)
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MC layout
Sales/ less: COS (opening stock + VC - closing stock)/ less: FC
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TAC layout
Sales/ less: COS (opening stock + production costs (VC+FOAR) - closing stock)/ over/(under) abs
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MC vs TAC: profit reconciliation
MC --> TAC (inc/(dec) stock x FOAR)
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TAC: over/ (under) abs equation
less/ (more) overheads incurred than expected
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Relevant costing: include/ ignore costs
INCLUDE: revenues/ mat+lab. incremental costs/ opportunity costs IGNORE: sunk costs/ non-cash flows/ committed costs (contracts)/ common costs (facility sustaining)
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Relevant costing: when needed (5)
(1) special selling price (ST/ outside main market) (2) product mix decisions when limiting factor (3) replacement decisions (4) subcontracting decisions (5) discontinuation decisions
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Investment appraisal: NPV (equation, definition, +ves/ -ves)
total present value of a time series of future cash flows/ +ves = time value for money/ used CF/ -ves: not comparable (%)/ need to determine CoC/ doesn't consider CF timings
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Investment appraisal: IRR (equation, definition, +ves/ -ves)
cost of capital when NPV=0/ +ves: time value of money/ comparable (%)/ -ves: assume linearity/ assume only 1 sign change/ need to estimate CoC
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Investment appraisal: ARR (equation, definition, +ves/ -ves)
compares profit with money invested/ +ves: comparable (%)/ shoes project profitability/ -ves: uses profits/ ignores time value of money
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Investment appraisal: payback period (equation, definition, +ves/ -ves)
time taken to repay initial investment/ +ves: good in rapidly changing market/ easy to calculate/ -ves: ignores time value of money/ ST approach (ignores past payback)
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ABC: (4) reasons for it
(1) information processing costs cheaper (c-b analysis) (2) mechanisation producing wider product range (OH in differing proportions - high non-vol) (3) direct lab. hrs lower (results in OH per lab hr being overstated) (4) intensive competition
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ABC: 2 types of OH
(1) Volume (OH vary with production level in ST) (2) Non-volume (OH vary with some other activity)
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ABC: 4 steps
(1) identify activities (c-b analysis) (2) cost drivers (factors influencing activity, cause-and-effect, not arbitrary) (3) cost pool (measurable no. of drivers --> total across all products) (4) assign cost per driver to individual product OH cost
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ABC: (5) advantages
(1) simple after step 1 (2) recognises complexity (range/ ST/ products) (3) realistic decision making (in CVP) (4) takes MA past traditional 'factory floor' boundary (OH cost concern --> quality + control) (5) used in service org (mostly indirect $)
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ABC: (4) disadvantages
(1) degree of arbitrary cost apportionment (cost pool stage) (2) Drivers can't be specific (3) only quantitative/ related to production (4) needs to be effectively used (c-b analysis)
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ABC: (4) activity hierarchies
(1) unit-level (volume/ per unit - lab.) (2) batch-level (per batch - setups) (3) product-sustaining (incurred irrespective - maintenance) (4) facility-sustaining (common - admin)
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splitting semi-varible costs: High low method equation
comparing changes in cost that result from highest and lowest activity levels
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Other cards in this set

Card 2


CVP assumptions (6)


(1) all other variables cst (only volume changes) (2) single product/ cst. sales mix (3) TC+TR linear functions (4) profits MC (5) costs separable (6) analysis only ST relevant range

Card 3


margin of safety + equation


Preview of the front of card 3

Card 4


profit-volume ratio (contribution ratio) + equation


Preview of the front of card 4

Card 5


Mark up


Preview of the front of card 5
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