ACCA F2 flashcards – set 1

An incremental cost is an extra cost (and is relevant for investment decisions).

The three ‘E’s’ are:

• Economy
• Efficiency
• Effectiveness

Benchmarking is the comparison with best practice.

The four perspectives are:

• Financial
• Customer
• Internal
• Innovation and learning

RI = profit less notional interest on the capital invested

ROI = profit / capital invested

The dividend cover = profit after tax / dividends

The interest cover = profit before interest and tax / interest

The quick ratio = (current assets – inventory) / current liabilities

The current ratio = current assets / current liabilities

The four main elements are:

• Purpose
• Strategy
• Culture
• Values

Possible reasons for an adverse material expenditure variance include:
– paying more than the budgeted price per unit of materials due to errors in purchasing
– a price increase in materials
– purchasing better quality materials
– incorrect budgeting of the standard cost of materials

The operating statement shows why the actual profit differs from the budgeted profit.

The sales volume variance measures the effect on the budgeted profit of the difference between the actual sales volume and the budgeted sales volume.

Bottom-up budgeting is where lower level managers are involved in the budget process – they prepare budgets for their departments which are then checked and co-ordinated by higher level management.

Top-down budgeting is where the budgets are prepared by high-level management and then communicated to lower levels.

Lower level management do not participate in the budget process.

The IRR is the rate of interest at which the Net Present Value of the project is zero.

The payback period is the number of years it takes to get back the original investment, in cash terms.

A sunk cost is a cost already incurred (and is not relevant for investment decisions)

Capital expenditure is the acquisition of non-current assets (which appear on the Statement of Financial Position)

Revenue expenditure is the payment of running expenses (which appear on the Income Statement)

The principal budget factor is the factor that limits the level of activity of the organisation (usually sales).

A flexed budget is a budget re-written for the actual level of activity.

Planning
Control
Co-ordination
Authorisation
Communication
Motivation
Evaluation

A Paasche index number uses current year quantities.

A Laspeyre price index number uses base year quantities.

If there is perfect negative correlation, then r will equal -1.

It means that 75% of the changes in y are explained by changes in x.

The coefficient of determination is the square of the coefficient of correlation.

Perfect positive linear correlation means when the observations are plotted on a graph they all lie exactly on a straight line pointing upwards (i.e. both variables increase together)

r is the coefficient of correlation

n is the number of pairs of observations

Prevention costs (the costs of improving the quality of the production process)

Appraisal costs (the costs of quality control checks)

Internal failure costs (the costs of re-working; the costs of rejects)

External failure costs ( the costs of delivering poor quality to the customer – e.g. replacements, repair work)

‘Get it right first time’ – i.e. good quality production – no re-working, no rejects

Continuous improvement

Customer focus

The cost gap is the excess of the estimated actual cost over the target cost.

The target cost is the maximum cost we can allow in order to achieve the target level of profitability based on a pre-determined selling price.

A cost driver is whatever activity is causing the cost to occur.

* Intangibility – the output of a service industry is performance rather than tangible goods.
* Perishability – a service cannot be stored
* Simultaneity – a service is received by the customer at the same time as it is delivered – it cannot be checked first.
* Heterogeneity – every service is likely to be different.

A by-product is output from a process which has a low value relative to the main product(s) being produced in the process.

Abnormal gains and losses are valued at full cost per unit.

An abnormal gain is the amount by which the actual loss is less than the normal (or expected) loss.

An abnormal loss is the excess of the actual loss over the normal (or expected) loss.

A normal loss is the loss that is expected to occur.

A mark-up is when the profit is calculated as a percentage of cost; a margin is when the profit is calculated as a percentage of selling price.

The profits will be the same if there is no change in the level of inventory over the period (i.e. when the closing inventory is the same level as the opening inventory).

The difference is because of the difference in the way opening and closing inventories are valued. Under marginal costing they are valued at the marginal (variable) cost of production; under absorption costing they are valued at the full cost of production (variable plus fixed).

The marginal cost of production is the total of all variable production costs.

The contribution is the profit before fixed costs (or the revenue less all variable costs).

The actual overheads are less than the total overheads absorbed.

Allocation – whole cost items are charged to the relevant cost centre

Apportionment – cost items are shared/divided between several cost centres

The labour production volume ratio = expected hours to produce actual output / total hours available (budgeted) x 100%

Labour capacity ratio = Number of hours spent working / total hours available x 100%

Idle time ratio = idle hours / total hours x 100%

Labour efficiency ratio =  expected hours to produce actual output / actual hours to produce actual output x 100%

Labour turnover ratio =

number of leavers who require replacing / average number of employees x 100%

Employees are paid a fixed amount for each unit produced.

 Direct labour costs are directly involved in the making of products – the basic pay plus overtime premium on specific jobs

Indirect labour costs are all other labour costs – general overtime premiums, bonus payments, and the cost of indirect workers (e.g. canteen, maintenance)

When we are producing our own inventory and therefore deliveries arrive over a period instead of all at once.

The re-order quantity is the quantity actually ordered each time. The re-order level is the level of inventory that triggers the placing of an order.

C_h represents the cost of holding one unit for one year.

D represents the total demand per year.

C_o represents the cost of placing one order.

FIFO and Weighted Average Cost are allowed by IAS 2. LIFO is not allowed.

FIFO means first-in-first-out and means that we assume that items are issued out of inventory in the order in which they were received into inventory. Therefore, any closing inventory is assumed to be made up of the most recent items received into inventory.

A delivery note is included by the supplier with the goods, and lists the quantity of goods that are being delivered.

A purchase requisition form is prepared by the department that requires the material and is sent to the purchasing department.

A cost centre is a production or service location, activity, function or item of equipment for which the total cost can be calculated.

A cost unit is a unit of product or service for which the cost is calculated.

The gradient of the line would be ‘b’.

The variable cost per unit is ‘b’ in the equation

The fixed cost is ‘a’ in the equation

The dependent variable is y

The dependent variable would be the sales revenue (it depends on the amount of advertising expenditure.)

A semi-variable cost is a combination of variable and fixed costs.

A stepped fixed cost is one that is fixed in total within a certain level of activity, but where once an upper limit of activity is reached then a new higher level of fixed cost occurs.

A fixed cost is one which remains constant in total over certain levels of activity.

A variable cost is one which varies in total with the level of activity.

Indirect costs are those costs which cannot be specifically identified with a specific cost unit or cost centre.

The prime cost is the total of the direct costs of a unit.

Direct costs are those that can be specifically measured in each unit of production.

A pie chart is a circle that is divided into segments representing each type of observation. The size of each segment is proportional to the proportion of the total that are within each type of observation.

The line that most nearly goes through all the points when the data is plotted on a graph.

The population is stratified and a sample of each strata is restricted to a fixed number.

Every n’th item is selected, after a random starting item

Each item in the population has an equal chance of being selected.

A sampling frame is a numbered list of all items in a population

To enable a selling price to be set
To calculate a profit per unit
To value inventory

Data consists of facts that have been gathered.

Information is data that has been processed in a way that is meaningful to the person who receives it.

Good information should be:

• Accurate
• Complete
• Cost-effective
• Understandable
• Relevant
• Accessible
• Timely
• Easy to use

To help management run the business in a way that achieves the objectives of the business.