ACCA F8 flashcards – set 1

* Ideal standard
* Basic standard
* Expected standard
* Current standard

Limitations of standard costing are:
• accurate preparation of standards can be difficult
• it may be necessary to use different standards for different purposes
• less useful if not mass production of standard units
* traditional standards are based on company’s own costs where the practices of other organisations are taken into account
• can lead to an over-emphasis on quantitative measures of performance at the expense of qualitative measures

Uses of standard costing are:
* inventory valuation
* as a basis for pricing decisions
* for budget preparation
* for budgetary control
* for performance measurement
* for motivating staff using standards as targets

Standard costing is a system of accounting based on pre-determined costs and revenue per unit which are used as a benchmark to assess actual performance and therefore provide useful feedback information to management.

Practical reasons for the learning effect to cease are:
(a) When machine efficiency restricts any further improvement
(b) The workforce reach their physical limits
(c) If there is a ‘go-slow’ agreement among the workforce

Seasonal variations is the regular rise and fall over shorter periods of time. For example, winter hats sales are likely to be higher than average every winter and lower than average every summer

Cyclical Variations are the wave-like appearance of a number of time series graph when taken over a number of years. Generally this correspondents to the influence of booms and slumps in the industry.

Trend: is the underlying pattern of a time series when the short term fluctuations have been smoothed out.

Decision trees are diagrammatical representations of the various alternatives and outcomes. They are relevant when using an expected value approach and where there are several decisions to be made.

* costs
* competitors
* customers

Total factory costs = all production costs except materials

The service is received by the customer at the same time as it is performed.

Services are intangible and it is therefore harder to measure the quality.

* Strategic
* Tactical
* Operational

* Financial performance
* Competitive performance
* Quality
* Flexibility
* Resource Utilisation
* Innovation

* Financial
* Customer
* Internal
* Innovation and Learning

Key performance indicators are the measures used to determine whether or not the critical success factors are being achieved.

Critical success factors are those areas that the business must focus on if it wishes to succeed.

The price elasticity of demand is the % change in demand divided by the % change in price.

Mark-up is the gross profit as a percent of cost. Margin is the gross profit as a percent of sales.

Slack occurs when the optimum solution uses less of a resource than the maximum that is available.

* Economy
* Efficiency
* Effectiveness

The maximum transfer price is the lower of:
* the selling price less the marginal costs of the receiving division
* the price for which the receiving division could buy the goods externally

The minimum transfer price is the marginal cost of the transferring division plus any lost contribution.

The RI is the division profit (before interest and tax) less a notional interest charge on the capital invested in the division.

The ROI is the divisional profit (before interest and tax) as a percentage of the capital invested in the division.

An investment centre is a division for which the divisional manager has control over costs, revenues, and investment in non-current assets and net current assets.

A division is an area of the business over which the divisional manager has a degree of autonomy (power to make decisions).

A transfer price is the price at which one division charges another division for goods or services provided.

Internal (employees, management)
Connected (shareholders, suppliers, customers, lenders)
External (government, community etc..)

Intangibility
Simultaneity / inseparability
Perishability
Heterogenuity
No transfer of ownership

Non-financial performance measures (such as quality) and important for achieving future growth. Financial measures concentrate on the past rather than the future.

TQM is a strategy aimed as creating an awareness of quality in all aspects of a business, thus reducing wastage and inefficiencies.

JIT involves keeping minimum inventories – producing goods when they are needed and eliminating large inventories of raw materials and finished goods.

Operational variances are comparing the actual results with the revised standard.

Planning variances are comparing the revised standards with the original standards.

The revised standard cost is a realistic standard cost after taking into account permanent changes since the original standard cost was calculated.

An operating statement is a statement reconciling the actual profit to the budgeted profit, and explaining the reasons for the difference.

A fixed overhead volume variance arises when the actual production is different from the budgeted production.

The employment of higher or lower skilled workers.
The use of better or worse quality materials
More or less training of workers

The purchase of better or worse quality materials (resulting in less or more wastage)
Greater or lesser efficiency of the production department in controlling waste
A change in the mix of materials

A change in the price charged by the supplier
A change of supplier
The deliberate purchase of better/worse quality material

A higher or lower selling price
A change in market share
A change in the size of the overall market

The purpose of a flexed budget is control – the actual results can be compared with the flexed budget results.

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

The main uses are the valuation of inventory, and to act as control (comparing actual with standard costs).

As total output doubles, the average time per unit will fall to a fixed percentage of the previous average time per unit.

Learning curve theory allows the average labour time per unit to be estimated and is therefore useful when budgeting costs that vary with the labour time per unit (the cost of labour, and possibly variable overheads if these are incurred on an hourly basis).

Feedback control compares actual results with budget.
Feedforward control compares budget results with forecast.

Rolling budgets involve always having a budget for the following twelve months, which involves updating the existing budget and adding an additional period (usually month).

Incremental budgeting involves taking the results for the previous period and adjusting for inflation and changes in the expected level of activity.

Top-down budgeting is where the budget is imposed on the budget holder
Bottom-up budgeting is where the budget holder participates in preparing the budget

* Planning
* Control
* Communication
* Co-ordination
* Evaluation
* Motivation
* Authorisation and delegation

Sensitivity analysis looks at the effect of changes in just one variable at a time.
Simulation attempts to look at the effect of all possible combinations of variables.

The decision maker is said to be a risk avoider.

The decision maker is a risk seeker.

What is the attitude to risk of a decision maker who uses the expected value approach?

The decision maker is a risk avoider

For each course of action, the best outcome is identified (maximum)
The chosen course of action is the one that gives the best (maximum) of the best outcomes.

For each course of action, the worst outcome is identified (minimum)
The chosen course of action is the one that gives the best (maximum) of the worst outcomes

1 It is usually impossible for the probabilities to be estimated accurately
2 For a one-off decision, the actual outcome will not be the expected value
3 Expected values ignore the risk and the decision makers attitude to risk

The expected value is the weighted average of the possible outcomes, weighted by their respective probabilities.

Risk is measurable – several outcomes are possible and the probability of each outcome is known.

Uncertainty is not measurable – there are several possible outcomes, but the probabilities of the outcomes are not known.

A sunk cost is a cost that has already been incurred (and is therefore not affected by any future decision).

Price discrimination is when the same product or service is sold at different prices in different markets.

Volume discounting is the strategy of offering a discount to customers who purchase a large quantity

Penetration pricing is the strategy of charging a low price when a product is first launched in order to gain market share, with the intention of increasing the price later.

Market skimming is the strategy of charging a high price when a product is first launched, with the intention of reducing the price over time. (A popular strategy for new technology – rich people are prepared to pay higher prices to be the first to own the new technology)

The shadow cost of a resource is the most extra (i.e. the premium) that the business would be prepared to pay for one extra unit of the resource.
(calculated as the extra contribution that would be generated by having one extra unit of the resource at its original cost).

The CS ratio = contribution / sales

The margin of safety is the difference between the budgeted sales volume and the breakeven sales volume.
It can be expressed in units, or in $’s of revenue. or as a percentage of the budgeted sales volume.

The vertical axis shows the profit (or loss) in $’s.

The horizontal axis either shows the volume in units, or the sales revenue in $’s

The vertical axis shows the costs and revenues in $’s.

The horizontal axis shows the volume in units.

The sales revenue at which the profit is zero
(i.e. no profit / no loss)

The number of units sold at which the profit is zero (i.e. no profit / no loss)

1 Inout / output analysis
2 Flow cost accounting
3 Life cycle costing
4 Activity based costing

1 Increase the selling price
2 Reduce material cost per unit
3 Reduce the operating expenses
4 Reduce the time required per unit

TPAR = throughput contribution per hour / factory cost per hour

The bottleneck is the operation that is limited the rate of production

1) That the company operates following just-in-time principles (i.e. keeping minimum levels of inventory)
2) That in the short term, all costs are fixed other than the cost of materials (i.e. that the only variable cost is materials)

1 Design costs out of the product
2 Minimise the time to market
3 Maximise the length of the life cycle

* Development phase
* Introduction / launch phase
* Growth phase
* Maturity phase
* Decline phase

The idea of lifecycle costing is to include all costs over the entire life of a product (and hence the estimated profitability) as opposed to costing over one year at a time.

Steps to be considered would include:
1) Value analysis – change the design so as to eliminate costs that do not add value in the perception of the customer
2) Cut material costs by reducing wastage
3) Cut labour costs by finding ways of working faster
4) The use of technology to make production more efficient

The cost gap is the excess of the estimated cost of production over the target cost

In order to calculate a target cost:
1 Determine a realistic selling price
2 Decide on what profit is required
3 Subtract the profit from the selling price to arrive at the target cost.

The cost driver is the unit of an activity that causes the activity cost to change.