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### What is meant by an ‘incremental cost’?

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

### In assessing ‘Value for Money’, what are the three ‘E’s’?

The three ‘E’s’ are:

- Economy
- Efficiency
- Effectiveness

### What is meant by the term ‘benchmarking’?

Benchmarking is the comparison with best practice.

### What are the four perspectives covered by the Balanced Scorecard?

The four perspectives are:

- Financial
- Customer
- Internal
- Innovation and learning

### How is the Residual Income (RI) calculated?

RI = profit less notional interest on the capital invested

### How is the Return on Investment (ROI) calculated?

ROI = profit / capital invested

### How is the Dividend Cover calculated?

The dividend cover = profit after tax / dividends

### How is the Interest Cover calculated?

The interest cover = profit before interest and tax / interest

### What is the Quick Ratio (or Acid-test Ratio)?

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

### What is the Current Ratio?

The current ratio = current assets / current liabilities

### What are the four main elements that one would expect to appear in a Mission Statement?

The four main elements are:

- Purpose
- Strategy
- Culture
- Values

### Give possible reasons for an adverse material expenditure variance.

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

### What is the purpose of an operating statement (as part of variance analysis)?

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

### What does the sales volume variance measure?

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

### What is bottom-up budgeting?

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.

### What is top-down budgeting?

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.

### What is the definition of the Internal Rate of Return (IRR)?

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

### What is meant by the ‘payback period’?

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

### What is a ‘sunk cost’?

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

### What is the difference between capital expenditure and revenue expenditure?

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)

### What is meant by the ‘principal budget factor’?

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

### What is a flexed budget?

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

### What are the purposes of budgeting?

Planning

Control

Co-ordination

Authorisation

Communication

Motivation

Evaluation

### A Paasche price index number uses base year or current year quantities. Which?

A Paasche index number uses current year quantities.

### A Laspeyre price index number uses base year or current year quantities. Which?

A Laspeyre price index number uses base year quantities.

### If there is perfect negative correlation between two variables, what will be the value of the coefficient of correlation?

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

### What does a coefficient of determination of 0.75 mean?

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

### How is the coefficient of determination calculated?

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

### What is meant by the expression ‘perfect positive linear 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)

### What is the symbol for the coefficient of correlation on the formulae sheet?

r is the coefficient of correlation

### In the formulae for regression analysis on the formulae sheet, what does the symbol n represent?

n is the number of pairs of observations

### What are the four types of cost relating to quality?

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)

### What are the basic principles involved in Total Quality Management?

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

Continuous improvement

Customer focus

### What is meant by the ‘cost gap’ in the context of target costing?

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

### What is meant by the term ‘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.

### In Activity Based Costing, what is meant by the term ‘cost driver’?

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

### What are the four main differences between the output of service and manufacturing businesses?

* 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.

### What is meant by the term ‘by-product’?

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

### In process costing, how are abnormal losses or gains valued?

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

### In process costing, what is meant by an abnormal gain?

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

### In process costing, what is meant by an abnormal loss?

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

### In process costing, what is meant by a normal loss?

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

### What is the difference between a profit mark-up and a profit margin?

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.

### Under what circumstances will the profit using marginal costing and the profit using absorption costing be the same?

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).

### What is the reason for a difference between the profit calculated under marginal costing principles and the profit calculated under absorption costing principles?

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).

### What is meant by the ‘marginal cost of production’?

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

### What is meant by the word ‘contribution’?

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

### If there is an over-absorption of overheads, does it mean that the actual total overheads a more or less than the total overheads absorbed?

The actual overheads are less than the total overheads absorbed.

### What is the difference between the allocation of overheads and the apportionment of overheads?

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

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

### Define the labour production volume ratio (activity ratio)

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

### Define the labour capacity ratio

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

### Define the labour idle time ratio

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

### Define the labour efficiency ratio

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

### Define the labour turnover ratio.

Labour turnover ratio =

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

### What is meant by a piecework system of remuneration?

Employees are paid a fixed amount for each unit produced.

### What is the difference between direct and indirect labour costs?

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)

### In which circumstance do we use the formula for the Economic Batch Quantity instead of the formula for the Economic Order Quantity?

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

### In inventory control, what is the difference between the ‘re-order quantity’ and the ‘re-order level’?

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.

### In the formula on the formula sheet for the Economic Order Quantity, what does the symbol C_{h} represent?

C_{h }represents the cost of holding one unit for one year.

### In the formula on the formula sheet for the Economic Order Quantity, what does the symbol D represent?

D represents the total demand per year.

### In the formula on the formula sheet for the Economic Order Quantity, what does the symbol C_{o} represent?

C_{o }represents the cost of placing one order.

### Which of the following methods of inventory valuation are acceptable under IAS 2 for financial accounting:

### FIFO; LIFO; Weighted Average Cost ?

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

### What is meant by the FIFO method of valuing inventory?

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.

### What is a ‘delivery note’?

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

### What is a ‘purchase requisition form’?

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

### What is meant by a ‘cost centre’?

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

### What is meant by a ‘cost unit’?

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

### If the linear equation y = a + bx, were to be drawn on a graph, what would be the gradient of the line?

The gradient of the line would be ‘b’.

### In the linear equation y = a + bx, where y is the total cost and x is the total production, what is the variable cost per unit?

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

### In the linear equation y = a + bx, where y is the total cost and x is the total production, what is the fixed cost?

The fixed cost is ‘a’ in the equation

### In the linear equation y = a + bx, which is the dependent variable?

The dependent variable is y

### If we have an equation relating the total sales revenue to the total advertising spend, which would be the dependent variable?

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

### What is a ‘semi-variable cost’?

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

### What is a ‘stepped fixed cost’?

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.

### What is a ‘fixed cost’?

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

### What is a ‘variable cost’?

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

### What is meant by ‘indirect costs (or overheads)’?

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

### What is the ‘prime cost’ of a unit of production?

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

### What are ‘direct costs’?

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

### Describe a ‘pie chart’?

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.

### What is meant by a ‘line of best fit’?

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

### What is meant by ‘quota sampling’?

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

### What is meant by ‘systematic sampling’?

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

### What is meant by ‘random sampling’?

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

### When sampling, what is meant by a ‘sampling frame’?

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

### What are the purposes of costing (i.e. calculating the cost of producing a product or service)?

To enable a selling price to be set

To calculate a profit per unit

To value inventory

### What is the difference between data and information?

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.

### What are the attributes of good information?

Good information should be:

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

### What is the purpose of management accounting?

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

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