ACCA P5 flashcards – set 2

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

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.

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

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)

Capital reserves are the share premium account and the revaluation reserve. They represent amounts owing to shareholders, but this amount cannot be paid out as dividend.

The four perspectives are:

• Financial
• Customer
• Internal
• Innovation and learning

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)

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

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).

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

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

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.

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.

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.