CIMA P1 Flashcards

* 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.

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.

Total factory costs = all production costs except materials

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

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).

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

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).

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 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

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

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

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 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.

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

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

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)

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

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

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).

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

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

The fixed cost is ‘a’ in the equation

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.

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

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.