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List four standards in Standard costing?
* Ideal standard
* Basic standard
* Expected standard
* Current standard
What are the limitations of standard costing?
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
What are the uses of standard costing?
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
What is Standard costing?
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.
What are Seasonal variations in time series analysis?
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
What are Cyclical Variations in time series analysis?
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.
What is Trend in time series analysis?
Trend: is the underlying pattern of a time series when the short term fluctuations have been smoothed out.
What are decision trees?
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.
What is meant by the return per factory hour in throughput accounting?
What is meant by total factory costs for throughput accounting?
Total factory costs = all production costs except materials
In the context of linear programming, what is meant by ‘slack’?
Slack occurs when the optimum solution uses less of a resource than the maximum that is available.
What are operational variances measuring?
Operational variances are comparing the actual results with the revised standard.
What are planning variances measuring?
Planning variances are comparing the revised standards with the original standards.
When considering planning and operational variances, what is meant by the revised standard cost?
The revised standard cost is a realistic standard cost after taking into account permanent changes since the original standard cost was calculated.
What is the purpose of an operating statement?
An operating statement is a statement reconciling the actual profit to the budgeted profit, and explaining the reasons for the difference.
If absorption costing is being used, what is the cause of a fixed overhead volume variance?
A fixed overhead volume variance arises when the actual production is different from the budgeted production.
Suggest three possible reasons for the existence of a labour efficiency variance.
The employment of higher or lower skilled workers.
The use of better or worse quality materials
More or less training of workers
Suggest three possible reasons for the existence of a materials usage variance.
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
Suggest three possible reasons for the existence of a materials price variance.
A change in the price charged by the supplier
A change of supplier
The deliberate purchase of better/worse quality material
Suggest three possible reasons for the existence of a sales volume variance.
A higher or lower selling price
A change in market share
A change in the size of the overall market
What is the purpose of a flexed budget?
The purpose of a flexed budget is control – the actual results can be compared with the flexed budget results.
What is a flexed budget?
A flexed budget is where the original budget is re-written for the actual level of activity.
What are the main uses of the standard cost of a product?
The main uses are the valuation of inventory, and to act as control (comparing actual with standard costs).
What is the difference between feedback and feedforward control?
Feedback control compares actual results with budget.
Feedforward control compares budget results with forecast.
What is meant by a ‘rolling budget’?
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).
What is meant by incremental budgeting?
Incremental budgeting involves taking the results for the previous period and adjusting for inflation and changes in the expected level of activity.
What is the difference between top-down budgeting and bottom-up (or participative) budgeting?
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
What are the principal aims / uses of budgeting?
* Authorisation and delegation
What is the attitude to risk of a decision maker who uses the minimax regret approach?
The decision maker is said to be a risk avoider.
What is the attitude to risk of a decision maker who uses the maximax approach?
The decision maker is a risk seeker.
What is the attitude to risk of a decision maker who uses the expected value approach?
What is the attitude to risk of a decision maker who uses the maximin approach?
The decision maker is a risk avoider
What is the maximax decision rule?
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.
What is the maximin decision rule?
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
What are the limitations of using expected values for decision making?
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
What is meant by the term ‘expected value’ in the context of decision making under uncertainty?
The expected value is the weighted average of the possible outcomes, weighted by their respective probabilities.
What is the difference between risk and uncertainty?
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.
What is meant by the term ‘sunk cost’?
A sunk cost is a cost that has already been incurred (and is therefore not affected by any future decision).
What is meant by the term shadow cost (or shadow price)?
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).
What is the definition of the CS ratio?
The CS ratio = contribution / sales
What is meant by the term ‘margin of safety’?
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.
What are the labels of the axes on a profit volume graph?
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
What are the labels of the axes on a breakeven chart?
The vertical axis shows the costs and revenues in $’s.
The horizontal axis shows the volume in units.
What is meant by the term breakeven sales revenue?
The sales revenue at which the profit is zero
(i.e. no profit / no loss)
What is meant by the term breakeven sales volume?
The number of units sold at which the profit is zero (i.e. no profit / no loss)
In what ways can the throughput accounting ratio of a product be improved?
1 Increase the selling price
2 Reduce material cost per unit
3 Reduce the operating expenses
4 Reduce the time required per unit
What is the definition of the throughput accounting ratio (TPAR) for a product?
TPAR = throughput contribution per hour / factory cost per hour
What is meant by the term ‘bottleneck’ in the context of throughput accounting?
The bottleneck is the operation that is limited the rate of production
What is meant by the term ‘cost driver’ in the context of activity based costing?
The cost driver is the unit of an activity that causes the activity cost to change.
What is meant by an ‘incremental cost’?
An incremental cost is an extra cost (and is relevant for investment decisions).
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 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 a ‘sunk cost’?
A sunk cost is a cost already incurred (and is not relevant for investment decisions)
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?
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 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)
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 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.
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).
What is meant by a ‘cost unit’?
A cost unit is a unit of product or service for which the cost is calculated.
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
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.
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 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:
- 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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