CIMA P1 flashcards

Good information should be:

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

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.

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

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

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

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.

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

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

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

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

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

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 the ‘marginal cost of production’?

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

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

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

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)

Planning Control Co-ordination Authorisation Communication Motivation Evaluation

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

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

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

What is meant by an ‘incremental cost’?

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

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.

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.

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

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 bottleneck is the operation that is limited the rate of production

TPAR = throughput contribution per hour / factory cost per hour

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

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

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

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

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 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 CS ratio = contribution / sales

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).

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

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.

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

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

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.

The decision maker is 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 said to be risk neutral.

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

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

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).

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

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

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

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

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

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

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

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

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

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

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

Total factory costs = all production costs except materials

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.

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

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.

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

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.

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

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

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