Flashcards · 9706 · A Level Topic 4

Cost and management accounting (A Level) flashcards

33 cards on A Level Topic 4, subtopics 4.1 to 4.4. Pick a subtopic or study them all.

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4.1 Activity based costing (ABC)

Cost pool and cost driver: Cost pool: the overhead cost collected for one activity. Cost driver: the factor that causes the cost of an activity and measures each product's use of it.
An inspection pool of $45,000 is driven by 150 inspections. A product needs 12 inspections for 800 units. Cost per unit?: Driver rate 45,000 ÷ 150 = $300 per inspection. 12 × $300 = $3,600; $3,600 ÷ 800 = $4.50 per unit.
Total cost $13.50 per unit. Selling price with a 40% mark-up, and the margin that gives: Price = 13.50 × 1.40 = $18.90. Profit $5.40; margin = 5.40 ÷ 18.90 = 28.6% of selling price.
Selling price from a margin on selling price: formula: Selling price = total cost ÷ (1 − margin %). Mark-up is profit as a percentage of cost; margin is profit as a percentage of selling price.
What makes a good cost driver?: It causes the pool cost (cause and effect), can be measured for each product, the data is available at reasonable cost, and products use it in different proportions.
Why can ABC raise the cost of a low-volume product?: Low-volume products use set-ups, inspections and orders heavily for their size. Labour-hour absorption spreads these costs over high-volume lines; ABC moves them back to the products that cause them.
400 units are in closing inventory. Overhead is $6.00 per unit under ABC and $4.50 traditionally. Effect on total profit?: Profit is 400 × $1.50 = $600 higher under ABC, because more overhead is carried forward in inventory. If all output is sold, total profit is the same under both.
Three limitations of ABC: Costly and time-consuming to set up and run; the choice of pools and drivers needs judgement; some overheads have no clear driver; savings appear only if resources are actually removed.

4.2 Standard costing

Direct material price and usage variance formulae: Price = (standard price − actual price) × actual quantity bought. Usage = (standard quantity for actual output − actual quantity used) × standard price.
Standard 3 m at $4.00 per unit. 500 units made using 1,540 m costing $6,468. Price and usage variances?: Price: 1,540 × $4.00 − $6,468 = $308 A. Usage: (1,500 − 1,540) × $4.00 = $160 A.
Standard 2 hours at $9.00 per unit. 300 units made in 590 hours costing $5,605. Rate and efficiency variances?: Rate: 590 × $9.00 − $5,605 = $295 A. Efficiency: (600 − 590) × $9.00 = $90 F.
Fixed overhead expenditure and volume variances, and how volume splits: Expenditure = budgeted − actual fixed overhead. Volume = (actual output − budgeted output) × standard fixed overhead per unit. Volume = capacity + efficiency sub-variances.
Budget 1,000 hours, fixed overhead $12 per hour. Actual 950 hours worked; standard hours for actual output 920. Capacity and efficiency variances?: Capacity: (950 − 1,000) × $12 = $600 A. Efficiency: (920 − 950) × $12 = $360 A. Volume: $960 A.
Sales price and sales volume variances: Price = (actual price − standard price) × actual units sold. Volume = (actual units sold − budgeted units) × standard profit per unit.
Material price favourable with usage adverse; labour rate favourable with efficiency adverse. Likely causes?: Materials: cheaper material that was wasted more. Labour: trainees or less skilled staff, paid less but working slower.
Two advantages and two disadvantages of standard costing: Advantages: management by exception; variances assigned to managers; targets can motivate; simpler inventory valuation. Disadvantages: standards are costly to set and update; out-of-date standards mislead; variances are known only after the event.

4.3 Budgeting and budgetary control

Master budget: The summary of all the budgets: usually the budgeted statement of profit or loss, budgeted statement of financial position and cash budget.
Production budget formula. Sales 450 units, opening inventory 60, closing 90?: Production = sales + closing inventory − opening inventory. 450 + 90 − 60 = 480 units.
Material used 1,200 kg; opening inventory 150 kg; closing 200 kg; $3.20 per kg. Purchases?: 1,200 + 200 − 150 = 1,250 kg. 1,250 × $3.20 = $4,000.
Sales: January $10,000, February $12,000. Customers pay 70% one month after sale, 30% two months after. Cash received in March?: 30% × $10,000 + 70% × $12,000 = $3,000 + $8,400 = $11,400.
Why is depreciation left out of a cash budget?: It is a non-cash expense: no money leaves the business. It is still included in the budgeted statement of profit or loss.
Variable costs are $18,000 at 600 units. Flexed figure at 750 units, and what happens to fixed costs?: $18,000 ÷ 600 = $30 per unit; 750 × $30 = $22,500. Fixed costs are not flexed (within the normal activity range).
Why compare actual results with a flexed budget rather than a fixed budget?: Both relate to the same output, so the remaining differences come from price, efficiency and spending, not volume. Managers are not blamed for volume they did not control.
Limiting factor in budgeting: The scarce resource or condition that caps activity (demand, labour, materials, machine hours, cash). Budget that function first and fit the others to it.
Participative vs imposed budgets: one risk of each: Participative: managers may build slack into their requests. Imposed: quick and aligned with objectives, but managers may resent and reject targets they did not help set.

4.4 Investment appraisal

Discount factor formula, and the factor for year 3 at 8%: 1 ÷ (1 + r)ⁿ. 1 ÷ 1.08³ = 0.7938.
Cost $50,000; inflows $15,000, $20,000, $25,000, $10,000 in years 1–4. Payback?: Cumulative $15,000, $35,000 after 2 years; $15,000 still needed from year 3's $25,000. 2 + 15,000 ÷ 25,000 = 2.6 years (about 2 years 7 months).
ARR: formula. Cost $40,000, 4 years, total net cash inflows $56,000, no residual value?: ARR = average profit ÷ average investment × 100. Profit $16,000; average profit $4,000; average investment $20,000; ARR = 20%.
Cost $30,000; $12,000 a year for 3 years; factors at 10%: 0.9091, 0.8264, 0.7513. NPV and decision?: Present values 10,909 + 9,917 + 9,016 = $29,842. NPV = 29,842 − 30,000 = ($158). Negative, so reject.
NPV is $2,000 at 12% and ($1,500) at 16%. Estimate the IRR: IRR ≈ 12 + [2,000 ÷ (2,000 + 1,500)] × 4 = 14.3%. It is an estimate from interpolation; accept only if above the cost of capital.
Forecast profit $9,000 after depreciation $6,000 and an apportioned overhead of $1,500 that would be paid anyway. Net cash inflow?: 9,000 + 6,000 + 1,500 = $16,500. Depreciation is non-cash and the apportioned overhead is not a relevant cash flow.
Which appraisal techniques ignore the time value of money, and which uses profit rather than cash?: Payback and ARR ignore the time value of money. ARR uses profit; payback, NPV and IRR use cash flows.
One strength and one weakness each of payback and NPV: Payback: simple, shows speed of cash recovery; ignores later cash flows and the time value of money. NPV: uses all cash flows and the time value of money, shows value added; needs a cost of capital and relies on forecasts.