Financial Management Accounting

Variable Cost per Unit

(Cost of high - Cost of Low) / Units of high - Units of low)

Direct Material Price Variance

Standard cost per material * Act QT Material - Actual Cost

Direct Material Usage Variance

(Standard Qt Material per unit* St price per mat * Actual Units) - Standard price per mat * Actual Qt Mat

Direct Labour Variance

(Labour hour per unit * Standard cost per Lab hour * Actual Units) - Actual Cost

Direct Labour Rate Variance

(Standard rate of labour - Actual rate of labour) x Actual hours

Direct Labour Efficiency Variance

(Lab hours per unit * Lab rate * actual Units) - Lab rate * actual hours

Variable overhead Price variance

Var OH rate X actual hours - actual cost

Variable overhead efficiency Variance

hours per unit X actual units X standard rate - standard variable overhead rate X actual hours

Value Analysis

Value analysis (VA) identifies four characteristics of value; cost, exchange, use and esteem value

Reducing cost of features not valuable to the customer

Value and Quality of product must be maintained and a reduced cost

This involves reviewing the costs and raw materials

Value Engineering

Value built into products without unessarry costs, the lowest cost should be achieved for a specific design

Benefits of ABC

• More precise product costing:

  ABC allocates indirect costs to activities and then to products, providing a more accurate picture of a product's true cost than traditional methods that rely on volume-based allocations. 

• Better profit margin analysis:

  By including all costs, both direct and indirect, ABC gives a clearer view of each product's or service's profitability. 

• Informed pricing strategies:

  Accurate cost data allows for more strategic and profitable pricing decisions. 

• Supports better budgeting:

  ABC provides more accurate data, which leads to more realistic and effective budgeting. 

Negatives of ABC

• Expensive to implement and maintain:

  Setting up an ABC system can be costly due to the need for new software, training, and the extensive data collection and analysis involved. 

• Time-consuming:

  The process of collecting, analyzing, and updating data for ABC is very time-consuming compared to traditional costing methods. 

• Difficult to identify cost drivers:

  Finding appropriate and accurate cost drivers can be a significant challenge. 

• Not suitable for all businesses:

  For smaller companies with low overhead or simple business models, the cost and effort of implementing ABC may outweigh the benefits. 

Incremental Benefits

• Easy and quick to prepare:

  It requires less time, effort, and resources because it uses the prior year's budget as a base, rather than building from scratch. 

• Lower cost:

  Due to the reduced preparation time and simplified process, the cost to create the budget is lower. 

• Stability and consistency:

  The approach provides a stable and predictable budget year-to-year, which is ideal for organizations with minimal planned changes. 

Incremental Negatives

• Encourages wasteful spending:

  Managers may spend the entire budget to ensure a similar or larger budget the following year, even if the money isn't necessary. This "use it or lose it" mentality can lead to waste and inefficiency. 

• Promotes complacency:

  The simplicity of the process can lead to a lack of thorough review, creating a "disconnect from reality" where budgets are not questioned and may become outdated. 

• Fails to adapt to change:

  The assumption that the future will be similar to the past makes it difficult to adjust to major shifts in the market, company, or industry. 

Positives for Rolling Budget

• Flexibility and agility:

  Rolling budgets can adapt quickly to market shifts, new opportunities, or unexpected expenses without waiting for an annual cycle. 

• Improved accuracy:

  By constantly updating with the latest financial data, these budgets provide a more reliable and accurate picture than static annual plans, reducing guesswork. 

• Better decision-making:

  Having timely and accurate information available allows management to make more informed decisions about spending, resource allocation, and strategic initiatives. 

Negatives of Rolling Budget

• More labor-intensive:

  Rolling budgets require more frequent monitoring and analysis, putting a strain on staff time and resources. 

• Increased costs:

  Additional time means higher staff and resource costs, especially for departments like procurement and accounts. 
  Need for new tools:

  Implementation may require acquiring new software to handle regular updates, which involves investment and training. 

Flexible Budget Positives

• Realistic projections:

  A flexible budget adjusts to actual sales or production levels, providing a more accurate financial picture than a static budget based on fixed assumptions. 

• Adaptability to change:

  It allows a business to react quickly to market fluctuations, unexpected costs, or new opportunities by adjusting spending accordingly. 

• Increased accountability:

  It makes managers more accountable because their performance is measured against a relevant and up-to-date benchmark. 

Flexible Budget Negatives

• Time-consuming:

  Creating and updating a flexible budget requires more time and expertise than a static budget.

• Complex calculations:

  It involves complex calculations and analysis to categorize costs, determine cost-per-unit, and adjust for different activity levels.

• Requires accurate cost identification:

  Misclassifying costs as fixed when they are variable (or vice versa) can lead to misleading adjustments and poor decision-making. 

Fixed overhead volume variance

(Budgeted overheads/Budgeted output) x actual output - Budgeted overheads

Product Life Cycle

Introduction, limited competition, early adopters

Growth, more competition, wider market available

Maturity, reduction in competition, sales growth starts to slow

Decline, decline in demand, price reductions likely

Identify one performance indicator used by Sportronix Ltd for each element of a balanced scorecard

Financial perspective - Spend per customer

Customer perspective - Repeat customers or Customer feedback

Innovation & Learning perspective - New destinations or Staff turnover

Internal perspective - Website offering