AMAC (AAT Level 4)

What is marginal costing (MC)?

Only VARIABLE production costs are incorporated.

What is total absorption costing (TAC)?

Where both FIXED and VARIABLE costs are incorporated.

What is activity based costing (ABC)?

A method of attributing overhead costs to products based on measurable factors that relate to activities that create overhead costs.

e..g., Set-up costs could be charged using number of set-ups.

What are some advantages of activity based costing?

1. Provides more accurate product line costings

2. Flexible to analyse costs for cost objects that aren't just products, e.g., managerial responsibilities.

3. More logical and comprehensive basis for costing work.

4. Aids identification and understanding of cost behaviour and therefore can improve cost estimation.

5. Provides meaningful financial and non-financial measures.

What are some disadvantages of activity based costing?

1. Little evidence to suggest that ABC improves profitability.

2. ABC information is historic and therefore lacks relevance for future strategic decisions.

3. Practical problems can occur such as cost driver selection.

What is meant by sunk costs?

Cost that has already been incurred and therefore will not be relevant to the investment decision (not relevant).

What is meant by committed costs?

Cost that will be incurred in the future as a result of past decisions that cannot be changed now (not relevant).

What is meant by opportunity cost?

The cost incurred by the forgone potential benefit from the best rejected course of action.

What are relevant costs?

Costs or revenues that change as a DIRECT result of a decision taken.

What are make or buy outsourcing decision techniques?

If the variable cost of producing the product internally is cheaper that the purchasing cost of the product, and the fixed costs are unavoidable, the product should be produced internally.

- Look out for opportunity costs (e.g., alternative uses of capacity).

- Social factors (redundancies)

- Legal factors (impact contractual obligations)

- Control of quality and delivery

- Customer perception (may value in-house production)

- Confidentiality (information given about product making process).

What is the shutdown decision technique?

If the product is generating a positive contribution and the fixed costs are unavoidable, it should NOT be shutdown.

- Look at future incremental cash flows

- Closure costs

- Reorganisation costs

- Alternative uses for resources

- Additional costs, such as reorganisational costs

- Impact of customers (portfolio size)

- Impact on other products (could be a loss leader)

What is the mechanisation decision technique?

If the cost of using machinery to complete a process is cheaper than a manual labour process, the process should be mechanised.

What is the index value of the base period?

100

How is the index value calculated?

Divide current years number with base year's number x 100

What is indexing rebasing?

Where base period is changed and each index needs to be divided by previous index for new base year.

What are the disadvantages of moving averages?

1. Values at beginning and end of series are lost, therefore, the complete period is not covered.

2. Moving averages may generate cycles not present in original data.

3. Averages are strongly affected by extreme values.

What is the equation to calculate price adjusted figures using RPI?

Current price = Actual revenue x (RPI in current year / RPI in sales year)

How do you deflate sales numbers?

Actual revenue x (RPI of first year / RPI of current year)

What are the disadvantages to linear regression?

- Assumes a linear relationship

- Based on historic information

- Ignores external factors

What are the advantages of expected value calculations?

1. Takes uncertainty into account via probability.

2. Information reduced to single number resulting in easier decisions.

3. Calculations are simple.

What are the disadvantages of expected value calculations?

1. Probabilities used are very subjective

2. EV is just a weighted average and has little meaning for one-off product

3. EV may not correspond to any actual possible outcomes

4. EV gives no indication of risk of arriving at calculated value.

What are the functions of the budgeting committee?

- Agree policy with regard to budgets

- Co-ordinate budgets

- Suggest amendments to budgets

- Approve budgets after amendment

- Examine comparisons of real vs budgeted and recommend action

- Agree planning assumptions

What are the aims of budgeting?

- Planning

- Controlling

- Co-ordination

- Communication

- Motivation

- Evaluation

- Authorisation

What is management by exception (efficient management)?

- Attention is drawn only to areas where operations are seen to be 'out of control'.

- Achieved by identifying variances that are 'exceptional'

What is responsibility accounting?

- Use of budgets as targets against which management performance can be measured.

- Presentation of particular performance reports relating to particular responsibility centres.

What are participative budgets?

Where more levels of managers give their input into the construction of budgets.

What are the advantages of participative budgets?

- Increased motivation

- Should contain better information

- Increases managers' understanding and commitment

- Better communication

- Senior can managers can concentrate on strategy

What are the disadvantages of participative budgets?

- Senior managers may resent loss of control

- Bad decisions from inexperienced managers.

- Budgets may not be in line with corporate objectives

- Budget preparation is slower and disputes can arise

- Figures may be subject to bias if junior manages try to impress or set easily achievable targets

- Certain environments may preclude participation, e.g., contracts already agreed.

What is incremental budgeting?

Starts with previous period's budget / actual results and adds or subtracts an incremental amount to cover inflation and other known changes.

- Good for stable businesses

- Quickest and easiest

- Can build upon previous problems and inefficiencies

- Uneconomic activities may be continued (e.g., producing in-house instead of outsourcing)

- Managers may spend unnecessarily to use up their budgeted expenditure.

What is zero-based budgeting (ZBB)?

Requires cost element to be specifically justified as though the activities were being undertaken for the first time.

ADVANTAGES

- Inefficient or obsolete operations can be identified and discontinued.

- Increased staff involvement at all levels due to additional information being required.

- Responds to changes in the business environment.

- Knowledge of cost behaviour patterns will be enhanced.

- Resources should be allocated efficiently and more economically.

DISADVANTAGES

- Emphasises short-term benefits to the detriment of long-term goals.

- Budgeting process may become too rigid.

- Management skills required may not be present.

- Managers may feel demotivated due to the large amount of time spent of budgeting processes.

- Ranking can be difficult when elements are quantitative in nature.

What is priority-based budgeting?

Aims to produce competitively ranked listing of high to low priority discrete bids for resources which are called decision packages.

Zero assumption is not required.

What is activity-based budgeting?

Preparing budgets using overhead costs from activity based costing methodology.

ADVANTAGES

- Draws attention to costs of overhead activities.

- Recognises activities that drive costs resulting in better understanding and management of costs.

- Better total quality management (TQM)

DISADVANTAGES

- Lots of effort needed to establish key activities and their cost drivers

- May be difficult to identify clear individual responsibilities for activities.

What are rolling budgets?

A budget that is continuously updated so that the next 12 months of operations are always budgeted

ADVANTAGES

- Planning and control will be based on a more accurate budget.

- Reduce element of uncertainty since they concentrate on short term events.

- Always a budget that extends into future.

- Forces management to reassess the budget regularly.

DISADVANTAGES

- More costly and time consuming than incremental budgets

- May demotivate employees if they feel they spend too long budgeting.

- Danger that the budget becomes only a slight adjustment of previous budget.

- Increase in amount of budgeting could lead to drop in productivity.

- Issues with version control

What is a capital expenditure budget?

Component of the finance budget. A capital expenditure budget sets out the type and cost of the non-current assets that must be purchased, and how it will be financed.

What is a cash budget?

Budget that aims to pave the way to ensure that the business can pay for things at all times.

What is feed forward control?

Forecasting of differences between actual and budget before the actual results are out yet. Normally goes in line with a corrective action before result.

- Encourages managers to be proactive and deal with problems before the occur.

- Re-forecasting on a continuous basis can save time when it comes to completing quarterly or annual budget.

- Time consuming.

- High level of sophistication to forecast with software.

What is a standard cost?

Predetermined cost which is calculated for specific product.

ADVANTAGES

- Enables judgement of performance

- Enables management by exception where high variances can be isolated.

- Simplifies bookkeeping if inventories are valued at standard.

DISADVANTAGES

- Quickly become out of date

- Establishing and maintaining standards is costly.

- Unrealistic standards can demotivate staff.

How do you calculate sales price variance?

Diff between:

- Actual units X actual selling price

- Actual units X standard selling price

How do you calculate sales volume variance?

Diff between:

- PROFIT: for absorption

- CONTRIBUTION: for margin

How do you calculate the idle time variance?

At standard rate, workout difference between actual hours paid and actual hours worked.

How do you calculate the labour efficiency variance?

Actual output ->

Diff:

- Hours it DID take

- Standard hours it SHOULD take

What is the labour activity ratio?

Standard hours for production / budgeted hours

Basically, what percentage of the budgeted production was produced.

How do you calculate the labour rate variance?

Number of hours paid ->

Diff:

- Standard pay rate

- Actual pay rate

What is the labour efficiency ratio and how is it calculated?

Standard hours for actual production / actual hours worked

Relative to the standard hours, how much quicker or slow did the staff work than the budget.

How is variable overhead expenditure variance calculated?

Actual number of hours worked

Diff:

- Did cost

- Should have cost

How is variable overhead efficiency variance calculated?

Actual output produced

- Labour hours it did take

- Labour hours it should've taken

x Standard variable overhead rate per hour

How is fixed overhead volume variance calculated?

Diff:

- Budgeted output at OAR per unit

- Actual output at OAR per unit

What do you need to remember when calculating fixed overhead expenditure variance?

Budget fixed costs per unit have assumed the budgeted unit output and any comparisons therefore need to be made with that in mind.

What are the steps taken to calculate variable overhead expenditure variance?

1 - Calculate labour hours per unit

2 - Calculate variable overhead per labour hour

3 - Calculate actual labour hour variance.

What is the equation for Return on Capital Employed (ROCE)?

(Profit before tax and financial costs / Revenue) * (Revenue / Assets)

or

Profit margin x Asset turnover

or

Profit before interest and tax / (total assets - total liabilities)

What is the equation for capital employed?

Equity + non-current liabilities

or

Total assets - current liabilities

What is the equation for profit margin?

Profit before finance costs and tax / revenue

What is the equation for asset turnover?

Revenue / capital employed

What is the equation for trade receivables collection period?

Trade receivables / revenue * 365

What is the equation for trade payables payment period?

Trade payables / (payables -> cost of sales) * 365

What is the equation for inventory holding period?

Inventory / cost of sales * 365

What is the equation for working capital?

Receivable days + inventory days - payable days

What are the five AAT code of conduct principles?

- Integrity

- Objectivity

- Professional competence and due care

- Confidentiality

- Professional behaviour

What are the four components of the balanced scorecard?

- Financial (ratios)

- Customer (satisfaction)

- Internal business process (manufacturing)

- Innovation and learning (new product)

What is the equation for ROI?

Controllable profit / capital employed

What is the equation for residual income (RI)?

Controllable profit - notional interest cost

> 0 accept

< 0 reject

Notional interest cost = cost of capital x net assets

What is the equation for Accounting Rate of Return (ARR)?

Average annual profits before finances and tax / initial capital costs

or

Average annual profits before finances and tax / average capital investment

Profit = cum. sales - cum. costs - (init cost - scrap = depreciation)

What is the equation for average capital investment?

(initial investment + scrap value) / 2

How do you calculate present value?

Future cash flow X discount factor

How do you calculate NRV on grid with present value?

Start with 1.0 (init investment) and assume that represents 110% and repeat process

e.g., 1, 0.909, 0.826

What are the four V's of big data?

- Volume

- Velocity

- Variety

- Veracity

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