Applied Management Accounting formulas (AAT Level 4)

Fixed Overhead Volume Variance

(Actual output x OAR) - (Budgeted output x OAR)

Sales Volume Variance (absorption)

(Actual quantity of goods sold x standard profit per unit) - (Budgeted quantity of goods sold x standard profit per unit)

Return on Capital Employed (ROCE)

Operating profit / (Fixed assets + net current assets)

Asset Turnover

Turnover / (Fixed assets + net current assets)

Operating budget

Short to medium-term budget, compares with past periods

Capital budget

Deals with the acquisition of fixed assets, concerned with 1-off transactions

Fixed budget

Assumes a certain level of output (sales) and the budget is build around that fact

Flexed budget

A budget prepared for the actual activity level for the period, used from cost behaviours

Incremental budgeting

The traditional approach by basing this budget of the previous period and adjusting for inflation

Zero-based budgeting

A budgeting approach in which managers begin with a budget of £0 and every transaction must be justified

Priority based budgeting

Similar to zero based budgeting, examines what the company wants to achieve and allocates money & resources to the most important

Activity based budgeting

Used to manage indirect costs within each department, used the same cost drivers as in ABC

Rolling budget

Budget is continuously extended as time goes on, provides accuracy that enables changing conditions

Contingency budgets

Budgets that are available to cope with unexpected events and the impact

Feedforward

Information regarding the organisation's current performance that is used for future budgeting

The Ideal Standard

No room for inefficiency or wastage

The Target Standard

Set at the level that the organisation wants to achieve under the current conditions

The Normal Standard

At the expected level of achievement under the current conditions. The most realistic option

Pros of Activity Based Costing

Accurate product costs that aids pricing & future decision-making, budgeting & cost management is also improved

Cons of Activity Based Costing

Expensive to coordinate, time-consuming, fixed costs are ignored, reacts badly to behavioural changes (addition or removal of a department)

Value Engineering

New products are designed for quality but at a low price, analyse every part of a product that enhances the value

Value Analysis

Analysing each part of an existing product and question whether its function is valuable

Relevant costs

Transactions that are; in the future, incremental (extra cost/income from a decision) & cash flow (real money, not a cash book entry)

Internal Rate of Return (IRR)

Low % rate + (NPV using low rate / diff between 2 NPV's) x % rate diff of 2 DCF

Accounting Rate of Return (%)

Average annual profit / total investment x 100