Chapter 1 AMAC

What does capital expenditure include?

1) The purchase of NCA

2) The improvement of the earning capability of the NCA

What does revenue expenditure include?

1) The purchase of goods for resale

2) The maintenance of the existing earning capacities of the NCA

3) Expenditure incurred in conducting the business

What is cost classification

Cost classification is the arrangement of cost items into logical groups, for example, by their type (capital/revenue exp), their function (admin/production) or by their nature (materials/labour)

Group those listed below into the following categories: Administration, Marketing & distribution, Capital expenditure and Cash flow

• Depreciation charge of office equipment

• Sales staff salaries

• Factory extension

• Payments to suppliers

• Packing materials

• Van purchase

• Finance director’s salary

• Account staff salaries

• Office staff salaries

• Advertising

• Drivers’ salaries

• Lorry repairs

Administration:

• Depreciation charge of office equipment

• Finance director’s salary

• Accounts staff salaries

• Office staff salaries

Marketing and distribution:

• Sales staff salaries

• Advertising

• Drivers’ salaries

• Packing materials

• Lorry repairs

Capital expenditure:

• Factory extension

• Van purchase

Cash flow:

• Payments to suppliers

What is another term for indirect production costs?

Production overheads

Define contribution and state the formula

Contribution is the amount needed to cover fixed costs and still make a profit.

Contribution=SP-VC

What does an increase and decrease in inventory mean for profit and constant inventory

Inventory increase= profit increase minus fixed O/Hs incurred

Inventory decrease= profit decrease minus fixed O/Hs incurred

Constant inventory= same profit through both absorption costing & marginal costing

What’s the formula for closing inventory?

Closing inventory= production-sales

What does an increase in inventory mean for absorption costing and marginal costing?

Absorption costing has higher profits than marginal costing

Formula for sales

Sales= sales (units) x selling price

Formula for production costs

Production costs= cost per unit x actual production (units)

Formula for Cost of sales

COS= OP + P - CL

COS= production costs- CL

Formula for OAR (Overhead Absorption Rate)

Total production overheads/ Total activity level

When are fixed overheads incurred and expensed?

Fixed overheads are incurred when the product is produced but expensed when the product is sold

Formula for over/under absorption

Budgeted CPU(cost per unit) x actual production- actual fixed O/H incurred

Why is costing important?

1) Budgets/forecasts—> predicts future costs accurately

2) Cost Control—> identify where costs can be reduced/better managed

3) Decision Making —> accepting a special order/ changing production level

4) Breakeven Analysis (revenue=costs, point to 0 profit)

What are prime costs?

The total of all direct costs

What do cost centres help with and what does it increase?

Controlling, monitoring and analysing which increases efficiency

What are the two ways factory cost centres can be split into?

Production cost centres (directly involved in the production and provision) and service cost centres (not involved in production and provision but needed to support the production cost centres)

Classify the following cost centres into production/service:

• Canteen

• Stores

• Stitching

• Maintenance

• Packing

• Finishing

Servicing:

• Canteen

• Stores

• Maintenance

Production:

• Stitching

• Packing

• Finishing

What are the differences between absorption costing and marginal costing?

Absorption costing:

• Each unit absorbs its share of total production costs

• Each unit = Direct production costs + absorbed production overheads

• When Production > Sales = Stock increase —> Profit increases. This is because some of the fixed costs are now in closing stocks

• When Sales > Production = Stock decrease —> Profit decreases

Marginal costing:

• Only variable costs of production

• Fixed production overheads are treated as period costs (treated as an expense in the P&L)—> not part of unit cost

• Helps with decision making

What are the advantages of marginal costing versus absorption costing?

Marginal costing:

• Expenses in period

• Used for short term decision making

• Profit is not affected by stock levels because they’re expensed in the period

Absorption costing:

• It is included in unit costs

• It is used for financial reporting

• Profit changes with stock levels

Which budget does this cost fit into: Recruitment advertisement for a new finance director in an accountancy magazine.

Picklist:

• Administrative overheads budget

• Marketing budget

• Production budget

Administrative overheads budget (This is because the advertisement is designed to hire internal staff which helps with the general running of the business)

Which budget does this cost fall into: Client entertaining at horse racing.

Picklist:

• Administration department

• HR department

• Marketing department

• Production department

• Sales team

Marketing departing

Which budget does this cost fall into: Depreciation of factory building

Picklist:

• Average inventory of raw materials held

• Floor area

• Number of staff employed

• Units produced

Floor area (as this is the depreciation of the factory building)

Match each of these to either: fixed, semi variable, stepped or variable costs

1) Maintenance contract which costs £10,000 annually plus an average of £500 cost per call out

2) Sales car depreciation based upon miles travelled

3) Machine consumables cost based on machine hours

4) Rent for a building that houses the factory, stores and maintenance departments

1) Semi variable

2) Variable

3) Variable

4) Fixed

Where can you find share prices?

In the financial press

Which stage in the product life cycle is most likely to produce an accurate figure for future sales?

Maturity stage. During the maturity stage, the pattern of sales is likely to be consistent