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B391 - Management accounting and international finance - Coggle Diagram
B391 - Management accounting and international finance
Unit 1
Types of cost
Fixed
Function of time
Incurred with no production
Stepped costs
Range where cost changes
e.g. more production required
Direct
Absorption costing
All costs go toward unit output
Related to production e.g materials
Variable
Marginal costing
Variable = Charged production unit
Fixed = Charged against profit
Consider relevant range
Where variable costs are constant
Contribution
Sales revenue per unit - variable cost per unit = contribution per unit
Less fixed costs = net profit
Towards fixed cost of production
Contribution to sales ratio principle
(contribution / sales revenue) * 100 = % sales of contribution
Simple
Fast
Identifies impact on profits
Break-even analysis
Net profit = 0
Represented as break-even point
Total fixed costs / contribution per unit
Total fixed costs / contribution to sales ratio = sales revenue required
Margin of safety
How much can sales decrease before loss incurred
Percentage margin of safety
(Expected sales - Break-even sales) / Expected sales * 100
(Target profit + Fixed costs) / Contribution per unit = number of units required to meet target profit
Limitations
Assumes relationship between variables is constant
Profits calculated on marginal costing basis
Linearity is assumed e.g. costs increase at same rate and do not change based upon volume
Relevant range
A constant sales mix is assumed
Limiting factor analysis
Is there a reason I cannot increase production?
Indirect
Cannot be traced directly
e.g. certain overheads
Determing fixed vs variable
High-low method
Simple
Quick
Inaccurate
Identify period with highest and lowest production
Compare cost for patterns
If it doubles or halves with production, cost is variable
Otherwise, suggests some element of fixed cost
Calculate highest cost vs lowest
1 more item...
Line of best fit
Scatter graph
Visual representation
Not in-depth for understanding why
Costs and decision-making
Understand
Cost control
Cost structure
Performance of an individual product or service
Cost unit
Defined product or service associated with cost
Decided by business
Cost classifications
By purpose
Objective
Direct vs indirect
By nature
Subjective
Material, labour or expenses
By function
By behaviour
Fixed, variable, semi-variable or stepped fixed
Normal or abnormal
e.g. short-term cost of materials
Controllable/uncontrollable
Relevant/irrelevant
Cost centre
Where costs are attributed to in an organisation
Normally departments
Cost object
Specific activity
Cost card
Breaks down costs for materials, labour and overheads
Includes direct labour costs
And indirect
e.g. pension contributions
Absorption costing
Absorb all production costs
Regardless of indirect, direct,
fixed or variable
Indirect may have to be estimated
Fixed costs in period / number of units produced in period
Cost of production needs to be known in advance
Measure plan vs actual
Adjust according to
Under-absorption
Costs / profit lower than estimated
Over-absorption
Costs / profit higher than estimated
Can give misleading results
When activity volume changes
More appropriate when stable
Relevant costs
Vs irrelevant
Sunk costs
Will occur regardless
Committed costs
Non-cash
Depreciation
Ignore in analysis
Occurs only if action is taken
Can be avoided by not doing it
Determine if relative benefit outweighs relative costs
Used assessing cash flows
Opportunity costs
The cost of actions not followed
Activity based costing
Links indirect costs to activities
Allocates costs to final product
Framework
Classify indirect costs to product or service
Establish cost driver
Activities which cause cost to be incurred
Machinery set-up time
Product components
Machinery run-time
Quality control requirements
Methodology
Batch level costs
Multiple units of the product
Re-tooling
Re-setting
Higher variation generally = higher costs
Product sustaining costs
Arise from service/ support
Bills of materials maintenance
Routing sheet
Unit level costs
Vary directly with volume produced
Power costs
Wear and tear
Facility sustaining costs
Not attributable to specific process
Management salaries
More 'objective'
More accuracy = more reliable pricing strategy
Captures complexity
Suits a diverse product mix
Compare lines or services
Benefits
Effectively links costs to producttion
Establish minimum price
Determine product lines to be dropped
Highlights cost drivers
Focus on profitability
Investigate, rectify or alter
Enhances decision making
Activity based budgeting
Costs not just divided into departments
Highlight improvement options
Activity based management
Uses costing as management control
Product mixes
Product prices
Operational costs
Customer matrix
Value chain analysis
Customer account profitability analysis
Assigns costs to customers
Different customers consume different support resources
May wish to negotiate prices to take into account
Limitations
Short-term bias if used incorrectly
Should be used in lifetime analysis
Stops once production has ended
Still contains subjectivity
e.g. cost allocation
Time consuming
Incurs own costs
Benefits might not be perceived to outweigh costs
Unit 2
Budgeting
Enables
Short-term planning
Feed into long-term objectives
Monthly
Annually
Quarterly
Threat identification
Management performance analysis
Responsibility centre
Responsibility accounting
Revenue
Profit
Cost or expense
Investment
Needs to be managed
Accounting control system
Measurement of outputs
Financial
Cash flow
Non-financial
Employee turnover
Flexible if required
Variance analysis
Difference between
Planned vs Actual
Favourable
Costs lower than plan
Sales higher than plan
Adverse
Costs higher than plan
Sales lower than plan
Understand why
Incorrect plan?
Unforeseen change?
Poor communication of goals?
Inadequately defined goals?
Lack of coordination?
Standard costing
Achievable estimate
Use for setting targets
Compare standard vs actual
Attainable
Not ideal
Incremental
Adds % to previous
Simple, easy
Relies on historical data
Poor reflection on change
Zero-base
Start from scratch
Justify every cost
Time-consuming
Rolling
Adjustments made
According to monthly analysis
Activity based
Split between
Value adding
Focus on refining
Improvement
Non-value adding
Focus on automation
Reduce time spent
Assess causes of cost drivers
Better control and knowledge
Links strategy to business activity