Flashcards
General Accounting Questions
Cards in this deck (69)
- 1What are the four phases in the development of management accounting?1) Internal Processes (eg. determining cost of goods & services.
2) Short term planning and control.
3) Controlling costs and waste reduction.
4) Generating shareholder value and more external focus on customers and competition. - 2What are the main areas Management Accounting helps Managers with?Planning - long term plans and strategies
Control - and performance evaluation
Decision making - Allocating resources
Determining costs/benefits - 3Are variable costs the same as relevant costs?No, relevant costs concern with the costs/benefits that vary with a decision. These could be fixed or variable. However, fixed costs often only change over a long period of time, (with inflation etc) so in the short term variable costs are normally the ones that vary with a decision.
- 44 Uses for Marginal Analysis1) Make or Buy
2) Continuation or Closing
3) Accept or Reject
4) Allocating scarce resources - 5How do we assess whether to accept reject a contract?Calculate additional revenue per unit - Additional cost per unit = Added contribution
Contribution X Units made = X
Accept or Reject? - 6Basic Assumptions of Cost-Volume-Profit1) Changes in production/sales volume are the sole cause for changes for costs and revenue changes
2) Total costs = FC + VC
3) Revenue and Costs behave as a linear function
4) Selling price, VC and FC are all knowns and constant
5) Often only a single product will be analysed and "" - 7Why is knowing BEP useful?- Can plan from it, know how many units need to be sold
- Useful as a comparison with planned level of activity in an attempt to assess the riskiness of a situation
- Can be used to find how many units need to be sold to meet a targeted profit - 8What is 'contribution'?The excess of sales revenue over variable costs
- 9What is operating gearing?The extent to which a company uses fixed costs in its cost structure.
- 10Fixed costs stay fixed when changes occur to the volume of activity however....cost per unit will decreases output increases as there are more units to spread the fixed cost over.
- 11When would you want full costing information?1) Pricing purposes
2) Income measurement
3) Budgeting - 12Benefits of ABC1) Provides a more accurate cost for each unit of product/service
2) Provides managers with a better understanding of the business - 13Criticisms of ABC1) Time consuming and costly
2) Reports can be difficult to understand
3) Few benefits where products provided have similar outputs
4) Not all costs can be identified easily with activities
5) Lack of information concerning costs can lead to arbitrary allocations
6) Identifying cost drivers can be difficult
7) Uses past costs and ignore opportunity costs - 14How does ABC differ to the traditional approach?ABC's philosophy is that overheads don't occur for no reason, therefore it charges overheads to units of output to derive full costs, whereas traditional costing treats all other/indirect costs as commons costs
- 15How do we do ABC?Eg, if the cost drivers is purchasing
Add total purchases of all products
Divide Purchase overheads by total = cost per purchase
Times cost per purchase by how many there purchases the product has. - 16How are cost drivers found?Support activities involved in making products/services
- 17What environment was traditional full costing developed for?Labour intensive
Low levels of overheads to direct costs
Uncompetitive market - 18In our environment, why may full costing seem a little outdated?Because our current business environment is:
- capital intensive
- high level of overheads to direct costs
- highly competitive international market
- service industry dominated
-OAR exceed direct labour rate per hour
- impact of small change in labour time is a larger increase in share of overheads than traditional costing may reflect - 19What are the advantages of full costing?1) Provides a long run average cost
2) Widely practised as accounting regulations insist on inventories to be valued at full cost in statements - 20What are the disadvantages of full costing?1) Past costs
2) Restricts the consideration of future costs to outlay costs only (not opportunity costs) - 21How do managers use full costing?1) assessing relative frequency
2) exercising control
3) assessing performance
4) pricing and output decisions - 22Whats the difference between variable and fixed costing?Variable costing includes only variable costs (direct and indirect) in the cost of product and fixed costs are charges to the period incurred
whereas
Fixed costing includes direct costs (variable/fixed) in cost of product and includes a fair share of indirect costs - 23Are direct and variable costs the same thing?Direct costs are the costs directly related to a certain product, eg. labour hours
Variable costs change in relation to cost and output
Direct costs can be variable or fixed, they are different concepts but in some cases a direct cost will be variable. eg. inventory for a product - 24Why is OAR useful?- Calculate a price for the job
- Working out whether a profit or loss has been made - 25What is job costing?A methods of costing where we accumulate costs for specific customers orders because the orders vary from customer to customer.
eg consulting work - 26When do we use process costing and how do we do it?Add all costs/How many units
When a business produces a single product or units are nearly identical - 27How is full costing different to marginal costing?Full costing takes in to consideration ALL costs involved with a task whereas marginal costing only takes variable costs into account, usually.
- 28What is risk?The likelihood that what is projected might not happen.
- 29How do businesses cope with risk?Sensitivity Analysis
Expected Values (probability weighting)
Adjusting the discount rate to include a risk premium - 30What is sensitivity analysis?The examination of key input values affecting the project to see how changes in each input might influence the viability of the project
- 31What is the working capital formula?Current Assets - Current Liabilities
- 32Why do we hold cash?To meet day to day commitments
To deal with uncertain cash flows
To exploit profitable opportunities - 33Disadvantages of NPVDoesn't take in to account further outflows
Long term projects may lead to conflict in the objectives of managers and shareholders, e.g.. bonuses v. shareholder wealth - 34Why are cash flows used over profit flows?Because cash flows are subjective as well as cash being the ultimate measure of economic wealth and investing in projects etc.
Profit is relevant to reporting the productive effort for a period. - 35Why might managers prefer IRR to NPV?* IRR is measured in a % which is like other financial rations etc. ROCE
* Managers think its easier to rank projects in terms of % return. (However IRR can provide a misleading ranking) - 36If Payback Period took the value of money in to account, would it be better than NPV?If we discounted the cash flows arising project project PP would be more like IRR/NPV. However other flaws other than time value would still occur, for example it ignore relevant data following the payback period.
- 37Why is NPV seen as superior?Only method of appraisal to have a direct affect on the wealth of the shareholders
+ = more money
- = less money
Includes all relevant cash flows
Objectives of the business are clear
Takes timing of cash flows into consideration - 38What is IRR?Internal Rate of Return
The discount rate which when applied to an investment opportunity givens an NPV of £0 - 39Adv of IRRMeasure of profitability
Similar to NPV in that all relevant cash flows are taken in to consideration
Takes into consideration time value of money - 40Disadv of IRRIgnore scale of investment
Requires a hurdle rate to be set
Doesn't directly address the question of wealth generation
eg. always ranks IRR of 25% above that of 20% when the latter could bring in more return, - 41How to derive IRR?1) Iteration - trial and error
2) Interpolation - calculate NPV go project at 2 rates, one +, one -, guess where it is in-between! - 42How to use IRR ?- choose the highest IRR project
- can compare to a hurdle rate, has to be higher than hurdle to be accepted - 43Adv of NPV- Takes into account the time value of money
- Maximises shareholder wealth
- Uses cash flows, less subjective
- Includes relevant cash flows and treats them different based on when they occur - 444 Investment Appraisal Techniques1) ARR
2) Payback Period
3) NPV
4) IRR - 45Define NPVThe process of calculating all relevant cash flows related to an investment opportunity to give the net present value of the opportunity.
- 464 factors influencing returns required by investors1) When
2) Inflation
3) Risk Premium
4) Interest foregone - 47Adv of Payback Period- uses cash flows instead of profit figures, emphasises liquidity, projects that recoup money quickly are more economically attractive
- quick and easy to calculate
- easy to understand - 48Disadv of PP- doesn't look at risk as a whole, just the chance of a project finishing too early
- ignores what year maximum repayment will be in
- doesn't maximise shareholder wealth
- ignore cash flows after the payback period, ie. ignores the profitability of the project
- ignores the time value of money, but an improvement on ARR - 49If we are given profit figures we must _______ so they becomes cash flows and can be used in PPADD BACK THE DEPRECIATION
- 50PP is considered...... to be a measure of a projects risk
Longer the PP higher the risk
Compare a PP with a target that reflects the organisations acceptable level of risk
The org has unrecovered investment during the payback period
Must be shorter than the maximum payback period set by the org - 51ADV of ARR- linked with ROCE
- simple
- %
- relate profit to the cost of the assets invested to generate that profit - 52DISADV of ARR- uses accountancy profit - subjective
- % doesn't distinguish between the magnitude of returns
- ignores the time value of money - 53ARR RuleCompany sets minimum target ARR
Project must exceed this to be accepted
Highest project ARR is chosen - 54What is investment appraisal?To decide whether to go ahead with an investment project, companies usually apply one or more techniques
- 55Factors to consider in investment appraisal aka. capital budgeting1) Nature/purpose, does it fit with the org?
2) Problems/risks
3) Pattern and timing of cash flows
4) Project timescales/milestones
5) Finance and other resources - 56What are the stages of the investment decision process?1) Determine investment funds available
2) Identify profitable project opportunities
3) Evaluate the proposed projects
4) Approve the project
5) Monitor and control the project - 57What are investment decisions important?- involves larger amounts of money
- hard to bail out (specific project)
- crucial for survival
- high level or risk and uncertainty - 58What does a new investment involve?Long term projects
Initial cash inflow
Small cash inflows in the future - 59Examples of investment decisions- new current assets
- new products
-buying other businesses
- expanding - 60What is strategic management accounting?A form of management accounting where emphasis is placed on information which relates to factors external to the business as well as non financial information and internally gathered info.
- 61What is the strategic planning framework?1) establish a mission and objectives
2) undertake a position analysis
3) identify and assess the strategic options
4) select strategic options and formulate plans
5) perform, review and control - 62What is position analysis made up of?Pest
Swot
Competitor analysis
Benchmarking - 63What is customer profitability analysis?A form of analysing the costs of serving each customer/group of customers.
- 644 main areas on the balance score card are..1) Financial
2) Internal Business Procedures
3) Customer
4) Learning and Growth - 65Problems with conventional (financial/lagging) performance methods- emphasis only one perspective
- based on historical data
- encourages short term actions which limits future competitiveness
- provides limited guidance for future actions - 66Adv. of non financial performance (leading) measures such as - staff turnover - returns - % on time production etc.- provides a closer link to long term strategies
- gives guidance for future decisions
- can be good indications for future financial performance - 67How can we compare divisional performance?- with other divisions
- with past division performance
- with similar businesses
-with budgets - 68Key features of Kaplan and Nortons Balance Scorecard1) Only include KPIs
2) Has to be linked to the strategy of the business
3) Needs an indicator and measurement - 69When to use variable cost based approach?When division is operating below capacity
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- Flashcards on General Accounting Questions, created by megsy on 26/05/2014.
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