Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

REVISION NOTES ACCN4

4
...
The account is used to calculate the
‘production cost of goods completed for the period’
...

Calculate unit cost of goods manufactured
Production Cost of Goods Completed
Number of Units Completed
OPENING INVENTORY OF RAW MATERIALS
ADD: PURCHASES OF RAW MATERIALS
LESS: CLOSING INVENTORY OF RAW MATERIALS
EQUALS: COST OF RAW MATERIALS USED

ADD: DIRECT LABOUR
ADD: DIRECT EXPENSES
EQUALS: PRIME COST

ADD: PRODUCTION (FACTORY) OVERHEADS eg, indirect materials, indirect labour, rent of factory, depreciation of
factory machinery, factory heat and light
EQUALS: TOTAL / PRODUCTION COSTS / MANIFACTURING COSTS

ADD: OPENING INVENTORY OF WORK-IN-PROGRESS
LESS: CLOSING INVENTORY OF WORK-IN-PROGRESS
EQUALS: PRODUCTION COST OF GOODS COMPLETED
Transfer Prices and Factory Profit
Some manufacturing businesses transfer the production cost of goods completed at a profit
...

The profit is added to the production cost of goods completed before it is transferred to the income statement
...


This is then shown as an adjustment to the factory profit figure in the income statement
...
2 COSTS AND CONTRIBUTION
Management Accounts
-Distributed internally for use within the business
-Management decide the layout- doesn’t follow IAS 1
-Looks at both past and future data
-Not legally required to produce
-Includes financial and non-financial information

Financial Accounts
-Use for external reporting
-Companies Act 2006 requires them
-Looks at past data only
-Usually financial information only
-Detailed results for a defined period

DIRECT COST
Can be directly identified to the product, service or
department that is being costed
...

-Indirect materials
-Indirect labour
-Indirect expenses
-Administration overhead
-Selling and distribution overhead

Total Direct Costs = Prime Cost

Total Indirect Costs = Total Overheads
Materials includes inventories
Labour includes methods of payment for labour
Expenses may be specific for a cost cent or jointly shared between cost centres
DIRECT AND INDIRECT COSTS
DIRECT MATERIALS
DIRECT LABOUR
DIRECT EXPENSES
PRIME COST

X
X
X
X

PRODUCTION OVERHEADS
PRODUCTION COST

X
X

NON-PRODUCTION OVERHEADS
- SELLING AND DISTRIBUTION
- ADMINISTRATION
- FINANCE

X
X
X

TOTAL COST

X

REVISION NOTES ACCN4
Fixed Costs
Costs that do not normally change when the level of output or activity changes
...

- Vary directly with activity level
- Variable cost per unit is the same for each unit produced

Semi-Variable Costs
These are costs where a part of the cost acts as a variable cost, and a part as a fixed cost
...

-

Only variable costs charged as cost of sales
Closing inventories are valued at marginal cost
Fixed costs or overheads are treated as period costs
Contribution per unit is constant at all levels of output and sales
CONTRIBUTION PER UNIT = SALES PRICE PER UNIT – VARIABLE COST OF UNIT
TOTAL CONTRIBUTION – TOTAL FIXED COSTS = PROFIT
MARGINAL COSTING STATEMENT
LESS
EQUALS
LESS
EQUALS

SALES REVENUE
VARIABLE COSTS
CONTRIBUTION
FIXED COSTS
PROFIT

Advantages
-

Contribution (towards fixed costs) is clearly identified
With the marginal cost of output identified, the managers can focus on the contribution provided by the
output
The effect on costs of changes in sales revenue can be calculated
It helps with decision making in the forms of:
o Costing project
o Make or buy
o Acceptance of additional work
o Price setting
o Optimum use of scarce resources

REVISION NOTES ACCN4

4
...

FIXED COSTS (£)
CONTRIBUTION PER UNIT (£)
CONTRIBUTION PER UNIT (£) = SELLING PRICE PER UNIT - VARIABLE COSTS PER UNIT

Interpretation of break-even
-

The break-even graph can show the profit or loss at any level of output/sales contained within the graph
To calculate profit or loss from the graph simply measure the gap between sales revenue and total costs at a
chosen number of units
OR to calculate the profit or loss at any level of output/sale use the following
PROFIT/(LOSS) = (SELLING PRICE – VARIABLE COSTS) PER UNIT X VOLUME – FIXED COSTS

Limitations of break-even analysis
-

-

The relationship between sales revenue, variable costs and fixed costs may not always remain constant
because:
o Sales price may differ at different quantities sold
o Variable costs may alter at different levels of output
o Fixed costs do not remain fixed at all levels of output
The assumption that all output is sold may not be true
The presumption that there is only one product may not be correct
External factors (such as rate of inflation) are not considered

Margin of Safety
The margin of safety is the amount by which sales exceed the break-even point
...

IN UNITS
IN £
AS A %

SALES VOLUME (UNITS) – BREAK-EVEN POINT (UNITS)
MARGIN OF SAFETY (UNIT) X SELLING PRICE (£)
MARGIN OF SAFETY (UNITS) X 100 SALES VOLUME (UNITS)

REVISION NOTES ACCN4
Target Profit
It is possible to calculate the output that needs to be sold to give a certain amount of profit (called the target profit)
...

CONTRIBUTION (£)
SELLING PRICE (£)

REVISION NOTES ACCN4

4
...
Examples include:
- Department
- Project
Cost Unit

-

Machine

A unit of product or service to which costs can be related
...

ADD
ADD
ADD
EQUALS

DIRECT MATERIALS
DIRECT LABOUR
DIRECT EXPENSES
OVERHEADS (Fixed and Variable)
ABSORPTION COST

X
X
X
X
X

Absorption costing and marginal costing compared
Marginal Costing
-

Recognises that fixed costs do not change with activity levels
Identifies the cost of producing one extra unit
Absorption Costing

-

Absorbs ALL production costs into each unit of output

Attempts to provide for fixed costs as it goes along
Impact on profit
If the inventory levels have changed throughout the period, the profit will be different
...

MARGINAL COSTING Closing inventory are valued at marginal production cost
...


ABSORPTION RECONCILIATION
MARGINAL COSTING PROFIT
Adjust for fixed overheads included in inventory valuation:
+ increase / - decrease
ABSORPTION COSTING PROFIT

X
X / (X)
X

REVISION NOTES ACCN4
Increase in inventory in a period
-Absorption costing reports higher profit
-More fixed overheads included in closing inventory
than in opening inventory
-So cost of goods sold of period decreased
-Hence, profit higher
ACTIVITY BASED COSTING (ABC)

Decrease in inventory in a period
-Absorption costing reports lower profit
-Lower fixed rate overheads included in closing
inventory than in opening inventory
-So cost of goods sold of period increased
-Hence, profit lower

ABC is a refinement on absorption costing – an absorption rate is calculated per activity, rather than per
department/cost centre
1
...

3
...


Identify an organisations major activities
Identify cost drivers
Collect the costs associated with each activity into cost pools
Charge support overheads to products based on their usage of the activity (measured by the number of the
activity’s cost driver they generate)
...
Group overheads into activities per how they are driven
...

2
...

3
...
Calculate total activity cost for each unit:
COST PER UNIT OF COST DRIVER X TOTAL COST DRIVER PER UNIT
5
...
5 OVERHEADS AND OVERHEAD ABSORPTION
Allocation of overheads is the charging to a cost centre of overheads that are incurred entirely by that cost centre
Apportionment of Overheads
Apportionment of overheads is the sharing of overheads over a number of cost centres to which they relate
...


OVERHEAD
Rent, rates
Heating, lighting
Buildings insurance
Buildings depreciation
Machine insurance
Machine depreciation
Canteen
Supervisory costs

BASIS OF APPORTIONMENT
Floor area (or volume of space) of cost centres
Floor area (or volume of space) of cost centres
Floor area (or volume of space) of cost centres
Floor area (or volume of space) of cost centres
Cost or net book value of machinery and equipment
Value of machinery; or machine usage (hours)
Number of employees in each cost centre
Number of employees in each cost centre, or labour hours worked by
supervisors in each cost centre
Allocate – know which cost centre the overhead relates to
Apportion – share the overheads between the cost centres using a basis (method) that is fair
Attribution of overheads
1
...
Apportion production overheads relating to several cost centres, using a fair basis
3
...

COST + PROFIT = SELLING PRICE
Two methods of calculating/applying profit
-

Profit mark-up
Profit margin

REVISION NOTES ACCN4
Overhead Absorption Rate
The final stage in absorption costing is the absorption of overheads into unit costs using overhead absorption rates
(OARs)
Based on absorption:
-

By unit (identical units)
By direct labour hour (labour intensive)
By machine hour (machine intensive)

OAR =

TOTAL BUDGETED COST CENTRE OVERHEADS
TOTAL PLANNED WORK IN THE COST CENTRE
Calculating over/under absorbed overheads
OAR x ACTUAL HOURS = ABSORBED OVERHEAD
DEDUCT ACTUAL OVERHEAD
= (UNDER)/OVER ABSORBED OVERHEAD

Under absorbed – extra expense for business (less profit)
Over absorbed – extra income for the business (more profit)

REVISION NOTES ACCN4

4
...

Comparisons need to be made between:
-

The marginal cost of making the product
The price quoted by the outside supplier

The lower the price is, in financial terms, the better choice
Opportunity costs – is the benefit that is foregone when a course of action is taken
Acceptance of Additional Work
To ensure profit from the acceptance of additional work, a contribution towards profit is needed
...

Other factors to consider before accepting additional work:
-

The additional work should not take place of products or services that can be sold at above absorption cost
There must be spare capacity to produce the additional products or services
Original customers must not be aware of the special prices
A customer buying at a special price may undercut the other customers whom pay the normal rate

Price Setting
A price is the amount of money is agreed between a buyer and a seller which enables the exchange of a product to
take place
...

Optimum Use of Scarce Resources (limiting factor analysis)
If a limiting factor exists, a business will attempt to work in such a way as to maximise the profit (or minimise the
loss) that it will make
...
Calculate the contribution per unit of scarce resource to make the decision to which product to manufacture
– the one with the highest contribution per unit of scarce resource will maximise profits
2
...
Where there is a maximum level of output for the selected product, use as much of the scarce resource as
possible, then ‘spill over’ any unused scarce resource to the next best product
...
7 STANDARD COSTING AND VARIANCE ANALYSIS
Standard costing sets pre-determined/budgeted cost for materials, labour and overheads in advance of production
...
Standard
costing is ideal for situations where components are identical and manufacturing operations are repetitive
...

MATERIALS VARIANCE
MATERIALS PRICE VARIANCE
MATERIAL USAGE VARIANCE

(standard quantity x standard price) x (actual quantity x actual price)
Actual quantity x (standard price – actual price)
Standard price x (standard quantity – actual quantity)

Labour Variances - Labour variance is the difference between the standard cost of labour and the actual cost of
labour for the actual production
...

SALES VARIANCE
SALES VOLUME VARIANCE
SALES PRICE VARIANCE

(standard quantity x standard price) – (actual quantity – actual price)
Standard price x (standard quantity – actual quantity)
Actual quantity x (standard price – actual price)

Advantages
-It can be used to help with
-Decision making, price setting
-Planning, the quantity and cost of resources needed
for production
-Control, by comparing standard cost to actual costs,
variances can be calculated so that action can be taken

Disadvantages
-If the standard is set incorrectly it can lead to ‘false’
variances
-Prices of materials and labour may fluctuate
frequently, meaning the standard cost quickly goes outof-date
-Variance analysis can be a complex process
-Need to be aware of the interdependence of variances

Reconciliation Statements
Variances can be brought together in a reconciliation statement which may take the form of:
-

A profit reconciliation statement
A cost reconciliation statement
A sales reconciliation statement

Reconciliation statements set out the variances and demonstrate to the management of a business how the forecast
profit or cost or revenue has been affected by variances to give the actual profit or cost or revenue for the period
...


REVISION NOTES ACCN4

4
...
A capital investment project
involves spending money now to receive benefits (or reduced costs) in future years
...

If no precise year was given, use the following formula:
LAST NEGATIVE CUMULATIVE
NEXT CASHFLOWS

Advantages
-it is easy to calculate
-It is easy to understand
-It places emphasis on the earlier cash flows, which are
more likely to be accurate than later cash flows
-It is an ideal capital appraisal method for high
technology projects

(X12 = MONTHS)
(X52 = WEEKS)
(365 = DAYS)
Disadvantages
-All cash flows after the payback period are ignored
-Within the payback period it fails to consider the
timing of net cash flows
-The effects on inflation are ignored
-The time value of money is ignored, unlike the
discount cash flow method

Discounted Cash Flow – Net Present Value
Discounted cash flow is a method of capital investment appraisal which recognises that money has time value – it
compares net cash flows, at their present values, with the initial cost of the capital investment to give a net present
value of the capital project
...
To calculate present
value of cash flows they are multiplied by ‘discounted factors’ which are based on the cost of capital
...

Advantages
-All cash flows are considered
-The time value of money is used
-The timing of cash flows is considered
-Although more complex to calculate than payback
period, when using a table of factors the calculations
are easy to make

Disadvantages
-The cost of capital – or rate pf return – is in practice
difficult to ascertain and may also vary over the life of
the project
-The meaning of net present value is not always clear to
users of the information
-The project with the higher net present value may not
always produce the best quality of output

Other considerations
Total implications – the effect on the business as a whole
Cost of capital – possible changes in the cost of capital will have a direct effect on the viability of the project
Taxation considerations – any changes in taxations may also affect the viability of the project
Size of investment – this must be within the financial capacity of the business in case cash inflows fall short
Other considerations – for example, economic climate, political factors, training costs etc

REVISION NOTES ACCN4

4
...

Sales Budget
A sales budget is used to estimate sales in units and revenue
...

Sales Unit
Sales Value

MONTH 1
X
£X

MONTH 2
X
£X

MONTH 3
X
£X

Production Budget
A production budget shows the level of production in units needed to meet the demand for expected sales and
identifies any production problems that may need to be resolved
...

Sales
Opening Stock
Closing Stock
Production

MONTH 1
X
(X)
X
X

Benefits of the production budget:
-

Identify the production capacity available
Schedule resources
Meet sales demand
Male best use of spare capacity

MONTH 2
X
(X)
X
X

MONTH 3
X
(X)
X
X

REVISION NOTES ACCN4
Purchases Budget
A purchases budget shows the number and value of the goods that need to be bought in order to meet the demands
of the production department
...

MONTH 1
Units
Sales
Opening Stock
Closing Stock
Purchases
Purchases Cost

MONTH 2

MONTH 3

X
(X)
X
X
X

X
(X)
X
X
X

X
(X)
X
X
X

Labour Budget
A labour budget is used to plan and control the labour hours and labour costs of production-line employees
...

Opening Debtors
Credit Sales
Receipts
Discount Allowed
Bad debts w/o
Closing Debtors

MONTH 1
X
X
(X)
(X)
(X)
X

MONTH 2
X
X
(X)
(X)
(X)
X

MONTH 3
X
X
(X)
(X)
(X)
X

Trade Payables Budget
A trade payables budget is used to estimate the timing and amounts of payments to creditors and is linked to the
purchases budget, the cash budget and the master budget
...

Forecast profit can be calculated
...


Differences between cash and profit
•
•

Cash is money in the bank or held a physical cash
Profit is a calculated figure which shows the surplus of income over expenditure for the period

Budgetary Control
The is the process of using budgets to monitor actual results against budgeted figures
...
10 DECISION-MAKING AND SOCIAL ACCOUNTING
Social accounting is the need for a business to be accountable for its actions to society

---