AAT Level 4 - Management Accounting: Decision and Control
- MADC
Revenue expenditure -: 1. Expenditure on items that will last for less than one year.
2. Charged to SPL as expense for the period.
Capital expenditure -: 1. Expenditure on items that will last for more than one year.
2. Creates non-current asset on balance sheet that will be capitalised and depreciated
over useful life.
Why cost? -: 1. Set selling prices.
2. Value inventory.
3. Identify ways to reduce costs.
4. Set cost targets for production staff and managers.
5. Use cost targets to review and improve actual performance.
Costs by nature -: 1. Direct costs - can be traced to production of single unit. Total of
direct costs is prime cost.
2. Indirect costs or overheads - shared over many units produced over a period.
Costs by function -: Relate to area of business in which costs incurred:
1. Production costs.
2. Non-production costs: administration, finance, selling and distribution.
Relationship between nature and function of costs -: 1. Direct costs are always
production costs.
2. Indirect costs can be production or non-production costs.
Cost card -: Summary of costs involved in producing one unit of product.
Cost unit -: Product or service for which costs are allocated in a cost card. May not be
single physical unit of production (e.g. bag of screws).
Cost centre -: Department to which costs can be allocated, either production cost
centre or service cost centre.
High-low method -: 1. Select highest and lowest figures for output and activity -
removing fixed cost step up, if given - and calculate differences.
2. Use differences to calculate variable cost per unit.
3. Calculate fixed cost using formula TC = FC + VC/unit x volume.
Absorption costing: definition -: Full costing method that includes both variable costs of
production and share of fixed production overheads.
, Absorption costing: method -: 1. Allocate direct costs to cost card.
2. Allocate (to single cost centre) and apportion (across several cost centres) indirect
costs.
3. Reapportion from service to production cost centres.
4. Absorb into cost units using Overhead Absorption Rate, defined as production
overhead / activity level.
Types of OAR -: 1. Per unit - when all units are identical.
2. Per labour hour - when activity is mainly manual.
3. Per machine hour - when activity is mainly automated.
Under and over-absorption of overheads -: 1. Absorbed overhead = pre-determined
OAR x actual activity.
2. If absorbed greater than actual overhead, we have over-absorbed and must increase
profit in P&L.
3. If absorbed less than actual overhead, we have under-absorbed and must reduce
profit in P&L.
Difference between absorption and marginal costing profit -: 1. Difference in profit =
movement in opening and closing inventory x fixed OAR.
2. When inventory increasing, absorption profit greater than marginal profit.
3. When inventory decreasing, absorption profit less than marginal profit.
Activity based costing -: Form of absorption costing where overheads of cost centre
are split into cost pools that behave in same way. These cost pools are absorbed into
production units by identifying cost driver that causes them to increase.
Contribution -: Selling price less variable cost.
Break-even point in units -: Fixed costs / contribution per unit.
Break-even point in revenue -: 1. Break-even point in units x selling price per unit, or
2. Fixed costs / contribution to sales ratio.
Margin of safety -: Budgeted sales volume - break-even sales volume / budgeted sales
volume x 100.
Target profit - units required -: Fixed costs + target profit / contribution per unit.
Limiting factor analysis - steps to calculate optimal production plan -: 1. Identify limiting
factor.
2. Calculate contribution per unit of each product.
3. Calculate contribution per unit of limiting factor.
4. Rank.
5. Follow ranking to work out optimal production.
- MADC
Revenue expenditure -: 1. Expenditure on items that will last for less than one year.
2. Charged to SPL as expense for the period.
Capital expenditure -: 1. Expenditure on items that will last for more than one year.
2. Creates non-current asset on balance sheet that will be capitalised and depreciated
over useful life.
Why cost? -: 1. Set selling prices.
2. Value inventory.
3. Identify ways to reduce costs.
4. Set cost targets for production staff and managers.
5. Use cost targets to review and improve actual performance.
Costs by nature -: 1. Direct costs - can be traced to production of single unit. Total of
direct costs is prime cost.
2. Indirect costs or overheads - shared over many units produced over a period.
Costs by function -: Relate to area of business in which costs incurred:
1. Production costs.
2. Non-production costs: administration, finance, selling and distribution.
Relationship between nature and function of costs -: 1. Direct costs are always
production costs.
2. Indirect costs can be production or non-production costs.
Cost card -: Summary of costs involved in producing one unit of product.
Cost unit -: Product or service for which costs are allocated in a cost card. May not be
single physical unit of production (e.g. bag of screws).
Cost centre -: Department to which costs can be allocated, either production cost
centre or service cost centre.
High-low method -: 1. Select highest and lowest figures for output and activity -
removing fixed cost step up, if given - and calculate differences.
2. Use differences to calculate variable cost per unit.
3. Calculate fixed cost using formula TC = FC + VC/unit x volume.
Absorption costing: definition -: Full costing method that includes both variable costs of
production and share of fixed production overheads.
, Absorption costing: method -: 1. Allocate direct costs to cost card.
2. Allocate (to single cost centre) and apportion (across several cost centres) indirect
costs.
3. Reapportion from service to production cost centres.
4. Absorb into cost units using Overhead Absorption Rate, defined as production
overhead / activity level.
Types of OAR -: 1. Per unit - when all units are identical.
2. Per labour hour - when activity is mainly manual.
3. Per machine hour - when activity is mainly automated.
Under and over-absorption of overheads -: 1. Absorbed overhead = pre-determined
OAR x actual activity.
2. If absorbed greater than actual overhead, we have over-absorbed and must increase
profit in P&L.
3. If absorbed less than actual overhead, we have under-absorbed and must reduce
profit in P&L.
Difference between absorption and marginal costing profit -: 1. Difference in profit =
movement in opening and closing inventory x fixed OAR.
2. When inventory increasing, absorption profit greater than marginal profit.
3. When inventory decreasing, absorption profit less than marginal profit.
Activity based costing -: Form of absorption costing where overheads of cost centre
are split into cost pools that behave in same way. These cost pools are absorbed into
production units by identifying cost driver that causes them to increase.
Contribution -: Selling price less variable cost.
Break-even point in units -: Fixed costs / contribution per unit.
Break-even point in revenue -: 1. Break-even point in units x selling price per unit, or
2. Fixed costs / contribution to sales ratio.
Margin of safety -: Budgeted sales volume - break-even sales volume / budgeted sales
volume x 100.
Target profit - units required -: Fixed costs + target profit / contribution per unit.
Limiting factor analysis - steps to calculate optimal production plan -: 1. Identify limiting
factor.
2. Calculate contribution per unit of each product.
3. Calculate contribution per unit of limiting factor.
4. Rank.
5. Follow ranking to work out optimal production.
