To improve contribution/ - Increase selling price
sales ratio - Reducing unit variable costs by improving labour
efficiency or obtaining cheaper materials from
different suppliers
- Automating production and substituting variable
costs with fixed costs
Relevant and Irrelevant Relevant cost = varies across the alternatives and therefore
costs affects the decision
Irrelevant cost = does not vary across the alternatives / is
constant / fixed across alternatives / does not affect the
decision
sunk costs and Sunk Costs = historic costs = unavoidable = irrelevant
opportunity costs Opportunity Costs = measure of lost opportunity from
choosing one alternative over another = avoidable =
relevant
budget setting Advantages:
(Planning, coordination, control, communication,motivation,
evaluation of performance, decision-making)
Budgets set with management participation are based on
information from employees most familiar with the
department and knowledge spread among several levels of
management is pulled together. They may therefore be
more realistic. Morale and motivation is improved and
participative budgeting may increase operational managers
commitment to organisational objectives.
Coordination between units is improved. Individual
managers aspiration levels are more likely to be taken into
account.
Disadvantages:
(Benefits exceed cost of budgetary control,accuracy,
demotivation, disfunctional management,set too easy, may
restrict activities)
Participative budgets may lead to budgetary slack or budget
bias, where targets are deliberately set at a lower level so
that they can be easily achieved or exceeded. This would
lead to lower targets, suboptimal performance and
underachievement disguised as meeting expectations. This
would be unsuitable for control purposes.
Participative budgeting can also lead to empire
Factors affect accuracy of .Different techniques used to analyse fixed and variable
the analysis of costs into costs (for example HighLow method only uses 2 extreme
fixed and variable observations to derive the cost estimate equation)
components .The presence of fixed cost step functions makes it difficult
to derive a simple cost regression equation which will
accurately predict the changes in costs arising from changes
in volume
, .Changes in production technology and product mix will
mean that equations derived from past cost observations
will be inaccurate when predicting future cost-volume
relationships
.Costs may be influenced by other variables besides activity/
volume. Therefore simple regression equations will yield
inaccurate cost-volume relationships. Under these
circumstances, multiple regression analysis should be used.
.Choice of the wrong activity base – for example, different
measures such as direct labour hours, machine hours or
units of output can be used to measure activity. Inaccurate
cost estimation equations will be derived if activity bases
are used which are not highly correlated with total cost.
.An insufficient number of observations is used to derive the
cost estimation equation.
how the analysis of costs Analysis of costs into their fixed and variable elements is
into fixed and variable used by the management accountant in the following areas:
components is of use in . Planning: The analysis is necessary to predict costs for a
planning, control and range of output levels in order to determine their target
decision-making activity level at which the budget should be set
techniques used by . Control: Flexible budgets are needed for cost control
management accountant purposes
. Decision making: Analysis is necessary in order to
determine the incremental costs of making a component
would be assessed where a company has spare capacity and
wishes to evaluate a make or buy decision
Explain the relative merits Absorption Costing (Absorbs he total costs of the whole
of absorption costing and business amongst all of the cost units/ To calculate profit
maginal costing – for the and inventory valuation for the financial statements)
company’s internal Advantages
decision making purposes Does not require the separation of mixed costs into fixed
and variable components
Ensure fixed costs are covered when setting prices
Disadvantages
Profit can be manipulated by changing inventory levels
Severs the relationship between profit and sales volumes
Marginal costing
(To help with decision-making, cost are classified as either
fixed or variable; contribution to fixed cots is calculated as
selling price less variable costs)
Advantage:
Contribution Margin and Profit are linked to sales volume
Treats Fixed Costs in accordance with their nature: Period
Costs
sales ratio - Reducing unit variable costs by improving labour
efficiency or obtaining cheaper materials from
different suppliers
- Automating production and substituting variable
costs with fixed costs
Relevant and Irrelevant Relevant cost = varies across the alternatives and therefore
costs affects the decision
Irrelevant cost = does not vary across the alternatives / is
constant / fixed across alternatives / does not affect the
decision
sunk costs and Sunk Costs = historic costs = unavoidable = irrelevant
opportunity costs Opportunity Costs = measure of lost opportunity from
choosing one alternative over another = avoidable =
relevant
budget setting Advantages:
(Planning, coordination, control, communication,motivation,
evaluation of performance, decision-making)
Budgets set with management participation are based on
information from employees most familiar with the
department and knowledge spread among several levels of
management is pulled together. They may therefore be
more realistic. Morale and motivation is improved and
participative budgeting may increase operational managers
commitment to organisational objectives.
Coordination between units is improved. Individual
managers aspiration levels are more likely to be taken into
account.
Disadvantages:
(Benefits exceed cost of budgetary control,accuracy,
demotivation, disfunctional management,set too easy, may
restrict activities)
Participative budgets may lead to budgetary slack or budget
bias, where targets are deliberately set at a lower level so
that they can be easily achieved or exceeded. This would
lead to lower targets, suboptimal performance and
underachievement disguised as meeting expectations. This
would be unsuitable for control purposes.
Participative budgeting can also lead to empire
Factors affect accuracy of .Different techniques used to analyse fixed and variable
the analysis of costs into costs (for example HighLow method only uses 2 extreme
fixed and variable observations to derive the cost estimate equation)
components .The presence of fixed cost step functions makes it difficult
to derive a simple cost regression equation which will
accurately predict the changes in costs arising from changes
in volume
, .Changes in production technology and product mix will
mean that equations derived from past cost observations
will be inaccurate when predicting future cost-volume
relationships
.Costs may be influenced by other variables besides activity/
volume. Therefore simple regression equations will yield
inaccurate cost-volume relationships. Under these
circumstances, multiple regression analysis should be used.
.Choice of the wrong activity base – for example, different
measures such as direct labour hours, machine hours or
units of output can be used to measure activity. Inaccurate
cost estimation equations will be derived if activity bases
are used which are not highly correlated with total cost.
.An insufficient number of observations is used to derive the
cost estimation equation.
how the analysis of costs Analysis of costs into their fixed and variable elements is
into fixed and variable used by the management accountant in the following areas:
components is of use in . Planning: The analysis is necessary to predict costs for a
planning, control and range of output levels in order to determine their target
decision-making activity level at which the budget should be set
techniques used by . Control: Flexible budgets are needed for cost control
management accountant purposes
. Decision making: Analysis is necessary in order to
determine the incremental costs of making a component
would be assessed where a company has spare capacity and
wishes to evaluate a make or buy decision
Explain the relative merits Absorption Costing (Absorbs he total costs of the whole
of absorption costing and business amongst all of the cost units/ To calculate profit
maginal costing – for the and inventory valuation for the financial statements)
company’s internal Advantages
decision making purposes Does not require the separation of mixed costs into fixed
and variable components
Ensure fixed costs are covered when setting prices
Disadvantages
Profit can be manipulated by changing inventory levels
Severs the relationship between profit and sales volumes
Marginal costing
(To help with decision-making, cost are classified as either
fixed or variable; contribution to fixed cots is calculated as
selling price less variable costs)
Advantage:
Contribution Margin and Profit are linked to sales volume
Treats Fixed Costs in accordance with their nature: Period
Costs
