P1

The application of the principles of accounting and financial management to create, protect, preserve and increase value for the stakeholders of for-profit and not-for-profit enterprises in the public and private sectors

The gathering of cost information and it's attachment to cost objects, the establishment of budgets, standard costs and actual costs of operations, processes, activities or products; and the analysis of variances, profitability or the social use of funds

multiply the change in inventory by the overhead absorption rate to give you the difference. If stocks have increases in the period absorption costing will be the higher profit

Direct material
Direct labour
Direct expenses
Production overheads

Costs which are charged in full to the P&L in the period in which they occured. These include admin costs, selling and distribution costs and finance costs

Direct Materials
Direct Labour
Direct Expense
NO OVERHEADS

Non production overheads (also called period costs which are charged in full to the P&L

Absorption costing
Marginal costing

1) Production Costs
2) Non - Production Costs

Full production cost will include the OAR for production overheads but total cost also includes non production overheads

average of X

Coordination
Responsibility
Utilisation
Motivation
Planning
Evaluation
Telling

marginal costing treats all fixed costs as period costs, absorption costs will absorb the fixed costs per unit.

the sum of

An activity that consumes resources and for which overhead costs are identified and allocated

A unit of activity that consumes resources, a factor influencing the level of cost

Indirect costs are high relative to direct costs
Products or services are complex, tailored to customer needs
Some products sold in large numbers, but others are sold in small numbers

Relevant
Easy to measure

1) Group production overheads into activities, according to how they are driven
2) Identify cost drivers for each activity, i.e what causes these activity costs to be incurred.
3) Calculate a cost driver rate for each activity
4) Absorb the activity costs into the product
5) Calculate the full production cost and/or the profit or loss

Physical measurement
Market value measurement
Net realisable value

Materials cost ONLY! Labour and expenses are considered fixed costs (Still need too do opening Inv plus purchases less closing inventory for cost of sales)

Throughput accounting ratio

Job Costing
Batch Costing
Service Costing
Process Costing
Costing in the public sector

The evaluation of performance by means of variances, whose timely reporting should maximise the opprtunity for managerial action

this is only on the price variance, usage variance will be on materials used

Profit

When using an absorption costing system

When using a marginal costing system

The budget that drives the others (usually sales budget) it will determine the production volumes etc.

Volume
Variety
Velocity
Veracity (integrity/authenticity)

Contribution to sales ratio

The proportion of Fixed costs to total costs
High operational gearing = high fixed costs, high breakeven point and high C/S ratio.
High operational gearing means profits increase rapidly after breakeven point
also means they would struggle in recession as Fixed costs hard to reduce

DOFPIS

Simplify the equations by using abbreviations for the products or variables ie use X and Y instead of product alpha and product bravo

Unless told otherwise the objective is usually to maximise contribution, so, you need to express this is a formula. For example if you are using X and Y as your variables and the contribution for each is 4X and 8Y then your forlual would be contribution = 4X + 8Y

Restate each of the contraints in a formula. For example
Dept A: 8X + 10Y < 11,000
Dept B: 4X + 10Y <9,000

you also need a non negative contraint, for example
X,Y > 0
which simply means X & Y cant be less than zero

Draw the constraint lines. If a constraint is 4X + 8Y < 8000 then make the X zero so that 8Y = 8000, this becomes 8000/8 = 1000. You can mark 1000 on the Y axis ( on the Y line) then do the same the other way around, 4X +8Y < 8000 becomes 4X + 0Y = 8000, which becomes 8000/4 = 2000. you can mark 2000 on the X axis line. Then you join the 2 points together. Repeat for each constraint. The area between zero and the crossover points is the feasable area.

There are 2 options.
. using simultaneous equations
. using an IS0- contribution line

Simultaneous equation = Calculate the coordinates for X and Y at each vertex (further points) on the feasible region. Then calculate the contribution for each vertex by substituting the values for X and Y into the objective function. The one with the highest contribution is the solution. If you cannot determine the numbers at all of the points then use the simultaneous equations. for example:-

if you have Dept A: 8x + 10y = 11,000
Dept B: 12x + 6y = 12000
multiply one of the sets of data to get one common denominator ie Dept A times 1.5 would mean that both x's are now 12, so this becomes
Dept A: 12x + 15y = 16,500
Dept B: 12x + 6y = 12,000
Then duduct one set of data from the other to leave 0x + 9y = 4,500. you can then dicide 4,500 by 9 to get the value for Y as 500. You can then use that value to solve the rest nto get the value of x

Iso contribution line = we need to maximise contribution so choose a value for you contributions ie if contribution is £4 for X and £8 for Y you could use 4X + 8Y = 4000. You can plot the this on the graph as y = 500 and x = 1000 for the 2 points (you changed one to zero and divided the 4000 by the remainder) then joint the 2 points to give your ISO line. Move this line outwards evenly and the last crossover point it touches in the feasible area is your optimal solution. Calculate the constribution for those levels of production

Shadow price is the amount ABOVE usual price

the increase in value which would be created by having available one additional unit of a limiting resource at its original cost. This represents the opportunity cost of not having the use of the one extra unit.

Only scarce resouces (binding constraints) will have a shadow price as they are fully utilised at the optimal solution

The amount of each resourse which will be unused if a specific linear programming solution is implemented

This is utilisation of a resource over and above minimum. Surpluses rend to arise in minimisation of cost problems where we have greater than or equal to constraint lines. eg. a constraint may state that it is necessary to produce a minimum of 400 units. If the optimum plan then recommends producing 450 units, the surplus in this case would be 50 units.

If the constraint is binding then the surplus will be zero

Risk seeker

Risk Averse

Risk averse (sore loser)

You do profit / CONTRIBUTION X 100

times by 100 to show as %