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Which of the following types of standards is NOT commonly recognized in standard costing?
Standard cost cards are used to calculate variances between actual and standard costs.
True
What is the primary purpose of standard costing?
To establish cost control and to analyze variances.
The total sales variance can be broken down into sales price variance and __________ variance.
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Match the following variances to their components:
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What is the formula for calculating the gross profit margin?
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The working capital cycle is calculated by adding inventory days and payable days together.
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What does ROCE stand for?
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The formula for the trade receivables collection period is trade receivables divided by revenue multiplied by _____.
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Which of the following costs are NOT part of the costs of quality?
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The inventory holding period is calculated using cost of sales as the denominator.
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What is the purpose of using non-financial performance indicators?
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Match the following performance indicators with their definitions:
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What is one potential reason for variances in overhead costs?
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Activity based costing is generally less accurate than traditional absorption costing.
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What is the primary benefit of using activity based costing over traditional absorption costing?
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In the target costing process, the difference between the target cost and the actual cost is known as a ______.
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Match the following terms with their descriptions:
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Which situation would best warrant the use of activity based costing?
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One of the implications of adopting activity based costing is a potential change in unit selling prices.
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What does the fixed overhead volume variance measure?
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What best describes direct labour costs?
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Indirect costs can be traced to individual units of production.
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Name one example of an indirect cost.
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Indirect material costs, like office supplies, cannot be traced to __________ units of production.
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Match the following costs with their descriptions:
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Which of the following is NOT an example of an indirect cost?
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Electricity invoices are considered direct costs.
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What type of staff costs would include salaries of secretaries?
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Which of the following best defines capital expenditure (Capex)?
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Revenue expenditure is capitalised and depreciated over its useful life.
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What is a cost card?
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A cost unit refers to a product or service for which costs are being ______.
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What is an example of revenue expenditure?
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Cost centres are points for aggregating resources rather than costs.
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Why might a manufacturer of screws prefer to use a cost unit based on a volume of 1,000 screws?
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Match the following terms with their definitions:
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Study Notes
Profitability
- Gross profit margin is calculated by dividing gross profit by revenue and multiplying by 100.
- Operating profit margin is calculated by dividing operating profit by revenue and multiplying by 100.
- Return on capital employed (ROCE) is calculated by dividing operating profit by capital employed and multiplying by 100.
- Capital employed is calculated by adding total equity to non-current liabilities.
Efficiency
- Trade receivables collection period is calculated by dividing trade receivables by revenue and multiplying by 365. It represents the average number of days it takes a business to collect payment from its customers.
- Trade payables payment period is calculated by dividing trade payables by cost of sales and multiplying by 365. It represents the average number of days it takes a business to pay its suppliers.
- Inventory holding period is calculated by dividing inventories by cost of sales and multiplying by 365. It represents the average number of days it takes a business to sell its inventory.
- Working capital cycle is calculated by adding inventory holding period to trade receivables collection period and subtracting trade payables payment period.
- Expense/revenue percentage is calculated by dividing a specific expense by revenue and multiplying by 100. It represents the percentage of revenue that is consumed by a particular expense.
- Asset turnover is calculated by dividing revenue by the difference of total assets and current liabilities. It represents the efficiency with which a business generates revenue from its assets.
Non-Financial Performance Indicators
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Costs of Quality are used to classify various costs related to quality.
- Prevention Costs: Costs incurred to prevent defects from occurring in the first place.
- Appraisal Costs: Costs incurred to detect defects during production or before goods and services are delivered to customers.
- Internal Failure Costs: Costs incurred when a defect is detected before the goods or services are delivered to customers.
- External Failure Costs: Costs incurred when a defect is discovered after the goods or services are delivered to customers.
Standard Costing
- Standard Costing is a technique for planning and controlling costs.
- Standard cost cards summarize the expected costs of producing a unit of product.
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Standards are predetermined measures of how much should be used.
- Ideal Standards are based on perfect conditions with no waste or inefficiency.
- Target Standards are challenging but achievable standards that require efficiency and effectiveness.
- Normal Standards are based on historical data with adjustments for expected changes.
- Basic Standards are based on the most fundamental factors like labor, materials, and overhead.
Activity Based Costing (ABC)
- ABC is a method of allocating overhead costs to products and services based on the activities that consume those costs.
- It is appropriate for situations with a wide variety of products or services and significant indirect costs.
- ABC can provide more accurate cost information than traditional absorption costing and can ultimately lead to better decision-making.
- ABC can highlight potential implications for unit selling prices and profitability.
Target Costing
- Target costing is a technique used to determine the cost of a product or service that can be sold at a desired profit margin.
- Value analysis is a process that helps identify cost reduction opportunities.
- Value engineering is a detailed analysis that examines ways to enhance value while reducing costs.
- Cost gap refers to the difference between the target cost and the current cost.
Capital versus Revenue Expenditure
- Capital expenditure (Capex) involves purchasing items that have a useful life of more than one year.
- Revenue expenditure (Revex) involves purchasing items that have a useful life of less than one year.
Miscellaneous
- Cost card: A summary of costs involved in producing a unit of a product.
- Cost unit: A product or service for which costs are allocated.
- Cost centre: A location or department where costs are accumulated.
Direct and Indirect Costs
- Direct costs are costs that can be directly traced to a particular product or service.
- Indirect costs are costs that cannot be directly traced to a particular product or service.
- Some examples of indirect costs include factory rent, electricity to run machinery, administration expenses, indirect material, and indirect labor.
Fixed Costs
- Fixed costs are costs that do not change with the level of production or sales.
- Variable costs are costs that change with the level of production or sales.
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Description
Test your knowledge on key profitability and efficiency metrics in business finance. This quiz covers important calculations such as gross profit margin, operating profit margin, ROCE, and various collection and payment periods. Enhance your understanding of how these metrics impact financial analysis.
