Association of Accounting Technicians (AAT) Management Accounting Techniques (Level 3) Flashcards

24 sample cards from the Management Accounting Techniques (Level 3) deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. Give the materials purchases budget formula (in units/kg).

   $$\text{Purchases} = \text{Material used in production} + \text{Closing material inventory} - \text{Opening material inventory}$$ Material used $=$ production units $\times$ material per unit.

2. What is a cash budget and how does it differ from a budgeted income statement?

   A cash budget is a period-by-period forecast of cash receipts and payments, showing the closing cash balance. Unlike the income statement, it is prepared on a cash (not accruals) basis: it records when cash actually moves and excludes non-cash items like depreciation.

3. Name items that appear in a budgeted income statement but NOT in a cash budget, and vice versa.

   In the income statement but not the cash budget: depreciation, accruals, and credit sales/purchases not yet settled. In the cash budget but not the income statement: capital expenditure payments, loan receipts/repayments, drawings/dividends, VAT, and the timing of cash from credit transactions.

4. How is the closing cash balance in a cash budget calculated?

   $$\text{Closing balance} = \text{Opening balance} + \text{Total receipts} - \text{Total payments}$$ The closing balance of one period becomes the opening balance of the next. A negative closing balance signals a cash shortfall requiring financing.

5. How are receipts from credit customers timed in a cash budget?

   Cash is recorded in the period the customer actually pays, not when the sale is made. For example, if customers pay one month after sale, January credit sales appear as February receipts. Settlement (cash) discounts reduce the amount received.

6. What is variance analysis?

   Variance analysis is the comparison of actual results with the budget (or standard), calculating the differences (variances) and identifying their causes. It is a control technique that helps managers investigate and correct performance through management by exception.

7. What is the difference between a favourable and an adverse variance?

   A favourable (F) variance increases profit compared with budget - actual revenue higher or actual cost lower than expected. An adverse (A) variance reduces profit - actual revenue lower or actual cost higher than expected.

8. What does a flexed (flexible) budget do and why is it used in variance analysis?

   A flexed budget restates the budget for the actual level of activity achieved, by flexing variable costs/revenues while holding fixed costs constant. It is used so that actual results are compared with what they should have been at the actual volume - giving a fair like-for-like comparison.

9. How are the sales volume effect and the cost/price effects separated using a flexed budget?

   Compare the original (fixed) budget with the flexed budget to find volume-related differences; then compare the flexed budget with actual results to find the cost and price (efficiency/expenditure) variances. This isolates the effect of activity changes from operating performance.

10. Give the formula for the direct materials price variance.

    $$\text{Materials price variance} = (\text{Standard price} - \text{Actual price}) \times \text{Actual quantity purchased}$$ A positive result (paid less than standard) is favourable; paying more than standard is adverse.

11. Give the formula for the direct materials usage variance.

    $$\text{Materials usage variance} = (\text{Standard quantity for actual output} - \text{Actual quantity used}) \times \text{Standard price}$$ Using less than standard is favourable; using more is adverse. It is valued at standard price.

12. Give the formula for the direct labour rate variance.

    $$\text{Labour rate variance} = (\text{Standard rate} - \text{Actual rate}) \times \text{Actual hours paid}$$ Paying a lower rate than standard is favourable; a higher rate is adverse.

13. Give the formula for the direct labour efficiency variance.

    $$\text{Labour efficiency variance} = (\text{Standard hours for actual output} - \text{Actual hours worked}) \times \text{Standard rate}$$ Taking fewer hours than standard is favourable; taking more is adverse. Valued at standard rate.

14. Give possible causes of an adverse materials usage variance.

    Higher wastage/scrap, poor-quality (cheaper) materials, faulty or poorly maintained machinery, less skilled labour producing more rejects, theft, or inaccurate (too tight) standards.

15. Why might a favourable materials price variance be linked to an adverse usage variance (interdependence)?

    Buying cheaper, lower-quality material gives a favourable price variance but the inferior material may produce more wastage and rejects, causing an adverse usage variance. Variances are interdependent, so causes should not be investigated in isolation.

16. What is 'management by exception' in the context of variance reporting?

    Management by exception means managers focus their attention only on significant variances (those exceeding a materiality or percentage threshold), rather than investigating every small difference. This directs limited time to the issues most worth correcting.

17. What is capital investment appraisal?

    Capital investment appraisal is the evaluation of proposed long-term investments (e.g. buying machinery or a new project) to decide whether the expected future returns justify the initial capital outlay. Main basic methods are payback period, accounting rate of return, and net present value.

18. What is the payback period and how is it calculated for even cash flows?

    The payback period is the time taken for a project's cumulative cash inflows to recover its initial investment. For constant annual cash flows: $$\text{Payback} = \frac{\text{Initial investment}}{\text{Annual net cash inflow}}$$

19. Payback example: a machine costs $\pounds 60{,}000$ and generates $\pounds 15{,}000$ net cash inflow per year. What is the payback period?

    $$\text{Payback} = \frac{60{,}000}{15{,}000} = 4 \text{ years}$$ The initial outlay is recovered exactly after four years of equal inflows.

20. How is the payback period found when annual cash flows are uneven?

    Build up cumulative cash flows year by year until the cumulative figure turns from negative to positive. The payback falls within the year it turns positive; interpolate using $$\text{Months} = \frac{\text{Cash still to recover at start of year}}{\text{Cash inflow during that year}} \times 12$$

21. What are the main advantages and disadvantages of the payback method?

    Advantages: simple to calculate and understand, emphasises liquidity and early cash recovery, reduces risk by favouring quick returns. Disadvantages: ignores cash flows after payback, ignores total project profitability, and (in its basic form) ignores the time value of money.

22. What is the time value of money, and why does it matter in investment appraisal?

    The time value of money is the principle that $\pounds 1$ received today is worth more than $\pounds 1$ received in the future, because money can be invested to earn a return (and inflation/risk erode future value). Appraisal therefore discounts future cash flows to present value.

23. What is the discount factor formula used in net present value calculations?

    $$\text{Discount factor} = \frac{1}{(1+r)^{n}}$$ where $r$ is the discount (cost of capital) rate and $n$ is the number of years. Multiplying a future cash flow by this factor gives its present value.

24. What is net present value (NPV) and what is the decision rule?

    NPV is the sum of the present values of all a project's cash flows (inflows less the initial outlay), discounted at the cost of capital: $$\text{NPV} = \sum \frac{\text{Cash flow}_n}{(1+r)^{n}} - \text{Initial investment}$$ Decision rule: accept if $\text{NPV} \geq 0$ (positive adds value); reject if negative. Choose the highest NPV among competing projects.

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Management Accounting Techniques (Level 3) flashcards FAQ