Chapter 1: Revision of MA topics

Question 1

What is the purpose of costing?
(4 points)

Answer 1

1) Value inventory- recorded in the BS
2) Record costs- recorded in P&L
3) Price products- make a profit
4) make decisions - what to make & quantity

Question 2

What is standard costing

Answer 2

predetermined unit cost set under specified working conditions

Question 3

What is the purpose of standard costing

Answer 3

1) Control-> investigate differences between actual vs standard

2) Planning-> help budget

3) Performance Management -> performance of cost center managers

4) Inventory valuation-> alternative to LIFO & FIFO

5) Accounting simplification -> only 1 cost

Question 4

What organisation is Standard costing best used for?

Answer 4

Mass production of homogenous products & repetitive assembly work
Low human intervention

Question 5

What is Mcdonaldisation

Answer 5

Each type of product made identically. Uses machines for drinks & pre-measured sauces

Question 6

What is standard costs based on?

Answer 6

Expected use & price of material, labour & overheads

Question 7

What are the 4 types of standard?

Answer 7

1) Attainable standards
2) Basic standards
3) Current standards
4) Ideal standards

Question 8

What are attainable standards

Answer 8

Efficient but not perfect operating conditions
Allowances for normal material loss, fatigue, machine breakdowns etc
Most frequent type of standard
Motivate employees to work harder
Realistic but challenging target

Question 9

What are Basic standards?

Answer 9

LT standards- unchanged over years
show trends overtime e.g material prices/ labour rates/ efficiency
Don’t highlight current efficiency
Can demotivate employees if too easy to achieve- bored & unchallenged

Question 10

What are current standards?

Answer 10

Current working conditions
Useful when current conditions are abnormal
Don’t attempt to motivate employees - unchallenged

Question 11

What are ideal standards?

Answer 11

Perfect operating conditions
No wastage/ scrap/ breakdowns/ idle time/ inefficiencies
Can have adverse motivational impacts- impossible to achieve

Question 12

When are ideal standards used?

Answer 12

Japanese companies
Pinpoint areas for close examination where there could be large cost savings

Question 13

What is a fixed budget?

Answer 13

Prepared before budget period
Single level of activity

Question 14

What is a flexible budget?

Answer 14

Prepared before budget period
Number of levels of activity
Includes fixed & variable costs

Question 15

What is a flexed budget?

Answer 15

End of the budget period
Estimate of costs & revenues based on actual level of output

Question 16

What does budgetary control do?

Answer 16

Compares actual results vs expected = variance
Can be favorable (better than expected) or adverse
Can be shown in flexible budget statement (not the same as the flexible budget)

Question 17

What is a controllable expense?

Answer 17

If a manager is responsible for it being incurred / authorise expenditure
Only evaluated on controllable expenses

Question 18

What is absorption costing

Answer 18

Full production cost per unit
Production costs only
Shown in a cost card

Question 19

What are prime costs

Answer 19

Total of all direct costs

Question 20

What does a cost card look like

Answer 20

Direct labour cost per unit
Direct Material cost per unit
Production OH cost per unit
Full production OH per unit
Selling price per unit
Profit/ loss per unit

Question 21

In absorption costing what are the 3 activity levels?

Answer 21

Units of production
Machine hours
Labour hours

Question 22

What is the calculation for OAR? ( OH absorption rate)

Answer 22

OAR= Production OH total/ Activity level (you choose- units* activity level per unit)

Question 23

What is the pre-determined OH absorption rate calculation?

Answer 23

Pre-determined OH absorption rate= budgeted OH/ Budgeted volume

Question 24

What is budgeted volume

Answer 24

E.g Total units
Direct labour hours
Machine hours

Question 25

What is over and under absorption?

Answer 25

Over- absorption= Absorbed > actual
Under- absorption= Absorbed< Actual

Question 26

How do you calculate Over/ under absorption?

Answer 26

1) Calculate OAR = Budgeted OH cost/ Budgeted Activity level

2) Over absorbed= actual activity * OAR

3) OH absorbed (step 2) - actual OH= Over/ Under absorbed

Question 27

What is marginal costing

Answer 27

Variable costs are charged to cost units
Fixed costs written off against aggregate contribution

Question 28

What is marginal cost

Answer 28

Extra cost of making & selling 1 more unit
or
saving by making & selling 1 less unit

Question 29

What is contribution

Answer 29

*-+Sales value- variable cost

aka contribution to fixed costs & profits

In marginal costing it varies in direct proportion to volume of units sold*=097542qac

Question 30

Advantages of absorption costing

Answer 30

1) Element of fixed overheads in accordance with IAS2

2) Analysing over/ under absorption can help with cost control

3) Small organisations = absorbing OH into cost of products is good at estimating job costs & profits

Question 31

What is the disadvantage of absorption costing

Answer 31

More complex than marginal costing
no useful info for decision making

Question 32

Advantages of Marginal Costing

Answer 32

Contribution per unit is constant
No over/ under absorption –> no adjustments on P&L
Fixed costs are a period cost–> charged in full to period under consideration
Good for decision making
Simple

Question 33

Disadvantages of Marginal costing

Answer 33

Closing inventory isn’t valued in accordance with IAS 2 principles
Fixed production OH not shared between units of production but written off