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Management Accounting 🪙 Flashcards

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1
Q

What is the definition of management accounting?

A

The process of identification, measurement, accumulation, analysis, preparation,interpretationand communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises thepreparation of financial reportsfor non-management groups such as shareholders, creditors, regulatory agencies and tax authorities.

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2
Q

What is financial accounting concerned with?

A

Concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators.

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3
Q

What is managerial accounting concerned with?

A

Concerned with providing information to managers within an organization so that they can formulate plans, control operations, and make decisions.

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4
Q

Cost management information is needed for each of the following management functions:

A

Strategic Management
Planning and Decision Making
Management and Operational Control
Preparation of Financial Statements

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5
Q

What is strategic management?

A

Most important of the management functions

Involves identifying and implementing goals and action plans to maintain a competitive advantage

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6
Q

What is planning and decision making?

A

Information is needed to support
recurring decisions such as scheduling production, pricing, repairing and replacing equipment

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7
Q

What is management and operational control?

A

Information is needed to identify inefficient operations and reward effective management practices

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8
Q

What is preparation of financial statements?

A

Information is needed to guarantee compliance with regulatory reporting requirements

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9
Q

What is the strategic emphasis?

A

The focus of cost management is on working with management to achieve the organization’s goals, through understanding the organization’s competitive environment and implementing the organization’s strategy to succeed in this environment

This often means using all of the organization’s resources to identify and satisfy the customers’ needs

The strategic emphasis often requires creative and integrative thinking from a cross-functional viewpoint

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10
Q

What are the 4 types of organizations?

A

Manufacturers
Merchandisers (Wholesalers & Retailers)
Service Firms
Government & Not-for-Profit

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11
Q

What are the changes in the contemporary business environment?

A

Shift to a global business environment - economic interdependence & nationalism

Lean manufacturing - inventory reduction & quality control, flexible manufacturing systems, emphasis on speed-to-market

Importance of information technology

Focus on the customer

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12
Q

How do the Changes in The Contemporary Business Environment Affect Cost Management?

A

The management accountant’s role:
Provide strategically relevant cost management information to help the organization keep up with the ever-changing environment.

This requires the development of critical success factors (CSFs), measures of performance that are essential to competitive advantage.

Management accountants have responded to the contemporary business environment with thirteen Contemporary Management Techniques

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13
Q

What is the balanced scorecard?

A

A contemporary management technique

An accounting report that addresses an organization’s performance in four perspectives: financial, customer, internal processes, and learning and growth

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14
Q

What is the strategy map?

A

A contemporary management technique

The strategy map is a method, based on the balanced scorecard, that links the four perspectives in a cause-and-effect diagram

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15
Q

What is the value chin?

A

A contemporary management technique

An analysis tool used to identify the specific steps required to provide a competitive product or service to the customer

Helps identify steps that can be eliminated, improved, or outsourced

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16
Q

What is activity-based costing and management?

A

A contemporary management technique

Improves the tracing of costs to individual products, services or customers

Used to improve operational and management control

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17
Q

What is business analytics?

A

A contemporary management technique

An approach to strategy implementation in which the management accountant uses data to understand and analyze business performance.

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18
Q

What is target costing?

A

A contemporary management technique

A method that has resulted from intensely competitive markets.

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19
Q

What is the target cost equation?

A

Target Cost = Market-determined price – Desired Profit.

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20
Q

What is life-cycle costing?

A

A contemporary management technique

Costs should be monitored throughout a product’s entire life cycle – from research and development to sales and service

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21
Q

What is benchmarking?

A

A contemporary management technique

Process by which a firm identifies its CSFs, studies the best practices of other firms in achieving these CSFs, and institutes change based on the assessment results

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22
Q

What is business process improvement?

A

A contemporary management technique

This technique involves managers and workers committing to a program of continuous improvement in quality and other critical success factors (CSFs)

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23
Q

What is total quality management?

A

A contemporary management technique

A technique by which management develops policies and practices to ensure the firm’s products and services exceed customer’s expectations

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24
Q

What is lean accounting?

A

A contemporary management technique

Measures the financial benefits of a firm’s progress in implementing lean manufacturing.

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25
What is the theory of constraints?
A contemporary management technique Helps firms improve cycle-time (i.e., the rate at which raw materials can be converted to finished products)
26
What is sustainability?
A contemporary management technique Means the balancing of the company’s short and long term goals in all three dimensions of performance – social, environmental, and financial.
27
What is enterprise risk management?
A contemporary management technique A framework and process that firms use to manage the risks that could negatively or positively affect the company’s competitiveness and success.
28
What is cost?
A cost is incurred when a resource is used for some purpose Costs are assembled into meaningful groups called cost pools (e.g., by type of cost or source)
29
What is a cost driver?
Costs are assembled into meaningful groups called cost pools (e.g., by type of cost or source)
30
What is a cost objective?
A cost object is any product, service, customer, activity, or organizational unit to which costs are assigned for some management purpose
31
What is the purpose of cost classification?
Assigning costs to cost objects Accounting for costs in manufacturing companies Preparing financial statements Predicting cost behavior in response to changes in activity Making decisions
32
What are direct costs?
Costs that can be easily and conveniently traced to a unit of product or other cost object. Examples: direct material and direct labor
33
What are indirect costs?
Costs that cannot be easily and conveniently traced to a unit of product or other cost object. Example: manufacturing overhead
34
What are common costs?
Indirect costs incurred to support a number of cost objects. These costs cannot be traced to any individual cost object.
35
What are the 3 classifications of manufacturing costs?
Direct Materials Direct Labor Manufacturing Overhead
36
What are direct materials costs?
Raw materials that become an integral part of the product and that can be conveniently traced directly to it. Example: A radio installed in an automobile
37
What are direct labor costs?
Labor costs that can be easily traced to individual units of product. Example: Wages paid to automobile assembly workers
38
What is manufacturing overhead?
Includes all manufacturing costs except direct material and direct labor. These costs cannot be readily traced to finished products. Includes indirect materials and indirect labor costs that cannot be easily or conveniently traced to specific units of product.
39
Give 4 examples of manufacturing overhead:
Depreciation of manufacturing equipment Utility costs Property taxes Insurance premiums incurred to operate a manufacturing facility
40
How are manufacturing costs often classified as?
Prime costs = direct materials & sometimes direct labor Conversion costs = manufacturing overhead & sometimes direct labor
41
What are the 2 types of nonmanufacturing costs?
Selling costs Administrative costs
42
What are selling costs?
Costs necessary to secure the order and deliver the product. Selling costs can be either direct or indirect costs.
43
What are administrative costs?
All executive, organizational, and clerical costs. Administrative costs can be either direct or indirect costs.
44
What are product costs?
Product costs include all costs that are involved in acquiring or making a product. Product costs “attach” to a unit of product as it is purchased or manufactured and they stay attached to each unit of product as long as it remains in inventory awaiting sale.
45
For manufacturing companies, what product costs are included?
Raw materials: includes any materials that go into the final product. Work in process: consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer. Finished goods costs: consists of completed units of product that have not yet been sold to customers.
46
What is cost behavior?
Cost behavior refers to how a cost will react to changes in the level of activity.
47
What are the most common types of cost behavior?
Variable costs. Fixed costs. Mixed costs.
48
What are variable costs?
A cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost per unit is constant.
49
What are fixed costs?
A cost that remains constant, in total, regardless of changes in the level of the activity. If expressed on a per unit basis, the average fixed cost per unit varies inversely with change in activity.
50
What are the 2 types of fixed costs?
Committed = Long-term, cannot be significantly reduced in the short term. Discretionary = May be altered in the short-term by current managerial decisions
51
What is the behavior of variable costs?
In total = total variable cost increases & decreases in proportion to changes in the activity level. Per unit = Variable cost per unit remains constant.
52
What is the behavior of fixed costs?
In total = total fixed cost is not affected by changes in the activity level within the relevant range. Per unit = fixed cost per unit decreases as the activity level rises and increases as the activity level falls.
53
What is the goal of making decisions?
To identify those costs that are either relevant or irrelevant to the decision.
54
What are differential costs?
Differential costs (or incremental costs) are the difference in cost between any two alternatives. A difference in revenue between two alternatives is called differential revenue. Both are always relevant to decisions. Differential costs can be either fixed or variable.
55
What are opportunity costs?
The potential benefit that is given up when one alternative is selected over another. The potential benefit that is given up when one alternative is selected over another.
56
What are sunk costs?
Sunk costs have already been incurred and cannot be changed now or in the future. These costs should be ignored when making decisions.
57
Why costing system?
1. Costing accuracy is critical to a firm’s success 2. Costing systems help management estimate costs and accurately charge customers 3. An accurate costing system can provide a competitive advantage
58
What is product costing?
the process of accumulating, classifying, and assigning direct materials, direct labor, and factory overhead costs to cost objects, which most commonly are products, services, or projects: - Direct costs are traced to a cost object (e.g., a job) -Indirect costs are allocated to a cost object (using one or more cost-allocation bases/cost drivers)
59
What are the 3 choices that must be made when developing a product-costing system?
1. Cost accumulation method (i.e., job or process costing) 2. Cost measurement method (i.e., actual, normal, or standard costing) 3. Overhead assignment method (i.e., volume-based or activity-based)
60
What does a firm's choice of costing system depend on?
firm’s industry and product or service firm’s strategy and management information needs costs and benefits of acquiring, designing, modifying, and operating a particular system
61
What is job costing?
All manufacturing costs incurred are assigned to jobs This type of system is appropriate when cost can be readily identified with specific customers, jobs, or projects Often found in small or medium firms that produce customized products Example: Construction, printing, special equipment manufacturing, shipbuilding, medical services, custom furniture manufacturers, advertising agencies, accounting firms, etc.
62
What is process costing?
Often found in large firms that produce one or a few homogeneous products through continuous mass production Example: Chemical industry, bottling companies, plastics, food products, and paper products, cement manufacturing, brick production, etc.
63
What is cost assignment?
The process of assigning costs to cost pools or from cost pools to cost objects
64
What is cost allocation?
The assignment of indirect costs to cost pools and cost objects through the use of cost drivers These cost drivers are often called allocation bases
65
What is an actual costing system?
Uses actual costs incurred as the measure of product cost.
66
Why is an actual costs rarely used?
Unit costs fluctuate significantly, thereby increasing the possibility of error in pricing, adding/dropping product lines, and executing performance evaluations Factory overhead costs are only known at or after the end of the period (thus, cost information is not available on a timely basis)
67
What is a normal costing system?
Uses actual costs for direct materials and direct labor but normal costs for factory overhead: Involves estimating a portion of overhead to be assigned to each product as it is produced providing a timely estimate of cost Choice of an appropriate denominator activity level for allocating fixed overhead costs is a key consideration
68
What is the standard costing system?
Uses standard costs for all cost elements, direct and indirect: Standard costs are costs a firm should attain under relatively efficient operating conditions Standard costing systems provide a basis for cost control, performance evaluation, and process improvement
69
What are the 3 types of costing systems?
Actual Costing Normal Costing Standard Costing
70
Why does a firm need accurate cost information to be competitive?
Product pricing decisions Product profitability analysis Customer profitability analysis Evaluation of management performance Refinement of strategic goals
71
What is the job costing system?
Accumulates costs and assigns them to specific jobs, customers, projects, clients, or contracts
72
What is the basic supporting document of the job costing system?
the job-cost sheet - which records and summarizes the costs of direct materials, direct labor, and factory overhead for a particular job A job cost sheet is started when the production or processing of a job begins
73
How is job costing used in service industries?
used extensively in service industries such as advertising agencies, construction companies, hospitals, accounting firms, and law firms The cost object is often a client, contract, or project rather than a job, but the approach is the same
74
What is the difference between manufacturing and services in terms of job costing?
the use of direct materials--service industries may use little or no direct materials The main focus of a service industry’s costing system is direct labor The OH rate is usually based on direct labor cost
75
What is operation costing?
A hybrid costing system that uses job costing to assign direct material costs to jobs and a processing “departmental” approach to assign “conversion costs” to products or services:
76
When is operation costing common?
Common in manufacturing companies whose conversion activities are similar across several product lines, but whose direct materials vary significantly Direct material costs are traced directly to jobs while conversion costs (direct labor and factory overhead) are traced to departments and then to jobs Commonly in the following industries: clothing, food processing, textiles, shoes, furniture, metalworking, jewelry, and electronic equipment
77
What is process costing?
A system where the unit cost of a product or service is obtained by assigning total costs to many identical or similar units of output.
78
How are unit costs calculated?
Unit costs are calculated by dividing total costs incurred by the number of units of output from the production process. Unit costs are calculated by dividing total costs incurred by the number of units of output from the production process.
79
What is the difference between process costing and job costing?
The main difference between process costing and job costing is the extent of averaging used to compute the unit costs of products or services.
80
Why is it incorrect to cost each job at the same average cost in a job-costing system?
Why is process costing used to calculate an average production cost when identical or similar units are mass-produced?
81
Why is process costing used to calculate an average production cost when identical or similar units are mass-produced?
In contrast, when identical or similar units of products or services are mass-produced, process costing is used to calculate an average production cost for all units produced.
82
What is the main difference between process costing and job costing?
The main difference between process costing and job costing is the extent of averaging used to compute the unit costs of products or services.
83
When do process-costing systems separate costs into categories?
When costs are introduced into the process.
84
When are direct materials added to process-costing?
Direct materials are usually added at the beginning of the production process, or at the start of work in a subsequent department down the assembly line.
85
When are conversion costs added to process-costing?
Conversion costs are generally added equally along the production process.
86
What are the characteristics of job-costing systems?
Distinct, identifiable units of a product or service. Examples: Custom-made machines, houses
87
What are the characteristics of process-costing?
Masses of identical or similar units of a product or service. Examples: Food, chemical processing
88
What are the 3 principal reasons that have accelerated the demand for refinements to the costing system?
Increase in product diversity Increase in indirect costs with different cost drivers Competition in product markets
89
What does the refinement of costing systems require?
Gathering, validating, analyzing, and storing vast quantities of data.

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