Management Accounting and Analysis of Cost

Question 1

who is the audience for management accounting

Answer 1

someone, a manager, inside the organisation

Question 2

what information does management accounting provide

Answer 2

costing, decision making, planning, performance evaluation

Question 3

what are the basis for financial decisions

Answer 3

accounting numbers

Question 4

what is the difference in users between MA and FA

Answer 4

MA applies to internal managers and staff
FA is for all other external users but also internal

Question 5

what is the difference in the nature of the report between MA and FA

Answer 5

MA reports are for a specific purpose, group or decision
FA is more general in purpose

Question 6

what is the difference in the level of detail between MA and FA

Answer 6

MA often provides considerable detail - very specific and focused
FA provides a more general overview - lacks detail

Question 7

what is the difference in availability of MA and FA reports

Answer 7

MA reports are often prepared quickly for current decision making
FA must be reported annually legally and sometimes semi-annually

Question 8

what is the difference between regulations in MA and FA

Answer 8

MA - there are no regulations on the standard content and formats
FA - legally regulated by external parties

Question 9

what is the difference in focus between MA and FA

Answer 9

MA - area, division, department, responsibility, product, service, customer, manager
FA - reported for the whole organisation

Question 10

what is the difference in the time horizon between MA and FA

Answer 10

MA looks to the future using past and present information - forward looking
FA uses past and present information to show what has happened - backward looking

Question 11

what are some of the types of cost

Answer 11

direct/indirect
production/non-production
fixed/variable
avoidable/unavoidable
relevant/not relevant
sunk
opportunity
incremental

Question 12

what cost must we know to calculate a selling price

Answer 12

total cost

Question 13

what is overhead absorption

Answer 13

the process of determining the allocation of indirect costs to a product or service

Question 14

what are the types of direct costs

Answer 14

direct materials, direct labour, direct expenses, total direct costs/prime cost

Question 15

what are the types of indirect costs

Answer 15

indirect materials, indirect labour, indirect expenses, total indirect costs

Question 16

what costs are not considered direct or indirect

Answer 16

non production costs/other overheads

Question 17

together, what do the direct and indirect costs make up

Answer 17

production costs

Question 18

direct materials

Answer 18

parts of the finished product, plastic, metal, electronics

Question 19

direct labour

Answer 19

cost of staff who worked in production

Question 20

direct expenses

Answer 20

additional linked-to-product expenses

Question 21

what is the formula for prime cost (total direct cost)

Answer 21

direct materials + direct labour + other direct expenses

Question 22

indirect materials

Answer 22

materials not part of the finished product, eg machine oils

Question 23

indirect labour

Answer 23

factory staff not associated with production

Question 24

indirect expenses

Answer 24

all other factory overheads eg rent, lighting, heating

Question 25

what is the formula for total production costs

Answer 25

direct + indirect production costs

Question 26

non-production costs (other overheads)

Answer 26

selling and distribution, administration overhead

Question 27

what is the formula for total cost

Answer 27

direct + indirect + non-production

Question 28

what is a contribution

Answer 28

some costs are incurred making a second 'batch' of a product but it might be less than the original batch a contribution contributes towards the costs that will be incurred anyway whether another batch is produced or not

Question 29

what factors should managers consider before agreeing to a sale

Answer 29

will the order impact current production will the price lead to more orders in the future could something else be sold or produced instead do you want to be associated with the customer you are selling to (more general: environmental, social, ethical, political, legal, long term prospects, company direction, industry or market risks, reliability of numbers)

Question 30

absorption

Answer 30

process of sharing out indirect costs over several products or services (very arbitrary)

Question 31

what is allocated cost per product

Answer 31

some cost incurred/ number of products produced by cost

Question 32

why do we absorb overheads (main reasons for allocation)

Answer 32

product pricing and to match cost with revenue when calculating profit

Question 33

why must we allocate for product pricing

Answer 33

to get a good estimate of full cost to set selling price what are customers willing to pay vs what supplier wants to charge

Question 34

what is cost-plus pricing

Answer 34

selling price = total cost + profit %

Question 35

how are indirect costs absorbed

Answer 35

based on a chosen allocation rate

Question 36

why do we allocate to match cost with revenue

Answer 36

accruals concept and carrying forward inventory (recorded at full cost including allocated overheads) then full cost matched against revenue when sold

Question 37

what is the traditional allocation rate per product

Answer 37

overhead per unit = total production overhead/number of units

Question 38

what is traditional allocation rate per direct labour hour

Answer 38

overhead rate per DLH = total production overhead/total number of DHLs

Question 39

what is traditional allocation rate per machine hour

Answer 39

overhead rate per MH = total production overhead/total number of MHs

Question 40

what are departmental overhead rates

Answer 40

applying a unique rate to different departments

Question 41

why might you use departmental overhead rates

Answer 41

different products spend different times in each department some may be more machine intensive or labour intensive so use different rates in theory it is a better allocation method to give a more accurate cost

Question 42

what are the steps in ABC design

Answer 42

1 identify major activities that take place in organisation 2 assign costs to cost pools for each activity 3 determine cost drivers for each activity 4 assign costs of activities to products according to demand for activities

Question 43

is ABC considered more or less accurate than the traditional method

Answer 43

more

Question 44

criticisms of ABC

Answer 44

arbitrary cost allocation is still involved in deciding on cost pool how to decide on best cost driver, and can they be accurately recorded unused production space will have no activities but still have costs data: rubbish in/rubbish out determination of cost pools and cost drivers is complicated and time consuming