Past Papers Flashcards
(21 cards)
a) Discuss the similarities and differences between traditional costing and activity based costing.
Similarity: Both aim to assign overheads to products to calculate total cost.
Difference 1 – Cost drivers: Traditional uses one volume-based driver (e.g. labour hours); ABC uses multiple activity-based drivers (e.g. setups, orders).
Difference 2 – Accuracy: ABC is more accurate, especially in complex environments; traditional can distort costs.
Difference 3 – Complexity: Traditional is simpler and cheaper; ABC is costly and data-heavy.
Difference 4 – Suitability: Traditional suits labour-intensive firms; ABC suits diverse, automated businesses.
Difference 5 – Decision-making: ABC gives better insight for pricing, outsourcing, and product mix decisions.
Discuss the four main levels of activities in activity-based costing (ABC), with examples.
Unit-level activities – Performed each time a unit is made.
🔹 Example: Using electricity to run machines for each item produced.
Batch-level activities – Performed each time a batch is made, regardless of units.
🔹 Example: Machine setup for a production run of 500 shirts.
Product-level activities – Support the entire product line, not tied to volume or batches.
🔹 Example: Designing a new smartphone model.
Facility-level activities – Support the whole organisation, not specific to products.
🔹 Example: Building rent, security, general admin.
Q: Explain the budgeting techniques: (1) Zero-based budgeting and (2) Activity-based budgeting.
Zero-Based Budgeting (ZBB):
Every budgeting period starts from zero — no cost is automatically carried over.
🔹 Each activity must be justified from scratch, regardless of last year’s spend.
🔹 Used for: Cutting waste, prioritising essential spending (e.g. public sector budgets).
Activity-Based Budgeting (ABB):
Budget is based on planned activity levels and the cost of activities that drive them.
🔹 Focuses on the cost drivers — like setups, orders, inspections — to build the budget.
🔹 Used for: More accurate budgeting in complex, multi-product firms.
Q: How could a company implement (1) Zero-Based Budgeting and (2) Activity-Based Budgeting when preparing their annual budget?
Zero-Based Budgeting (ZBB):
Break the organisation into decision units (departments, teams).
Managers create budget requests from zero, justifying every activity and cost.
Rank activities based on cost–benefit and strategic priority.
Allocate resources to only those activities that are essential and justified.
Activity-Based Budgeting (ABB):
Identify all key activities needed to deliver products/services.
Estimate the demand for each activity (e.g. number of orders, setups).
Use cost drivers to calculate the cost of each activity.
Build the budget based on total activity cost, not just departments.
Q: Discuss the extent to which CVP/break-even analysis is limited by its assumptions. List 5 key assumptions.
CVP analysis is useful, but oversimplifies reality. Its assumptions often don’t hold true in dynamic environments, so decisions based solely on it may be flawed.
🔹 Five key assumptions:
Selling price per unit is constant.
Variable cost per unit is constant.
Fixed costs remain unchanged within the relevant range.
All units produced are sold (no inventory change).
The business makes and sells a single product (or constant sales mix).
Q: Give 3 examples of when break-even assumptions are violated, and explain the nature of each violation.
Bulk discounting – Selling price isn’t constant as discounts apply at higher volumes.
→ Violates: constant selling price assumption.
Mixed product sales – Sales mix shifts, and different products have different margins.
→ Violates: constant sales mix/single product assumption.
Stepped fixed costs – Fixed costs rise after hitting capacity limits.
→ Violates: fixed costs remaining constant.
Q: What is zero-based budgeting (ZBB) and how does it differ from incremental budgeting?
ZBB: Starts from zero each year. All spending must be justified from scratch.
Incremental budgeting: Builds next year’s budget by adjusting last year’s figures.
🔹 ZBB avoids complacency and forces evaluation; incremental assumes past spend is mostly valid.
Q: What are the main steps in preparing a zero-based budget?
1) Identify decision units (e.g. departments).
2) Create decision packages for all activities.
3) Justify each package from zero.
4) Rank packages by importance and value.
5) Allocate budget based on rankings and available funds.
Q: What are three potential advantages of zero-based budgeting over traditional systems?
1) Eliminates waste – Forces justification of all costs.
2) Improves efficiency – Encourages resource reallocation to high-value areas.
3) Promotes strategic thinking – Focuses on activities that align with current objectives.
Explain the benefits and limitations of standard costing practices in a company?
Standard Costing – Benefits & Limitations
✅ Benefits:
Controls costs via variance analysis
Improves budgeting & performance evaluation
Motivates staff with clear targets
Supports pricing & decision-making
Simplifies costing in repetitive processes
❌ Limitations:
Can be outdated or unrealistic
Not suited to custom/service industries
May demotivate or cause blame
Ignores quality/customer focus
Backward-looking, not real-time
Explain the difference between standard variable costing and standard absorption costing?
Standard Variable vs Standard Absorption Costing
🟦 Standard Variable Costing:
Only includes variable production costs in unit cost
Fixed overhead = period cost (expensed in full)
Focuses on contribution margin
Used for internal decisions
🟩 Standard Absorption Costing:
Includes variable + fixed production costs in unit cost
Fixed overhead = part of inventory value
Used for external reporting (GAAP/IFRS)
Can cause over-/under-absorption
What are the benefits and limitations of using standard costing in a company?
Benefits:
Fast and easy to implement
Cheaper than more complex costing methods
Supports budgeting and variance analysis
Helps track performance by comparing actual vs standard costs
❌ Limitations:
Can over/under-allocate overheads
May distort product costs if assumptions are outdated
Unrealistic standards can demotivate staff
Less useful in non-repetitive or service environments
What is standard costing?
Standard costing is a cost accounting method where predetermined (standard) costs are assigned to materials, labour, and overheads.
It’s used to estimate product costs and compare them with actual costs to identify variances for control and decision-making purposes.
What is the difference between standard variable costing and standard absorption costing?
Variable costing includes only variable production costs (materials, labour, variable overheads). Fixed overheads are treated as period expenses.
Absorption costing includes both variable and fixed production costs in unit cost. Fixed overheads are absorbed into inventory, affecting profit depending on production volume.
Key difference: Absorption spreads fixed costs across units, variable does not.
Explain the benefits and limitations of standard costing
practices in a company
Benefits:
Helps with budgeting and planning
Enables variance analysis to control performance
Sets performance targets for staff
Simplifies cost reporting and product costing
Can reveal inefficiencies quickly
Limitations:
May be unrealistic if based on outdated assumptions
Variances can be misleading if not interpreted properly
Doesn’t suit dynamic, fast-changing environments (like modern lean systems)
Can demotivate staff if targets feel unattainable
Focuses too much on cost control instead of value creation
What is a Material Price Variance and what causes it?
It is the difference between the standard cost and the actual cost per unit of material, multiplied by actual quantity used.
Causes: change in supplier prices, bulk discounts, inflation, poor negotiation, or unexpected delivery charges.
What is a Material Usage Variance and what causes it?
It measures the difference between standard quantity allowed and actual quantity used, multiplied by the standard cost per unit.
Causes: waste, theft, poor-quality inputs, inefficiencies, or improved production methods.
What is a Labour Rate Variance and what causes it?
It is the difference between standard wage rate and actual wage rate, multiplied by actual hours worked.
Causes: overtime, hiring workers at different rates, wage inflation, union agreements, or pay errors.
What is a Labour Efficiency Variance and what causes it?
It measures the difference between standard hours allowed and actual hours worked, multiplied by the standard rate.
Causes: worker skill, training, supervision, motivation, machinery issues, or absenteeism.
What is a Fixed Overhead Expenditure Variance and what causes it?
It is the difference between budgeted fixed overheads and actual fixed overheads incurred.
Causes: unexpected rent, insurance changes, utility bills, salary changes for management.
