Week 1 - 8 study

Question 1

What are the two types of value that management accounting focuses on? Which is more important?

Answer 1

Customer value and shareholder value. S/holder value is more important.

Question 2

What is the main difference between mgmt an financial accounting?

Answer 2

financial accounting is focused on reporting of info to external parties while mgmt accounting is more internally focused. In addition, financial accounting is highly regulated whereas mgmt accounting is not.

Question 3

What is the difference between contemporary and conventional mgmt accounting systems.

Answer 3

compared to conventional systems, contemporary mgmt systems: - recognizes that costs can be caused by a range of different factors and/or activities. - performance mgmt looks at non-financial info as well - cost managed focuses on the causes of costs and how they can be controlled pro actively

Question 4

At the highest level possible, what are the two ways that costs can be classified for accounting purposes?

Answer 4

Expensed (P&L) or capitalised in the balance sheet.

Question 5

What is the difference between fixed and variable costs and what is the ‘relevant range’ in relation to such costs.

Answer 5

The classification of Fixed and variable costs focuses on the way costs behave as the level of activity changes. If activity increases, variable costs generally increase and fixed costs remain the same. The relevant range is the range of activity over which the firm expects cost behaviour to be consistent. i.e. the range over which estimates of fixed and variable costs are valid

Question 6

What is a cost object?

Answer 6

Any items for which a manager wants to measure a cost..

Question 7

Distinguish direct and indirect costs in a manufacturing context. Give examples

Answer 7

Direct manufacturing costs can be identified with or traced to a particular cost object whereas indirect costs cannot. Costs must be able to be able to be traced in an economically feasible way. Examples of direct costs include direct material costs and direct labour costs. Indirect costs include those that are applied by way of manufacturing overhead. e.g. indirect materials, indirect labour, electricity, depreciation, rent, insurance etc.

Question 8

The various activities in a value chain can be divided into three different categories. What are they and what sort of activities do they involve. Hint: river

Answer 8

1. Upstream - earlier costs in the R&D, design and supply phase. 2. Production costs - costs incurred to physically produce products 3. Downstream costs- later costs including marketing, distribution and customer services. Various support services (including HR and accounting functions) are ancillary to the value chain activities.

Question 9

What is a cost driver? What is the conventional approach to understanding cost drivers vs contemporary approaches?

Answer 9

A cost driver is an activity or factor that causes costs to be incurred. Conventional approaches recognise that production volume and sales volume are the only cost drivers. Contemporary viewpoints recognise that there are a range of other drivers such as activity based costing.

Question 10

What are the four levels in which activity based approaches classify costs?

Answer 10

1. unit level costs (per unit) 2. Batch level costs 3. product (per type of product) 4. Facility level

Question 11

What is a step fixed cost?

Answer 11

A cost that remains fixed over a wide range of activity levels but slumps to a different amount for levels outside of that range.

Question 12

What are the three categories of costs that typically make up total product costs (or manufacturing costs)?

Answer 12

Direct labour, direct materials and manufacturing overhead.

Question 13

What is a simple definition of manufacturing overhead?

Answer 13

ALL costs that cannot be traced to manufactured goods in an economically feasible way (i.e. indirect costs). In addition, man. overhead includes the costs of man. SUPPORT DEPARTMENTS

Question 14

How does product costing for external reporting purposes differ from that typically used for managerial accounting purposes?

Answer 14

For external reporting purposes, only production costs are included in product costs. For managerial accounting purposes, production/manufacturing costs AS WELL AS upstream and downstream costs may be included. [Whether upstream or downstream costs are included depends on whether costs are being looked at from a short term or long term perspective.]

Question 15

Describe the system of manufacturing costs in the accounts. [KEY REVISION]

Answer 15

1. As raw materials are purchased, they are transferred (dr’d) to the raw material inventory account. 2. As production takes place, all man. costs are Dr’d to the WIP account (including direct labour and man. overhead costs) 3. When products are completed, products are transferred from WIP inventory to finished goods 4. When products are sold, costs are transferred form finished goods to COGS expense. 5. COGS is closed to the P&L at the end of the period and transferred to the P&L.

Question 16

What are the three main “inventory” accounts?

Answer 16

Raw materials WIP Finished goods

Question 17

What sort of account is the “manufacturing overhead” Dr account (asset or expense)?

Answer 17

Neither. It is a temporary account that allows us to accumulate the expense over time.

Question 18

Why does over and under applied overhead occur?

Answer 18

Because when overhead is applied to products using a predetermined rate, overhead actually incurred differs from that actually applied.

Question 19

How is under/over applied overhead treated in the accounts at the end of the period? (2 ways)

Answer 19

It is either closed to COGS (i.e. any variance is posted to bring the man. overhead account to zero) or It is pro rated to COGS, WIP inventory and finished good inventory (more accurate)

Question 20

What are the 2 “conventional” product costing systems? How do they differ?

Answer 20

Job costing and process costing. Job costing: - manufacturing costs are accumulated and traced to different jobs/batches - products are typically individual or unique Process costing - costs are traced to processes, accumulated and are averaged across all units produced. - more common in a mass production environment where there are repetitive processes - products are typically identical or very similar.

Question 21

Differentiate the journal entries where labour costs are direct and indirect to a particular job.

Answer 21

When labour costs are direct, DR WIP CR Wages payable/paid When costs are indirect DR Manufacturing overhead CR Wages payable/paid

Question 22

How is a manufacturing overhead predetermined rate determined e.g. per labour hour.

Answer 22

The total budgeted man. overhead costs is divided by the total number of budgeted labour hours e.g. $20/ labour hour

Question 23

When would it be appropriate for an org. not to have a WIP account for costing purposes?

Answer 23

Where the org does not have partially completed products (WIP) at the end of the period (e.g. a soft drink manufacturer).

Question 24

What are the two main steps when using the process costing system?

Answer 24

1. Estimate the cost of the production process 2. Calculate the average cost per unit (by dividing total costs by total number of units produced)

Question 25

Process costing is more complex where there are WIP inventories at the beginning and end of a period. What needs to be considered in this case?

Answer 25

The following needs to be considered: - units started in the previous period (opening WIP) and completed in the current period - Units started and completed during the period - units that are incomplete at the end of the period (ending WIP) To account for the factors above, we need to use equivalent units.

Question 26

What are equivalent units? How are they used to calculate product cost using the process costing method?

Answer 26

In order to factor in that units in ending WIP are at different stages of completion with respect to MATERIAL and CONVERSION costs, equivalent units are used.

Question 27

Describe the two different measures of equivalent units that are used when WIP is involved?

Answer 27

Equivelant units of: DIRECT MATERIAL and CONVERSION COSTS (the costs of direct labour and man, overhead incurred to convert raw material to a finished product.

Question 28

What are the four steps in process costing when there is beginning and ending WIP?

Answer 28

1. Analyse the physical flow of units (i.e. units in opening WIP, units started &transferred out ) 2. Calculate the equivalent units (for both direct material and conversion) 3. Calculate the unit costs (by adding up all costs incurred and dividing them by the total equivelant units) 4. Analyse the total costs (by multiplying the total cost per equivelant unit \* equivelant units)

Question 29

What are the two methods that can be used to calculate equivalent units? How do they differ?

Answer 29

Weighted average cost AND FIFO The weighted average cost method includes total costs incurred (including those in opening WIP) when calculating unit costs and equivalent units. The FIFO method assumes that the WIP inventory is completed before the production of new units commences. Therefore, the equivalent units in opening WIP are subtracted from the total e. units. (i.e. only the costs incurred in the current month are used).

Question 30

What is hybrid costing?

Answer 30

a costing method that draws on combination of both job and process costing features. Costs are typically applied on a per-batch basis. A.K.A Operation costing.

Question 31

What are the five steps in the "service" value chain?

Answer 31

1. R&D 2. Design 3. Production/ delivery 4. Marketing 5. Customer Suport

Question 32

What are the 3 different types of service entities?

Answer 32

1. Professional services - unique services provided by professional staff e.g. PwC 2.Mass services - many customers, non customised service e.g. supermarket 3. Service shops - In the middle between professional services and mass services firms.

Question 33

What costing systems are more suitable for different types of service firms.

Answer 33

Professional services = job costing Mass services - process costing Service shops - hybrid costing

Question 34

What is the key difference between costing for manufacturing and service firms for external reporting purposes?

Answer 34

- Generally, in service firms there is no inventory. - There are no external reporting requirements to estimate individual service costs. Therefore, such systems should only be implemented where benefits exceed costs.

Question 35

What are the relevant factors that should be considered when determining if a service costing system should be implemented?

Answer 35

Service costing can be used to: -assess profitability - set prices -plan and control costs etc [managers decision making needs]

Question 36

How does costing in a retail and wholesale business differ from that of a service firm?

Answer 36

- Tangible goods are sold - inventories and COGS are recorded in the accounting ledger

Question 37

What is the COGS formula?

Answer 37

Cost of beginning inventory + purchases - cost of ending inventory.

Question 38

What sort of costs are typically included in overhead for service firms?

Answer 38

Upstream and downstream costs

Question 39

What is a cost pool and how is it used to allocate costs to products? What is a requirement where costs are pooled?

Answer 39

A cost pool = a collection of costs that are allocated to cost objects.Cost pooling is used to simplify the cost allocation process. In order to be pooled, costs must have a common allocation base (A.K.A Cost driver).

Question 40

What is a cost driver? What are common examples of cost drivers?

Answer 40

Cost driver = an activity or factor that causes costs to be incurred. Machine hours, labour hours, units of output, floor area etc.

Question 41

How does overhead allocation differ between product costing and responsibility area costing?

Answer 41

For product costing, indirect product costs are used. For responsibility area costing, costs are only indirect costs of the specific responsibility area.

Question 42

What are the three methods used to allocate overhead costs when using the product costing system?

Answer 42

1. Plantwide rate 2. Departmental rate 3. Activity based costing

Question 43

How is the plantwide overhead rate used to allocate costs to products? What are the three steps? [Common sense & KEY REVISION]

Answer 43

The plantwide overhead rate gathers all man. overhead costs into a pool and allocating them using the following 3 steps: 1. Identify the cost driver 2. Calculate the predetermined man. o/head rate by dividing the budgeted man. o/head by the budgeted level of the cost driver. e.g. $9 per labour hour. 3. Apply overhead based on the predetermined rate and the products consumption of the cost driver. e.g. 2 labour hours = $18.

Question 44

What is the departmental rate method of allocating overhead costs to products? What is the two stage allocation process?

Answer 44

Man. o/head is allocated based on different cost drivers in different departments.(recognizing that the costs of man. costs may differ across different depts). 1. Assign overhead costs to production departments using the appropriate cost driver. 2. Apply them to the products by calculating a predetermined man. overhead rate for each dept.

Question 45

What is the ABC method of allocating overhead costs? What is the two stage process that is used to allocate costs using ABC?

Answer 45

ABC = recognizing that there may be a number of different cost drivers for many cost items, ABC focuses on the allocation of activity costs. e.g. quality control activity costs may be allocated to products based on the amount of labour hours the product spends in the quality control dept. 1. Overhead costs are assigned to acitivites 2. Overhead costs are applied to products (based on the activity cost per unit of cost driver).

Question 46

What are the negatives of the plantwide and departmental o/head costing systems compared to ABC?

Answer 46

- less accurate - tends to overcost high-volume simple products and undercost low volume complex products. - increasingly, more costs are non-volume driven e.g. depreciation - the proportion of overhead costs as a proportion of total costs is increasing, making them even more important over time.

Question 47

What are the three methods that are used to allocate SUPPORT department costs to production depts?

Answer 47

- Direct - Step-Down - Reciprocal Service

Question 48

How is the direct method of allocating support costs used?

Answer 48

Each support dept costs are allocated among the production dept that consumes part of the support depts output (based on relative proportion) Note: Services provided between service departments are ignored.

Question 49

How is the step-down method of allocating support costs used?

Answer 49

support dept costs are allocated to products, PARTIALLY recognizing the services that are provided by one support dept to another. Note: the full set of support relationships are NOT recognized. We must choose a sequence in which to allocate the support dept costs.

Question 50

How is the reciprocal method of allocating support costs used?

Answer 50

This method fully recognises the provision of services between service departments. [Method Not revised].

Question 51

The bill of activities is the final step of the ABC costing process. what info dies it show?

Answer 51

It shows the activities, cost per unit of activity driver, quantuty if activity drivers consumed and therefore the costs of activities consumed by a product.

Question 52

What is ABM?

Answer 52

Activity based management = a model that provides info to managers to help reduce costs and improve other sources of customer value. Info from ABC is used to analyse activities, cost drivers + performance.

Question 53

What is CVP analysis? What are the key groups of costs that should be indentified for CVP?

Answer 53

Cost volume profit analysis = used to determine the effects of changes in sales volume on costs,revenues and profit. As a starting point, costs should be seperated into variable and fixed costs.

Question 54

What is the break even point and what are the formulas that can be used?

Answer 54

Break even point = the volume of sales where revenues and expenses are equal and profit = zero. Formulas: BEP (units) = Fixed costs/ Unit contribution margin BEP(sales $) = Fixed costs/Unit contribution margin ratio

Question 55

What is the unit contribution margin and the unit contribution margin ratio in the context of the break even point?

Answer 55

Unit contribution margin = the difference between the sales revenue and total variable costs per unit i.e. the amount available to cover fixed costs and then contribute to profits. Unit contribution margin raio = the unit contribution margin divided by the unit sales price.

Question 56

What does the PV (profit volume) graph show?

Answer 56

The total amount of profit or loss at different levels of sales volume. It has: - a fixed costs line (horizontal) - Total costs lines - Revenue line

Question 57

What is the modified version of the break even point formula that can be used to calculate "Target net profit"?

Answer 57

Target sales volume = (fixed expenses+ TARGET NET PROFIT)/Unit contribution margin This formula can be used to determine the level of sales volume that must be achieved to reach a certain level of profit.

Question 58

What is the modified version of the break even point formula that can be used to calculate "Target net profit" INCLUDING INCOME TAXES?

Answer 58

= fixed expenses + (Target net profit/(1-tax rate))/ unit contribution margin i.e. gross up the profit amount by the tax rate so that after tax profits are achieved at the desired level.

Question 59

What is the "saftey margin" and how does CVP analysis asisst managers in applying the saftey margin to the business?

Answer 59

The safety margin is the difference between the BUDGETED sales and the BREAK EVEN sales volume. It gives managers a feel for how close projected sales are to the break even point.

Question 60

What does it mean when fixed costs are 'stepped' in the context of CVP analysis?

Answer 60

Different fixed costs may aply to different levels of sales/production volume. Therefore, the fixed costs lines and the total costs line on a CVP/PV graph will be stepped.

Question 61

What is the weighted average unit contribution margin and how is it used for break-even point analysis?

Answer 61

Weighted average unit contribution margin = the average of the products' unit contribution margins, weighted by the SALES MIX e.g. 25/75 This version of the BEP formula is used when an organisation sells multiple products

Question 62

Over what time frame should CVP analysis be used for decision making purposes?

Answer 62

Short term only.

Question 63

What are the four characteristics of relevant cost information for manager decision making?

Answer 63

1. costs that are relevant differ among the alternative courses of action (i.e. those that remian the same need not be considered) 2. costs must relate to the future (historical costs are ignored) 3. Costs must be timely 4. Cos information can be qualitative or quantitative

Question 64

What is the difference between opportunity and sunk costs? Which are relevant for decision making?

Answer 64

Opportunity costs = the potential benefit given up when the choice of one action precludes a different action Sunk costs are those that have already been incurred. Sunk costs are NOT relevant for future decisions and should always be IGNORED.

Question 65

To accept or reject a SPECIAL order is a common decision that managers must make. What factors should be considered when making such a decision?

Answer 65

- The incremental revenue and incremental costs must be caluclated - Whether there is any excess capacity

Question 66

What are incremental revenues and costs?

Answer 66

The additional revenue/costs that will be gained/incurred as a result of choosing one course of action over another. Note: Fixed costs should NOT be included as they remain the same regardless of whether a speacial order is accepted or not.

Question 67

When should a special order be accepted (i.e. when there is and isnt spare capacity)

Answer 67

Generally, where there is excess capacity and i. revenues exceed i. costs, the order should be accepted. When there is no excess capacity, the opportunity costs associated with the production of an existing product to take on the special order must be considered.

Question 68

To 'make or buy' a product is a key decision that managers must make. What must be considered when making such a decision?

Answer 68

Avoidable and unavoidable costs must be considered. i.e. only the avoidable costs that will not be incurred in the furture if a particular decision is made are relevant. The decision should be made where avoidable costs \< additional costs incurred by buying/outsourcing. Note: these factors are also relevant for a competitive bidding situation when determining prices.

Question 69

What is the main difference betwen outsourcing decisions and make or buy product decisions?

Answer 69

Outsourcing decisions tend to be more LONG TERM.

Question 70

What factors must be considered when considering an "add or delete product/department" decision?

Answer 70

The unavoidable costs must be factored into the decision. Only where operating income for the firm increases should the decision go ahead.

Question 71

What are joint products?

Answer 71

Two or more products produced simultaneously from the one production process. Such products cannot be seperated prior to split off.

Question 72

What is the "split off point" in the context of joint products cost allocation?

Answer 72

the stage in the production process where the joint products are identifiable as seperate products.

Question 73

What are the two methids that are used for joint cost allocation?

Answer 73

1.Physical measure i.e. based on weights/units AND 2.Monetary measure (i.e relative sales /gross margin/Net realisable value)

Question 74

How does market positioning influence pricin positions (hint: how does cost and customer value come into it)

Answer 74

When positioning itself in he market, typically the cost will form the LOWER limit of the price and the customer value sets the UPPER limit.

Question 75

What is price elasticity? when is demand elastic/inelastic?

Answer 75

Price elasticity refers o the impact of price changes on sales volume. When a demand is elastic it means that pice has a negatie impact on sales volume. Inelastic demand is where price has little or no impact on sales volume.

Question 76

What is a basic assumption of all economic profit models (in relation to elasticity)?

Answer 76

That demand in elastic

Question 77

What are the three different pricing strategies?

Answer 77

1. Value based pricing - where the customers perception of value guides pricing 2. Economic value pricing - based on marginal benefits recieved 3. Cost based pricing - based on a cost pricing formula (including a mark up)

Question 78

what is the formula for cost based pricing? (common sense)

Answer 78

Price = cost +(mark up percentage\*cost)

Question 79

What are the two methods for determining cost when using the 'cost plus' pricing method?

Answer 79

1. Absorption costing (i.e. Direct Material + Direct Labour + Variable Man o/head + fixed man. o/head). Fixed man. o/head is "INVENTORIED". 2. Variable costing (i.e. same as absorption costing except NO Fixed man. o/head is included). fixed man. o/head is instead EXPENSED during the period.

Question 80

Absorption cost pricing methods include fixed man. o/head. What are the benfits/disadvantages of using this pricing method?

Answer 80

Benefits: It provides an equitable price as all costs are evenly allocated Cost effective method as pricing can use costing data Disadvantages: As allocated fixed costs are included, it isnt clear from the data how total costs will change as sales/production volume increases. Not consistent with CVP

Question 81

What are the advantages and disadvantages of using variable cost pricing techniques?

Answer 81

Advantages: Doesn't obscure prices by including fixed costs (making them appear variable) Consistent with CVP Disadvantages Not useful for the long term and pricing does not reflect fixed costs that must be incurred. (a higher margin % must be used to factor this in)

Question 82

What is the formula for calculating the mark up %?

Answer 82

= (required profit + costs not included in cost base)/(annual volume\*cost base) Costs not included in cost base are typically fixed costs when the variable costing method is being used.

Question 83

what are the two strategic pricing methods used to price NEW products?

Answer 83

1. Skimming pricing - prices are initially set igh to reap short term profits off a new product. Over time the price will be lowered. 2. Penetration pricing - a low initial price is set to attract market share.

Question 84

Whn determining the most 'tactical' product mix, what factors should be considered? (particularly where there are scarce resources)

Answer 84

Where there are limited resources the optimum product mix should be determined by the products with the greatest contribution margin per unit of the scarce resource

Question 85

When calculating the cost of goods (using equivelant units for WIP) contrast the process used to calculate the COG completed during the month AND the cost of closing WIP? What are the important points to note when undergoing this process?

Answer 85

1. For cost of goods completed during the period, use the "units completed and transferred" figure and multipy it by the total cost per equivelant units figure for both conversion and materials. 2. Cost of good at period end uses the closing units multiplied by the same cost per equivelant units figure. - note this differs for FIFO method) - Opening WIP does not need to be converted to equivelant units

Question 86

What are the two types of value that management accounting focuses on? Which is more important?

Answer 86

Customer value and shareholder value. S/holder value is more important.

Question 87

What is the main difference between mgmt an financial accounting?

Answer 87

financial accounting is focused on reporting of info to external parties while mgmt accounting is more internally focused. In addition, financial accounting is highly regulated whereas mgmt accounting is not.