Block 7

Question 1

Costing procedures can assist managers in making decisions regarding:

Answer 1

 mix of products and services offered to customers: for example if a product or service (such as a 3D television) is not profitable due to high costs this could be discontinued.
 enhancement of the efficiency of operations: for example if cost drivers (such as floor space) are understood they can be targeted by managers to increase the profit margin (i.e., by renting a smaller factory).
 development of competitive strategy: for example deciding whether to be a cost leader (low cost and basic product such as Ryanair) or a differentiator (high costs and high value such as Waitrose).

Question 2

Management Accountant

Answer 2

Management Accountant (Blocks 7 and 8)
Primary use for the data: Internal
Purpose: Assist management in planning and controlling the business to make effective decisions
Law: No legal requirements
Format Produced: Management discretion
Scope: Flexible, includes historical, current and future information which can focus on specific parts of the business
Information: Financial and non-financial Key Performance Indicators (KPIs) (e.g. number of customers per hour)

Question 3

Direct Costs

Answer 3

Direct costs are those that can be directly traced in full to a cost unit (e.g. a table that the company is producing).

There are 3 elements of direct costs:

1. Direct material costs. Direct material costs are costs of material used to make and sell a cost unit (e.g. wood being used to make the table). Note: materials used in negligible amounts are indirect material costs.
2. Direct labour costs. Direct labour costs are costs of labour used to make a cost unit (e.g. wages paid to the carpenter who will make the table).
3. Direct expenses. Direct expenses are other costs incurred in full as a direct consequence of making a table (e.g. licence fee paid to the designer per table made).

Question 4

Indirect Costs (or overheads)

Answer 4

Overheads are costs incurred which cannot be traced directly and in full to a cost unit (e.g. glue for tables, supervisor’s salary)
A management accountant will have to subsequently allocate these indirect costs if they are to calculate the full cost of a product or service. Overheads may impact internal perception of departments; overhead classification could result in some departments looking extremely costly or being unable to make a profit, whilst others look as though they are doing very well, and so careful allocation of indirect costs is critical:

Overall cost of running business:
Direct (prime) Indirect/overheads

Material costs = Direct Material costs + Indirect material costs
+ + +
Labour costs = Direct Labour costs + Indirect Labour costs
+ + +
Expenses = Direct Expenses + Indirect Expenses

Question 5

The following costs have to be allocated if the full cost of the product or service is to be determined

Answer 5

1. Administration overhead. Administration overhead includes costs incurred in directing, controlling and administering the business (e.g. Finance Director’s salary, bad debt expenses, depreciation of office computers…).
2. Selling overhead. Selling overhead includes costs incurred in raising sales and customer retention (e.g. sales rep commission, lighting costs of showroom/shop…).
3. Distribution overhead. Distribution overhead includes costs incurred in packaging and delivering goods to customers (e.g. postage/courier costs to send goods out, depreciation of distribution lorries…).