Cost Accounting

Question 1

Contribution Margin

Answer 1

(Sales - VC)

The contribution to fixed costs and operating income from the sale of a product or provision of a service.

Question 2

Contribution Margin Format

Answer 2

Sales
- VC
= CM
- FC
= Profit / Loss

Question 3

CM Ratio

Answer 3

CM / Sales
UCM / Selling Price
The portion of each sales dollars that remains after covering the variable costs and are available to cover fixed costs or provide for profit.

Question 4

Relevant Range

Answer 4

Different fixed costs have different relevant ranges which is the level of activity over which a particular cost behaviour pattern exists.

Question 5

Linearity

Answer 5

We assume that there is a linear relationship between total costs and activity when its actually a curvy linear relationship.

Question 6

An Alternative formula for CVP analysis

Answer 6

SPx = VCx + FC + Profit

Question 7

Breakeven

Answer 7

BE in Units = FC / UCM
BE in $ = FC / CM%
or = (FC / UCM) x SP

(UCM = SP - VC / unit)

Question 8

Margin of Safety

Answer 8

How much above breakeven we are currently operating at.

Can indicate risk.

Question 9

Operating Leverage

Answer 9

The mix of FC and VC within the cost structure of the organisation. Higher the FC = higher the operating leverage = higher the risk.

Question 10

Cost Accounting

Answer 10

Relies on the accumulation and determination of product and process or service costs for the purpose of assigning these to a cost object.

Costs are assigned to products (cost sits in finished goods until sold ie inventory in BS) and become expenses when the product is sold (COGS = product cost x units sold).

Question 11

Product Costing

Answer 11

Assign all possible direct costs (RM + DL) to the job and then charge each unit of output with a ‘fair share’ of indirect costs (OH).

Question 12

Direct Costs

Answer 12

Traced to a specific product.
Would not be incurred if the product discontinued.
eg RM, DL

Question 13

Indirect Costs

Answer 13

Cannot be traced to a specific product.
Would be incurred even if the product discontinued.
eg OH

Question 14

Manufacturing Overhead

Answer 14

All manufacturing costs except RM and DL.

They’re indirect as it is not feasible to relate OH items to individual products or services.

Question 15

Period Costs

Answer 15

All other costs which are not product costs.
They’re indirect.
Usually a lump sum for the period / year.

Question 16

Total Costs Summary

Answer 16

Total Costs = FC + VC
Total Costs = DC + IC
Total Costs = Product + Period

Question 17

3 Inventory Accounts in Manufacturing cost accounting system

Answer 17

1. Raw Materials = parts, assemblies, materials
2. Work in progress = accumulate all manufacturing costs as goods are being made.
3. Finished Goods = Cost of completed item.

Question 18

POAR

Answer 18

= Estimated total manufacturing OH cost for the coming period / Estimated total units in the allocation base for coming period.

CAB = normally a driver of OH costs
Businesses may have single overhead rates or multiple.

Question 19

Applied OH

Answer 19

= POAR x Actual quantity of CAB

Question 20

Variance

Answer 20

Difference between actual and applied OH

• Smaller variance = Transferred directly to COGS
• Material variance (misstatement will affect decision of a user) = May be allocated to work in progress, finished goods or COGS proportionally.

Question 21

Pricing

Answer 21

Pricing usually takes into consideration the 3 Cs:

1. Cost
2. Customers
3. Competitors

Question 22

Cost-plus pricing

Answer 22

Generally product cost + Mark-up

However it is flexible and may take into consideration customers and competitors.

Question 23

Market-based pricing

Answer 23

Starts with ‘target price’ which is an estimate based on an understanding of customers perceived value for a product / service and how competitors are / will price theirs.
Businesses can then work backwards to find a target cost.

Question 24

Relevant Information

Answer 24

• Differential costs: Will differ according to alternative activities being considered.
• Opportunity cost: Income foregone by choosing one alternative over another.

Overall relevant costs must be:

• Controlable
• Future costs
• Consider capacity
• Must first be operating above breakeven otherwise this is the first decision.

Question 25

Irrelevant Information

Answer 25

• Allocated cost: A common cost that has been arbitrarily assigned to a product or activity, eg Overhead.
• Sunk cost: A cost that has already been incurred and will not change.
  FC likely to be irrelevant.

Question 26

Factors which need considering

Answer 26

Strategic reasons, competitive reasons, employees and expertise, resourcing, reputation, control and hidden costs.

Question 27

Product Mix Decision

Answer 27

Managers often face the problem of deciding how scare resources are going to be utilised.
Relevant cost = CM per limiting factor.
(FC usually irrelevant so managers focus on maximising CM)
Most profitable mix of products occurs when the CM / limiting factor is maximised.

Question 28

Make or Buy Decision

Answer 28

Relevant cost = Avoidable costs
Quantitative decision = look for cheapest option

Other important factors to consider:

• Control over timing, quality and pricing of inputs
• What happens to staff
• Do we have use for facilities currently in operation (ie use them to produce something else)
• Any hidden costs

Question 29

Special Order Decision

Answer 29

A one off order from a customer
Relevant costs = Capacity, CM (FC not relevant so any increase in CM = increased profit)

Other factors to consider:

• Is there other customers who would pay more if we selling off cheaply.
• Potential loss of customer goodwill
• Would it be more beneficial to decrease total capacity if inability to to sell full production in an ongoing problem.
• Accessing overseas markets

Question 30

Sales Forecast

Answer 30

Forecasted volume x forecasted price

Question 31

Inventory Flow Model

Answer 31

Opening Inventory
\+ Production / purchases
= Goods available for sale
- Closing Inventory
= Cost (or quantity) of goods sold

Question 32

Production Budget

Answer 32

Always in units

Opening Inventory
\+ Production
= Goods available for sale
- Closing Inventory 
= Goods sold

Sales
+ Ending Inventory
-Opening Inventory
= Production

Question 33

Purchases budget

Answer 33

In Raw Materials

Opening Inventory
\+ Purchases
= Materials available for production
- Ending inventory
= Materials used

RM uses in production
+Ending Inventory
-Opening Inventory
= Purchases

Question 34

Cash Receipts Budget

Answer 34

How much cash we get from our customers

immediate or delayed

Question 35

Cash Budget

Answer 35

How much cash we have spent and received and thus how much cash the business currently has.
Helps reflect the business better than anything else as it has less manipulation and estimates.