Cost Accounting Flashcards
Name three areas impacted by different approaches to identifying costs.
- Inventory valuation
- Financial and profit reporting
- Decision-making
What does the AICPA define accounting as?
The art of recording, classifying, and summarizing transactions and events of financial character.
Who are the primary users of accounting information?
- Internal stakeholders (mainly managers)
- External parties (shareholders, creditors, regulatory agencies)
What is management accounting primarily concerned with?
Provision of information to people within the organization to help them plan, control activities, and make better decisions.
What is financial accounting primarily focused on?
Provision of information to external parties and preparation of financial statements.
True or False: Management accounting is subject to legal requirements.
False
What is the main difference in focus between financial accounting and management accounting?
Financial accounting reports the entire organization, whereas management accounting can focus on segments or parts of the organization.
What type of information does financial accounting provide?
Historical information on past performance.
Fill in the blank: Management accounting can report on various activities at _______ intervals.
[timely]
What is cost accounting?
Conducted within management accounting; involves establishing costs associated with manufacturing a product or delivering a service.
What do financial accounting standards state about cost of goods sold?
It should include all costs incurred in getting goods to their present location and condition.
What are considered ‘relevant costs’ in management accounting?
- Manufacturing costs
- Non-manufacturing costs
How does management accounting treat fixed costs when making short-term decisions?
Fixed costs may be considered irrelevant.
What can affect reported profit within a given reporting period?
The decision to use different methods to value inventory.
What happens to manufacturing fixed costs when included in cost-per-unit valuation?
They affect costs charged in subsequent periods.
What is a plant-wide manufacturing overhead rate?
Dividing total manufacturing overheads by a time measure like direct labour hours to get a rate per hour.
What is the impact of using a plant-wide overhead rate for diverse products?
It may not provide an accurate basis for costing and could mislead decision-making.
What should be considered when deciding to terminate production of a product?
- Future costs and benefits
- Relevant future costs that change as a result of the decision
What is the relevance of scrap value when considering terminating production?
It is a benefit derived directly from the decision.
What should a company consider when making a decision regarding production termination?
Only future costs and benefits that change as a result of the decision
What is a relevant future cost associated with terminating detergent production?
10% reduction in direct labour
What benefit can be derived from terminating detergent production?
Scrap value for specialist machinery
What type of cost is the cost of raw materials already purchased?
Sunk cost
Is the depreciation cost for specialist machinery relevant to the decision to terminate production?
No, it is a sunk cost
What is the primary role of a management accountant?
To assist in decision-making using both historical data and future estimates
What does the CGMA Cost Transformation model aim to achieve?
Cost competitiveness
List the six elements of the CGMA Cost Transformation model.
- Engendering a cost-conscious culture
- Managing the risks inherent in driving cost competitiveness
- Connecting products with profitability
- Generating maximum value through new products
- Incorporating sustainability to optimise profits
- Understanding cost drivers
What is the focus of engendering a cost-conscious culture?
Integrating a culture of continual improvement in cost competitiveness
Why should organizations manage risks in achieving cost competitiveness?
To identify factors that might limit cost transformation
What is essential for all products and services in a business?
They must contribute to the profits of the business
What should new products and services maintain while being flexible?
An acceptable profit margin
How can businesses enhance the value of their brand to environmentally-conscious consumers?
By incorporating sustainability to optimise profits
What is vital for a business to understand in order to minimize costs?
Cost drivers
Management accounting primarily serves which stakeholders?
Internal stakeholders
Financial accounting serves which type of parties?
External parties
What is a key difference between management and financial accounting?
Legal requirements and obligations regarding formats, content, and timing
Fill in the blank: Financial accounting stipulates all costs incurred in getting the inventory to its _______.
present location and condition
What does management accounting focus on for planning, control, and decision-making?
Different views for arriving at the cost
The CGMA Cost Transformation model focuses on achieving and maintaining cost competitiveness while continuing to offer _______.
products and services that appeal to customers
What are the two main categories of costs discussed?
- Direct costs
- Indirect costs
What are direct costs?
Costs that are directly traceable to a cost object.
What are indirect costs?
Costs that cannot be identified specifically and exclusively with a particular cost object.
Give examples of direct material costs.
- Main ingredients
- Wood panels
- Door fittings
What are prime costs?
Direct materials and direct labour costs in a manufacturing context.
What is a cost object?
An item or service to which a selling price is attached.
Fill in the blank: Indirect costs are often referred to as _______.
overheads
What are direct labour costs?
Labour costs that can be specifically and exclusively identified with a particular cost object.
What are indirect materials?
Materials used for cleaning or repairing machinery rather than those that can be directly traced to a particular cost object.
Give examples of indirect expenses.
- Factory lighting
- Rent of the factory
- Depreciation of machinery
What are product costs?
Costs associated with goods purchased or produced for resale.
What are period costs?
Costs not included in inventory valuation and treated as expenses in the period incurred.
True or False: Direct costs are incurred as a direct consequence of producing a specific product.
True
What is the difference between direct and indirect costs based on the cost object?
Direct costs can be traced to a specific cost object, while indirect costs cannot.
What are the components of manufacturing overhead?
All costs of manufacturing apart from direct materials and direct labour costs.
What is a specific example of a direct cost in a manufacturing setting?
Assembly line labour
What costs are included in the category of indirect labour?
- Factory supervisor salary
- Cleaning staff
Fill in the blank: The costs that can be traced to the product are those that are _______.
uniquely incurred in producing each unit or batch
What is the role of a cost object in costing?
To understand the costs incurred in delivering a product or service.
What does the term ‘overheads’ refer to?
Indirect costs in a manufacturing company.
What are variable costs?
Costs that vary in direct proportion to changes in the volume of activity.
Provide an example of a variable cost.
Raw materials used to manufacture a unit of output.
How are total variable costs calculated?
Total variable cost = Cost per unit × Production output.
What is a cost driver?
A factor that causes costs to be incurred.
Give an example of a cost driver.
The number of batches in production.
What are fixed costs?
Costs that are not affected by changes in the level of activity for a specified period.
Provide an example of a fixed cost.
Rent of premises.
What are stepped fixed costs?
Costs that are fixed for a specified period within a specified activity range but increase in a stepwise fashion beyond a certain point.
ie mobile phone usage or presenter salary
What is a semi-variable cost?
A cost that varies but not in direct proportion with changes in the level of activity over a defined period.
Provide an example of a semi-variable cost.
Monthly telephone charges.
What are product costs?
Costs associated with goods purchased or produced for resale.
What are period costs?
Costs that are not product costs and are expensed in the period incurred.
How do fixed costs behave over time?
They remain constant for a specified period but may change in the longer term.
True or False: Fixed costs increase with production output.
False.
Fill in the blank: The total variable cost increases or decreases with activity, whereas the variable cost per unit of raw materials remains the same. This is characteristic of _______.
variable costs.
What happens to fixed costs as production levels increase?
They remain the same.
What is the relationship between fixed costs and output levels?
Fixed costs decrease per unit as output levels increase.
List some examples of cost drivers.
- Number of labour hours worked
- Number of quality inspection processes
- Number of customers
- Number of component parts in a product
How are product costs classified in a manufacturing company?
As direct and indirect costs of production.
What is the difference between product costs and period costs?
Product costs are inventoriable; period costs are expensed in the period incurred.
What happens to costs if activity decreases in the long term?
Buildings and machinery could be sold and staff could be released.
True or False: The categorization of raw materials as a variable cost changes with the price paid per unit.
False.
What are the implications of semi-variable costs for management accounting?
They include both fixed and variable components, affecting budgeting and forecasting.
What can cause fixed costs to rise in a stepwise fashion?
Increased activity beyond a certain level
This may require renting additional factory space, hiring more staff, and purchasing more machinery.
Define semi-variable costs.
Costs that vary but do not vary in direct proportion with changes in activity
They include both a fixed and a variable component over a defined period.
What are the components of the cost for power?
Fixed cost for monthly connection fee and variable cost per kilowatt-hour used
This illustrates the nature of semi-variable costs.
Classify the rent of a factory as a product cost or period cost.
Product cost
Product costs are associated with goods purchased or produced for resale and are used for inventory valuation.
Classify the rent of a sales showroom as a product cost or period cost.
Period cost
Period costs are treated as expenses in the period incurred and are not included in inventory valuation.
What are variable costs?
Costs that vary in direct proportion to changes in the level of activity
They are often referred to as ‘product’ costs.
What are fixed costs?
Costs not affected by changes in the level of activity during a specified period
They are sometimes called ‘period’ costs.
What do semi-variable costs include?
Both a fixed and a variable component
They vary over a defined period.
What are stepped fixed costs?
Fixed for a specified period but within a specified activity range
They change in a stepwise manner based on activity levels.
Fill in the blank: Product costs are associated with goods purchased or produced for _______.
resale
True or False: All manufacturing expenses are classified as product costs.
True
True or False: Period costs are included in inventory valuation.
False
What does absorption costing include in the unit cost?
All production costs, including fixed costs
Fixed costs are released as an expense only when the product is sold.
In marginal costing, what types of costs are included in the unit cost?
Only variable costs of production
Fixed production overheads are treated as period costs.
What adjustment is necessary for profit calculation in absorption costing?
Under- or over-absorption adjustment
This adjustment ensures the actual expenditure for the period is included.
What occurs to profit reporting when inventory levels change during a period?
A difference in profits reported will occur
Profits will differ unless sales equal production.
What are the variable costs considered in throughput accounting?
Only direct material costs
All other costs are treated as fixed costs in the period incurred.
How does throughput accounting affect inventory valuation?
It recognizes the least amount of product costs
Only direct materials are included in inventory valuation.
Which accounting method results in the highest closing inventory valuation?
Absorption costing
It adds fixed production overheads to the inventory valuation.
Which accounting method results in the lowest net profit?
Throughput accounting
Only direct materials are included in closing inventory, expensing all other costs.
What is the impact of absorption costing on net profit?
Net profit is highest
More costs are included in the closing inventory valuation.
Fill in the blank: In marginal costing, fixed production overheads are treated as _______.
period costs
What tool does throughput accounting provide to measure throughput?
TPAR
TPAR stands for Throughput Performance Assessment Ratio.
