FFMA - Week 5

Question 1

What is the focus of the first few lectures in the introduction to management accounting?

Answer 1

The focus is on defining management accounting, distinguishing it from financial accounting, describing the role of the management accountant, identifying management philosophies for continuous improvement, and providing insight into current issues for management accounting. It also includes considering the role of business ethics in the management accounting profession.

Question 2

How does management accounting differ from financial accounting?

Answer 2

Management accounting differs from financial accounting in that it focuses on providing information internally to help managers make better decisions and improve the efficiency and effectiveness of operations. It’s oriented towards internal management needs, future planning, and creating value, as opposed to financial accounting, which presents financial information externally and follows set rules.

Question 3

What are the two separate definitions of ‘management’ and ‘accounting’?

Answer 3

Management is defined as the range of activities involved in running an organization, while accounting is the activities gauging an organization’s performance or planning for its future performance, including stewardship, control, and audit.

Question 4

How do Drury and Caulfield, Smith, Thome, and Helton define management accounting?

Answer 4

Drury defines management accounting as concerned with providing information to people within the organization to help make better decisions and improve the efficiency and effectiveness of existing operations. Caulfield, Smith, Thome, and Helton define it as the process and techniques focusing on the effective use of organizational resources to support managers, enhancing both customer value and shareholder value.

Question 5

What is the role of an accounting information system in management accounting?

Answer 5

An accounting information system in management accounting provides the necessary information required by managers to manage resources and create value. It includes regular estimates of the cost of goods and services and helps managers plan and control operations.

Question 6

How is management accounting information characterized in terms of its nature and flexibility?

Answer 6

Management accounting information is often ad hoc, oriented towards future profit maximization, and serves as a means to an end. It focuses on the internal managerial needs and is highly flexible, adapting to managers’ specific requests.

Question 7

What influences the accounting information in an organization?

Answer 7

Accounting information is influenced by production and service technologies, organizational structures, organizational size, and the sophistication level of computer systems.

Question 8

How does management accounting information vary across different management levels?

Answer 8

The detail of management accounting information provided varies according to the managerial level. Operational managers on the shop floor may require detailed information, while higher-level managers need more summarized data.

Question 9

Define management accounting.

Answer 9

Management accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of information used by management to plan, evaluate, and control within an entity, ensuring appropriate use of and accountability for its resources.

Question 10

What is the planning and control cycle in management accounting?

Answer 10

The planning and control cycle involves formulating long-term and short-term plans, implementing these plans, measuring performance (controlling), and comparing actual performance with planned performance. This cycle helps in revising plans and understanding the control actions needed.

Question 11

What services does management accounting provide to management?

Answer 11

Management accounting develops and communicates plans to key personnel, evaluates performance, reports results, and maintains financial and non-financial information for decision-making by management.

Question 12

(FFMA-012) What are the characteristics of useful information in management accounting?

Answer 12

Useful information in management accounting must be relevant, understandable, timely, comparable, reliable, and complete. These characteristics ensure the information provided is applicable, clear, timely for decision-making, able to be compared with other data, trustworthy, and offers a full view of the situation.

Question 13

(FFMA-013) Why is timely information important in management accounting?

Answer 13

Timely information allows managers to make decisions at the right moments. For example, a car manufacturer needs hourly or daily updates on production rather than monthly reports, to address issues and improve operations promptly.

Question 14

(FFMA-014) How does the concept of comparability apply in management accounting?

Answer 14

Information must be comparable to provide context and meaning. For instance, knowing a department’s profit is £50,000 is more informative when compared against expected goals or past performance, providing a benchmark to assess whether the outcome is favorable or not.

Question 15

(FFMA-015) What is the importance of setting well-defined objectives in management accounting?

Answer 15

Well-defined objectives in management accounting are crucial for measuring performance effectively. Poorly defined objectives can lead to difficulty in assessing whether organizational goals are being met. Clearly defined objectives, like aiming for a specific degree classification, provide a clear target and allow for more accurate performance measurement.

Question 16

(FFMA-016) How does the cost-benefit criterion apply to management accounting information?

Answer 16

The cost of obtaining and processing information should not outweigh its benefits. The cost-benefit criterion in management accounting ensures that the value derived from information exceeds the costs involved in acquiring and analyzing it. This balance is crucial for efficient decision-making and resource allocation.

Question 17

(FFMA-017) What factors have increased the need for management accounting information?

Answer 17

Factors include the increasing complexity and size of organizations, emphasis on quality, rapid technological development, global competition, and changing regulatory environments. These factors necessitate more comprehensive and sophisticated management accounting information for effective decision-making and competitive advantage.

Question 18

(FFMA-018) How has the business environment changed in terms of management accounting?

Answer 18

The business environment has evolved to emphasize higher quality products, lower costs, global competition, anticipating customer needs, and individualization of products. This change has led to the adoption of new management accounting techniques like just-in-time, total quality management, and customer profitability analysis to adapt to these new market demands.

Question 19

(FFMA-019) What are the current issues in management accounting?

Answer 19

Current issues include adapting to globalization, focusing on customer preferences, addressing technical obsolescence, changing organizational forms, the increased importance of service industries, and evolving public sector management approaches. These issues require management accounting to be dynamic and responsive to changes.

Question 20

(FFMA-020) What is the role of ethics in management accounting?

Answer 20

Ethical practices in management accounting build trust and promote loyal, productive relationships among users of accounting information. Ethics involve adhering to codes set by professional organizations and ensuring transparency and accountability in financial reporting and decision-making processes.

Question 21

(FFMA-021) What are the learning objectives of the upcoming lectures in Management Accounting?

Answer 21

The objectives include identifying various cost objects, understanding the concept of traceability of costs, distinguishing between product and period costs, and appreciating the relevant cost to be used in decision-making.

Question 22

(FFMA-022) What is cost classification in management accounting?

Answer 22

Cost classification in management accounting involves grouping costs that share the same attributes relative to a stated cost object, which is any activity for which a separate measurement of costs is required, such as a product or service.

Question 23

(FFMA-023) Why is it important to assign costs to cost objects in management accounting?

Answer 23

Assigning costs to cost objects is crucial for pricing, determining profitability, and controlling costs. It helps in setting product prices, understanding product profitability, and managing costs effectively.

Question 24

(FFMA-024) How are costs accumulated and assigned in cost collection systems?

Answer 24

Costs are accumulated by classifying them into categories like direct labor, direct materials, indirect costs, or by cost behavior (fixed or variable). These costs are then assigned to cost objects to determine the total cost of each object.

Question 25

(FFMA-025) What are the main objectives of assigning costs to cost objects?

Answer 25

The objectives include tracing costs to specific products or services, financial reporting (inventory costs or period expenses), predicting cost behavior in response to activity changes, assessing performance based on controllable/uncontrollable costs, and decision-making using cost types like differential, sunk, or opportunity costs.

Question 26

(FFMA-026) What is the difference between retailing and manufacturing in terms of cost handling?

Answer 26

Retailers buy and sell finished goods, accumulating costs as merchandise inventory. Manufacturers buy raw materials, produce and sell finished goods, and their inventory consists of materials, work in progress, and finished goods.

Question 27

(FFMA-027) How is inventory and cost of goods sold reported by retailers and manufacturers?

Answer 27

Retailers report the cost of unsold goods as merchandise inventory in the statement of financial position and the cost of goods sold in the statement of profit or loss. Manufacturers report inventories of materials, work in progress, and finished goods in the financial position statement and cost of goods sold in the profit or loss statement.

Question 28

(FFMA-028) Why is the focus shifted from financial statement costs to product costs in management accounting?

Answer 28

The focus is shifted to product costs in management accounting to understand what products are costing the company, as product costs are the costs a company assigns to units produced. This shift helps in accurately determining the cost of manufacturing products.

Question 29

(FFMA-029) What are the components of product costs in management accounting?

Answer 29

Product costs in management accounting consist of direct materials, direct labor, and manufacturing overhead. Direct materials are integral parts of the product, direct labor includes labor costs easily traced to product units, and manufacturing overhead covers indirect labor and materials.

Question 30

(FFMA-030) How are direct and indirect costs defined in manufacturing?

Answer 30

Direct costs are attributable to a single cost object, such as a specific product. Indirect costs are attributable to two or more cost objects, meaning they cannot be directly traced to a single product or service.

Question 31

(FFMA-031) What are prime costs and conversion costs in manufacturing?

Answer 31

Prime costs are the sum of direct materials and direct labor. Conversion costs are the sum of direct labor and manufacturing overhead. These categorizations help in understanding the components of total manufacturing costs.

Question 32

(FFMA-032) What are non-manufacturing costs and how are they categorized?

Answer 32

Non-manufacturing costs include marketing and selling costs (necessary for securing orders and delivering products) and administrative costs (executive, organizational, and clerical costs not assignable to manufacturing or marketing).

Question 33

(FFMA-033) How are product costs and period costs treated differently in financial statements?

Answer 33

Product costs are recorded as inventory in the statement of financial position and become part of the cost of goods sold upon sale, impacting the statement of profit and loss. Period costs, like administrative and selling expenses, are written off directly to the statement of profit and loss in the period they are incurred.

Question 34

(FFMA-034) What is the importance of understanding differential costs and revenues in decision-making?

Answer 34

Differential costs and revenues, which vary among alternatives, are crucial in decision-making. They help determine the net benefit or cost of choosing one option over another by comparing the additional costs incurred and the extra revenue earned from different choices.

Question 35

(FFMA-035) How are opportunity costs relevant in management accounting?

Answer 35

Opportunity costs represent the potential benefits given up when choosing one alternative over another. They are crucial in decision-making as they reflect the cost of foregone alternatives, helping to assess the true cost of a decision.

Question 36

(FFMA-036) What are sunk costs and how should they be treated in decision-making?

Answer 36

Sunk costs are past expenses that cannot be recovered or changed by any current or future decision. They are not differential costs and should be ignored in decision-making, as they don’t influence the current cost-benefit analysis of a choice.