FFMA - Week 6

Question 1

(FFMA-037) What is the significance of understanding cost behavior in management accounting?

Answer 1

Understanding cost behavior is crucial for managers to predict how changes in activity levels affect costs. This knowledge aids in estimating future costs and the impact of operational changes on profitability.

Question 2

(FFMA-038) How do variable costs behave in relation to changes in activity level?

Answer 2

Total variable costs change in direct proportion to changes in activity level. However, on a per-unit basis, variable costs remain constant regardless of the activity level.

Question 3

(FFMA-039) What are some examples of variable costs in different types of organizations?

Answer 3

Examples include direct materials and direct labor in manufacturing, cost of goods bought for sale in retail, and supplies and travel in service organizations.

Question 4

(FFMA-040) How are fixed costs characterized in relation to changes in activity level?

Answer 4

Fixed costs remain constant within a relevant range of activity. However, on a per-unit basis, fixed costs vary inversely with changes in volume – decreasing per unit with increased activity and increasing per unit with decreased activity.

Question 5

(FFMA-041) What is the relevance of the ‘relevant range’ in the context of fixed costs?

Answer 5

The relevant range is the range of activity within which the assumption that fixed costs remain constant is valid. Beyond this range, fixed costs may change due to the need for additional resources or changes in operational capacity.

Question 6

(FFMA-042) What is the importance of the cost driver or activity base in variable costing?

Answer 6

The cost driver or activity base is what a variable cost varies with. It’s a measure of the event that triggers the incurrence of the variable cost, such as units produced, miles driven, labor hours, or machine hours.

Question 7

(FFMA-043) What is a mixed cost and how is it characterized in cost behavior?

Answer 7

A mixed cost, also known as semi-fixed or semi-variable, contains both fixed and variable components. Part of the cost changes with volume or usage, while another part remains fixed over time.

Question 8

(FFMA-044) How is the equation of a line used to represent a mixed cost?

Answer 8

The equation of a line, y = mx + c, is used to represent a mixed cost where ‘y’ is the total mixed cost, ‘c’ is the total fixed cost, ‘m’ is the variable cost per unit, and ‘x’ is the level of activity.

Question 9

(FFMA-045) What are examples of behavior patterns of mixed costs in different scenarios?

Answer 9

Examples include a salesperson’s salary (basic salary plus commission) and a theme park’s entrance fee with optional priority passes. The total cost increases with additional usage or sales, combining fixed and variable elements.

Question 10

(FFMA-046) How are variable, fixed, and mixed costs represented graphically?

Answer 10

Variable costs start from zero and increase proportionally with activity. Fixed costs remain constant at all activity levels within the relevant range. Mixed costs start above zero due to the fixed component and then increase with activity due to the variable component.

Question 11

(FFMA-047) How are variable, fixed, and mixed costs observed in different types of businesses?

Answer 11

In a manufacturing company, variable costs might be materials and direct labor, fixed costs could be supervisor salaries and rent, and mixed costs might include utility bills. In a service company, variable costs could be zero-hour contract labor, with fixed costs like business rates and mixed costs like power and heating.

Question 12

(FFMA-048) What is the purpose of the high-low method in cost behavior analysis?

Answer 12

The high-low method is used to analyze the relationship between activity level (like machine hours) and associated costs (like maintenance costs). It involves identifying the highest and lowest levels of activity and examining the corresponding costs to separate variable from fixed costs.

Question 13

(FFMA-049) How are the fixed and variable components of a mixed cost determined using the high-low method?

Answer 13

By comparing the total costs at the highest and lowest activity levels, the difference in cost is attributed to the variable component. The fixed component is then calculated by subtracting the variable cost (at a given level of activity) from the total cost.

Question 14

(FFMA-050) How do you calculate the variable cost per unit using the high-low method?

Answer 14

The variable cost per unit is calculated by dividing the difference in total costs at the high and low activity levels by the difference in the number of units between these levels. This gives the cost incurred for each additional unit of activity.

Question 15

(FFMA-051) How is the total cost formula derived using the high-low method?

Answer 15

The total cost formula, Y = mx + c, is derived by substituting the known values (total cost and activity level) into the formula. ‘m’ represents the variable cost per unit, ‘x’ is the activity level, and ‘c’ is the fixed cost.

Question 16

(FFMA-052) How can the high-low method be validated for accuracy?

Answer 16

The method’s accuracy can be validated by applying the derived total cost formula (variable cost per unit and fixed cost) to both the high and low activity levels. The calculated total costs should match the actual costs at these levels.

Question 17

(FFMA-053) What are the different types of fixed costs, and how do they differ?

Answer 17

Fixed costs are divided into committed costs, which are long-term and can’t be reduced in the short term (like rent and depreciation), and discretionary costs, which can be altered in the short term by current managerial decisions (like advertising and research and development).

Question 18

(FFMA-054) What is the trend towards fixed costs in modern businesses?

Answer 18

Modern businesses are experiencing a trend towards increased fixed costs due to automation and the rise of salaried knowledge workers, leading to fewer decision alternatives for managers and making planning more crucial.

Question 19

(FFMA-055) How does the contribution approach differ from traditional profit statements?

Answer 19

The contribution approach separates costs based on behavior, subtracting variable costs from sales to find the contribution margin. This margin covers fixed costs and then contributes to profit. It emphasizes cost behavior, unlike traditional profit statements, which are organized by function (like cost of goods sold and gross margin).

Question 20

(FFMA-056) Why is the contribution margin approach important in management accounting?

Answer 20

The contribution margin approach is crucial because it provides insight into how changes in sales and variable costs impact profit. By focusing on cost behavior, it aids managers in making informed decisions, especially regarding variable costs.

Question 21

(FFMA-057) What are the main types of costing systems in management accounting?

Answer 21

The main types of costing systems are specific order costing, which includes job costing and contract costing, and continuous operation costing, which includes process costing, service costing, and batch costing.

Question 22

(FFMA-058) What is continuous operation costing, and how is it applied?

Answer 22

Continuous operation costing is used in mass production, where goods or services are produced through repeated processes. This system applies process costing, where costs are averaged over units, and service costing, which is used for heterogeneous and intangible services.

Question 23

(FFMA-059) How is specific order costing characterized?

Answer 23

Specific order costing applies to organizations producing separately identifiable items or services per customer order. It involves job costing for small-scale, unique items, and contract costing for large-scale, long-term projects.

Question 24

(FFMA-060) What is the job order cost sheet, and what does it record?

Answer 24

The job order cost sheet is a primary document that tracks costs associated with a specific job. It records direct materials, direct labor, and manufacturing overhead costs, and summarizes the total and unit costs of the job.

Question 25

(FFMA-061) How are direct and indirect costs recorded and allocated in job costing?

Answer 25

Direct costs like materials and labor are charged directly to the job, as they can be easily traced. Indirect costs, like manufacturing overhead, are not directly traceable to a single job and require allocation across multiple jobs based on a suitable method.