Functions Of Management Accounting

Question 1

The managers of business carry out functions of

Answer 1

Planning, decision making and control

Question 2

Decision making

Answer 2

• central to management of an enterprise

- decisions on resources (people, products, services) and activities (how to undertake them)

Question 3

Control

Answer 3

• once a decision has been made management must be in a position to control the activity
• to carry out the control function, a management control system is needed

Question 4

Planning

Answer 4

• strategic planning- preparing, evaluating and selecting strategies for long term plan of action
• operational planning- detailed plans by which those working within and organisation are expected to meet the short term objectives
• corporate strategic planning
• business strategic planning

Question 5

Management accounting supports management functions by

Answer 5

Directing attention, keeping the score and solving problems

Question 6

Contingency theory

Answer 6

Explains how management accounting methods have developed in a variety of ways depending on the judgements of decisions required

Question 7

Strategic management accounting

Answer 7

Pays particular attention to the provision and analysis of financial information on the firms product markets and competitors’ costs and cost structures, and the monitoring of the enterprises strategies and those of its competitors in these markets over a number of periods

Question 8

Costs may be classified using the definitions

Answer 8

• fixed/variable cost
• direct/indirect cost
• product/ period cost

Question 9

The choice of cost classification

Answer 9

Should be matched to the management function of planning, decision making or control

Question 10

Cost coding

Answer 10

Is essential to make the cost classification system operational in a computer-based recording system

Question 11

Cost classification must be relevant to

Answer 11

The responsibility level for which the costs are reported, which may be a cost centre or a profit centre or an investment centre

Question 12

Variable costs

Answer 12

One in which varies directly with changes in the level of activity over a defined period of time

Question 13

Total product cost

Answer 13

Consisting of direct materials, direct labour and production overheard cost

Question 14

Prime cost

Answer 14

Cost of direct materials, direct labour and other direct costs of production

Question 15

The purchasing, storage and use of materials are controlled by

Answer 15

Documentation and processes that are designed to safeguard the assets and ensure the accuracy of recording systems

Question 16

FIFO (first in first out)

LIFO (last in first out)

Answer 16

Methods of pricing the issue of goods from inventory, and the valuation of inventory, in times when prices are changing

Question 17

What is important in accounting for materials

Answer 17

• documentation
• the distinction between direct and indirect costs of materials
• fixed and variable costs of materials

Question 18

Direct cost

Answer 18

Cost directly traceable to an identifiable unit, such as a product or service or department of the business, for which costs are to be determined

Question 19

Indirect cost

Answer 19

Cost that is spread over a number of identifiable units, such as a product or service or department of the business, for which costs are to be determined

Question 20

The cost of waste and scrap are indirect costs that form part of the total

Answer 20

Production cost

Any cash received for scrap should be deducted from the cost of buying the materials

Question 21

Labour costs

Answer 21

Recorded and controlled in a way that ensures employees are paid correctly for work done and labour costs of activities are recorded accurately

Question 22

Scrap

Answer 22

Waste material to be sold at a very low price in relation to original cost

Question 23

Labour costs

Answer 23

Recorded and controlled in a way that ensures employee are paid correctly for work done and labour costs of activities are recorded accurately

Question 24

Accounting for labour

Answer 24

Concerned with whether costs are direct or indirect and distinction between fixed and variable costs of labour

Question 25

Total product cost

Answer 25

Defined as consisting of direct materials, direct labour and production overhead costs

Question 26

Production overhead costs

Answer 26

Comprise indirect materials, indirect labour and other indirect costs of production

Question 27

Allocation

Answer 27

Of indirect costs to cost centres means that the entire cost item is identified with one cost centre

Question 28

Apportionment

Answer 28

Of indirect costs across cost centres means that the cost item is shared across those cost centres on some basis which is a fair representation of how the cost item is used by each cost centre

Question 29

Absorbtion

Answer 29

The process by which overhead costs are absorbed into units of output or ‘jobs’

Question 30

To ensure the best results the scheme of apportionment and absorption must be

Answer 30

• fair to all parties involved in the process
• representative of the benefit each party gains from the shared cost
• relatively quick to apply so that the provision of information is not delayed; and understandable by all concerned

Question 31

Traditional approach to product costing

Answer 31

Sequence of allocate, apportion and absorb

Question 32

Activity based costing (ABC)

Answer 32

Traces overhead costs to products by focusing on the activities that drive costs (cause costs to occur).

Provides a method of spreading overhead costs

Question 33

Process of product costing

Answer 33

Costs are collected in cost pools then spread over products based on cost per unit of activity for the activity in question
Costs are then allocated to products on the basis of a cost per unit of activity

Question 34

Cost drivers

Answer 34

have taken on an increasingly important role in apportioning indirect costs to cost centres

Question 35

Contemporary management accounting practise

Answer 35

Focuses on the accountant becoming part of the operational team so as to ensure that the job costs derived are understood and reflect the factors that drive the costs to be incurred

Question 36

Job costing system

Answer 36

A system of cost accumulation where there is an identifiable activity for which costs may be collected. The activity is usually specified in terms of a job of work or a group of tasks contributing to a stage in the production or service process

Question 37

Job-cost record

Answer 37

Shows the costs of materials, labour and overhead incurred on a particular job

Question 38

Prime cost of production

Answer 38

Is equal to the total of direct materials, direct labour and other direct costs

Question 39

Total product cost

Answer 39

Comprises prime cost plus production overhead cost

Question 40

Absorption costing (full costing)

Answer 40

All production costs are absorbed into products. The unsold inventory is measured at total cost of production
Fixed production overhead costs are treated as a product cost

Question 41

Marginal costing (variable costing)

Answer 41

Only variable costs of production are allocated to products. The unsold inventory is measured at variable cost of production
Fixed production overhead costs are treated as a period cost of the period in which they incurred

Question 42

What may arise in absorption costing

Answer 42

Under absorbed or over absorbed fixed overhead

It is reported in the profit and loss statement as an adjustment to cost of sales

Question 43

Profit under absorption costing differs from profit under marginal costing when

Answer 43

Inventory levels are changing. If total production equals total sales there is no difference in total profit

Question 44

When inventory levels are falling

Answer 44

Profit under absorption costing is lower than profit under marginal costing
The difference is equal to the decrease in inventory levels multiplied by the fixed overhead cost rate

Question 45

When inventory levels are rising

Answer 45

Profit under absorption costing is higher than profit under marginal costing
The difference is equal to the increase in inventory levels multiplied by the fixed overhead cost rate

Question 46

When is absorption costing usually required

Answer 46

For inventory valuation in financial accounting standards or other regulations
Those using such financial statements need to be aware that reported profit can be affected by the change in the volume of inventory over the period

Question 47

Marginal costing

Answer 47

May be more useful for decision making because it treats fixed production overhead costs as a cost of the period
Reported profit is not affected by the changes in inventory held