Fundamentals of costing (1)

Question 1

Define management information

Answer 1

MI is any information prepared to assist management with planning, decision-making and control

Question 2

Define management accounting

Answer 2

MA is the identification, generation, presentation, interpretation and use of relevant information to prepare management accounts and schedules

Question 3

Define cost accounting

Answer 3

CA is the production of cost information to assist management

Question 4

Financial accounting:
Users - 
Purpose - 
Law (required or not) - 
Format - 
Scope - 
Information -

Answer 4

Users - External
Purpose - Record historical financial performance and position
Law - Prescribed by CA 06, GAAP, IFRS
Scope - Historical, covers business as a whole, usually gives minimum info required
Information - mostly financial

Question 5

Management accounting:
Users - 
Purpose - 
Law (required or not) - 
Format - 
Scope - 
Information -

Answer 5

Users - Internal
Purpose - Assist management in planning and controlling the business to make effective decisions
Law - No legal requirements
Format - Management discretion
Scope - Flexible, includes historical, current and future information which can focus on specific parts of the business
Information - Financial and non-financial key performance indicators (KPIs)

Question 6

Define cost object

Answer 6

A cost object is anything for which we are trying to ascertain the cost (e.g. painting division, product x, machine y, person z…)

Question 7

Define cost centre

Answer 7

A cost centre is a department, process or function where costs can be accumulated (e.g. goods inwards department, milling machine..)

Question 8

Define cost unit

Answer 8

A cost unit is a product or service for which costs are determined (e.g. the cost of making a widget, a batch of marmalade)

Question 9

Define composite cost unit

Answer 9

A composite cost unit is a cost unit made up of two parts. Most commonly it is a service provided where a unit of ‘production’ is hard to calculate and compare

Question 10

What are the three elements of direct costs?

Answer 10

A direct cost is a cost which can be traced in full to a cost unit.

(1) Direct material costs - costs of materials used to make and sell a cost unit (e.g. a table)
(2) Direct labour costs - Costs of labour used to make a cost unit
(3) Direct expenses - Other costs incurred as a direct consequence of making a table (licence fee per table)

Question 11

What is an indirect cost?

Answer 11

An indirect cost (or overheads) are costs incurred which cannot be traced directly and in full to a cost unit

Question 12

Define production overheads

Answer 12

Production overheads are costs incurred (other than direct production costs) in producing the product or service. It includes indirect materials, indirect wages and indirect expenses.

Production overheads are also called manufacturing or factory overheads
ONLY production overheads can be included in the value of inventories

Question 13

Define other (non-production) overheads

Answer 13

Non production overheads are overheads (other than production overheads) incurred in operating the business. They include:

(1) Admin overheads - costs involved in directing, controlling and administering the business
(2) Selling overhead - Costs incurred in raising sales and customer retention (sales rep commission)
(3) Distribution overhead - Costs incurred in packaging and delivering goods to customers

Non production overheads CANNOT be included in the value of inventories

Question 14

Define product costs

Answer 14

Product costs are any costs incurred in the manufacture of goods/services

Product costs are incurred in inventory valuation and are therefore part of the cost of sales expense

Product costs include:

(1) Direct production costs (direct materials, d labour, d expenses)
(2) Production overheads

Question 15

Define period costs

Answer 15

Period costs are costs deducted as an expense in the income statement in a particular period

Period costs are not included in inventory valuation

Question 16

Define fixed costs

Answer 16

Costs incurred by the business MAY change with activity levels

Fixed costs - FC remain constant in total over a range of activity levels (e.g. salaries, rent, rates)

Fixed costs per unit of activity will fall as the activity level increases because the FC are being ‘spread’ over more units

Question 17

Define variable costs

Answer 17

Variable costs change in total as the level of activity changes (e.g. total direct materials cost increase as output levels increase)

Variable costs per unit of activity remain constant as activity level changes

Question 18

Define semi-variable costs

Answer 18

Semi-variable costs have both a fixed and variable element. They are therefore partly affected by a change in the level of activity.

Semi-variable costs are also called semi-fixed or mixed costs.

Question 19

Define stepped-fixed costs

Answer 19

Costs are constant within the relevant range for each activity level but when a critical activity level is reached, the total cost incurred increases to the next step

Question 20

Define responsibility accounting

Answer 20

Responsibility accounting is a system ensuring that responsibility for all the activities (costs and revenues) of the business can be assigned to individual managers in order to monitor and assess performance

Question 21

Define responsibility centre

Answer 21

A responsibility centre is a department/function/process/division/product whose performance is the responsibility of a specific manager

Question 22

Define controllable costs

Answer 22

Controllable costs can be influenced/changed by a manager’s decisions

Question 23

Define uncontrollable costs

Answer 23

Uncontrollable costs cannot be influenced/changed by a manager’s decisions within a given time period

Question 24

The ICAEW Code of Ethics implements the IFAC Code of Ethics. State the principles

Answer 24

Management information should be:

(1) Clear
(2) Accurate and complete
(3) Prepared on a timely basis

The code contains five fundamental principles:

(1) Integrity
(2) Objectivity
(3) Professional competence
(4) Confidentiality
(5) Professional behaviour

Question 25

State the threats to objectivity identified by the ICAEW Code of Ethics

Answer 25

Familiarity - becomes too sympathetic to the interests of the client
Self-review - Responsible for reviewing subject matter for which the firm or individual were previously responsible
Self-interest - Could benefit from a financial or other interest in client
Intimidation - Deterred from acting by threats
Advocacy - Promotes, or may be seen to promote a client’s position or opinion

Question 26

Name the safeguards to reduce risk of threat to objectivity

Answer 26

Consult with:

(1) Superiors
(2) Line manager
(3) Those charged with governance
(4) ICAEW

If the threat cannot be reduced:

(1) Refuse to remain associated with any information determined to be misleading
(2) Consider obtaining legal advice
(3) Consider whether to resign