Grüning Review Questions Flashcards
What are the differences between Financial and Management Accounting? (5 Areas)
Statutory Requirements:
- FAcc.: annual financial Accounts
- MGTA: optional
Reporting Object:
- FAcc.: whole business; segment reporting sometimes; actual performance
- MGTA: small parts e.g. products, customers; thinking in alternatives
Time Dimensions:
- FAcc.: past oriented
- MGTA: future (and past) oriented
GAAP:
- FAcc.: uniform, consistent, objective, verifiable
- MGT.: Management needs, decision usefullness
Reporting Frequency
- FAcc.: annually, quarterly
- MGTA.: depends on information needs
Describe the 7 steps of Planning and Control Process
Planning Process:
- identify objectives
- search for alternaticve Actions
- Gather data about alternatives
- select alternatives
Control Process
- Implement decisions
- compare actual and planned outcome
- respond to deviations
What counts as Manufacturing Costs?
- Direct Materials + Direct Labour = Prime Cost
- Prime Costs + Manufacturing Overhead = Total Manufacturing Cost
- Total Manufacturing Cost + Non-Manufacturing Overhead = Total Costs
What are Direct Cost?
- can be specifically and exclusively identified with a certain cost object
- i.e. can be traced to this cost object
What are Indirect Costs?
- cannot be identified specifically and exclusively with a certain cost object
- i.e. cannot be traced to this cost object
How are direct cost allocated?
Through cost tracing
How are Indirect Costs allocated?
Through
- Traditional Costing System
- Activity Based Costing System
What are the 4 characteristics of simplistic cost systems?
- Inexpensive to operate
- Extensive use of arbitrary cost allocations
- Low levels of accuracy
- High cost of errors
What are characteristics of highly sophisticated Cost systems
- Expensive to operate
- Extensive use of cause-and-effect cost allocations
- High levels of accuracy
- Low cost of errors
How does the Two-stage allocation Process work?
Step 1: Assign overhead initially to cost centres
Step 2: Allocate cost centre overheads to cost objects (e.g. products) using second stage allocation bases.
Why are Actual Overhead rates inappropriate?
- Product costs can only be calculated after the end of the period.
- If periods are years considerable delay
- If periods are month overhead rates are subject to seasonal fluctuations
What are budgeted overhead rates?
- based on long-term estimates
- estimated normal overhead costs of the year
- estimated normal activity level, i.e. estimated normal amount of application base of the year
Where is over/underapplied overhead closed?
Against CoGS -> current profit statement
When would you use a job costing system?
- Various different products are produced in discrete batches.
- Batches are unique, but all products within a batch are identical.
⇒Costs need to be allocated to jobs/batches.
e.g.: plates produced in a pottery, airplanes at Airbus
How is the flow of information for job-costing?
Sales Order –> Production Order
Materials Requisition FOrm
Direct Labour Time Ticket
Predetermined Overhead Rates
Job Costing Sheet
How may raw material valuation affect priduct price?
If bought at different prices its relevant how they are valuated:
- FiFo
- LiFo
- Average Cost
How are Costs per Units calculated for Process Costing when there are no losses within the process?
CpU: total Cost for the period / output for the period
How Are CpU calculated for process costing if there are normal losses in the process with no scrap value?
Cost per unit = total cost for the period / expected output of the period
What are normal losses in process costing?
- Losses, inherent to the production process
- e.g. evaporating liquids
- Cost is absorbed by good production
What are abnormal losses in process costing?
Unexpected losses
- e.g. use of inferior materials
- Cost is recorded separately and treated as a period cost
- Abnormal losses are valued at cost per unit of normal production
How are the CpU calculated for process costing with normal losses with scrap value?
Cost per unit = (total cost for the period – scrap value of normal losses)/expected output of the period
How are abnormal losses in process costing with scrap value valued?
At CpU of normal production
How are abnormal gains in Process Costing with scrap value valued?
- Abnormal loss is less than expected, i.e. a gain results
- Gains are recorded separately and treated as a period earnings
- Abnormal gains are valued at cost per unit of normal production
How do you calcuate CpU when some Output is partially completed WIP (process Costing) using weighted Average Method?
Value of Opening WIP + Cost Added in Period = Total Cost
Completed Units + Ending WIP Equivalent Units = Total Equivalent Units
Total Costs / Total Equivalent Units = CpU
What are Equivalent Units?
Units are valued at % of completion
–> 70% completion = 0,7 Equivalent Units
How do you calcuate CpU when some Output is partially completed WIP (process Costing) using FiFo Method?
Cost added per Period
(Completed Units - Beginning WIP equivalent units) + Ending WIP Equivalent units = Total Equivalent Units
Cost Added in Period / Total Equivalent Units = CpU
What is the difference between Absorption Costing and Variable Costing?
Absorption and Variable Costing differ in how fixed Manufacturing Cost are treated.
Absorption Cost: Overhead= WIP Stock –> Finished Goods stock –> P&L
Variable Cost: variable Overhead= WIP Stock –> Finished Goods stock –> P&L;
fixed overhead = P&L
How do you calculate CpU in Absorption Costing?
CpU = variable Cost + (Fixed manufacturing Cost per period / Units produced)
What is the impact on profit if production is not equalling sales?
- If production exceeds sales profit under absorption costing > profit variable costing
- If sales exceed production profit absorption costing < profit variable costing
⇒Under variable costing profit more closely follows sales
What is the pro of Variable costing?
- provides more useful information for decision-making
- removes from profit effects of stock changes
- avoids fixed overheads being capitalised in unsaleable stocks
Pro absoption costing
- does not understate the importance of fixed cost
- avoids fictional losses being reported, e.g. stocks accumulated for seasonal sales
- compatible to financial reporting requirements
What is the Cost Volume Profit Model?
Comparison of Revenue, Cost (variable and fixed) and Volume
What is the relevant range in Cost Volume Profit Modell?
- Constant fixed cost within the “Relevant Range” of activity
- Costs are fixed in the short term, but can be changed in the longer term.
How is profit algebraic calculated in CVP Model?
profit = unit price · units – (fixed cost + unit variable cost · units)
How is the Break even point (unit) calculated?
Fixed Costs / Contribution per unit = Break Even Units
Contribution per Unit = Selling price - Unit variable cost
Target profit = (Fixed Costs + Target Profit) / Contribution per Unit
What is the profit at a particular leven in CVP profit?
Profit = Contribution per Unit · Units – Fixed Costs
How is the selling price determined in CVP modell?
[(Profit + Fixed Costs) / units] + Unit variable Costs
How many additional sales are necessary to cover additional fixed costs?
Additional Fixed Costs / Contribution per Unit
How is the Margin of safety calculated in CVP modell?
(expected sales - Break-even sales) / Expected saled
What are the assumptions of the Cost Volume Profit Analysis?
- All other variables remain constant
- e.g. sales mix, production efficiency, price levels, production methods
- Fixed costs do not change
- Profits are calculated on a variable costing basis
- Unit variable cost and selling price are constant per unit of output
- The analysis applies over the relevant range only
- Costs can be accurately divided into their fixed and variable elements
- Single product or constant sales mix
What is the impact of relevant cost and revenues?
- Special pricing decisions
- Product-mix decisions when capacity constraints exist
- Decisions on replacement of equipment
- Outsourcing (Make or buy) decisions
- Discontinuation decisions
What is Direct Costing System?
- Indirect costs are not assigned to cost objects
- No profit, but a contribution to cover total fixed cost is reported per cost object
What is Traditional Costing System
- Use unsophisticated methods to allocate indirect costs to cost objects
- e.g. per machine hour, labour hour, direct labour cost etc.
What is Activity-Based Costing (ABC) System
- Use sophisticated methods to allocate indirect costs to cost objects
- e.g. based on activities that require certain support functions
How is cost allocation managed in Traditional costing Systems?
- First Stage Allocation
• mainly departments - Second Stage Allocation
• small number of volume or cost-based cost drivers
• more or less arbitrarily allocation of cost
How is cost allocated in ABC systems?
1. First Stage Allocation • activities/support units 2. Second Stage Allocation • large number of cost drivers • based on cause-and-effect relationships
How do you design ABC Systems
- Identify major activities
- Assign costs to activity cost centres
- Determine the cost driver for each major activity
- Assign the cost of activities to products
How are Activities classified?
- Unit level activity
- Batch level activity
- Product sustaining activity
- Facility sustaining activity
Is ABC cost of using resources or cost of supplying resources?
Using resources
What is the relation of supplied resources and Used resources?
Cost of supplied resources = Cost of used resources + Cost of idle capacity
When does unused capacity arise?
Unused capacity arises with committed resources
• Committed resources must be acquired in discrete amounts in advance of usage
• Alternative: flexible resource supply to continually adjust resource supply (e.g. outsourcing)
What effect does ABC have on product cost?
- ABC shifts cost from less complex to more complex products
- More complex products require more activities that are recognised in ABC systems
- ABC shifts cost from standard to customer individual products
- Design and set-up are explicitly recognised in ABC systems
What are the stages of the planning process?
Long-Term:
- Establish objectives
- Identify potential courses of action (i.e. strategies)
- Evaluate alternative strategic options
- Select alternative courses of action
Annual budgeting process:
- Implement long-term plan via annual budget
- Monitor actual results
- Respond to divergencies from plan
How do you establish objectives in the planning process?
- Mission
- Corporate objectives
- Unit objectives
How do you identify potential strategies?
- Strategic analysis
- Cost leadership
- Differentiation
- Focus
How do you evaluate strategic options?
- Suitability
- Feasibility
- Acceptability
How do you Implement Long-Term Plans
- Budgeting
- Shorter planning horizon
- More precise and detailed
- Financial terms
- Compliance will be monitored
- Developed from scratch (Zero-Based Budgeting) or derived from previous year
What are the 6 functions of budgets?
- Planning
- force managers to consider how conditions might change and what steps should be taken now
- encourage managers to consider problems before they arise - Coordination
- compel managers to examine relationships between their own operation and those of other departments - Communication
- everyone should have a clear understanding of their obligations to achieve the budget
- individuals can be made accountable for implementing the budget - Motivation
- Focus on participation
- Provide a challenge/target - Control
- Compare actual with budget
- Direct attention ⇒ management by exception - Performance Evaluation
- feedback
How is the Budget made (process 8 steps)
- Communicating Details of Budget Policy and Guidelines
- Determine the factor that restricts output
- Preparation of sales budget
- Initial preparation of various budgets
- Negotiation of budgets with higher management
- Coordination and review of budgets
- Final acceptance of budgets
- Ongoing review of the budgets
What is “Zero-Based Budgeting”?
Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a “zero base,” and every function within an organization is analyzed for its needs and costs.
What are criticisms of budgeting?
- encouraging rigid planning and incremental thinking
- being time-consuming
- producing inadequate variance reports; “how” and “why” unanswered
- too much focus on short-term financial numbers
- yearly rigid ritual
- 12-month commitment; risky since based on uncertain forecasts
- meeting lowest targets only and not attempting to beat targets
- spending what is in the budget to guard against budget reductions next year
- achieving the budget even if undesirable actions required
What are standard costs?
• predetermined costs per unit
⇒target costs that should be achieved under efficient operating conditions
⇒expected, i.e. future costs
What are Budget Cost?
Budget Costs are predetermined total costs
What are standard costing systems?
- Suitable for repetitive organizations
* Allocate variances to responsibility centres
How do you establish cost standards?
2 Approaches
- Historical Records
• efficiency of past period unknown
⇒focus is not really on using resources efficiently - Engineering Studies
• Detailed study of each operation
• direct material standards (standard quantity · standard price)
• direct labour standards (standard quantity · standard price)
• overhead standards
• not observable
• not traceable to units
• analyse fixed and variable elements
• fixed costs are often not controllable in the short-term
What are the three types of cost standards?
- Basic Cost Standards
- left unchanged over long periods
⇒inappropriate if production methods, prices etc. change
- left unchanged over long periods
- Ideal Cost Standards
- represent perfect performance
- cost minimum, i.e. reached only under most efficient conditions
⇒impractical
- Currently Attainable Cost Standards
- costs that occur under efficient conditions
- difficult, but possible to achieve
= attainable standards
What are the purposes of standard costing?
- Prediction of future costs useful for decision-making
- Challenging target that individuals are motivated to achieve
- Setting budgets and evaluating performance
- Control device by highlighting those activities that do not conform to plan
- Simplify the task of tracing costs to products for inventory valuation
What are the direct material variances?
- Material price variance
• (standard price – actual price) x actual quantity - Material quantity variance
• (standard quantity – actual quantity) x standard price - Total direct material variance
• standard costs – actual costs
• material price variance + material quantity variance
What are the direct labour variances?
- Wage rate variance
• (standard rate – actual rate) x actual hours - Labour efficiency variance
• (standard hours – actual hours) x standard rate - Total labour variance
• standard costs – actual costs
• wage rate variance + labour efficiency variance
What are the overhead variances?
- Variable overhead expenditure variance
• (actual hour · standard rate) – actual cost
• affected by
• the efficiency of using the overhead items
• price changes - Variable overhead efficiency variance
• (standard hours – actual hours) · standard rate
• affected by the efficiency of using labour hours, not overhead items! - Total variable overhead variance
• standard costs – actual costs
• variable overhead expenditure variance + variable overhead efficiency variance - Fixed overhead expenditure variance
• budgeted fixed overhead – actual fixed overhead
What are the sales variances?
- Total sales margin variance
• (actual contribution – budgeted contribution) - Sales margin price variance
• (actual price – standard price) x actual volume - sales margin volume variance
• (actual sales volume – budgeted sales volume) x standard unit contribution margin
How do you reconcile Budgeted and Actual Profit?
Sales variances Sales margin price Sales margin volume \+ Direct cost variances Material price Material usage Labour rate Labour efficiency \+ Manufacturing overhead variances Fixed overhead expenditure Variable overhead expenditure Variable overhead efficiency Budgeted profit – actual profit
What are Standard Absorption Costs?
⇒Fixed overhead is allocated to products
• Fixed overhead rate = budgeted fixed overhead / budgeted activity
• Volume variance
• (actual activity – budgeted activity) x standard overhead rate
• arises if actual and budgeted activity vary
⇒not useful for cost control as fixed costs are sunk costs
What are three strategic Positions?
- Cost leadership
- Differentiation
- Focus
What is defender and prospoector strategy?
- Defender strategy
- mass production of limited product lines with routine technology in stable markets
- e.g. great emphasis on financial information
- Prospector strategy
- new innovative products in new markets with proprietary technology
- e.g. great emphasis on non-financial information
What is a balanced scorecard?
- Integrates financial and non-financial performance measures
- Seeks to implement the strategy of an organisation
- Applied by service firms and not-for-profit organisations as well
What are 4 (Generic) Perspectives of balanced scorecard?
- Financial perspective
- Customer perspective
- Internal business perspective
- Learning and growth perspective
What are the Cause-and-Effect Relationships in Balance Scorecard?
employee training –> on-time delivery –> customer satisfaction –> Economic Value Added
What are the Key Benefits of the Balanced Scorecard?
- Combines four different perspectives on firm performance in one report
- Provides a comprehensive framework for translating company’s strategic goals into a coherent set of performance measures
- Helps to consider all important operational measures simultaneously. Allows to observe interrelations between measures
- Promotes to formulate and implement an explicit strategy; improves communication within the organisation
What are Key Limitations of Balanced Scorecard?
- ambiguous cause-and-effect relationships without empirical support
- various other perspectives on firm performance omitted
- e.g. environmental; employees
