Intro to Management Accounting Flashcards
What is the role of management accounting?
It creates organisational value by improving decision-making, communication, and management of organisational members.
How did the industrial revolution affect management accounting?
It led to the separation of ownership and management, necessitating more robust inventory costing and external financial reporting, forming the basis for modern cost accounting.
What did Johnson and Kaplan mean by “Relevance Lost”?
They argued that traditional management accounting methods had become irrelevant to managers’ needs in a rapidly changing environment.
What challenges faced traditional management accounting by the 1980s?
Increasing indirect costs, less relevant labour-based costing, and a need for timely and more specific information to handle increased competition and innovation.
What innovations were suggested in response to the “Relevance Lost” criticism?
The adoption of Activity-Based Costing (ABC) and the Balanced Scorecard.
What led to the development of ABC?
The increasing significance of overhead costs and the inadequacy of volume-based measures for cost allocation in a complex production environment.
How does ABC differ from traditional costing in allocating costs?
ABC uses cost drivers based on activities that cause overhead, unlike traditional systems that allocate costs using arbitrary bases like labour or machine hours.
What are the criticisms of ABC?
ABC can be seen as a glorified absorption costing approach that still focuses too much on production and post-production costs, with challenges in dealing with service industries and R&D.
Why is ABC sometimes considered a “management fad”?
Some critics argue that its benefits are overemphasized by consultants, and it does not always provide significantly better results than traditional methods.
What are the main concepts behind ABC?
- Activity: A specific task that consumes resources.
- Cost Pool: A collection of costs associated with a particular activity.
- Cost Driver: The factor that causes changes in the cost of an activity.
What levels of activity are recognized in ABC?
Unit-level, Batch-level, Product-level, Customer-level, and Organisation-level activities
What steps are involved in implementing an ABC system?
- Identify key activities.
- Determine the cost drivers for each activity.
- Create cost pools for each driver.
- Allocate costs to products based on their usage of these activities.
What did Cooper and Kaplan highlight about low volume products and costs?
Low volume products often create more overhead due to more complex production requirements, which ABC captures better than traditional costing.
When is ABC especially beneficial for decision making?
When indirect costs are high, production is diverse, products/services are complex, and there are both high and low-volume items.
How can ABC help identify profitable and unprofitable products?
By more accurately assigning overheads, ABC can highlight products that are less profitable due to high indirect costs.
