Lecture 8

Question 1

What is the info required to answer the question of “Shall I invest in manufacturing more soap powder, or do I switch resources into toothpaste?”

Answer 1

Relative demand for each product
Actions of competitors
Costs of inputs (materials, labour)
Availability of suitable labour

Question 2

What is the info required to answer the question of “shall I continue offering a television repair service as support for my sales of televisions?”

Answer 2

Market research on demand
Sales with/without repair service
What competitors are doing
Cost of repairs
Profit margin

Question 3

What is the info required to answer the question of “is it cost effective to have three separate locations at which my tenants can pay their rent?”

Answer 3

Cost of maintaining offices, staff
Cost of reducing staff

Question 4

What is the info required to answer the question of “will this investment in a new factory pay for itself over the next ten years?”

Answer 4

Cost of investment
Cost of capital (borrowing/raising equity)
Future cash flows

Question 5

Management functions - tell me about planning

Answer 5

Maximise short term profit to long term and market share
Add value to business (e.g. sales, production, capital expenditure)

Establish goals -> specify how goals will be achieved -> develop budgets

Question 6

Management functions - tell me about decision making

Answer 6

Involves making a selection among competing alternatives

About resources
About activities
Financial matters (particularly cost)
Impact on employees
Impact on competitors

What should we be selling?
Who should we be serving?
How should we execute?

Question 7

Management functions - tell me about control

Answer 7

Gathers feedback to ensure that plans are being followed

Feedback in form of performance reports that compare actual results with the budget are an essential part of control function

Is outcome in accordance with initial plans and objectives?
Costs
Profit

Question 8

What does control require?

Answer 8

Timely, relevant and accurate info
Cost measurement
Effective communication
Organisational structure
Responsibility and authority

Cascade down
Flow upwards

Question 9

Role of management accounting - tell me about directing attention

Answer 9

Who should take action?
Whose responsibility is this loss?
Who is to be congratulated on this favourable result?

Highlight those costs which have departed from expectations

Fairness and timeliness
Responsibility
Recognise achievements
Demonstrate accountability

Question 10

Role of management accounting - tell me about keeping the score

Answer 10

How much?
How many?

Record keeping
- monitoring accounting records against physical quantities and measures

Completeness and fairness
- matching costs to a time period
- matching costs to an item of output
- matching costs against revenue of the period

Question 11

Role of management accounting - tell me about solving problems

Answer 11

Why did that plan go well?
Why did that action fail?
Which of these three choices is the best to take?
Relevance
Choices
Basis for understanding the problem

Question 12

What is the standard set of wording of management accounting?

Answer 12

There is none
CIMA guidance and definitions

Question 13

What is the definition of a cost?

Answer 13

A physical quantity measurement multiplied by a price measurement

E.g 100 units at £6 = cost of £600

Question 14

What are the classifications of costs?

Answer 14

Fixed costs and variable costs
Direct costs and indirect costs
Product costs and period costs

Question 15

What is the meaning of activity?

Answer 15

Generally, any physical operation that takes place in an organisation

Question 16

What is the meaning of output?

Answer 16

Product or service provided by the organisation

Question 17

What is a variable cost?

Answer 17

A cost with varies directly with changes in the level of activity over a defined period of time

Question 18

What is a fixed cost?

Answer 18

A cost which is not affected by changes in the level of activity over a defined period of time

Question 19

What is a semi-variable cost?

Answer 19

Fixed costs + variable costs

Question 20

What is a step cost?

Answer 20

Fixed cost that increases by steps

Question 21

What are some examples of variable costs?

Answer 21

Materials used to manufacture a unit of output or to provide a type of service
Labour costs of manufacturing a u it if output or providing a type of service
Commission paid to a salesperson
Fuel used by a haulage company

Question 22

What are examples of fixed costs?

Answer 22

Salary paid to a supervisor
Advertising in the trade journals
Business rates paid to the local authorities
Depreciation of machinery calculated on the straight line basis

Question 23

What are examples of semi-variable costs?

Answer 23

Office salaries where there is a core of long term secretarial staff plays employment of temporary staff when activity levels rise
Maintenance changes where there is a fixed basic charge per year plus a variable element depending on the number of call-outs per year

Question 24

What’s an example of a step cost?

Answer 24

Rent storage space until full capacity is reached then expand by renting second storage space

Question 25

What is a direct cost?

Answer 25

Directly traceable to an identifiable unit, such as a product or service or department of the business

Question 26

What’s an indirect cost?

Answer 26

Spread over a number of identifiable units of the business, such as products or services or departments for which costs are to be determined

Also called overhead costs!!!!!!

Question 27

What are product costs?

Answer 27

Costs associate with goods or services purchased, or produced for sale to customers

Question 28

What are period costs?

Answer 28

Costs which are treated as expenses in the period in which they are incurred

Question 29

What are some examples of product costs?

Answer 29

Direct materials
Direct labour
Manufacturing overhead
- indirect materials
- indirect labour
- other indirect costs

Question 30

What are some examples of period costs?

Answer 30

Selling expenses
Admin expenses

Question 31

What is the cost impact of a change in levels of production over a period of time?

Answer 31

Fixed & variable

Question 32

What is the cost effect of planning to expand operations by a new outlet in a particular location?

Answer 32

Direct & indirect

Question 33

What is the cost impact of remaining open for longer hours to improve on existing client services?

Answer 33

Fixed & variable

Question 34

What would the classification of costs be for the question of whether the company should produce components in this country or overseas?

Answer 34

Fixed & variable

Question 35

What would the classification of costs be for the question of if a company should continue to provide a service when demand is falling?

Answer 35

Fixed & variable

Question 36

Costs for control, what is the classification of cost for - How closely do the costs of each product match the targets set?

Answer 36

Direct & indirect

Question 37

Costs for control, what is the classification of cost for - how closely do the costs of a service department match the budget set for the department?

Answer 37

Direct & indirect

Question 38

Costs for control, what is the classification of cost for - is the value of the inventory (stock) of unsold goods stated correctly?

Answer 38

Product & period

Question 39

What is cost centre?

Answer 39

A unit of the organisation in respect of which a manager is responsible for costs under his or her control

Question 40

What is profit centre?

Answer 40

A unit of the organisation in respect of which a manager is responsible for revenue as well as costs

Question 41

What is investment centre?

Answer 41

A unit of the organisation in respect of which a manager is responsible for capital investment decisions as well as revenue and costs