MA

Question 1

Types of organisations

Answer 1

Merchandising: resalers (manage stocking, distribution, customer service)
Manufacturing: producers (labor, materials, facilities, etc.)

Question 2

Methods of strategy implementation

Answer 2

Balanced Scorecard: involving the creation of an accounting report based on the perspective of financial performance, customer satisfaction, internal processes as well as learning and growth and using a strategy map or cause-and-effect diagram summing up the factors.
Value Chain: going through the steps to create and provide a product or service.
Activity-based costing and management (ABC/M): tracking costs to products or individual customers in order to improve product value and firm competitiveness.
Business Analytics: simply use of information from statistical analysis to analyse performance via factors, such as consumer satisfaction.
Target Costing: lating out a desired cost of production based on competitive prices.
Life cycle Costing: oversseing the cost of product throughout its life cycle.

Question 3

Seven methods to implement strategy:

Answer 3

1. Benchmarking: identifying CSFs and comparing them with competitors and improve over competitors.
2. Business process improvement: implementing continuous improvement in quality and other CSFs.
3. Total quality management: policies and practices in order to exceed customer expectations on quality.
4. Lean accounting: used in tandem with lean manufacturing: analysing value streams to pinpoint where manufacturing methods lead to improved profitability.
5. Theory of constraints: improving the rate at which raw materials are converted to finished products.
6. Sustainability: balancing social, envaironmental and financial performance indicator.
7. Enterprise risk management: using framework to manage risks that include hazardous, financial, operating and strategic risks.

Question 4

Competitive strategy

Answer 4

1. Cost leadership: basically providing product at the lowest cost to undermine competitors profitability, requiring efficient productions and typically employing economic scale.
2. Differentiation: the focus on producing the highest quality product that gives consumers uniques value, making a relatively more expensive price worthwhile.

Question 5

Five steps of strategic decision making

Answer 5

1. Determine strategis issues relevant to the problem in question.
2. Determine alternative action
3. Obtain data, transform it into information and conduct analyses of alternative
4. Choose and implement the best alternative based on analysis and overall firm strategy.
5. Evaluate the effectivness of the selected alternative over time

Question 6

Costs

Answer 6

1. Cost driver - factors that cause a change in total cost.
2. Cost objects - specific product, services, customers or organisation units.
3. Cost pools - categorised by type of cost, source or responsibility

Question 7

Cost assignment

Answer 7

Direct tracing - which is used for assigning direct costs, or costs that can be easily traced to a cost pools or cost objects, like the associated materials that are used to create a product.
Allocation, which is used for assigning indirect costs, or costs that cannot be economically and easily traced to a cost pool or object, as is the case with costs like electricity to power a factory, as the cost of keeping the lights on cannot really be traced to specific product.

Question 8

Direct and indirect cost terminology

Answer 8

• Direct materials cost: the cost of materials associated with the cost object, with allowance for scrap and defective units.
• Direct labour hours: the cost of labor that can be directly associated with the cost object
• Indirect material cost: the cost of materials not included in the final product but still used in production
• Indirect labour cost: the costs associated with support functions in creating product, like supervision and inspection
• Factory overhead: a single cost pool that combines all indirect costs
• Prime costs: direct materials and direct labour combined
• Conversion costs: combine direct labour and factory overhead

Question 9

Cost drivers

Answer 9

1. Activity-based: which are determined through an analysis of firm’s operations and specific activities performed.
2. Volume-based: in which cost driver are simply the quantity of product or service produced or provided.
3. Structural: which are strategic cost drivers like scale, experience, technology and complexity, all of which have long effect on planning and decision-making
4. Executional: which include factors that the firm can manipulate in the short-tem. Amoung them are operations related decisions like workforce empowerment, production process design and supplier relations

Question 10

Manufacturing companies three inventory accounts:

Answer 10

1. Materials inventory: which contain the cost of the supply of materials for production
2. Work in process inventory: which includes all costs put into the manufacturing of products, but are not completed at the financial statement date.
3. Finished goods inventory

An inventory formula relates the inventory accounts:
Beginning inventory + cost added = Cost tranferred out + ending inventory

Total manufacturing cost is the sum of materials used, labour and overhead for the period.
The cost of goods manufactured is the cost of goods finished and transferred out of the WIP inventory account for the period

Question 11

Cost estimation

Answer 11

Is the development of a relationship between a cost object and its cost drivers to predict the cost.
Three ways to estimate:
1. Predict future costs using previously identified activity-based, volume-based, structural or executional cost drivers.
2. Identify the key cost drivers for a cost object.
3. Cost drivers and cost-estimating relationships are useful in planning and decision-making

Question 12

Six steps of cost estimation

Answer 12

1. Define the cost object
2. Determine the cost driver
3. Collect consistent methology and accurate data
4. Graph the data
5. Select and employ the estimation method
6. Assess the accuracy of the cost estimate, using for example, the mean absolute percentage error (MAPE)

Question 13

The high low method

Answer 13

Y = a + (b*X)
a - fixed quantity
b - the slope of the line and is given by:
b = difference between costs for high and low points / difference for the value of the cost driver for the high and low points

Question 14

Regression analysis (least squares regression)

Answer 14

Y = a+bX + e
a - fixed quantity
b - unit variable cost, or the coefficient of the independent variable
X - is the value of the independent variable, the cost driver
e - estimation error, or the difference in value between the actual data point and prediction

Two types of variables:
1. The dependent variable: cost estimation (revenue, labour hours, cash flow)
2. The independent variable: cost driver, used to estimate the value of the dependent variable

Question 15

Evaluating a regression analysis

Answer 15

R-Squared, a number between zero and one, which measures how much a change in the dependent variable can be attributed to a change in the independent variable. The closer R-Squared is to one, the higher the explanatory power of the equation;
t-value, a value that measures the degree to which each independent variable has a stable, long-term relationship with the dependent variable. Values less than two indicate little relationship between the variables, and thus low reliability of the independent variable;
Standard error of estimate, a measure of how dispersed actual observations are around the calculated regression line, providing a measure of the accuracy of the regression estimates themselves. This allows for the determination of a confidence interval, the range around the regression line in which actual values of predicted cost should fall. One standard error around the regression line, for example, is equal to a 67% confidence interval;
p-value, a measure of the risk that changes in the dependent variable associated with changes in the independent variable are only a result of chance. A p-value of less than 0.05 is desirable, as it indicates higher statistical significance.

Question 16

Time-series and Cross-selectional regression

Answer 16

Time series regression is the application of regression analysis to predict future amount, using prior data
Cross sectional regression estimates cost for a cost object and variables, where the information for all variables is taken from the same time.

Question 17

Learning curve analysis

Answer 17

Y = a*X^b
a - time required for the first unit
X - cumulative output
b - learning index, given by
b = ln(learning rate) / ln(increase in output/100)

Question 18

Cost-volume-profit (CVP)

Answer 18

CVP analysis evaluates how operating and marketing decisions affect short term profit, analysing the relationship between variable, fixed, unit selling prive, and the output level.
The model is:
Operating profit = Sales - Total costs
Operating profit = Sales - Variable costs - Fixed costs
pi = (pQ) - (vQ) - F

Question 19

Costing system

Answer 19

Costing system used should match the competitive and nature of the firm. There are three components of the costing system that a firm must decide on:
1. Cost accumulation method:
Job costing entails that costs can be accumulated by tracing them to a specific product or service. Consists of push method, in which production based on forecast of consumer demand and pull method, in which production occurs when customer order some quantity of product
Process costing entails that costs can be accumulated at the department level and then allocated from the departments to the products or services. Process costing is commonly found in firms that produce one of homogeneous products or services.
2. Cost measurement method:
An actual costing system uses actual costs incured for all product costs, including direct materials, direct labout and factory overhead.
A normal costing system uses actual costs for direct materials and direct labour, but uses normal costs for factory overhead. Normal costing consists of estimating a portion of overhead to be assigned to each product as it is produced. It provides a timely estimate of the cost of producing each product or job.
A standard costing system uses standard costs and quantities for direct materials, direct labour and factory overhead. Standard costs are expected costs the firm should attain. It provides a basis for cost control, performance evaluation, and process improvement.
3. Overhead application method
Volume based costing, with volume based cost driver
Activity based costing, using both volume and non-volume based cost driver to provide a more accurate allocation of overhead costs to products

Question 20

Factory overhead costs

Answer 20

Overhead application is a process of allocating factory overhead costs to jobs, involving the allocation of indirect costs to object. Two approaches:
Actual costing system uses actual costs for direct materials and direct labour, and records actual factory overhead for the jobs. Usually, the total amount of actual overhead is not known until the end of the accounting period, when all relevant figures are in.
Normal costing system uses actual costs for direct materials and direct labour, and applies factory overhead to jobs by using a predetmined rate.

Question 21

The application of factory overhead in Normal costing

Answer 21

The predetermined factory overhead rate is an estimated rate used to apply factory overhead cost to a specific job. Four steps of applying:
1. Estimate total factory overhead costs for upcoming operating period
2. Select the most appropriate cost driver for applying the factory overhead costs
3. Estimate the total amount of the chosen cost driver for the upcoming operating period
4. Divide the estimated factory overhead costs by the estimated amount of the chosen cost driver.

Formula:
Predetermined factory overhead rate = Estimated total factory overhead amount for the year / Estimated total amount of cost driver for the year

Question 22

Operation costing

Answer 22

Is a hybrid costing system that uses a job costing approach to assign direct material costs to jobs and a process costing approach to assign conversion costs to product or services. It is used in manufacturing operations, whose conversion activities are very similar across different product lines, but whose direct materials usage differs significantly

Question 23

Activity based costing and customer profitability analysis

Answer 23

ABC a costing approach that assigns resource costs to cost objects based on activities performed for the cost object. ABC allows more proportional allocation of costs.
An activity is any unit of work done, and a resource refers to some economic element that an activity requires.
Resource consuption cost drivers measure the amount of resources allocated by an activity, and activity consumption cost drivers measure the demand cost objects placed on resources.

Question 24

Two-stage cost assignment procedure

Answer 24

assigns resource costs to activity cost pools and then to cost objects to determine the amount of resource costs for each of the cost objects

Question 25

Volume-based costing system

Answer 25

Assign factory overhead costs first to plant or departmental cost pools, and then to products and services.

Question 26

ABC system

Answer 26

Link usage of resources to activities, whose costs are then linked to products, services or customers.

Question 27

Steps in developing an ABC

Answer 27

1. Identify resource costs and relevant activities, looking at which resources are consumed by which activities via activity analysis.
2. Assign resource costs to activities using resource consumption cost drivers, which include labour hours, employees, setups, moves, machine houres and square feet, depending on type of activity
3. Assign activity costs to cost objects, using activity consumption cost drivers

Question 28

Practical capacity

Answer 28

Calculating practical capacity, or the capacity available with current resources, will assist in calculating excesscapacity. Substracting the budgeted capacity by actual capacity will also result in excess capacity cost

Question 29

Activity-based management (ABM)

Answer 29

ABM manages resources and activities to improve the value of products or services to customers and increase the firm’s competitiveness and profitability. Two categories can be identified:
Operational ABM, enhancing operational efficiency and asset utilisation and lower costs.
Strategic ABM, focusing on choosing appropriate activities for operation and selecting the most profitable customer

Question 30

Process map

Answer 30

is a diagram that identifies each step in making a product or providing a service.
A high-value-added activity increases the value of the product or service for the cutomer
A low-value-added activity consumes time, resources, or space, but adds little in regard to satisfying customer need (moving parts between processes)

Question 31

Customer profitability analysis (CPA)

Answer 31

CPA looks at the profitability of each individual customer or customer group by identifying cost drivers and customer service activities like advertising, sales calls and delievery, all of which are required to complete the sale process.
Customer lifetime value: understand future of company with that customer
Customer cost analysis look at the cost drivers and activities related to servicing customer

Question 32

Three major extensions of ABC

Answer 32

Multi-stage ABC: In this approach, resource costs are initially assigned to activities. These costs are then assigned to other activities before being allocated to final cost objects. Costs may first be assigned to support activities and then to product activities and cost objects.

Resource consumption accounting: This method calls for an integrated and all-inclusive accounting approach based on an operational view of the organization. It provides managers with financial information about the firm’s activities and relies on four primary concepts:

Attributable cost: Costs are attached to a cost object only when there is clear causality.
View of resources as suppliers of capacity: Capacity is considered a function of available resources.
Operational view of the organization: Inputs and output units have a causal, quantity-based relationship.
Cost behavior: Cost characteristics are inherent to underlying resources and resource consumption.
Time-driven ABC (TDABC): This approach uses the cost per time unit of supplying a resource to directly allocate resource costs to objects. Unlike traditional ABC, where costs are first assigned to activities and then to cost objects, TDABC relies on accurate, standardized estimates of costs per time unit of an activity, providing a better framework for costing excess capacity.