Management Account - Chapter 1

Question 1

What are the 2 types of accounting?

Answer 1

Cost Accounting
Financial Accounting

Question 2

What is the difference between financial accounting and cost accounting?

Answer 2

Financial accounting uses the financial data to produce financial accounts (profit or loss and statement of financial position) used externally (usually provided by law)
Cost accounting uses the same financial data to produce internal reports for management purposes

Question 3

What is a cost unit?

Answer 3

Either a unit of production or a unit of service

Question 4

What is a composite cost unit?

Answer 4

Is a unit of output which compromises of two variables

Question 5

What is a responsibility centre?

Answer 5

Responsibility centres are segments of the business for which a manager is accountable

Question 6

What are the 4 main responsibility centres?

Answer 6

Cost Centre
Profit Centre
Investment Centre
Revenue Centre

Question 7

What is the definition of a cost centre?

Answer 7

Cost centres are segments of the business to which costs can be charged

Question 8

What is the definition of a profit centre?

Answer 8

profit centres are segments of a business which costs can be charged, revenue can be identified and profit can be calculated

Question 9

What is the definition of an investment centre?

Answer 9

Investment centres are segments of a business where profit is compared with the amount of money invested in the centre

Question 10

How do you calculate the return on an investment?

Answer 10

Profit DIVIDED by Investment MULTIPLIED by 100 EQUALS % of return on investment

Question 11

What is the definition of a revenue centre?

Answer 11

Revenue centre are segments of a business where sales revenue from the product sold/service provided is measured

Question 12

Classification of Costs - Name the 3 seperate sections in a business

Answer 12

Factory
Warehouse
Office (Where the support functions take place i.e marketing, sales, administration, finance, etc…)

Question 13

What are the 4 ways in which costs can be classified?

Answer 13

By Element
By Function
By Nature
By Behaviour

Question 14

When classifying costs by element what are the 3 most basic ways of splitting up costs by?

Answer 14

Materials (i.e. raw materials)
Labour
Expenses (i.e factory rate and rent)

Question 15

What is the definition of material costs, labour costs and expenses when classifying by element

Answer 15

Material Costs - are the costs of raw material, components and other goods used directly the the manufacturing process
Labour Costs - Cost of Employee’s wages and salaries
Expenses are all other costs which cannot be included in ‘materials’ or ‘labour’

Question 16

What is a prime cost?

Answer 16

The total of all the direct costs is called the PRIME COST

Question 17

What is a direct cost?

Answer 17

A direct cost is a cost that can be identified directly with each unit of output

Question 18

What is an indirect cost?

Answer 18

Also known as OVERHEADS these are all costs other than those identified as a ‘direct cost’ and cannot be identified directly which each unit of output

Question 19

When classifying costs by function what are the 2 main headings generally used?

Answer 19

Production
Non-Production

Question 20

By behaviour what are the 3 short term costs?

Answer 20

Fixed Cost
Variable Cost
Semi-Variable Cost

Question 21

Definition of a fixed cost?

Answer 21

Costs which remain the same over a range of output levels (i.e the rent of a factory will remain the same with 1 unit of output and 100 units of output)

Question 22

Definition of semi-variable cost

Answer 22

Costs which combine a fixed and variable element

Question 23

Fixed Costs do not remain the same (fixed) at all levels of production i.e increase in factory rent if a new premises is leased, these are called…

Answer 23

Stepped fixed cost

Question 24

Definition of variable costs?

Answer 24

Costs which vary directly with the level of output
i.e raw materials, royalties, etc..

Question 25

What is the purpose of classifying costs?

Answer 25

The reason for classifying costs is for management purposes. So that management can view the business from 4 different viewpoint to help with decision making, planning (forecasts & budget) and control

Question 26

We classify costs by nature so management can…

Answer 26

Can work out where savings could be made between the direct and indirect costs

Question 27

Management classify costs by element to…

Answer 27

To find the areas of high cost elements in order to make changes/savings

Question 28

Why might a manager want to identify costs by function?

Answer 28

By looking at the different departments to see which are high spending departments and where cuts can be made

Question 29

What is the advantage for classifying costs by behaviour ?

Answer 29

By identifying costs as being fixed, semi-variable or variable the business might be able to make savings by altering the balance between the fixed and variable costs

Question 30

How do you calculate the cost of a unit of output?

Answer 30

1. Identify the unit of output
2. Calculate the number of units for a particular time period
3. Calculate the total direct costs for the time period
4. Calculate all the overheads (indirect costs)
5. Charge the indirect costs to the units of output
6. Direct Costs + Indirect Costs DIVIDED by Unit of Output

Question 31

What is the total cost also known as?

Answer 31

The absorption cost (because it absorbs both the direct and indirect costs)

Question 32

What is a total cost statement?

Answer 32

A list of the total direct costs and overheads

Question 33

What is a product cost?

Answer 33

The costs that become part of the manufactured product this is, the direct material, direct labour, direct expenses and production overheads added together

Question 34

What is a period cost?

Answer 34

Costs that cannot be part of the manufactured product and cannot be assigned to products or closing inventory - which are incurred in a period of time

Question 35

How are costs classified by Nature?

Answer 35

Direct Costs
Indirect Costs