Management Account - Chapter 2

Question 1

In a manufacturing business what costs are classified as direct materials?

Answer 1

Classifies the cost of materials from which the finished product is made up of (i.e raw materials)

Question 2

What are the 3 types of materials held by a manufacturing business?

Answer 2

Raw Materials and Components
Work-in-Progress (part finished goods on the production line)
Finished Goods

Question 3

What type of materials are held by a trading business?

Answer 3

Goods for Sale/Re-sale

Question 4

What type of materials are held by a service business?

Answer 4

Consumable materials - these are materials that are either for use in the organisation or for sales the customers as part of the service provided

Question 5

What is perpetual inventory?

Answer 5

Is where businesses records the receipt and issues of inventory as the items pass in and out of the business and re-orders are made accordingly

Question 6

What is Just in Time (JIT)

Answer 6

A method favoured by manufacturing business where supplies of components are delivered to the production line just as they are needed. For JIT to operate effectively quality suppliers are needed!

Question 7

What is the Fixed Quantity Method?

Answer 7

Is a method used by business when re-ordering materials in set amounts

Question 8

What are the 5 parts to the fixed quantity method?

Answer 8

Maximum inventory level
Inventory Buffer
Re-Order Level
Lead-time
Re-Order Quantity

Question 9

What is an inventory buffer and how is it calculated?

Answer 9

This is the minimum level to be held in order to meet unexpected sales/emergencies
Re-Order Level - (average usage x average lead time)

Question 10

What is a re-order level and how is it calculated?

Answer 10

The re-order level is calculated so that replacement materials will be delivered just as the inventory level reaches the level of the inventory buffer
(average usage x average lead-time) + inventory buffer

Question 11

What is the re-order quantity and how is the maximum and minimum quantities calculated?

Answer 11

At the re-order level a purchase for new inventory is made to the supplier (usually via purchase order)
Maximum re-order quantity is calculated
Maximum inventory level - inventory buffer
The minimum re-order quantity is calculated
Re-Order level - inventory buffer

Question 12

What is the Economic Order Quantity (EOQ)

Answer 12

A method of minimising ordering costs and inventory holding costs to calculate the most efficient level of order to place

Question 13

How to do calculate the EOQ ?

Answer 13

SQUARE ROOT of 2 x annual usage x ordering cost DIVIDED by inventory holding cost

Question 14

How do you calculate the Valuation of Inventory

Answer 14

number of items held x cost per item = inventory value at cost

Question 15

Inventory is generally valued at either…

Answer 15

What the cost is to the business to replace/buy that item (including any additional costs to get the product into the current condition or current location i.e delivery costs)
OR
Net Realisable Value - which is the actual or estimated selling price (less any extra costs such as selling & distribution)

Question 16

Valuation of Inventory is taken from where entitled Inventories

Answer 16

International Accounting Standard (IAS) No. 2

Question 17

When valuing inventory a business would usually take either the…

Answer 17

The lower of either the cost and net realisable value

Question 18

How do you calculate the weighted average cost when valuing inventory?

Answer 18

Total cost of inventory held DIVIDED by number of items held

Question 19

What are the 3 methods of inventory valuation?

Answer 19

FIFO (First In First Out)
LIFO (Last in First Out)
AVCO (Weighted Average Cost)

Question 20

Why carry out costing?

Answer 20

Part of management accounting helps managers to:
Record, Monitor & Control Costs
Plan for the future
Make both short-term and long-term decisions

Question 21

What are the 5 types of specific costing methods?

Answer 21

Job Costing
Batch Costing
Process Costing
Unit Costing
Service Costing

Question 22

Why would you use Job Costing

Answer 22

Is used where each product or service that is produced is a ‘one off’ Job, it collects together all the costs for that particular job. Used for items that are specific to each customers individual requirements

Question 23

When would you use unit costing?

Answer 23

To calculate the cost of each individual unit and is more suited for businesses that produce several different products in large quantities

Question 24

What is Batch Costing ?

Answer 24

Is a variation of unit costing that is used when items are produced in batches. The items in the batch are identical and the costs are calculated for the whole batch

Question 25

What is service costing?

Answer 25

Is a costing method that is used in the service industry, useful where there is continuous activities that can be thought if as multiples of a simple measure of output

Question 26

What is process costing?

Answer 26

Is used where manufacture involves a continuous process which may never (or rarely often) stop and the costs are worked out for a specific period of time.

Question 27

How do you calculate the cost per unit with process costing method?

Answer 27

Cost per cost unit = total costs of the process for the period ÷ total cost units for the period

Question 28

What is work-in-progress

Answer 28

At the end of the period there will be part-completed items and these will then be calculated as work-in-progress

Question 29

How do you calculate the work-in-progress?

Answer 29

1. You will need to work out the degree of completeness of these unfinished products so then you can calculate the number of EQUIVALENT units for costing purposes

Number of part completed units x percentage of completeness = number of equivalent units

Question 30

What is the definition of a FIXED BUDGET?

Answer 30

A fixed budget will remain the SAME whatever the level of activity

Question 31

What is the definition of a FLEXIBLE BUDGET?

Answer 31

A flexible budget changes with the level of activity and takes into account different cost behaviour patterns

Question 32

What is the process for monitoring budget reports

Answer 32

1. Set Budgets
2. Compare budgeted figures to actual figures
3. calculate VARIANCES
   4, ANALYSE variances
4. EXPLAIN reasons for variances
5. take necessary action

Question 33

How do you calculate the Variances?

Answer 33

Budgeted costs or revenue MINUS the ACTUAL costs or revenue = variance

Question 34

What are the 2 types of Variances?

Answer 34

FAVOURABLE OR ADVERSE

Question 35

Favourable variances are…

Answer 35

IF the actual costs are LOWER than budgeted
IF the actual revenue is HIGHER than budgeted
IF the actual profit from operations is HIGHER than budgeted

Question 36

Adverse variances are…

Answer 36

IF the actual costs are HIGHER than budgeted
IF the actual revenue is LOWER than budgeted
IF the actual profit from operations is LOWER than budgeted

Question 37

What is management of exception in terms of variances in budgeting

Answer 37

The control systems of a business will set down procedures for acting on variances but only for significant variances known as management by exception (ie acting on variances that are significant)
Managers will work to tolerance limits for variances (tolerance limit is an acceptable percentage variance on the budgeted amount).

Question 38

Where are the variances accounted for in management accounts?

Answer 38

In budget reports

Question 39

What does a budget report account for ?

Answer 39

Budget reports reconcile the budgeted costs and actual costs for each cost element (direct materials, labour, expenses and overheads) and the budgeted revenues and show the variances (figures and account for if the variances are favourable or adverse)

Question 40

What are relevant costs?

Answer 40

Relevant costs are those costs that are changed by a decision

Question 41

What are irrelevant costs?

Answer 41

Irrelevant costs are those costs that are not affected by a decision.

Question 42

What are the 3 types of Short-term decisions?

Answer 42

Break-even analysis
Marginal Costing
Limiting Factors