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Accounting > Management Accounting > Flashcards

Management Accounting Flashcards

1
Q

What is Management Accounting?

A
  • Provides information to people within organisation to help make better decisions and improve the efficiency and effectiveness of existing operations.
  • Formulates plans, then compares them to actual performance.
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2
Q

What are the characteristics of useful information?

A
  • Timely
  • Understandable
  • Comparable
  • Reliable
  • Relevant
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3
Q

What are the benefits of information

A
  • Improved decisions
  • More effective planning
  • Greater operational efficiency
  • Improved customer & shareholder value
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4
Q

What factors increases the importance of information in management accounting ?

A
  • Increased complexity & size of organisation
  • Increased emphasis of quality
  • Rapid development and implementation of tech
  • World-wide competition, how to compete and be more profitable
  • Regulatory environment.
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5
Q

What is the CIMA written code of ethics?

A
  • Confidentiality
  • Professional competence and due care
  • Professional behaviour
  • Integrity
  • Objectivity
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6
Q

What is cost classification?

A

Grouping together costs which share the same attributes relative to a stated cost objective/object.

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7
Q

What are the main cost objectives?

A
  • Assigning costs to cost objects – traceability
  • Financial reporting – inventorial or expenses (product/period)
  • Predicting cost behaviour in response to changes in activity (fixed/variable)
  • Assessing performance (un/controllable)
  • Making decisions (differential, sunk, opportunity)
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8
Q

What are Manufacturing Costs?

A
  • Costs associated with the production function within a factory.
  • Direct materials, direct labour and manufacturing overhead (indirect labour/material).
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9
Q

Equations to consider within Manufacturing Costs:

A

Prime Cost = Direct labour + Direct materials.
Conversion Cost = Manufacturing Overhead + Direct Labour.

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9
Q

What are Non-Manufacturing Costs?

A
  • Market/Selling Costs, costs necessary to order/deliver product
  • Administrative Costs, executive/organisational/clerical costs which can’t be assigned to manufacturing or marketing
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10
Q

What is the difference between Period Costs & Product Costs?

A

Period Costs - costs not included in product costs, written off to the Income Statement in the period they are incurred.

Product Costs - direct materials/direct labour/manufacturing overhead. Goes to Balance Sheet as asset, then Income Statement when they are sold.

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11
Q

What is the Controllability Principle?

A

Only holding people accountable for the things that they can control.

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12
Q

What is Responsibility Accounting?

A
  • Produces info in a way that reflects managerial responsibility.
  • Eg. By department for each manager.
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13
Q

Factors which influences Decision Making:

A
  • Differential Costs & Revenues = Costs + Revenues, that differs among alternative courses of actions.
  • Opportunity Cost = potential benefit that is given up when one alternative is selected over another.
  • Sunk Costs = cannot be changed by any decision & should be ignored when making decisions.
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14
Q

Define Cost Behaviour…

A

How cost changes in relation to volume or activity. Some are variable, others are fixed.

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15
Q

What is Total Variable Cost (TVC)?

A
  • Change in cost when activities change.
  • ACTIVITY BASE = a variable cost must vary with something.
  • On a per unit basis, VC remains constant as volume changes.
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16
Q

Examples of TVC:

A
  • Direct Materials
  • Direct/Indirect Labour (wages)
  • Sale Commissions
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17
Q

What are Total Fixed Costs (TFC)?

A
  • Costs that remain constant within a relevant range of activity/volume.
  • On a per unit basis, varies inversely with changes in volume.
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18
Q

Examples of Fixed Costs:

A
  • Depreciation
  • Rent
  • Salaries
  • Auditors fees
19
Q

What are the different types of Fixed Costs

A

Committed Costs – long-term, cannot be reduced in the short term. Rent/depreciation on buildings.

Discretionary Costs – May be altered in the short-term by current managerial decisions. Advertising/Research and Development.

20
Q

What are Mixed Costs or Semi-Fixed/Variable Costs?

A

Something that has fixed and variable cost. Part of the cost changes with volume or usage, and part of the cost is fixed over time (electricity bill).

Y = MX + C
 Y – total mixed cost
 C – Total fixed cost
 M – variable cost per unit
 X – level of activity

21
Q

Equation for the Variable Cost per unit:

A

Variable cost per unit = difference in activity level/difference in cost.

22
Q

Equation for Fixed Cost:

A

Fixed cost = total cost at one of activity levels – total variable cost.

23
Q

What are the types of Costing Systems used to determine a products cost?

A

Specific Order Costing
- Job Costing
- Contract Costing
- Batch Costing

Continuous Operation Costing
- Processing Costing
- Service Costing
- Batch Costing

24
Q

What is Continuous Operations Costing?

A

Applicable where goods/services are mass produced from repeated procedures.

Process Costing,
- Output units are identical or nearly identical.
- Cost units are rarely separable
- Costs are attributed to a process and averaged over the number of units.

Servicing Costing,
- Canteens, maintenance, personnel.
- Used where there’s heterogeneity, simultaneity, perishability, and intangibility. - Many products separately identifiable.

25
Q

What is Specific Order Costing?

A

Appropriate where goods/services are separately identifiable from each other.

Job-Contract Costing,
- when a firm makes custom products or services for each customer
- Costs attributed to individual jobs/contracts.
- Job costing = short term, Contract costing = long term.

Job-Order Cost Accounting,
- a costing method which is used to determine the cost of manufacturing each product.
- Job-Order Cost Sheet: primary doc for tracking costs associated with a given job.
- Document Flow Summary

26
Q

How is the Document Flow Summary sorted?

A

Job Sheet Cost:
- Direct materials
- Direct Labour

Manufacturing Overhead Account:
- Indirect materials
- Indirect Labour (supervisors’ salary)

27
Q

Why are Overheads shared?

A
  • Cost of inventories include all costs of incurred to bring inventory to present location and condition.
  • Inventory cost + amount of overhead that is appropriate for what has enabled them to be produced. Must be shared fairly.
  • Important for inventory valuation as well as price setting.
28
Q

What is the process of assigning Overhead to products?

A
  • Productions Cost Centre (directly involved in production).
  • Service Cost Centre (stalls/canteens).

If not easily allocated to a cost centre, they are apportioned (so each cost centre gets the appropriate share).

Then costs accumulated in cost centres assigned to products. Total overhead costs charged to all units produced in proportion to the amount of productive capacity used up in making each unit.

29
Q

Example methods of apportionment:

A
  • Rent of building = percent of floor area used.
  • Lighting = kW hours/Floor area
  • Power for machines = kW hours
  • Production supervisor’s salary = No. of employees
  • Canteen costs = No. of employees
  • Depreciation of machinery = Net book value of fixed assets
30
Q

Equation for Absorption rate of product overheads and bases for this:

A

Absorption Rate = Estimated overhead cost for period/Estimated productive capacity for period

  • Machine hours
  • Direct labour hours
  • % Direct wages
  • % Direct materials
  • Prime Cost
  • No. of units
31
Q

How is Manufacturing Overhead applied?

A
  • Predetermined Overhead Rate (POHR) is used to apply overhead to jobs, determined before the period begins.
  • Based on estimates.
  • Overhead applied = POHR x Actual Activity
32
Q

Why are Predetermined Overhead Rates used?

A
  • Possible to estimate total job costs sooner as actual overhead isn’t known until the end of the period.
  • Needed to give a price.
  • Can result in the Over and Under Application of Overheads.

POHR = Estimated total manufacturing overhead cost for the coming period/Estimated total units I the allocation base for the coming period.

33
Q

Overhead Equations:

A
  • Total Overhead =Direct Material Cost / Production Overhead.
  • Total Overhead = Direct Labour Cost / Direct Labour Hours.
  • Overhead absorbed = £… per labour hour x Direct Labour Hours.
  • Over/Under Applied Overhead = Overhead Absorbed - Overhead Incurred (Production Overhead)
34
Q

Equation to workout the Overhead Absorption Rate per unit:

A

= Fixed Factory Overhead / Number of units sold.

35
Q

Equation to workout the Absorption Cost per unit

A

= TVC + Overhead Absorption Rate per unit

36
Q

What is Marginal/Variable Costing?

A

When driving car, we only think of variable cost (petrol) as car payment & absorption will have to be paid trip or no trip.

  • Product Cost = TVC
  • Period Cost = All FC
37
Q

What is Absorption Costing?

A
  • A method of calculating the cost of a product or enterprise by taking into account indirect expenses (overheads) as well as direct costs.- Variable & other costs considered (car insurance/payment).
  • Product Costs = total direct costs (direct material/labour) + a share of production overheads (variable manufacturing overhead) + unit overhead cost (FMO/units produced).
  • Period Costs = all non-production fixed costs (selling/admin expenses)
38
Q

What is the Contribution Approach?

A

Used for income statement where VC - Revenues = Contribution Margin.
FC - CM = net profit/loss.

39
Q

Advantages of the Contribution Approach:

A
  • Easy to understand
  • Consistent with CVPA
  • Net income is closer to net cash flow
  • Consistent with standard costs and flexible budgeting
  • Easier to estimate profitability of products
  • Profit is not affected by changes in inventories
  • Impact of fixed costs on profits emphasised
40
Q

What are the objectives of Cost Volume Profit Analysis?

A
  • A short-term decision making tool
  • Helps meet the needs of directing attention and solving problems
  • Establish what will happen to the financial results if a specified level of activity or volume fluctuates.
41
Q

How is CVPA applied?

A
  • Accepting a special order to use up spare capacity
  • Abandoning a line of business
  • Exposes existence of a limiting factor
  • Established if business has an in-house service or needs to buy from a contractor.
42
Q

Assumptions of CVPA

A
  • All other variables remain constant
  • Profits are calculated on a variable costing basis
  • The analysis applies to the relevant range only & short-term time horizon.
  • Costs can be accurately divided into their fixed and variable elements
  • Selling price is constant throughout the entire relevant range
  • Costs are linear throughout the entire relevant range
  • In manufacturing companies, inventories do not change (units produced = units sold)
43
Q

What is the Breakeven point?

A

Occurs when business covers all of its fixed costs.

Company’s total sales revenue = total expenses, or, the point where contribution = total fixed expenses.

44
Q

What is the Contribution Margin Ratio?

A

The difference between a company’s sales and variable costs, expressed as a percentage of sales.

CMR = Contribution Margin / Sales.

Accounting (2 decks)

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