Management Accounting

Question 1

Costing

Answer 1

Gathering of costing information and its attachments to cost objects (CIMA 2005)

Question 2

Define and explain absorption costing

Answer 2

The method used to obtain the full cost of a product or a service.
Method:
1. Trace all direct and indirect costs to the cost centres
2. Allocate and apportion production overhead costs
3. Absorb costs into products

Question 3

Cost Accumulation and Classification

Answer 3

by function, by the element, by nature, by behaviour

Question 4

Product Costs

Answer 4

those costs that are attached to the products and therefore included in the inventory valuation (raw materials, labour, and production overhead)

Question 5

Period Costs

Answer 5

Also known as non-manufacturing costs and they are not attached to the products and are not included in the inventory valuation (marketing and admin expenses)

Question 6

Direct Costs

Answer 6

those related to a given cost object (product, department) and that can be traced to it in an economically feasible way

cost object = product, department or service

a price that can be directly tied to the production of goods or services. direct costs also tend to fluctuation with production levels

Question 7

Indirect Costs

Answer 7

those that are related to the particular cost object but cannot be traced to in an economically feasible way

Question 8

How is price calculated when using absorption costing?

Answer 8

Price = cost + percentage for non-production cost + percentage for profit

Question 9

Elasticity of demand

Answer 9

if a change in price leads to a more than proportionate change in quantity demanded, demand is elastic. Products that can be swapped for a similar product have elastic demand

Question 10

Value-based pricing

Answer 10

a pricing strategy that sets prices primarily, but not exclusively, according to the perceived or estimated value of a product or service to the customer rather than according to the cost of the product or historical prices.

as per notes: increasing profits by increasing prices on selected products.

Question 11

Economic Theory: Supply and Demand

Answer 11

Both supply and demand are dependent on prices
“the amount of a commodity, product, or service available and the desire of buyers for it, considered as factors regulating its price.”

Higher the price, the greater the supply; whereas, as the price decreases, demand increases.

Question 12

Markup

Answer 12

The amount added to the cost price of goods to cover overheads and profit. The following must be considered:

1. competition and market conditions
2. covering non-manufacturing overheads
3. the desired return

Question 13

Cost-based Pricing (Cost-plus Pricing)

Answer 13

a pricing strategy in which the selling price is determined by adding a specific amount markup to a product’s unit cost.

Selling price = cost + markup

Question 14

Return on Investment (ROI)

Answer 14

the ratio between net profit and cost of investment

Question 15

Variable Cost Pricing

Answer 15

pricing method whereby the selling price is established by adding a markup to total variable costs.

Question 16

Target Costing

Answer 16

an approach to determine a product’s life-cycle cost which should be sufficient to develop specified functionality and quality, while ensuring its desired profit. It involves setting a target cost by subtracting the desired profit margin from a competitive market price.

Target Cost = Market Price - Desired Profit

Based on the law of supply and demand; to earn a profit, companies must focus on controlling costs

Question 17

Variable Costs

Answer 17

vary in direct proportion with activity (change in total in proportion to change in the related level of total activitiy)

Question 18

Fixed Costs

Answer 18

remain constant over wide ranges of activity

Question 19

Opportunity Cost

Answer 19

Value of the benefit sacrificed when one course of action is chosen over the other

Question 20

Marginal Costing

Answer 20

the cost of one additional unit of a good or service

Question 21

Contribution

Answer 21

Contribution = Sales Prices - Variable Costs

It only considers the costs and revenues that change and these are important because decisions are made based on whether the action will produce positive contributions or not

Question 22

Break-even Point

Answer 22

the point at which neither profit nor loss is made // total revenue = total costs (includes fixed costs & variable costs)

Question 23

Cost-Volume Profit or Break-Even Analysis

Answer 23

Q = Total Fixed Cost + Operating Profit / Price per Unit - Variable Cost per Unit

Question 24

Margin of Safety

Answer 24

The excess of planned or actual sales above break-even point and can be expressed as a percentage of the sales estimate

Question 25

Uses of Break-Event

Answer 25

Initial price setting
Business Plan
Marketing

Question 26

Cost

Answer 26

Often seen as expenditure and there are many types of costs:
historical/past/sunk cost vs replacement cost
full cost vs marginal costs
actual vs budgeted costs

Question 27

Overhead Expenses

Answer 27

all costs on the income statement except for direct labor, direct materials, and direct expenses.

Question 28

Overhead

Answer 28

refers to the ongoing business expenses not directly attributed to creating the product or service.

any expense incurred to support the business while not being directly related to a specific product or service.

Question 29

Prime Cost

Answer 29

the direct cost of a commodity in terms of the materials and labour involved in its production, excluding fixed costs.