Management Accounting Flashcards
What is management accounting?
Management accounting measures, analyses & reports financial & non financial information that helps managers make decisions to achieve organisational goals
What is financial accounting?
Financial accounting focuses on reporting to external parties such as investors, government agencies and banks.
What is the difference between financial and management accounting and how are they interlinked?
Management accounting focuses on internal reporting for decision making where as financial accounting focuses on the recording of business transactions to create GAAP based financial statements for external users.
Does management accounting only deal with cost?
This is misleading and management accounting reports on financial and non financial information that helps managers make better decisions to achieve organisation goals. Although management accounting does use cost information, it is only part of the organisations information used and analysed.
What are the 5 elements in the code of ethics for professional management accountants
- Integrity
- Objectivity
- Professional competence & due care
- Confidentiality
- Professional behaviour
Define direct costs
Direct costs of a cost object are costs related to the particular cost object that cannot be traced to that object in an economically feasible way
Define indirect costs
Indirect costs of a cost object are costs related to the particular cost object that cannot be traced in an economically feasible way
Define direct materials inventory
Direct materials in stock & awaiting use in the manufacturing process.
Define work in process inventory
Good partially worked on but not yet completed also called work in process
Define finished goods inventoyr
Goods completed but not yet sold
How has the environment in which management accounting is practiced changed?
- Advances in technology
- Competitive markets
- Deregulation
- Changes in Govt policy
New Management practices - Activity based costing
- Activity based budgeting
- Balance scorecard
What are rules
Rules are formally recognised ways in which things should be done
What are routines?
Routines are the way things are actually done
How are rules and routines inter-related?
Rules and routines are interrelated as rules are how things should be done. Overtime rules are taken for granted and become routines of how things are actually done.
What is meant by strategy un Management accounting?
Strategy specifies how an organisation matches its own capabilities with opportunities in the market place to accomplish objectives.
Describes how an organisation can create value for its customers while differentiating itself from competitors
What is continuous improvement?
is about consolidating improvements
Involves locking in gains through standardising procedures and bringing actual performance into conformance
What is meant by the term re-engineering?
Re-engineering questions and redesigns, fundamental operating procedures
What are the four perspectives in the balance scorecard?
- Financial perspective
- Customer perspective
- Internal business process perspective
- Leaning & growth perspective
Explain the financial perspective of the BSC
How do we look to shareholders?
Financial perspective evaluates the profitability of the strategy
Explain the customer perspective of the BSC
How do our customers see us?
This perspective identifies the targeted customer and & market segments & measures the companies success in these segments
Explain the internal business process perspective of the BSC
What must be excel at?
Focuses on internal operations that further both the customer perspective by creating value for customers and the financial perspective by increasing shareholder value
Explain the learning and growth perspective of the BSC
Can we continue to improve and create value?
Identifies the capabilities the organisation must excel at to achieve superior internal processes that create value for customers & shareholders
What is meant by the term downsizing?
- An attempt to eliminate unused capacity
- Match costs to activities that need to be preformed for operating effectively & efficiently un the present & future
What is a product differentiation strategy?
- Strategy designed to distinguish a companies products or services from the competition.
- Developing a strong value proposition so that a product or service is attractive to a target market.
What is cost leadership strategy?
Cost leadership is an integrated set of actions designed to produce/ deliver goods or services at the lowest cost relative to that of competitors while still providing desired features by customers
What is a job costing system?
A system where costs are assigned to a distinct unit, batch or lot of a product or service
What is a process costing system?
In a process costing system, the cost of a product or service is obtained by using broad averages to assign costs to masses of identical or similar units
What are equivalent units?
A derived amount of output units that take the quantity of each input in units completed, work in process and converts the quantity of input into the amount of completed output units that could be made with the quantity of input.
What costs are equivalent units made up of?
direct materials and conversion cots necessary to complete one unit
Why are equivalent units necessary in process costing?
Because not all physical units are completed to the same extent at the same time
Define relevant costs
Expected future costs that differs among the alternative course of action considered.
Why are historical costs irrelevant to relevant costs?
Because they are past costs & therefore cannot differ among the alternative future course of action
What are quantitative factors in decision making?
- Outcomes that are measured in numerical terms
- Some quantitative factors are financial and can be easily expressed in monetary terms
What are qualitative factors in decision making?
- Outcomes that are difficult to measure accurately in numerical terms
- E.g employee moral
What is the five step decision model?
Step 1: Identify the problem
Step 2: Collect relevant information
Step 3: Determine possible courses of action & consider the consequences of each
Step 4: Evaluate the decision, evaluate performance and learn
What are transferred in costs
- Costs incurred in previous departments that are carried forward as the product cost when in moves to the next stage in the production cycle.
Treated as a seperate type of direct costs added at the beginning of the process
Are only quantitative outcomes relevant in capital budgeting analyses?
No, qualitative factors are important to consider in making capital budgeting decisions. You should always consider financial and non financial information.
What is the payback method
Measures the time it will take to recoup, the net investment in a project
What is the accural accounting rate of return?
Divides and accounting measure of average annual income of a project by an accounting measure
What is cost assignment?
A general term that includes gathering accumulated costs to a cost object
What are two functions of cost assignment?
- Tracing accumulated costs with a direct relationship to the cost object
- Allocating the accumulated costs with an indirect relationship to a cost object
What is a cost driver?
A variable that causally affects the costs over a given time span
What are conversion costs?
A term referring to direct labour and factory overhead costs collectively
How are inventoriable costs treated from a financial accounting point of view?
They are costs that are capitalised as assets un till they are sold and transferred to cost of goods sold
What is inventory absorption costing?
A method of inventory costing in which all variable manufacturing cost and all fixed manufacturing costs are included as inventorial costs
Product costs are capitalised, period costs are expensed
What is inventory variable costing
A method of inventory costig in which only variable manufacturing costs are included as inventorial costs
Variable product and period costs are capitalised; fixed product an period costs are expensed
What are the three common features of cost accounting and cost management?
- Calculating the cost of products, services and other cost objects
- Obtaining information for planning & control & performance evaluation
- Analysing the relevant information for making decisions
Where did strategic Management Accounting come from
The terms strategy has been borrowed from the military. It can be seen that business strategy is not simply long-term planning, but must consider plans of competitors with the objective of being in a place of competitive advantage
What is the relationship between Business strategy and management accounting?
Tricker likened the relationship to military strategy and military intelligence. MA can assess strategic impact of internal information and collect information on competitors
What must firms with a differentiation strategy provide?
offer something that is unique. E.g better quality or features not offered by competitors
What must cost leader strategy companies provide?
A product that offers similar value or service at a lower price.
How do companies gain competitive advantage?
Using value chain analysis to reduce costs
What is the aim of the value chain?
Is to find linkages between value-creating activities which result in lower costs and or enhanced differentiation
What are the three main characteristics of SMA
- Collection of competitor information
- Exploitation of cost reduction opportunities
- Matching of accounting emphasis with strategic position
What are the 5 aspects of industry analysis?
- Number & strength of competitors
- Potential entrants to the market
- Availability of equivalent products
- Bargaining power of customers
- Bargaining power of input suppliers
What is the benefit of an effective product differentiation strategy?
Leads to brand loyalty & the willingness of customers to pay higher prices
What are the 2 important aspects to ensure a company is successful in delivering a cost leadership strategy?
Ability to achieve lower costs relative to competitors
Tight cost control that eliminates waste
What is the purpose of the balance scorecard?
To translate an organisation’s mission and strategy into a set of performance measures that provide the framework fro implementing its strategy.
What are typical measures of the financial perspective of the BSC?
Return on investment (ROI) Residual income (RI) Revenue Growth Cost reduction
What are typical measures of the customer perspective of the BSC?
Market share Customer retention & loyalty Customer acquisition Customer satisfaction Customer profitability
What are the three subprocesses of the internal business perspective of the BSC?
Innovation
Operations
Post-sales service
What are the typical innovation measures of the internal business perspective of the BSC?
Percentage of sales from new products
New products introduction versus competitors
Product development break-event time
What are the typical operations measures of the internal business perspective of the BSC?
1 . Cycle time
- Quality
- Activity & process costs
What does the learning and growth perspective of the BSC focus on?
The infrastructure that the business must build to create long-term growth and improvement
What are the 3 key principal categories of the learning and growth perspective of the BSC?
Employee capabilities
Information system capabilities
Motivation, empowerment and alignment
What are the 4 steps of true benchmarking?
- Identify key processes
- compare processes with best practice elsewhere
- Implement changes
- Continue to review performance
What is internal benchmarking?
Comparison with similar operations within own organisation
What are the 5 steps to process costing?
- Summarise the flow of physical units of output
- Compute output in terms of equivalent units
- Compute cost per equivalent unit
- Summarise total costs to account for
- Assign total costs to units completed and to units in ending work-in-process
What is the Weighted average process-costing method?
Weighted-average costs is the total of all costs in the work-in-process account divided by the total equivalent units of work done to date
What are the 3 key elements of Management Accounting?
Decision making
Planning
Control
What impact does control have?
The control function assesses whether goals were achieved and is often used to evaluate the performance of employees, departments, and the organization as a whole. It is vital to ensure that all actions of managers mesh together
What is planning?
Planning involves establishing goals and communicating these goals to employees of the organization.
What are the three stages of planning?
The objectives or mission of the business
Long terms plans
Short term plans or budgets
How does management accounting assist in sustainability?
Identifies relevant costs and benefits
Using activity-based costing
Carrying out a cost-benefit analysis of sustainability initiatives
What are the 6 elements of the value chain?
- Research & development
- Design
- Production
- Marketing
- Distribution
- Customer service
What are product costs?
product costs refer to all the costs incurred by a business from manufacturing a product or providing a service. Production costs can include a variety of expenses, such as labor, raw materials, consumable materials
What are the important aspects to consider in a make or buy situation?
Quality
Dependability of suppliers
costs
