Management Accounting test 2

Question 1

Define rolling budget

Answer 1

A rolling budget, also called a continuous budget is a budget or plan that is always available for a specified future period, by continually adding a period (month, quarter or year) to the period that just ended.

Question 2

What are the benefits of rolling budgets?

Answer 2

There is always a 12-month budget for the next year in place. Rolling budgets constantly force management to think about the forthcoming 12 months, regardless of the quarter at hand.

Question 3

What is an example of a rolling budget?

Answer 3

A four-quarter rolling budget for 2015 Is superseded by a four-quarter rolling budget for April 2015 to March 2016 and so on

Question 4

What is the purpose of an operating profit budget?

Answer 4

In preparing an operating profit budget companies want to avoid unnecessary idle cash and unexpected cash deficiencies.

Question 5

What is the purpose of a cash budget?

Answer 5

The cash budget highlights periods of idle cash and periods of cash shortage, and it allows the accountant to plan cost effective ways of either using excess cash or raising cash from outside to achieve the company’s operating profit goals.

Question 6

Should the cash budget be prepared at the same time as the operating profit budget?

Answer 6

Yes – Building a profitable operating plan does not guarantee that adequate cash will be available, so a cash budget must be prepared simultaneously

Question 7

What is the are the arguments against using ideal standards?

Answer 7

Ideal standards may create unrealistic expectation that demotivate employees who feel that cannot achieve them.
If used for planning, they may create faulty expectations about how much raw material and labour needs to be available

Question 8

What is the are the arguments for using ideal standards?

Answer 8

Ideal standards can highlight that there is still room for improvement as practical standards can impose a ‘glass-ceiling’

Question 9

List four reasons for using standard costs

Answer 9

1. Cost management
2. Pricing decisions
3. Budgetary planning and control
4. Financial statement preparation

Question 10

Why might an analyst examining variances in the production area look beyond that business function for explanations of those variances?

Answer 10

An individual business function, such as production is interdependent with other business functions. Factors outside of production can explain why variances arise in the production area.
Examples
• Poor design of products or processes can lead to a sizeable number of defects
• Marketing personnel making promises for delivery times that require a large number of rush orders can create production-scheduling difficulties
• Purchase of poor-quality materials by the purchasing manager can result in defects and waste.

Question 11

What can be found at the purchasing point in a materials and labour budget?

Answer 11

Responsibility for price variance

Question 12

What can be found at the production point in a materials and labour budget?

Answer 12

Efficiency variances

Question 13

What are the impacts of over costing?

Answer 13

Over costing may result in competitors entering a market and taking market share for products that a company erroneously believes are low- margin or even unprofitable

Question 14

What are the impacts of under costing?

Answer 14

Under costing may result in companies selling products on which they are in fact losing money, when they erroneously believe them to be profitable.

Question 15

What are the four levels of hierarchy activities?

Answer 15

1. Output-unit-level
2. Batch-level
3. Output-sustaining
4. Organisation-sustaining

Question 16

What are output-unit-level activities

Answer 16

Activities performed on each individual unit of output, such as running machines, that consume resources and cause costs

Question 17

What are batch-level activities?

Answer 17

Activities that relate to a group of units of outputs rather than to each individual unit of output e.g. set up costs

Question 18

What are Output-sustaining level activities?

Answer 18

Activities undertaken to support categories of outputs irrespective of the number of units or batches in which the units are produced. E.g., marketing costs

Question 19

What are organisation – sustaining activities?

Answer 19

Activities that support the company as a whole, but do not have a cause-and-effect relationship with any cost object. E.g., CEO costs

Question 20

What are the main benefits of ABC systems?

Answer 20

The main benefits of an ABC system is that it provides more meaningful cost information as it assigns overhead costs to activities based on more accurate data.

Question 21

What are the main limitations & costs of ABC systems?

Answer 21

• The measurements necessary to implement the systems. Even basic ABC systems require many calculations to determine costs of products and services. ABC systems often need to be updated regularly
• Very detailed ABC systems are costly to operate and difficult to understand.
• Sometimes the allocations necessary to calculate activity costs often result in activity-cost pools and quantities of cost allocation bases being measure with error. When errors are large, activity-cost information can be misleading.

Question 22

Should all businesses adopt a ABC system?

Answer 22

No activity-based approach should be adopted only if its expected benefits exceed its expected costs. It is not always a wise investment. If the jobs, products or services are alike in the way they consume indirect costs of a company, then traditional costing system will suffice.

Question 23

The sales forecast is the cornerstone for budgeting why?

Answer 23

Because the production & inventory levels generally depend on the forecasted level of sales

Question 24

What are prevention costs?

Answer 24

Costs incurred to prevent the production of products that do not conform to specifications

Question 25

What are the two characteristics of relevant costs?

Answer 25

Cost that occurs in the future | Costs that are different for different alternatives

Question 26

What are examples of prevention costs?

Answer 26

* Design engineering * Process engineering * Supplier evaluations * Prevention equipment maintenance * Quality training * Testing of new machines

Question 27

What are examples of appraisal costs?

Answer 27

* Inspection * Online product manufacturing & process inspection * Product testing

Question 28

What are examples of Internal failure costs?

Answer 28

* Spoilage * Rework * Scrap * Machine repairs

Question 29

What are external failure costs?

Answer 29

* Customer support * Manufacturing/ process reengineering for external failures * Warranty repair costs * Liability claims

Question 30

What are the advantages of budgets?

Answer 30

* Compels strategic thinking * Provides a framework for judging performance * Motivates employees & managers * Promotes coordination & communication

Question 31

Explain the difference between traditional & a ABC system

Answer 31

Traditional costing uses one cost pool and applies a broad average indirect cost to direct costs. ABC identifies individual activities as fundamental cost objects and uses many cost pools to assign the indirect cost rate, s work according to the hierarchy of activities.

Question 32

What is the difference between market based and cost-based pricing?

Answer 32

Market based costing charges a price based on what customers want and how competitors react. Cost-based pricing is based on what it costs to produce coupled with the ability to recoup the cost & still achieve a required rate of return

Question 33

What does the economic order quantity formula indicate?

Answer 33

Indicates that EOQ increase with higher demand or higher ordering costs and decreases with higher relevant costs.

Question 34

What are internal failure costs?

Answer 34

Costs incurred in defective products before they are shipped to customers

Question 35

What are external failure costs?

Answer 35

Costs incurred on defective products after they are shipped to customers

Question 36

What is a master budget?

Answer 36

Master budget consists of the operating budget & financial budget monetising the organisation objectives & proposed ways of attaining them.

Question 37

What are prevention costs?

Answer 37

Costs incurred to prevent the production of products that do not conform to specifications

Question 38

What are appraisal costs?

Answer 38

Costs incurred to detect which of the individual units of products do not conform to specifications.

Question 39

What are value added costs?

Answer 39

A cost if eliminated would reduce the actual or perceived value customers obtain from using the products.

Question 40

What are examples of value-added costs?

Answer 40

Direct materials, direct labour, tools & machinery

Question 41

What are non-value added costs?

Answer 41

A cost if eliminated would not reduce the actual or perceived value customers obtain from using the products.

Question 42

What are examples of non-value-added costs?

Answer 42

Breakdown costs, errors, defective products, scrap.

Question 43

Why is it important to distinguish between costs incurred and designed-in costs?

Answer 43

It is important to distinguish when costs are locked in and when costs are incurred because it is difficult to alter or reduce costs that have already been locked in.

Question 44

Why is product life cycle budgeting important to making decisions?

Answer 44

It is an estimate of the revenues and costs attributed to each product from its initial R&D to its final customer servicing and support. This type of budgeting allows managers to be sure they generate enough revenue to recover all of their costs, especially any high fixed pre-production costs

Question 45

If managers are unsure if a cost is value added or non-value added, how should they classify the cost and why?

Answer 45

Non-value added. This focusses organisations attention on reducing these costs instead of assuming that the costs add value.

Question 46

What is the risk of classifying a value-added cost as non-value added?

Answer 46

Organisations may cut costs that add value which could lead to poor customer experiences.

Question 47

What are purchasing costs?

Answer 47

Organisations may cut costs that add value which could lead to poor customer experiences.

Question 48

What are examples of purchasing costs?

Answer 48

Freight costs, discounts

Question 49

What are ordering costs?

Answer 49

Costs for preparing and issuing the purchase orders

Question 50

What are examples of ordering costs?

Answer 50

Preparing and inspecting items included in orders, matching invoices received, cost of obtaining purchase approvals

Question 51

What are carrying costs

Answer 51

opportunity cost in holding inventory for sale

Question 52

What are examples of carrying costs

Answer 52

Opportunity cost , storage, space rental, insurance, spoilage and obsolescence.

Question 53

How can standard costs be useful for planning and control?

Answer 53

A standard cost is a carefully determined cost based on the standard quantity and standard price for the inputs (direct materials, direct labour and variable overhead). Knowing the costs of production is important for pricing. Furthermore, based on expected production levels, the labour and direct materials requirements can be planned and targets set. After production is complete, the standards become a benchmark for judging performance. Because standards are important for both planning and control, an important decision is whether ideal or practical standards are set. Ideal standards can be good for motivation but practical standards provide a more realistic basis for planning.

Question 54

How does a flexible budget differ from a static budget, and why should companies use flexible budgets?

Answer 54

A static budget is based on the level of output planned at the start of the budget period. A flexible budget is adjusted (flexed) to recognise the actual output level of the budget period. Flexible budgets help managers gain more insight into the causes of variances than is available from static budgets.

Question 55

Why should a company calculate price and efficiency variances?

Answer 55

The price variance focuses on the difference between actual input price and budgeted input price. The efficiency variance focuses on the difference between actual quantity of input and budgeted quantity of input allowed for actual output.

Question 56

How can variance analysis help managers to achieve continuous improvement?

Answer 56

Managers use variances for control, decision implementation, performance evaluation, organisation learning and continuous improvement. When using variances for these purposes, managers consider several variances together, rather than focusing only on an individual variance.

Question 57

What is benchmarking and | why is it useful?

Answer 57

Benchmarking is the process of comparing the level of performance against the best levels of performance from within the organisation, competitors or world best practice. Benchmarks may be taken for any important dimension of performance.

Question 58

What are the three criteria for an activity-based costing

Answer 58

(1) significant competition; (2) indirect costs are a high percentage of total costs; and (3) outputs make diverse demands on indirect resources.

Question 59

What are the impacts of broad averaging?

Answer 59

Broad averaging has the effect of reporting a low (high) cost for an output when it consumes a high (low) level of resources

Question 60

What is activity-based management and | how are activities managed?

Answer 60

Activity-based management (ABM) focuses on observing and analysing activities as a basis for making a range of decisions, including pricing outputs, deciding on output mix, how to reduce costs, how to improve processes, product design, profitability and customer satisfaction

Question 61

What is activity-based costing, how do managers apply it and how can they use it to support activity-based management?

Answer 61

Activity-based costing (ABC) gives managers information about the costs of making and selling diverse outputs, rooted in activities; in what is happening in the business; in physical phenomena. A meaningful costing system embodies the essence of these activities, and activities form the basis units of measurement. ABC systems provide the detailed cost information to support ABM in making decisions on issues such as pricing, output mix, cost reduction, process improvement, and output and process redesign.

Question 62

How do managers evaluate an activity based costing system?

Answer 62

To evaluate an ABC system, managers need to establish that: the criteria for an ABC system exist; cost drivers and cost pools have been accurately identified with regard to cause-and effect relationships including the hierarchy of activities; and all costs have been assigned accurately.

Question 63

What are the four main capacity concepts | and how are they calculated?

Answer 63

capacity supplied— theoretical capacity practical capacity. Capacity can also be measured in terms of output demanded—normal capacity utilisation or budgeted capacity utilisation.

Question 64

What sort of external reporting frameworks are there, and why are they important?

Answer 64

External reporting frameworks provide standards that guide social and environmental reporting. This increases the rigour and comparability of reports. The most widely used reporting framework is the Global Reporting Initiative (GRI).

Question 65

What is environmental management accounting (EMA), and how can it be used to support an environmental management system (EMS)?

Answer 65

EMA provides financial and non-financial measures of environment-related performance. This can include the adaptation of existing management accounting tools (e.g. activity-based costing) or environmental-performance specific systems. EMA is an important part of an organisation’s EMS.

Question 66

What is involved in performing lifecycle analysis (LCA)?

Answer 66

LCA expands the notion of a product’s or service’s cost to include the entire lifecycle—from raw materials to ultimate disposal. Furthermore, LCA considers a product’s or service’s social and environmental impacts that may be difficult to measure in financial terms.

Question 67

What non-financial quality measures of customer satisfaction can managers use in their balanced scorecards?

Answer 67

number of customer complaints and percentage of defective units shipped to customers; internal-business-process measures such as percentage of defective and reworked products; and learning-and-growth measures such as percentage of employees trained in and empowered to use quality principles.

Question 68

What are T\three methods to identify quality problems and to improve quality.

Answer 68

(a) control charts to distinguish between random and non-random variations in an operating process; (b) Pareto diagrams to indicate how frequently each type of failure occurs; and (c) cause-and effect diagrams to identify and respond to potential causes of failure.

Question 69

How do managers use the economic-order-quantity (EOQ) decision model?

Answer 69

The EOQ decision model calculates the optimal quantity of inventory to order by balancing ordering costs and carrying costs. The larger the order quantity, the higher the annual carrying costs and the lower the annual ordering costs. The EOQ model includes costs recorded in the financial accounting system, as well as opportunity costs not recorded in the financial accounting system.

Question 70

What is a supply chain and what is the benefit of supply chain analysis?

Answer 70

The supply chain describes the flow of goods, services and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in the same organisation or in other organisations. Using supply chain analysis allows companies to coordinate their activities and reduce inventories throughout the supply chain.