PM specialist cost and management accounting techniques

Question 1

what 4 reasons may encourage us to know unit cost as a business

Answer 1

1. to value inventory
2. to record costs in income statement
3. to help price products for profit goals
4. to help in decision making techniques regarding which products should be made and in what quantities

Question 2

what is a direct cost

Answer 2

expenses that can be directly traceable to a product

Question 3

what is an indirect cost

Answer 3

expenses that cannot be directly traceable into the product

Question 4

what is the aim of using absorption costing

Answer 4

The aim of using absorption costing is to include all manufacturing costs (fixed and variable) in the cost of a product

Question 5

what are the 3 steps of absorption costing?

Answer 5

1. allocation- charge overheads directly to specific departments where they can be identified directly with a cost or cost unit
2. apportionment- overheads are shared around based which overheads relate to each department
3. costs - costs within production cost centers are charged to a cost unit using OAR

Question 6

what is OAR based on

Answer 6

1. labour or machine hours
2. % of direct labour cost

Question 7

what is budgeted OAR formula

Answer 7

Budegeted overheads / budgeted level of activity

Question 8

if what 3 conditions are there, will absorption based costing useful?

Answer 8

1. fixed costs are relatively immaterial compared to ,material costs. this is the case in areas where there is not many sophisticated and expensive facilities and machinery
2. most fixed costs accrue with time
3. there are long productions runs of identical products with little customization

Question 9

why is activity based costing useful?

Answer 9

1. becoaseue overheads have increased in proportion to direct costs and nowadays may make up most of the production, so you should know the overhead costs for decisions like where to reduce costs to increase profits
2. labour use is so little that there is little use in dividing in-terms of labour hours as the info would be too vague
3. some companies rely on customization and a computer may build the custom product from scratch by itself
4. many companies offer an extensive range of products ?

Question 10

what is the main reason to use ab costing

Answer 10

companies must know the causes of their overhead and the effect of the overhead

Question 11

what are advantages of abc (5)

Answer 11

1. it provides much better insight in to what drives overhead costs
2. ABC recognizes that overhead costs are not all related to production and sales volume
3. overhead costs is charged to the products in a more realistic way, hence the pricing of the product can be done more accurately as products cost cross subsidization is avoided
4. individual product profitability is better understood because oof ABC implementation that aids is decision making process
5. it can be used as a tool for cost control as it focuses on cause and effect relationship by identifying cost drivers

Question 12

what are the disadvantages of ABC (7)

Answer 12

1. ABC benefits will be limited benefit if the overhead costs are primarily volume related or if the overhead is a small proportion of the overall cost
2. it is impossible to allocate all overhead costs to specific activities
3. the choice of both activities and cost drivers might be inappropriate
4. the benefits obtained from ABC must not justify the gods
5. at times there are mire than one cost driver for an activity
6. organizations producing single product can’t yield benefits from ABC
7. information processing can be an issue when it comes to implementing ABC