Questions week 1

Question 1

1. How do management accounting/cost management and financial accounting differ?

Answer 1

Cost management is concerned with assigning costs and using information for planning, controlling, continuous improvement, and decision making. It encompasses cost accounting and management accounting but has a broader focus than the usual roles
assigned to cost accounting and management accounting. Cost accounting is concerned with assigning costs to various cost objects such as products, services, and activities. Cost management broadens this focus by emphasizing accuracy of
assignments based on causal relationships.
Management accounting is concerned with planning, controlling, and decision
making. Cost management broadens this focus by emphasizing continuous improvement and expanding planning, control, and decision making to include such
factors as processes, value chain, life cycle analyses, strategic considerations, and environmental costs.
Cost management differs from financial accounting in the following major ways: (1) an internal focus, (2) an emphasis on the future, (3) freedom from GAAP and other mandatory rules, (4) a multidisciplinary scope, (5) an evaluation of individual segments within the firm, and (6) the provision of more detailed information.

Question 2

2. Describe the connection among planning, controlling, and feedback

Answer 2

Planning establishes performance standards, feedback compares actual performance with planned performance, and control uses feedback to evaluate deviations from
plans.

Question 3

3. What is the role of cost management with respect to the objective of continuous
   improvement?

Answer 3

Cost management has the role of providing information to help identify opportunities for improvement and also provides an evaluation of the progress made in implementing the actions designed to create improvement.

Question 4

4. What role do performance reports play with respect to the control function?

Answer 4

Performance reports compare actual costs and revenues with planned costs and revenues and thus provide signals to managers that allow them to take corrective actions.

Question 5

5. What is a cost object? Give some examples.

Answer 5

A cost object is anything for which costs are measured and assigned. Examples include: activities, products, plants, and projects.

Question 6

6. What is an activity? Give some examples of activities within a manufacturing firm.

Answer 6

An activity is a basic unit of work performed within an organization. Examples include materials handling, inspection, purchasing, billing, and maintenance.

Question 7

7. What is a direct cost? An indirect cost? And what does traceability mean?

Answer 7

A direct cost is a cost that can be easily and accurately traced to a cost object. An indirect cost is a cost that cannot be easily and accurately traced to cost objects. Traceability is the ability to assign a cost directly to a cost object in an economically feasible way using physical observation or a causal relationship.

Question 8

8. Why is a scattergraph a good first step in separating mixed costs into their fixed and variable components?

Answer 8

A scattergraph allows a visual portrayal of the relationship between cost and activity.
It reveals to the investigator whether a relationship may exist and, if so, whether a linear function can be used to approximate the relationship.

Question 9

9. Why is knowledge of cost behaviour important for managerial decision making? Give an example to illustrate your answer.

Answer 9

Knowledge of cost behavior allows a manager to assess changes in costs that result from changes in activity. This allows a manager to assess the effects of choices that
change activity. For example, if excess capacity exists, bids that minimally cover variable costs may be totally appropriate. Knowing what costs are variable and what costs are fixed can help a manager make better bids.

Question 10

10. Some firms assign mixed costs to either the fixed or variable cost categories without using any formal methodology to separate them. Explain how this practice can be
    defended.

Answer 10

If the mixed costs are immaterial, then the method of decomposition is unimportant.
Furthermore, sometimes managerial judgment may be more useful for assigning costs than the use of formal statistical methodology