Revision of management accounting

Question 1

What are the different types of responsibility centre and what do they cover?

Answer 1

The underlaying factor in responsibility centres is Control-ability - Managers can only be responsible for costs they can control.

Investment Centre - Investment decisions, Revenue and costs.

Profit Centre - Revenue and Costs, drive sales while keeping costs low.

Cost Centre - Control over costs/expenses only, other areas are responsible for sales

Revenue Centre - Controls sales only, external and commercially focused.

Question 2

What are the underlaying assumptions and requirements of Absorption costing?

Answer 2

Assumption - Overhead Expenditure is linked to production volume.

Requirement - All production costs are included in the standard cost card.

Fixed overhead Absorption rate = Fixed Overhead cost/ Total budgets absorption basis

Under/Over absorption of overheads = (Budgeted overhead rate per unit x actual units) - actual overheads incurred.

Question 3

What do the various terms in Marginal costing mean?

Answer 3

Marginal Cost - Change in total cost from producing one additional unit.

Contribution - Sales value less Variable production costs, in other words the amount left over to “contribute” towards fixed costs.

Question 4

What are the advantages and Disadvantages of Absorption costing?

Answer 4

Advantages

• Where fixed overheads are a significant proportion of the overall cost of producing a product excluding this from product cost would not give a true cost to the business of it’s manufacture.
• Application of the absorption method effectively matches the production costs to the period they were incurred in (Accruals concept), any unsold items will carry that cost forward as inventory value to match against future sales. Meets requirements of IAS for external reporting.
• Analysis reasons for over/under absorption is a useful tool for cost control within the business.

Disadvantages

• The basis on which overheads are absorbed is arbitrary, subjective and methods of cost allocation may be deemed inappropriate.
• The absorption basis may not drive the overhead cost.
• Absorption costing is more complex to operate.
• May encourage over production resulting in changes in profit levels due to increase/decrease in inventory levels.

Question 5

What is standard costing and what purpose does it serve?

Answer 5

Standard Cost = predetermined unit cost set under specified working conditions.

Most suited to:

• Mass production of Homogenous Products
• Repetitive Assembly work

Question 6

What are the four main types of Standard and how do they differ?

Answer 6

Attainable Standards:

• Assume efficient but not perfect working conditions with allowances for waste, idle time and machine down time.
• Provide a realistic but challenging target so serve well for motivation.

Basic Standards

• Long term standards with little change YoY, used to show trends over time but will not give a good picture of current efficiency.
• Can serve as a demotivated as very easy to attain.

Current Standards

• Based on current working conditions, and apply when working conditions are abnormal making other standards meaning less.
• Also do not provide motivation to improve on current performance levels.

Ideal Standards

• Based on perfect operating conditions, no waste, idle time or machine down time, can be used to identify areas where there is potential for significant cost savings.
• Will also demotivate as can be impossible to achieve.

Question 7

How do controllability and Performance management relate to each other.

Answer 7

Controlability - The underlaying concept here is that a cost is controlled by a manager if they are responsible for incurring the cost or are the authoriser of the expenditure.

A manager should only be evaluated on the costs over which they have direct control - Performance management.

Question 8

What are the advantages and disadvantages of Marginal costing?

Answer 8

Advantages

• Contribution per unit is a consistent value - for short term decision making this is far more useful that the profit per unit value produced in absorption costing.
• As overheads are not absorbed there is no under/over absorption adjustment required.
• It is simple to operate.

Disadvantages

• Closing inventory is not valued in accordance with IAS 2