Session 1

Question 0

How are costs classified

Answer 0

1) Function
2) Tracebility/nature
3) Behavior
4) Products and period costs
5) Relevant and irrelevant costs

Question 1

What is the difference between a financial and mngt accountant

Answer 1

1) size: mngt accountants look at small parts of the organisation at a time Lila particular sector when financial accountants look at the organisation as a whole.
2) when they report: mngt accountants produce reports with much greater frequency. Whereas financial accounts are more geared to the year end accounts.
3) who are the reports for: the mngt accountant produces reports for internal managers to aid in the planning and decision making. Financial accountants are more geared up for external users or those who might want to invest in the firm.
4) formats: unlike the financial accountants who have to adhere to certain accounting standards management accountants have a free format so they can gear the complexity of the report to the needs of the individual.
5) attributes: mngt accountants are aimed at being relevant and timely whereas financial accountants are more precise and verified

Question 2

Explain the meaning of the principles regarding the ethical behaviour of professional accountants. Discuss their impact upon the activities of the management accountant.

Answer 2

1) Integrity
Integrity is an obligation to be honest in professional relationships, also implies fair dealing and truthfulness. Self interest or the interest of other parties must not impact upon the advice or work of the professional accountant
E.g
i) Not associated with info that is misleading, false or incomplete
ii) Avoidance of conflict of interest
iii) Communicate unfavourable as well as favourable info
2) Objectivity
Is an impartial judgement concerning the task under consideration with the influence of others leading to bias or conflict of interest.
E.G
i) Avoid situations which could compromise professional judgement
ii) Communicate fairly and objectively

3) Professional Competence
Is exercising due care, skill and diligence and avoiding action which could discredit the profession.
E.g
i)Maintain an appropriate level of professional knowledge.
ii) Courtesy and consideration in contact with others
iii) Be prepared to take legal action and/or resign when ethics are being compromised with in the employment organisation.

4) Confidentiality
Is respecting and protecting the privacy of information.
Eg
i) Refrain form distributing confidential information.

Question 3

Explain how costs are classified by Function

Answer 3

Costs are split into the following main functions:

1) Product costs (salary for factory supervisor)
2) Admin Costs (Ink cartridges, stationary and salary for payroll)
3) Selling and distribution (Sales staff commissions, road tax for delivery vans)
4) Finance costs (interest etc)

Question 4

Explain how costs are classified by Traceibility/nature

Answer 4

Costs are split in to:

1) Direct Costs - is expenditure incurred on a specific product, service, batch or job. ( the amount of flower going into making that particular cake)
- Direct costs include flower for the cake, labour and wages and direct expenses like plant/shop hire.
- The sum of all your direct costs is your total direct costs or prime costs

2) Indirect Costs - are costs incurred which cannot be traced in full to a specific job, batch, product or service and therfore must be apportioned.
- Indirect costs are also called overheads. They can be either manufacturing or non manufacturing.

Question 5

Explain how costs are classified by Products and period costs

Answer 5

Product costs are any costs that can be related back to the cost in producing the good. Generally they are direct costs.

Period costs are cost that relate to time e.g. rent and insurance

Question 6

Explain how costs are classified by Relevant and irrelevant costs

Answer 6

Relevant costs are future costs and include variable costs, incremental costs, opportunities costs

Irrelevant cost include sunk costs, commited costs, common costs and fixed costs.

Question 7

Differentiate between manufacturing and non manufacturing overheads

Answer 7

manufacuring overheads/costs consist of costs that cannot be directly traced to products. They are essential in the production process and in generating the final product and are therefore apportioned to products and services. Examples include

• indirect materials like glue, nails, oil
• indirect labor like factory supervisors
• indirect expenses like factory rent, plant insurance and depreciation.

Non-manufacturing Overheads/costs
These are overheads that are not linked to the “production” process. Examples include:
- Selling + distribution costs (advertising)
- Admin Costs (stationary)
- Finance costs (bank charges)

Question 8

Explain how costs are classified by behaviour

Answer 8

Behaviour costs are split into 5 categories: MUST REMEMBER THE GRAPHS TOO

1) Fixed costs
FC are assumed to remain constant over a relevant range of activity. It is unaffected by changes in level of activity (e.g rent, Insurance, depreciation).

2) Variable costs
VC are assumed to vary in direct proportion to changes in the level of activity/volume.

3) Semi Fixed/Stepped Costs
are costs that are fixed until certain trigger points are breached (e.g every 50 workers requires another supervisor)

4) Semi Variable costs
are costs that contain a fixed and a variable element. (e.g. A phone bill has a fixed cost in the line rental but the rest is fixed)

Question 9

What is a sunk cost

Answer 9

Sunk costs are costs that have already been incurred by an entity.
E.g. If a company does market research on whether to bring a new product to the market and it provides a favorable answer then in assessing whether the product should be produced. The money spent on the market research shouldnt be taken in the decision as it is a sunk cost.

Question 10

Opportunity costs

Answer 10

Is the benefit forgone choosing one option over another

Question 11

Contribution formula

Answer 11

Contribution= Selling Price - VC

Contribution represents the amount available to contribute towards FC. It is normally expressed as a monetary amount.

Question 12

Profit formula

Answer 12

Profit= Selling price - (VC + FC)

Or

Profit = Contribution - F.C.

Question 13

Mark up V Margin

Answer 13

Mark up represents profit as a % of cost (generally used in the manufacturing sector)

Margin represents profit as a % of selling price (generally used in the retail sector)

Question 14

Main objectives of a mngt accountant in a profit maximising entity?

Answer 14

PLANNING
The planning info provided by the mngt accountant may be about pricing, product cost or competition. Perhaps the main short term planning mechanism is budgeting which sets out how the Limited resources can be used to maximise profit.

CONTROL
To assist in the control process, the mngt accountant provides performance reports which compare actual performance with planned performance, in both financial and non financial terms.

MOTIVATION
The budget provided by the mngt accountant should motivate managers and employees to achieve the organisations objectives.

DECISION MAKING
The provision and analysis of data regarding the options available assists mngt in making informed decisions to maximise profit.

STRATEGIC INVOLVEMENT
The role of the mngt accountant is changing in todays modern business environment to include a more strategic role

Question 15

Mngt accountants can be considered to perform three important functions name and explain them (with examples)

Answer 15

SCORE KEEPING
This refers to the accumulation of data and the reporting of reliable results to all levels of mngt. Also refers to situations where actual results are different to planned results and this required management attention.

ATTENTION DIRECTING
Attempts to make visible both opportunities and problems on which managers need to focus. Examples are variance reporting and activity based costing. With ABC Management attention is directed to product costing and the establishment of selling prices when ABC is used instead of traditional methods. With variance reporting mngt attention is directed to areas where the actual results are significantly different to planned results. Attention directing should focus on all opportunities to add value to the organisation and not just on cost reduction opportunities.

PROBLEM SOLVING
This refers to the comparative analysis undertaken to identify the best alternatives in relation to the organisations goals. Most often associated with the analysis of non-recurrent decisions or problems. An example is where a company has a scarce resource (eg materials) and has to decide which products to allocate the materials to.

Question 16

What is the role of the mngt accountant with regard to PLANNING and CONTROL

Answer 16

PLANNING

• assisting in the determination of the organisations strategy and long term planning
• Communicate with the mngt team to determine the key budget factor for preparation of the short term annual budget.
• Communicate and coordinate plans with all functional managers.
• reviewing the consolidation of all functional budgets and formulating the master budget for the year
• Once the master budget has been prepared and approved you must issue it to every department and make sure that they know their goals and targets.
• Assessing the significance of variances and taking corrective action if necessary
• monitoring ongoing achievements and comparison with the long run strategy

PRODUCT COSTING
- selecting an operating and appropriate cost accumulation system.
- monitoring and accounting for all manufacturing material and labour costs
- deciding how manufacturing overheads will be assigned to products. This relates to the choice of using the traditional product costing approach assigning overheads bared on say labour hours.
Alternatively activity based costing ABC may be used whereby overheads are assigned to activities and allocated to products usage or consumption of the activities.
- to facilitate external reporting by ensuring that all costs are accumulated for each product in accordance with the accounting standards.

Question 17

the environment in which mngt accountants operate has changed considerably in recent years. Describe external factors that have influenced changes

Answer 17

1 Globalisation
With markets being more open than ever before due to communication internet and transport improvements there is much greater completion on a global basis. This has lead to companies looking for more info on their costs, prices and customers from the mngt accountant.

2 changing product life cycles
Over time as products are developed, produced and sold the need to understand and report the effect of the changing life cycle not just the manufacturing process has changed mngt accounting practices e.g. life cycle costing

3 greater consumer power
Cost is no longer the most important factor. There is now greater emphasis on quality value and innovation. This has caused mngt accounting practices to highlight the importance of non-financial factors in decision making.

4 increased regulation
Greater regulation to protect the environment and consumers has affected mngt accounting practices in terms of additional costs and methods of costing environmental effects.

5 greater complexity of product
As more complex products come on to the market mngt accountants must adapt to accurately cost these products

Question 19

the environment in which mngt accountants operate has changed considerably in recent years. Describe internal factors that have influenced changes

Answer 19

1 Decelopment on technology
These have effected every aspect of an orgs activity. Now mngt accountants have larger volumes of information that they can retrieve and compile more easy

2 emphasis on meeting consumer needs
This has resulted in the provision of more detailed cost and pricing information to satisfy more informed consumers

3 emphasis on cost reduction and efficiency
Mngt accounting practices have been adapted/introduced to show where quality issues may arise e.g. explanation of variances.

4 Changes in production methods
as more efficient production methods are establish there is a need for mngt accounting practices to properly reflect these efficiencies in product costing and pricing.

5 importance of managing performance
As the environment gets more competitive you have to look at all aspects of performance in the firm both financial and non financial.