Session 1: Accounting and decision relevance

Question 1

When does information become decision relevant? ( 5 things)

Answer 1

Objectivity
Strategy 
Balance 
Robustness 
Timeliness

Question 2

What does Objectivity mean?

Answer 2

Information should represent the status quo ( mirrror the economic reality of an organisation)

Question 3

What does Strategy mean?

Answer 3

Information should not only consider the status quo but also future related strategic aspects and how those will be affected by any managerial decisions.

Question 4

What does Balance mean?

Answer 4

There has to be a balance between too much and too little information.

Question 5

What does Robustness mean?

Answer 5

Information should mean the same in different contexts and should not be subject to high fluctuation risks.

Question 6

What does Timeliness mean?

Answer 6

Information should be quickly accessible by variety of actors across the organisation.

Question 7

What are relevant costs and revenues and irrelevant costs?

Answer 7

Relevant costs are costs/revenues that will be affected by a managerial decision. Irrelevant costs/revenues are those that will not change in the future when you make one decision versus another.

Question 8

Give examples of relevant costs

Answer 8

Incremental

Opportunity costs

Question 9

What are incremental/differential costs?

Answer 9

Incremental cost is the additional cost that should be incurred due to a management decision.These cost could be incremental variable cost and incremental fixed cost.

Question 10

What are examples of irrelevant costs?

Answer 10

Sunk costs (already incurred e.g. development costs) 
Committed cost ( agreed to pay, as a result of past decisions_
Absorption of fixed cost/General fixed overheads (Overhead Costs absorbed by using predetermined overheads rates are irrelevant cost)

Question 11

I want to go to St louis to chiago, here is a lists of costs, identify the relevant costs of car driving fuel instead of train, car insurance, St luica parking fee, car maintenance, decline in FMV of car, Chiago parking fee

Answer 11

Fuel- relevant
St luicia parking fee - irrelevant ( pay anyway if you take your car or train)
Car maintenance - if you drive more likely to need it.
decline in Fair market value of car - important if you want to sell car
chiago parking fee - relevant.

Question 12

What has there been which has meant there has been a refinement of managerial accounting systems?

Answer 12

Shorter product lifestyles (Changing cost structure (Indirect costs up / direct costs down)
Customisation
Increasing competition ( requires measurement of non financial data)

Question 13

What is a cost object and cost driver?

Answer 13

Cost object: anything which you can assign a cost too.

Cost driver : any factor that causes a change in the cost of an activity.

Question 14

If we have a cost object of an Assembled car, identify what cost categorisation would Tyres use in assembly of car, Power costs where power usage is metered only to the plant, salary of supervisor on Renault sandero assembly and Annual lease cost at Sandero plant line, in terms of Direct and indirect costs and variable and fixed costs.

Answer 14

Question 15

When working out product costs, what is a key challenge which in terms of making accounting information relevant?

Answer 15

Establishing cause and effect relations between cost pools(activity) and cost drivers.

Question 16

What are 3 ways cause and effect relationships might arise?

Answer 16

-Physical relationship between cost and cost driver
– Contractual arrangement
– Logic and knowledge of operations

Question 17

Does the cause and effect relationship imply a connection?

Answer 17

No e.g higher production generally results in higher material costs and labour costs, but it is not the cause of each other despite correlation.

Question 18

Example:
– A company produces carpets on order by the square meter
– It is estimated that 72 machine hours and 21 direct
manufacturing labour-hours are required to produce 650
square metres of carpet
à Both cost drivers would be economically plausible – how
should the company decide on a cost driver?

Answer 18

Both have cause and effect relationships, so the selection of cost driver would probably be based upon the slope of regression.

Question 19

What are the 3 types of error in costing systems?

Answer 19

Specification
Aggregation
Measurement

Question 20

What does Specification,Aggregation and Measurement mean as errors of costing systems?

Answer 20

Specification ( wrong choice of cost driver, hence wrong allocation base( no cause and effect relationship between OH costs and chosen allocation base)
Aggregation ( ‘Adding together similar but different cost allocation rates.
Measurement ( wrong measurement of costs within pool or quantity of activites used by individual products)

Question 21

There refinement systems of costing system such as ABC, trying to reduce Specification error ( better cost drivers) and Aggregation error( greater no. of cost pools), but what is the problem of increasing cost pools and drivers in trying to achieve accuracy?

Answer 21

Measurement errors

Question 22

What does this show?

Answer 22

Finer partition of indirect costs of the same pie.

Question 23

So what is summary key message

Answer 23

Accuracy often assumed to increase with fineness but expensive

Question 24

Is accuracy always wanted?

Answer 24

No, costing systems may be used used to direct behaviour, not to neutrally inform decisions.
For example systematic upward bias and systematic downward bias.

Question 25

What do firms do sometimes to cost pools as a way to manipulate costs?

Answer 25

Firms keep the number of cost pools low to focus managers attenttion to only a few-but critical cost drivers, these costs not allocated, are considered less crucial.

Question 26

So what is the main reason why Accurate costing is imprortant?

Answer 26

Accurate costing systems are important to support strategy development( decision making role)

Question 27

When does Accuracy of Costing systems become less crucial?

Answer 27

If strategic direction is known ,then costing systems used to implement rather than for decision making.

Question 28

When also making decisions within the firm, should a refined costing system, be the only basis you make deiscions on as a manager?

Answer 28

No, qualitative factors matter too, such as Employee morale, customer satisfaction.

Question 29

What does relevant range mean?

Answer 29

Is a range of activity which the pressumed cost structure and relationship are expected to remain valid.

Question 30

What are Committed costs and what are Flexible costs?

Answer 30

Committed : Acquired in advance of when they are used, contractually fixed.
Flexible : acquired as used or need, they are not contractually fixed.

Question 31

What is an activity measure?

Answer 31

A measure of the amount of activity that drives the costs in an activity cost pool number of set ups for set ups.

Question 32

How would i answer this question? LEARN THIS KEY!!!

Key here is that we have to understand to distinguish between the decision role and the control role.

Answer 32

1) Talk about how costing systems are used to direct behaviour not neutrally inform decisions. If strategy is known, then accuracy becomes less cruical, so costing systems used more to implement ( control) - E.g. Low sophiscation - firms keep the number of cost pools low to focus attention on a few but cruical cost drivers. Also some costs will not be allocated correctly. Hence accuracy not in as important.
2) Systematic downward bias: Firms use target costing to set cost standards based on estimates of what an item should cost in order to be able to compete effectively. Which means that costs are usually understated. This is because they want to encourage innovation and improvement.
3) Accuracy is important for support in strategy development ( decision-making role) Talk about ABC, partioning costs here, for accuracy of allocations. ( EVALUATION is accuracy is wanted it affects reliability of measurements though, as your more likely to make errors.