Summary Notes

Question 1

Who are the users of financial accounting and what is the purpose, law, format/style, scope, information use?

Answer 1

• Users: External
• Purpose: Record historical financial performance and position
• Law: Required by statute (CA 06)
• Format/style: Prescribed by CA 06/GAAP/IFRS
• Scope: Historical, cover business as a whole, minimum detail
• Information: Mostly financial

Question 2

Who are the users of management accounting and what is the purpose, law, format/style, scope, information use?

Answer 2

• Users: Internal
• Purpose: Assist management in planning and controlling the business to make effective decisions
• Law: No legal requirements
• Format/style: Management discretion
• Scope: Flexible, includes historical current and future information which can focus on segments of the business
• Information: Financial and non-financial key performance indicators

Question 3

What is a cost object?

Answer 3

Anything for which costs are determined

Question 4

What is a cost centre?

Answer 4

A department, process or function where costs can be accumulated

Question 5

What is a cost unit?

Answer 5

A product or service for which costs are determined?

Question 6

What is a composite cost unit?

Answer 6

A cost unit made up of two parts

Question 7

What is a standard cost card?

Answer 7

Shows the expected input resource usage and costs per unit

Question 8

How do you calculate the absorption costing profit?

Answer 8

Marginal costing profit X
Plus (closing inventory - opening inventory) x OAR X/(X)
—-
Absorption costing profit X

Question 9

What is FIFO?

Answer 9

First in, first out
Materials are issued out of inventory in the order in which they were delivered

Question 10

What is LIFO?

Answer 10

Last in, first out
Materials are issued out of inventory in the reverse order to which they were delivered

Question 11

What is cumulative weighted average?

Answer 11

• All inventory and issues are valued at an average price
• The average price is recalculated after each receipt (purchase)
• Cumulative weighted average price =
  Running total of costs/running total of units

Question 12

What is the periodic weighted average?

Answer 12

• Each issue is valued at the same average price
• Periodic weighted average price =
  Total costs for the period/total units for the period

Question 13

In times of RISING prices, what produces the highest and lowest closing inventory value?

Answer 13

In times of rising prices:
- Highest closing inventory value = FIFO
- Lowest closing inventory value = LIFO

Question 14

In times of RISING prices, what produces the highest and lowest value of issues?

Answer 14

In times of rising prices:
- Highest value of issues: LIFO
- Lowest value of issues: FIFO

Question 15

In times of RISING prices, what produces the highest and lowest profit?

Answer 15

In times of rising prices:
- Highest profit: FIFO
- Lowest profit: LIFO

Question 16

In times of DECREASING prices,what produces the highest and lowest closing inventory value?

Answer 16

In times of decreasing prices:
- Highest closing inventory value: LIFO
- Lowest closing inventory value: FIFO

Question 17

In times of DECREASING prices,what produces the highest and lowest value of issues?

Answer 17

In times of decreasing prices:
- Highest value of issues: FIFO
- Lowest value of issues: LIFO

Question 18

In times of DECREASING prices,what produces the highest and lowest profit?

Answer 18

In times of decreasing profit:
- Highest profit: LIFO
- Lowest profit: FIFO

Question 19

What do absorption costs include?

Answer 19

Absorption cost includes a ‘fair’ share of fixed production overheads in inventory valuation

Question 20

What is Step 1 in the traditional approach to calculating unit costs?

Answer 20

Step 1 - Overhead allocation and apportionment
- Overheads which solely arise in a department are allocated (given) in total to that cost centre
- Overheads that are factory wide are apportioned (shared) between cost centres on a fair basis (e.g. floor area or number of employees)

Question 21

What is Step 2 in the traditional approach to calculating unit costs?

Answer 21

Step 2: overhead reapportionment
- Overheads which have been allocated and apportioned to service departments are reapportioned to the production departments on a fair basis (e.g. time spent)

Question 22

What is Step 3 in the traditional approach to calculating unit costs?

Answer 22

• Each production department’s total overheads are absorbed into cost units on an appropriate basis for that department by calculating an Overhead Absorption Rate (OAR)
• OAR = Budgeted overhead cost/budgeted measure of activity
   The measure of activity could be prime cost, direct labour hours, labour hours
  or machine hours.
   OAR’s are based on budgeted data therefore differences to the actual
  overhead costs and measure of activity will lead to absorption of a different
  amount of overheads to what was actually incurred.
  £
  Actual overhead incurred X
  Overhead absorbed (actual activity × OAR) (X)
  –––
  Under / (over) absorbed overheads X/(X)

Question 23

How do you carry out activity based costing (ABC)?

Answer 23

Step 1
 Identify a business’s major activities
Step 2
 Identify cost drivers (factors causing activity costs to be incurred)
Step 3
 Collect activity costs into cost pools
Step 4
 Calculate an activity absorption rate and absorb into cost units.

Question 24

What are the different costing methods and what are they appropriate for?

Answer 24

 Job costing is appropriate for specific one-off jobs.
 Contract costing is appropriate for specific big jobs.
 Batch costing is appropriate for identical items.
 Process costing is appropriate for a continuous production process.
 Life cycle costing tracks costs and revenues over the products entire life cycle.
 Target costing deducts the required profit from the price customers will pay to
generate the target cost.

Question 25

What is ‘just in time’?

Answer 25

An approach to operations planning which aims for goods to be produced
exactly when they are needed.