The fundamentals of costing

Question 1

what is management information?

Answer 1

any information prepared to assist management with planning, decision making and control

(included financial, non-financial/ historical,future information)

Question 2

what is management accounting?

Answer 2

The identification, generation, presentations, interpretation, and use of relevant information to prepare management accounts and schedules.

This is a subset of management information.

Question 3

what is Cost Accounting?

Answer 3

The production of cost information to assist management.

This is a subset of management accounting.

Question 4

Difference between Financial Accounting and Management Accounting

Answer 4

Financial accounting is used by external users, the purpose is to record historical financial performance and position. It is required by statute and the format is prescribed by CA06, GAAP and IFRS. The scope covers the whole business and gives minimum required information. This information tends to be mostly financial.

Management accounting is used internally and to assist management in planning and controlling the business to make decisions. There is no legal requirement, and the format is by management discretion. The scope is flexible, and the information is financial and non-financial key performance indicators.

Question 5

What is a Cost Objective?

Answer 5

This is anything for which we are trying to ascertain the cost

Question 6

What is a Cost Centre?

Answer 6

A department, process, or function where costs can be accumulated (eg production/ IT department which don’t make a revenue)

Question 7

What is a Cost Unit?

Answer 7

the basic measure of product or service for which costs are determined

Question 8

What is a Composite Cost Unit?

Answer 8

This is a cost unit made up of two parts. Most commonly it is a service provided where a unit of production is hard to calculate and compare.

Question 9

What is included in cost classification - direct costs (prime cost)

Answer 9

• Direct Materials
• Direct Labour
• Direct expenses

Question 10

What is included in cost classification - indirect costs (Overheads)

Answer 10

Costs incurred which cannot be traced directly and in full to a cost unit (eg glue for tables, supervisors salary, depreciation)

Question 11

What are production overheads?

Answer 11

Production overheads are costs incurred (other than direct production costs) in producing the product or service. It includes indirect materials, indirect wages, and indirect expenses. Also called manufacturing or factory overheads. Only production overheads can be included in the value of inventories.

Question 12

What are other non-production overheads?

Answer 12

Other (nonproduction) overheads include:
- Administration overhead: includes costs incurred in directing, controlling, and administering the business
- Selling overhead: includes costs incurred in raising sales and customer retention
- Distribution overhead: includes costs incurred in packaging and delivering goods to customers

Question 13

What are product costs?

Answer 13

Product costs are any costs incurred in the manufacture of goods/services. Product costs are included in inventory valuation and are therefore part of the cost of sales expense.

Product costs include:
- direct production costs
- production overheads

Question 14

What are period costs?

Answer 14

Period costs are costs deducted as an expense in the income statement in a particular period. Period costs are not included in inventory valuation.

Question 15

Cost behaviour - Fixed Costs

Answer 15

• Fixed costs remain constant in total within a range of activity levels (eg salary rent
• Fixed costs per unit of activity will fall as the activity level increases because the FC are being spread over more units.

Question 16

Cost behaviour - Variable Costs

Answer 16

• Variable costs change in total as the level of activity changes (for example total direct materials cost increase as output levels increase).
• Variable costs per unit of activity remain constant as activity level changes.

Question 17

Cost behaviour - Semi-variable costs

Answer 17

Semi-variable costs have both a fixed and variable element. They are therefore partly affected by a change in the level of activity. Semi-variable costs are also called semi-fixed or mixed costs.
(eg monthly phone rental and 10p per minute of calls)

Question 18

Cost behaviour - Stepped fixed costs

Answer 18

Stepped-fixed costs are constant with the relevant range for each activity level but when a critical activity level is reached, the total cost incurred increases to the next step.

Question 19

Costs & Control - Responsibility Accounting

Answer 19

Responsibility accounting is a system ensuring that responsibility for all the activities (costs and revenues) of the business can be assigned to individual managers to monitor and assess performance.

Question 20

Costs & Control - Responsibility Centre

Answer 20

Responsibility centre is a department/function/process/product whose performance is the responsibility of a specific manager.

Question 21

Costs & Control - Controllable Costs

Answer 21

Controllable costs can be influenced/changed by a manager’s decisions.

Question 22

Ethics and management information - Code of ethics

Answer 22

The code contains 5 fundamental principles:
- Integrity: be straightforward and honest in all professional/business relationships.
- Objectivity: do not allow bias, conflict of interest or undue influence of others in business judgements
- Professional competence and due care: maintain professional knowledge and skill at an appropriate level and act diligently
- Confidentiality: do not disclose client information without appropriate specific authority
- Professional behaviour: comply with relevant laws and regulations and avoid actions discrediting the profession

Question 23

Costs & Control - Uncontrollable costs

Answer 23

Uncontrollable costs cannot be influenced/changed by a manager’s decisions within a given time period.
Most VCs are controllable in the short term. Most FCs are uncontrollable in the short term. (eg rent) A manager may not be able to control a cost because of the action of another manager.

Question 24

Ethics and Management Information - Threats and Safeguard

Answer 24

Threats to the code are familiarity, self-review, self-interest, intimidation, and advocacy.

Question 25

Ethics and relevance to management information

Answer 25

Cost accountants prepare and report information to assist management. Professional accountants should prepare and report information fairly, honestly and in accordance with relevant professional standards. Failure to mitigate any threat could lead to association with misleading information. This includes false statements, omitted or obscure statements and reckless statements.

Question 26

Sustainability

Answer 26

The use of resources in such a way that they do not compromise the needs of future generations. Three key headings can be used to consider sustainability issues:
- Social
- Environmental
- Economic

Question 27

Governance

Answer 27

The way organisations are directed and controlled by senior officers. The policies in place to manage the performance of three sustainability issues identified above. Boards of directors need to be actively considering what their organisations are doing to address sustainability.

Question 28

Environmental, social and governance (ESG)

Answer 28

A set of criteria used to measure and report on sustainability. ESG is specific and measurable, whereas sustainability is a general term. ESG reporting is still voluntary, however many organisations publish sustainability reports to show their commitment.

Question 29

double materiality

Answer 29

considering not only the sustainability issues that might create financial risks for the company but also where it can impact people and the environment