Week 1

Question 1

Management accounting

Answer 1

Management function that is heavily involved in providing accurate and internal financial reporting, allowing management to implement the organization’s strategy. It employs cost management information, a combination of financial information about costs and non-financial information about success factors related to an organization, like quality and productivity.

Question 2

5 stages of information processing in an organisation

Answer 2

1. A business event occurs;
2. Accountants collect data regarding the event;
3. Data is transformed to (cost management) information;
4. Cost management information is combined with general information about the strategy and the environment to produce knowledge;
5. Knowledge is used to make decisions.

Question 3

The 4 functions of Management

Answer 3

1. Strategic management
2. Planning and decision-making
3. Management and operational control
4. Preparation of financial statements

Question 4

Strategic management

Answer 4

Development and implementation of a sustainable competitive position in which the firm’s competitive advantage provides continued success.

Question 5

Planning and decision-making

Answer 5

Budgeting and profit planning, cash flow management, and other decisions related to the firm’s operations.

Question 6

Management and operational control

Answer 6

The former involves the evaluation of mid-level managers by upper-level managers, while the latter takes place when mid-level managers monitor the activities of operating-level managers and employees;

Question 7

Preparation of financial statements

Answer 7

Management seeks to comply with reporting standards of relevant groups and relevant federal authorities.

Question 8

Major types of organizations

Answer 8

1. Merchandising firms
2. Manufacturing firms
3. Service firms

Question 9

Merchandising firms

Answer 9

Firms that purchase goods for resale. These firms use cost management information to manage stocking, distribution, and customer service;

Question 10

Manufacturing firms

Answer 10

Use raw materials, labor, facilities and equipment to produce products, which are then sold either to merchandising firms, or to other manufacturing firms as raw materials to make other products.

These firms use cost management information to manage production costs.

Question 11

Service firms

Answer 11

Provide services that offer convenience, freedom, safety or comfort. Common
examples are transportation, health care, legal services, etc. These firms use cost management information to identify the most profitable services and to manage the cost of providing them.

Question 12

Public goods

Answer 12

Governmental and NPOs provide a service as well, but these services do not have a direct relationship between the amount paid and the services provided. Instead, the nature of these services and the customers that receive them are decided by the government or some philanthropic association.

Question 13

The Global Business Environment

Answer 13

The growth of international markets and trade has led to great changes in the business environment. The rise of trade agreements, such as the NAFTA, EU, CAFTA or the WTO, has led to opportunities for growth and profits in the global market.

Consumers benefit as well, because they can own high-quality goods at lower costs.

Question 14

Lean Manufacturing

Answer 14

Firms are innovating in different ways to remain competitive in the rise of global competition.

Lean manufacturing, like just-in-time inventory, can help reduce the cost of waste and storage. Japanese firms have introduced manufacturing ways that improve Cost and quality by using quality control and quality teams.

Flexible manufacturing has also been developed to reduce setup times and have a faster turnaround of customer orders.

Question 15

Use of IT, Internet and Enterprise Resource Management

Answer 15

The rise of the internet and technology has been fundamental to business changes. The growth of internet firms, such as Google or Amazon, have increased the use of the internet for communication, sales, data processing and enterprise resources management systems.

These innovations have allowed firms to be able to reduce time in processing or widening a firm’s information base, aiding cost management.

Question 16

Focus on the Customer

Answer 16

As businesses shifted their focus to account for the customers in recent years, so have cost management practices, which now include customer preferences and satisfaction.

Question 17

Management Organization

Answer 17

Management organization has changed in such a way that hierarchical firms are being replaced by flexible forms, profit-based to performance-based and so on.

In response to this, cost management practices have also changed to be more beneficial to cross-functional teams and various organizational forms.

Question 18

The strategic focus of cost management

Answer 18

Cost management goes through a series of stages, progressing in terms of complexity:
1. Systems are used for basic transaction reporting purposes;

2. The focus is on producing external, reliable financial reports;
3. Accurate and relevant cost information is developed by gathering data on operations;
4. Cost management information is factored into the strategic decision-making process.

The final step requires identification of the firm’s critical success factors (CSFs), or measures of a firm’s performance that is essential to its competitive advantage.

Question 19

Methods that focus directly on strategy implementation

Answer 19

• Balanced Scorecard: involving the creation of an accounting report based on the perspectives of financial performance, customer satisfaction, internal processes as well as learning and growth and using a strategy map or cause-and-effect diagram summing up the factors;
• Value Chain: going through the steps to create and provide a product or service;
• Activity Based Costing and Management (ABC/M): tracking costs to products or individual customers in order to improve product value and firm competitiveness;
• Business Analytics: simply the use of information from statistical analysis to analyse performance via factors, such as consumer satisfaction;
• Target Costing: laying out a desired cost for production based on competitive prices;
• Life-Cycle Costing: overseeing the cost of a product throughout its life cycle.

Question 20

Seven methods have been developed to implement strategy

Answer 20

1. Benchmarking: identifying CSFs and comparing them with the competitors and improve over competitors;
2. Business process improvement: implementing continuous improvement in quality and other CSFs;
3. Total quality management: policies and practices in order to exceed customer expectations on quality;
4. Lean accounting: used in tandem with lean manufacturing: analysing value streams to pinpoint where manufacturing methods lead to improved profitability;
5. Theory of constraints: improving the rate at which raw materials are converted to finished products;
6. Sustainability: balancing social, environmental and financial performance indicators;
7. Enterprise risk management: using a framework to manage risks that include hazardous,financial, operating and strategic risks.

Question 21

Developing a firm’s competitive strategy

Answer 21

1) Cost leadership: basically providing the product at the lowest cost to undermine competitor profitability, requiring efficient production and typically employing economies of scale. Example: all the discount supermarkets students shop at.
2) Differentiation: the focus on producing the highest quality product that gives consumers unique value, making a relatively more expensive price worthwhile. Example: famous shoe brand students want to buy from, but are unable to do because they lack funds.

Question 22

The five steps of strategic decision-making

Answer 22

Step 1: Determine strategic issues relevant to the problem in question.\

Step 2: Determine alternative actions.

Step 3: Obtain data, transform it into information and conduct analyses of alternatives.

Step 4: Choose and implement the best alternative based on analysis and overall firm strategy.

Step 5: Evaluate the effectiveness of the selected alternative over time.

Question 23

Costs, cost drivers, cost objects and cost assignment

Answer 23

A company is subject to a cost when it uses a resource to perform some action, like purchasing raw materials to manufacture a product.

Cost are tied to cost drivers, or factors that cause a change in total cost.

Costs are also tied to specific products, services, customers, activities or organizational units that are known as cost objects.

Costs are grouped into cost pools, categorized by type of cost, source or responsibility.

Question 24

Cost assignment

Answer 24

Refers to the process of assigning resource costs to cost pools, and from cost
pools to cost objects. There are two types of cost assignment:

1) Direct tracing, which is used for assigning direct costs, or costs that can be easily traced to a cost pool or cost object, like the associated materials that are used to create a product;
2) Allocation, which is used for assigning indirect costs, or costs that cannot be economically and easily traced to a cost pool or object, as is the case with costs like the electricity to power a factory, as the cost of keeping the lights on cannot really be traced to specific product.

Question 25

Direct materials cost

Answer 25

The cost of materials associated with the cost object, with allowance for scrap and defective units;

Question 26

Direct labour cost

Answer 26

The cost of labour that can be directly associated with the cost object;

Question 27

Indirect materials cost

Answer 27

The cost of materials not included in the final product but still used in production;

Question 28

Indirect labour cost

Answer 28

The costs associated with support functions in creating a product, like supervision and inspection;

Question 29

(Factory) overhead

Answer 29

Single cost pool that combines all indirect costs;

Question 30

Prime costs

Answer 30

Direct materials and direct labour combined;

Question 31

Conversion costs

Answer 31

Combine direct labour and factory overhead.

Question 32

Cost Drivers

Answer 32

Cost drivers used in the allocation of indirect costs allow assignments of costs to cost objects and cost pools, and demonstrate how changes in a cost driver will affect changes in total cost.

There are four major types of cost drivers:

1. Activity-based
2. Volume-based
3. Structural
4. Exectional

Question 33

Activity-based

Answer 33

Determined through an analysis of the firm’s operations and specific activities performed;

Question 34

Volume-based

Answer 34

Cost drivers are simply the quantity of product or service produced or provided. Volume-based cost drivers are associated with both fixed and variable costs, sometimes combined into a mixed cost.

There are also step costs, the costs that vary with the cost driver but do so in progressive steps, and unit costs.
Relevant range is the range of the cost driver in which the actual value of the cost driver is expected to fall, and for which the relationship between the cost and the cost driver is assumed to be approximately linear;

Question 35

Executional

Answer 35

Include factors that the firm can manipulate in the short-term. Among them are operations related decisions like workforce empowerment, production process
design and supplier relations.

Question 36

Costs of goods sold

Answer 36

Product inventory is treated as an asset until the inventory is sold. Then, the cost of the inventory is transferred to the income statement, where it is listed as cost of goods sold.

Question 37

Product costs

Answer 37

Include only the costs necessary to complete the product at the manufacturing step in the value chain, namely direct materials, direct labor and factory overhead.

For a merchandising firm, they include the cost to purchase the product plus transportation costs.

Question 38

Period costs

Answer 38

Non-product expenditures for managing the firm and selling the product, expensed in the period they are incurred.

Question 39

Three inventory accounts used by manufacturing companies

Answer 39

• Materials inventory, which contains the cost of the supply of materials for production;
• Work-in-process inventory, which includes all costs put into the manufacturing of products, but are not completed at the financial statement date;
• Finished goods inventory.

Question 40

Total manufacturing cost

Answer 40

Sum of materials used, labour and overhead for the period.

Question 41

The cost of good manufactured

Answer 41

Cost of goods finished and transferred out of the WIP inventory account for the period.

Question 42

Attributes of cost information

Answer 42

• Accuracy. Internal accounting controls to restrict and guide activities in financial data processing help avoid decision-making based on inaccurate data;
• Timeliness. The cost of delayed data can be significant in decisions;
• Cost and value of cost management information.

Question 43

Periodic and perpetual inventory systems

Answer 43

Large manufacturers use a point-of-sale or transaction-based computer system for recording sales and variations in inventory.

The perpetual inventory system updates the finished good inventory account for each sales transaction.

The periodic inventory system consists of a count of inventory at the end of each accounting period to determine the ending balance of the account.