Week 1-7

Question 1

What is the main difference between mgmt an financial accounting?

Answer 1

financial accounting is focused on reporting of info to external parties while mgmt accounting is more internally focused. In addition, financial accounting is highly regulated whereas mgmt accounting is not.

Question 2

What is value chain analysis?

What are the three different categories of VCA? what sort of activities do they involve?

Hint: river

Answer 2

Value chain describes the key activities in an org.

1. Upstream - earlier costs in the R&D, design and supply phase.
2. Production costs - costs incurred to physically produce products3. Downstream costs- later costs including marketing, distribution and customer services.Various support services (including HR and accounting functions) are ancillary to the value chain activities.

Question 3

What is sustainability?

What are the various aspects of sustainability that must be managed?

Answer 3

Development of an organisation that meets the needs of the present without comprimising the ability of future generations to meet their own needs. i.e. considering the competing demands of stakeholders

Aspects: economic, environemntal and social aspects.

Question 4

What is sustainability management accounting?

Answer 4

accounting that integrates economic, environmental and social performance with strategic management. It uses many of the same management accounting techniques but exyends the analysis into more than just profitability.

Question 5

What are some factors that explain why it is important for management accountants to act ethically?

Answer 5

• as accountants, we impact decision makers. we have the ability to imapct the information collected and presented
• we have the ability to impact rewards gained by others (bonuses etc)
• key part of culture

Question 6

describe the changing management accounting and control environment? What are the key changes?

Answer 6

Change from inward focused mgmt accounting (i.e. backward looking, internal costs, operational efficiency) to a more STRATEGIC focus (forward looking, inclusion of external info, influencer of decisions, seperation from financial accounting)

Overall the key changes are an increased focus on social, technical and economic factors.

Question 7

Strategy does not equal control. contrast strategy and control.

Answer 7

Strategy = a set of actions aimed at achieving objectives/goals. Strategy has three levels - corporate, business and functional.

Control systems are aimed at influencing descisions and behaviours of management.

Strategy and control are linked e.g. strategy impacts control systems e.g. product differentiation vs cost leadsership? And vice versa.

Question 8

What is strategic management accounting?

Answer 8

A strategic approach to management accounting that is:

• prospective (forward looking)
• outward looking
• Proactive & flexible
• Information orientation
• focus on sustainability (i.e. long term)

Question 9

What is strategic cost management

Answer 9

the use of cost data to develop & identify cost strategies that provide competitive advantage over the long run.

Question 10

What are the classifications of strategies per Porter?

Answer 10

1. Cost Leadership - focus is on efficiency, internal costs, reward cost reductions
2. Product differentiation - obtain external market info about customer preferences, reward customer satisfaction

Question 11

What are the five purposes of budgeting?

Answer 11

1. Planning2. Facilitating communication and co-ordination3. Allocating resources4. Controlling profit and resources5. evaluating performance and providing incentives.

Question 12

What is the difference between budgeting and strategic planning?

Answer 12

Budgeting =short term and strategic planning = long term.

Question 13

What is zero based budgeting?

Answer 13

Where all activities in the org. start with no budget. to receive an allocation, managers must justify each activity in terms of usefulness to the business.

Question 14

What are some of the ‘contemporary approaches to budgeting’?

Answer 14

• program budgeting
• zero based busgeting
• rolling budgets
• activity based budgets
• kaizen budgeting
• beyond budgeting

Question 15

What is program budgeting?

Rolling budgets?

Answer 15

Budgeting that requires the cost centre to plan its expenditure specifically around the programs or projects conducted by the cost centre.

Rolling budgets = a budget continuously redrafted for each new period. set 12 months in advance and then revised each month or quarter. Changes reflect recent results and incorporates changes in strategy, operating plans and te economy. Up to date option

Question 16

what is kaizen budgeting?

Answer 16

budgeting that sets targeted and constant costs reductions across time, anticipating market price reductions across the life of a product. Based on planned continuous improvements

Question 17

What are some negative behaviours that can result from budgeting?

What are some things that can make budgeting more positive?

Answer 17

1. Game playing - buidling in slack (i.e. conservative budgets), manipulating results, short term vs long term to meet budget.
2. Make sure the organisational culture is suited to such budgets, participation by managers, multiple performance measures.

Question 18

What is beyond budgeting?

Answer 18

• views traditional budgeting as ‘a waste of time’
• replaces traditional budgeting with decentralised decision making and bench marking.
• shift responsibility to front lineteams that are more closely connected to customers and to changes in the marketplace.
• quicker and more agile to customer needs (adaptive)
• utilises rolling forecasts.

Question 19

What is the difference between fixed and variable costs and what is the ‘relevant range’ in relation to such costs.

Answer 19

The classification of Fixed and variable costs focuses on the way costs behave as the level of activity changes. If activity increases, variable costs generally increase and fixed costs remain the same. The relevant range is the range of activity over which the firm expects cost behaviour to be consistent. i.e. the range over which estimates of fixed and variable costs are valid

Question 20

What is the ‘engineering cost estimation’ method? + s & -‘s?

Answer 20

A way of analysing cost behaviour by looking at the relationship between inputs and outputs e.g. labour time, materials and other respources used.

Can be used when past data isn’t available.

Time consuming and costly

Question 21

What is the ‘account analysis’ cost estimation method? + & -‘s?

Answer 21

A method of analysing cost behaviour by classifying cost accounts in the G/L as fixed, variable, mixed etc with respect to the cost driver. e.g. managers salaries = fixed.

Can be difficult to classify costs to fixed or variable. mixed costs have to be split out using another technique.

Simple method.

Question 22

What are the ‘quantitative analysis’ cost estimation method? (4 types)

Answer 22

Scatter plots: Analysis of cost behaviour using scater plot in order to see trends/patterns. Doesn’t compute a cost function

Two point method - uses two sets of data points to calculate a mixed cost function. uses TC = FC + VC * Q equation. Ignores all but two points though.

High low method - specific applicatrion of the two point method where the highest and lowest points of the cost driver are used. typically these points are atypical which can distort the data.

Regression analysis - cost functions are developed for a cost driver using mathematical formulas. Only provides a good estimate where there is a strong linear relationship between the cost and cost driver.

Question 23

What are some general points re: information quality that can impact cost estimation methods?

Answer 23

selection of cost pools, cost drivers, allocations, average costs

reliability of data generally

Question 24

What is CVP analysis? What are the key groups of costs that should be indentified for CVP?

What key information does CVP provide for decision making?

Answer 24

Cost volume profit analysis = used to determine the effects of changes in sales volume on costs,revenues and profit. As a starting point, costs should be seperated into variable and fixed costs.

Which products/services to emphasise

Sales needed to achieve target profit

Sales required to avoid losses

Whether to increase fixed costs

Risk to different cost structures (e.g. purchasing equipment (FC) to replace labour (VC).

Question 25

What is the “saftey margin” and how does CVP analysis asisst managers in applying the saftey margin to the business?

Answer 25

The safety margin is the difference between the BUDGETED sales and the BREAK EVEN sales volume. It gives managers a feel for how close projected sales are to the break even point.

The larger margin of safety, the less risk of loss a company faces.

Question 26

What does it mean when fixed costs are ‘stepped’ in the context of CVP analysis?

Answer 26

Different fixed costs may aply to different levels of sales/production volume. Therefore, the fixed costs lines and the total costs line on a CVP/PV graph will be stepped.

Question 27

What is the break even point and what are the formulas that can be used? (for single product analysis)

Answer 27

Break even point = the volume of sales where revenues and expenses are equal and profit = zero. Formulas:BEP (units) = Fixed costs/ Unit contribution margin BEP(sales $) = Fixed costs/Unit contribution margin ratio

Question 28

What is the unit contribution margin and the unit contribution margin ratio in the context of the break even point?

Answer 28

Unit contribution margin = the difference between the sales revenue and total variable costs per unit i.e. the amount available to cover fixed costs and then contribute to profits. Unit contribution margin raio = the unit contribution margin divided by the unit sales price.

Question 29

What is the modified version of the break even point formula that can be used to calculate “Target net profit”?

Answer 29

Target sales volume = (fixed expenses+ TARGET NET PROFIT)/Unit contribution margin This formula can be used to determine the level of sales volume that must be achieved to reach a certain level of profit.

Question 30

What is the weighted average unit contribution margin and how is it used for break-even point analysis?

Answer 30

Weighted average unit contribution margin = the average of the products’ unit contribution margins, weighted by the SALES MIX e.g. 25/75 This version of the BEP formula is used when an organisation sells multiple products

Question 31

What are the two methods that can be used for CVP of Multiple products?

Answer 31

1. Weighted average contribution margin
2. Package approach - constant sales mix can be treated as a single unit of sale i.e. package.

Question 32

What is the five step method for the weighted average contribution margin method for calculating CVP for multiple products?

Answer 32

1. For each product, calculate unit CM (price- VC)
2. For each product, weight CM by its sales mix (e.g. 0.3)
3. Sum weighted CM per unit for all products (i.e. add step 2 for all products together)
4. Calculate BEP for all products (1) in units (FC/Weighted CM per unit) (2) and then $ (FC/CMR where CMR = weighted CM per unit/ weighted selling price )
5. Break up BEP in units in proportion to sales mix i.e. multiply step 4 above by sales mix

Question 33

What is the five step method for the package CM method for calculating CVP for multiple products?

Answer 33

Note the package is based on the sales mox e.g. 3 cedar tables and 7 teak tables (0.3/0.7)

1. Calculate revenue per package
2. Calculate VC per package
3. Calculate CM per package (Step 1-Step 2)
4. Calculate BEp in packages i.e. FC/MC per package
5. Multiply package (in units) at BEp by sales mix - to convert back to units of each product.

Question 34

What is sensitivity analysis?

Answer 34

Analysis that shows the impact of changes in costs or price will have on profits and risks.

Question 35

What are the assumptions that must be made when using CVP for multiple products?

Answer 35

• assume that VC and selling price remain the same within the relevant range
• all production is sold
• prices and costs are known (including split between FC and VC)
• no chnages in underlying technology, productivity etc
• no chnages to capacity

Assume that sales mix is fixed

Question 36

What is the ‘degree of operating leverage’

Answer 36

a measure of the proportion of FC in the cost structure

CM/profit

Used to see what impact FC have on chnages in operating income as a result of changes to # of units sold

high degree of operating leverage = high proportion of FC = higher risk of loss when sales decrease

Question 37

What do the various cost estimation methods (such as engineering, account analysis, quantitative analysis etc) aim to do?

Answer 37

Split mixed costs into either fixed or variable costs.

Question 38

What are the three components of a costing system?

Answer 38

1. cost accumulation - Job/batch or process
2. How direct costs are recorded and traced - actual/normal or standard
3. Cost allocation for overheads - functional (traditional- e.g. departmental or plant-wide) or contemporary (ABC)

Question 39

When selecting a cost driver for a costing system, what are the measures of capacity that can be used?

Answer 39

Budgeted/ expected capacity

Normal (estimated) capacity - average over a number of years

Practical capacity - maximum practical volume

Question 40

How is normal and abnormal rework treated when using job costing?

Answer 40

Rework (defective units that are repaired and sold) revenue is recorded in the same way as spoilage i.e. normal - reduce overhead or abnormal - reduce loss in P&L

Question 41

How is scrap treated when using job costing?

Answer 41

Scrap revenue either:

• reduces the cost of a job with which it is associated OR
• reduced OH cost for the period (for all products)

Question 42

How is normal and abnormal spoilage treated when using job costing?

Answer 42

Normal spoilage (defective units that arise as part of regular operations) is charged to overhead and allocated to jobs. Alernatively, can be alocated to specific jobs.

Abnormal spoilage (i.e. spoilage that is not part of everyday operations) is excluded from product costs and recorded as a seperate loss in the P&L.

Question 43

What are the 2 “conventional” product costing systems? How do they differ?

Answer 43

Job costing and process costing.Job costing:- manufacturing costs are accumulated and traced to different jobs/batches - products are typically individual or unique. OH is allocated

Process costing- costs are traced to processes, accumulated and are averaged across all units produced.- more common in a mass production environment where there are repetitive processes- products are typically identical or very similar. equivelant units used to calculate partially completed units.

Question 44

What are the limitations of process costing?

Answer 44

• cost are averages only - less relevant for decision making
• product costs are often treated as variable costs which can distort cost calculations
• judgement required in equiv unit calcs - % of completion etc

Question 45

Absorption cost pricing methods include fixed man. o/head. What are the benfits/disadvantages of using this pricing method?

Answer 45

Benefits:It provides an equitable price as all costs are evenly allocated. Acceptable for ext reporting. Cost effective method as pricing can use costing data

Disadvantages:As allocated fixed costs are included, it isnt clear from the data how total costs will change as sales/production volume increases. Can manipulate inventory levels i.e. store overheads in inventory rather than expense them.

Question 46

What are the advantages and disadvantages of using variable cost pricing techniques?

Answer 46

Advantages:Doesn’t obscure prices by including fixed costs (making them appear variable).

DisadvantagesNot useful for the long term and pricing does not reflect fixed costs that must be incurred. Not acceptable for ext reporting. Fixed man. overhead is expensed which can impact profit.

Question 47

What are the implications of throughput costing?

Answer 47

• only includes material costs
• not acceptable for ext reporting
• production costs are more visible (as expensed in P&L
• chnages in inventory do not absorb production costs

Question 48

What are the benefits/disadvantages of tracking costs using actual costs?

Answer 48

• product costs reflect actual spending
• not timely - have to wait until costs are actually incurred to track them, costs will vary if they are not spent evenly

Question 49

What are the benefits/disadvantages of normal costing?

Answer 49

As an estimated allocation rate is used, more timely infromation.based on actual direct costs and usage, with average fixed overheads.

Must calculate under/over allocated overhead if rates are incorrect.

Question 50

What are the benefits/disadvantages of standard costing (based on what should be spent)

Answer 50

costs calculated in a timely manner, any variations in spending are removed from product costs (and are expensed instead).

if standard is not reasonable, reported costs can be innacurate, effort needed to determine standard and keep it up to date.

Question 51

What is the departmental rate method of allocating overhead costs to products? What is the two stage allocation process?

Answer 51

Man. o/head is allocated based on different cost drivers in different departments.(recognizing that the costs of man. costs may differ across different depts).1. Assign overhead costs to production departments using the appropriate cost driver. 2. Apply them to the products by calculating a predetermined man. overhead rate for each dept.

Question 52

What is the ABC method of allocating overhead costs? What is the two stage process that is used to allocate costs using ABC?

Answer 52

ABC = recognizing that there may be a number of different cost drivers for many cost items, ABC focuses on the allocation of activity costs. e.g. quality control activity costs may be allocated to products based on the amount of labour hours the product spends in the quality control dept. 1. Overhead costs are assigned to acitivites2. Overhead costs are applied to products (based on the activity cost per unit of cost driver).

Question 53

What are the negatives of the plantwide and departmental o/head costing systems compared to ABC? Positives?

Answer 53

• less accurate, tends to overcost high-volume simple products and undercost low volume complex products (misallocations). increasingly, more costs are non-volume driven e.g. depreciation- the proportion of overhead costs as a proportion of total costs is increasing, making them even more important over time (less accurate when product variety exists).

Simpler,

Question 54

What is target costing in the context of cost strategy?

Answer 54

determining the maximum allowable cost by determining external market prices less the desired return (profit margin).

The use of the target costing method is key when designing /resdesigning the production process to meet required profit margins.

Question 55

Contrast target costing with ‘cost based’ pricing? + & -‘s?

Answer 55

Target costing = market price - desired profit margin = Target full cost. costs have to be estimated at each point of the life cycle in order to design production processes to ensure they agree with target costing (in order to select products to produce). based on cost reductions in product design and manufacturing processes.

Cost based = full cost + desired profit = cost plus price (may not be consistent with market values)

Question 56

What are the key differences between target and kaizen costing?

Answer 56

• target costing occurs at the beginning of the product life cycle while kaizen ocurs afterwards
• kaizen focusses on cost reduction in the manufacturing phase while target costing looks at costing for the entire production process (design, manufacture etc) for new and existing products.
• target costing sets a single goal for cost and kaizen sets cost reduction goals.

Question 57

What is life cycle costing?

Answer 57

A costing strategy that considers chnages in price over the entire life of a good/service, from the time the product is introduced through a number of years. Looks at long term profitability.

A useful technique when there may be up front investments that are not profitable in the short term but are profitable over the long term. such projects may be declined under the target costing strategy as they may not meet the required target cost in the short term.

Question 58

What are the two main pricing strategies available?

Answer 58

Cost pricing (cost + mark up)

and market pricing (using a measure of customer demand/competitor pricing)

Question 59

What is one of the downsides of cost based pricing in relation to the impact of the use of sales volumes to determine price?

Answer 59

Can cause a ‘death spriral’ where volumes decrease, increasing cost per unit, increasing cost (and the price) , further reducing sales volumes etc etc.