Week 1 - 8 study Flashcards
What are the two types of value that management accounting focuses on? Which is more important?
Customer value and shareholder value. S/holder value is more important.
What is the main difference between mgmt an financial accounting?
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.
What is the difference between contemporary and conventional mgmt accounting systems.
compared to conventional systems, contemporary mgmt systems: - recognizes that costs can be caused by a range of different factors and/or activities. - performance mgmt looks at non-financial info as well - cost managed focuses on the causes of costs and how they can be controlled pro actively
At the highest level possible, what are the two ways that costs can be classified for accounting purposes?
Expensed (P&L) or capitalised in the balance sheet.
What is the difference between fixed and variable costs and what is the ‘relevant range’ in relation to such costs.
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
What is a cost object?
Any items for which a manager wants to measure a cost..
Distinguish direct and indirect costs in a manufacturing context. Give examples
Direct manufacturing costs can be identified with or traced to a particular cost object whereas indirect costs cannot. Costs must be able to be able to be traced in an economically feasible way. Examples of direct costs include direct material costs and direct labour costs. Indirect costs include those that are applied by way of manufacturing overhead. e.g. indirect materials, indirect labour, electricity, depreciation, rent, insurance etc.
The various activities in a value chain can be divided into three different categories. What are they and what sort of activities do they involve. Hint: river
- Upstream - earlier costs in the R&D, design and supply phase. 2. Production costs - costs incurred to physically produce products 3. 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.
What is a cost driver? What is the conventional approach to understanding cost drivers vs contemporary approaches?
A cost driver is an activity or factor that causes costs to be incurred. Conventional approaches recognise that production volume and sales volume are the only cost drivers. Contemporary viewpoints recognise that there are a range of other drivers such as activity based costing.
What are the four levels in which activity based approaches classify costs?
- unit level costs (per unit) 2. Batch level costs 3. product (per type of product) 4. Facility level
What is a step fixed cost?
A cost that remains fixed over a wide range of activity levels but slumps to a different amount for levels outside of that range.
What are the three categories of costs that typically make up total product costs (or manufacturing costs)?
Direct labour, direct materials and manufacturing overhead.
What is a simple definition of manufacturing overhead?
ALL costs that cannot be traced to manufactured goods in an economically feasible way (i.e. indirect costs). In addition, man. overhead includes the costs of man. SUPPORT DEPARTMENTS
How does product costing for external reporting purposes differ from that typically used for managerial accounting purposes?
For external reporting purposes, only production costs are included in product costs. For managerial accounting purposes, production/manufacturing costs AS WELL AS upstream and downstream costs may be included. [Whether upstream or downstream costs are included depends on whether costs are being looked at from a short term or long term perspective.]
Describe the system of manufacturing costs in the accounts. [KEY REVISION]
- As raw materials are purchased, they are transferred (dr’d) to the raw material inventory account. 2. As production takes place, all man. costs are Dr’d to the WIP account (including direct labour and man. overhead costs) 3. When products are completed, products are transferred from WIP inventory to finished goods 4. When products are sold, costs are transferred form finished goods to COGS expense. 5. COGS is closed to the P&L at the end of the period and transferred to the P&L.
What are the three main “inventory” accounts?
Raw materials WIP Finished goods
What sort of account is the “manufacturing overhead” Dr account (asset or expense)?
Neither. It is a temporary account that allows us to accumulate the expense over time.
Why does over and under applied overhead occur?
Because when overhead is applied to products using a predetermined rate, overhead actually incurred differs from that actually applied.
How is under/over applied overhead treated in the accounts at the end of the period? (2 ways)
It is either closed to COGS (i.e. any variance is posted to bring the man. overhead account to zero) or It is pro rated to COGS, WIP inventory and finished good inventory (more accurate)
What are the 2 “conventional” product costing systems? How do they differ?
Job costing and process costing. Job costing: - manufacturing costs are accumulated and traced to different jobs/batches - products are typically individual or unique 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.
Differentiate the journal entries where labour costs are direct and indirect to a particular job.
When labour costs are direct, DR WIP CR Wages payable/paid When costs are indirect DR Manufacturing overhead CR Wages payable/paid
How is a manufacturing overhead predetermined rate determined e.g. per labour hour.
The total budgeted man. overhead costs is divided by the total number of budgeted labour hours e.g. $20/ labour hour
When would it be appropriate for an org. not to have a WIP account for costing purposes?
Where the org does not have partially completed products (WIP) at the end of the period (e.g. a soft drink manufacturer).
What are the two main steps when using the process costing system?
- Estimate the cost of the production process 2. Calculate the average cost per unit (by dividing total costs by total number of units produced)
Process costing is more complex where there are WIP inventories at the beginning and end of a period. What needs to be considered in this case?
The following needs to be considered: - units started in the previous period (opening WIP) and completed in the current period - Units started and completed during the period - units that are incomplete at the end of the period (ending WIP) To account for the factors above, we need to use equivalent units.
What are equivalent units? How are they used to calculate product cost using the process costing method?
In order to factor in that units in ending WIP are at different stages of completion with respect to MATERIAL and CONVERSION costs, equivalent units are used.
Describe the two different measures of equivalent units that are used when WIP is involved?
Equivelant units of: DIRECT MATERIAL and CONVERSION COSTS (the costs of direct labour and man, overhead incurred to convert raw material to a finished product.
What are the four steps in process costing when there is beginning and ending WIP?
- Analyse the physical flow of units (i.e. units in opening WIP, units started &transferred out )
- Calculate the equivalent units (for both direct material and conversion)
- Calculate the unit costs (by adding up all costs incurred and dividing them by the total equivelant units)
- Analyse the total costs (by multiplying the total cost per equivelant unit * equivelant units)
What are the two methods that can be used to calculate equivalent units? How do they differ?
Weighted average cost AND FIFO The weighted average cost method includes total costs incurred (including those in opening WIP) when calculating unit costs and equivalent units. The FIFO method assumes that the WIP inventory is completed before the production of new units commences. Therefore, the equivalent units in opening WIP are subtracted from the total e. units. (i.e. only the costs incurred in the current month are used).
What is hybrid costing?
a costing method that draws on combination of both job and process costing features. Costs are typically applied on a per-batch basis. A.K.A Operation costing.
What are the five steps in the “service” value chain?
- R&D 2. Design 3. Production/ delivery 4. Marketing 5. Customer Suport
What are the 3 different types of service entities?
- Professional services - unique services provided by professional staff e.g. PwC 2.Mass services - many customers, non customised service e.g. supermarket 3. Service shops - In the middle between professional services and mass services firms.
What costing systems are more suitable for different types of service firms.
Professional services = job costing Mass services - process costing Service shops - hybrid costing
What is the key difference between costing for manufacturing and service firms for external reporting purposes?
- Generally, in service firms there is no inventory. - There are no external reporting requirements to estimate individual service costs. Therefore, such systems should only be implemented where benefits exceed costs.
