Week 1: Introduction

Question 1

“Management accounting” definition

Answer 1

Management function that is heavily involved in providing accurate & internal financial reporting. Allowing management to implement the organisation’s strategy.

Question 2

Cost management information

Answer 2

Combination of financial info about costs and non-financial info about success factors (quality, productivity etc.)

Question 3

Information is processed in 5 stages…

Answer 3

1. business event–>
2. data (collect data regarding the event)–>
   3.information (data is transferred into info)–>
3. knowledge
4. decision

Question 4

4 functions of management

Answer 4

1. Strategic management-
   development and implementation of a sustainable competitive position, in which firm’s competitive advantage provides continued success.
2. Planning and decision making-
   budgeting and profit planning, CF management, other decisions related to firm’s operations.
3. Management and operational control-
   involves evaluation of mid-level management by the upper level managers. Operational control takes place when mid-level managers monitor the activities of operating level managers.
4. Preparation of financial statements- management seeks to comply with reporting standards.

Question 5

Major types of organisations

Answer 5

1. Merchandising firms- purchase goods for resale
2. Manufacturing firms- use cost management info to manage production costs.
3. Service firms- use cost management info to identify the most profitable services and manage costs of providing them.

Question 5

2 competitive strategies

Answer 5

*Product differentiation:
firm offers a superior/unique product or service relative to the products or services of its competitors.
(Leads to brand loyalty and the willingness of customers to pay high prices)
ex. “Walmart”

*Cost leadership:
firm outperforms competitors in producing products or services at the lowest costs. Focus on productivity and efficiency improvements, elimination of waste, and tight cost control
(Leads to lower selling prices)
ex. “Samsung”

Question 6

“Cost driver” definition

Answer 6

A cost driver is a factor that causes a change in TC (e.g. production volume)

Question 7

“Cost object” definition

Answer 7

Cost objects are the things we want to know the cost of. Costs tied to a specific product, service, customers, activities etc.

Question 8

“Cost pool” definition

Answer 8

Costs are grouped in cost pools. Organised by type of costs, source, responsibility.

Question 9

Cost assignment

Answer 9

Assigning resource costs to cost pools and from pools to cost objects.
2 types of cost assignment:
1)Direct tracing-
used for assigning direct costs. Easily traced to cost pool or cost object, like the associated materials to produce product.
2)Allocation -
used to assigning indirect costs or costs that can’t be easily, monetary traced to cost pool or object.
ex. electricity costs in factory

That is why for assignment of indirect costs allocation, is used associating them with cost drivers. (Allocation bases)

Question 10

Direct vs. Indirect costs

Answer 10

Direct costs can be easily traced to cost objects.

Overhead costs (aka indirect costs) can’t be traced; instead they must be allocated to cost objects using a cost driver (aka cost allocation base).

Factory overhead is one cost pool for all indirect costs!!!

Question 11

Direct vs. Indirect MATERIAL costs

Answer 11

*Direct material costs
–>the costs of material associated with cost object, with allowance for scrap and defective units.
*Indirect material costs
–>the costs of material not included in the final product but still used in production

Question 12

Direct vs. Indirect LABOUR costs

Answer 12

*Direct labour
the cost of labour that can be directly associated with cost object.
*Indirect labour
the costs associated with support function in creating a product, like supervision or inspection

Question 13

Conversion costs

Answer 13

direct labour +factory OH
–>converting product into final good.

Question 14

Prime costs

Answer 14

direct materials + direct labour
–>pool of direct costs

Question 15

Variable vs. Fixed cost

Answer 15

Variable cost-
do change in proportion with volume of a cost driver, such as production or sales quantity.

ex. Material costs such as tires and engines are variable costs, they increase with the number of cars produced

Fixed cost-
do not change in proportion with volume of a cost driver, at least not within the relevant range.

ex. insurance or taxes for production plant
(Independent of whether 1 or 1000 cars are produced and sold)

Question 16

Relevant range of cost function

Answer 16

Relevant range—range in which the relationship between the activity/volume level and the respective cost is constant. It is possible to approximate as linear function in this range.

Cost behaviour is approximated by a linear cost function within the relevant range.

Question 17

When to invest or divest? Are the fixed costs always constant?

Answer 17

When business activity declines, firms divest to eliminate excess capacity.

When business activity increases, firms invest to increase capacity.

Over the long-term fixed costs behave like step-functions.

Question 18

Product costs vs. Period costs

Answer 18

*Product costs- include only the costs necessary to complete the product at the manufacturing step in the value chain (manufacturing) or to purchase and transport the product to the location of sale (merchandising)

Direct M. + Direct L. +Factory OH

*Period costs- (also called non-product costs) include all other costs incurred by the firm in managing or selling the product (costs outside the manufacturing step of the value chain)

Selling Expenses + Administrative Expenses

Question 19

4 Major “Cost drivers”

Answer 19

1. Activity based
   determine through analysis of firm’s operations and a specific activities performed
2. Volume based
   cost driver is quantity of products produced/services provided. Associate with FC and VC, sometimes mixed costs.
3. Structural
   Strategic cost drivers like scale, expertise, technology, complexity. All of them have long-term effects on planning and decision making.
4. Executional
   Include factors that firm can manipulate in short term. Operation related decisions- workforce empowerment, production process design, supplier relations.

Question 20

Must have elements in cost information

Answer 20

*Accuracy
*Timeliness
*Cost & value of cost management info

Question 21

Perpetual vs. Periodic inventory systems

Answer 21

Perpetual inventory systems–>
updates finished good inventory account for each sales transaction

Periodic inventory systems–>
consists of count of inventory at the end of each accounting period to determine the ending balance.

Question 22

Inventory formula relating to inventory accounts

Answer 22

Beg. inventory + costs added = costs transferred out +ending inventory