Week 1-Introduction to management accounting and cost terminology

Question 1

What is management accounting?

Answer 1

• application of principles of accounting and financial management to create, preserve and increase value for the stakeholders
• supports value creation in organisations
• inform strategic decisions
• plan and control activities
• ensure the efficient use of resources
• develop incentive structures
• implement corporate governance procedures, risk management and internal controls

Management Accounting covers both financial
and non-financial information to set goals and
forecast performance. Focused on the analysis of
future projections with short and long term planning;
but it depends on cost accounting systems which
need to be reliable.

Question 2

What is cost accounting?

Answer 2

Cost Accounting covers recording, classifying and
summarising of cost data of an organisation. It
deals with the identifying, correctly classifying,
allocating and recording of cost. It does not depend
on management accounting.

Question 3

What is the purpose of FA? MA?

Answer 3

FA: Help users to monitor managerial
stewardship and make decisions about the
provision of resources. External reporting to outside parties. Makes decisions about ressource allocation.

MA: Help managers to make decisions to fulfil
the organisation’s objectives. Internal collection and communication of accounting information

Question 4

Primary users of FR? and MA?

Answer 4

Fr: External, including investors, creditors,
regulators, and others
(publicly available)

Ma: Internal managers of the organisation (confidential, because commercially and politically sensitive)

Question 5

Timing FA/MA

Frequency of reporting

Answer 5

FA:  Mostly historical (e.g. 2019 reports
prepared in 2020)
 Some predictive value
-annual/quartely

MA:  Forward-looking and Future emphasis
(e.g. 2020 budget prepared in 2019)
 Based on historical information and
estimates
-Frequency of reporting as often as required

Question 6

Regulation Ma and Fa

Answer 6

fa: Financial statements:
 In accordance with Accounting Standards
(IFRSs)
 Subject to independent audit
-directed by authorative guidelines (accounting standards, law)

Ma: Internal measures and reports:
 Do not have to follow specific Accounting
Standards
 Based on cost-benefit analysis (not governed by external regulations)
-confidetial

Question 7

Verifiability vs relevance Fa and ma

Answer 7

FA:  Primary focus is on verifiability

MA: Primary emphasis is on relevance and
timeliness

Question 8

What kind of data is management accounting based on? Where is financial and non-financial data collected from?

Answer 8

• MA:statistics, mathematics, economics, laws, psychology, financial and quantitative, detailed, complied for a specific purpose.
• FA is mainly focused on financial inf (monetary terms, general purpose, less detail)

Financial information is based on accounting systems
Non-financial information is collected from production
processes and market research (e.g. consumer behaviour,
analysis of competitors etc.)

Question 9

What should Ma satisfy? Is there a standardised format of MA reports?

Answer 9

-serve the purpose that it is intended for

No standardised formats Reports tend to be more
detailed, are compiled for a specific purpose.

Question 10

describe the convergence of FR and MA

Answer 10

• Traditional financial reporting required basic cost
accounting information for inventory valuation methods.
• Modern financial reporting (contained in annual reports)
increasingly integrates information on:
– Strategy, business models, and KPIs (strategic management accounting)
– Executive pay (incentive compensation systems)
– Social and environmental performance (sustainability accounting)
Dividing line between management accounting and
financial accounting gets increasingly blurred.

1) Overlapping information needs
- managers can be interested in historical overview
- detailed inf relating to the future (planned level of profit, no-financial information, states of salas/orderbook, extent of profuct innovation)

2) mutual influences
- management tend to gather similar observations
- managers decide what inf to provide to users, yet they also have to be aware of external users’ expectations
- external reportig cycles have some influene on MA (ex: type of costing adopted)

3) Data convergence in reports
- traditional financial reporting requires Ma information for inventory valuation
- annual reporst increasingly integraes information on:

strategy, business models, stategig management, executive pay (incentive compensation systems), socail and environment accounting (sustainability accounting)

Question 11

What is a cost objective?

Answer 11

A cost object is any ‘product, service, centre, activity,
customer or distribution channel in relation to which
costs are ascertained.’

A cost object is any item for which cost
measurement is required, for example, a product or
a customer.

Question 12

What is a cost driver?

Answer 12

A cost driver is any factor that causes a change

in the cost of an activity.

Question 13

What are capitalised costs? Expensed costs?

Answer 13

Capitalised costs:
recognised as assets in Statement of Financial
Position (SoFP).

Expensed costs:
recognised on periodic basis as expenses in
Income Statement (IS)

Question 14

What are product costs?

Answer 14

total cost of purchasing or producing goods / delivering
services to customers.

ex: raw material, work in progress

Question 15

What are period costs?

Answer 15

All other selling and administrative costs that are not
included in product cost, such as advertising, salaries etc.

ex: selling and administrative expenses, depreciation, operating expenses,

Question 16

What does cost of sales include?

Answer 16

– Cost of sales includes:
• Cost of materials used in the finished product
• Cost of labour directly involved in the production of the product
• Manufacturing overhead

Question 17

What does inventory held include?

Answer 17

– Inventory held includes:
• Materials held for use (raw materials)
• Finished goods held for sale
• Unfinished goods (work-in-progress)

Question 18

Difference between the financial statements of trading business and service business

Answer 18

Trading businesses
– Cost of sales (I/S)
– Inventory held (SoFP)
– Examples: retail companies, wholesaling businesses

Service businesses
– Operating expenses related to provision of services in IS
(income statement)
– No inventory or Cost of Sales
– Examples: Investment Banks, Stock Exchange, professional
service firms (law, accounting, consulting)

Question 19

Flow of costs in a manufacturing business

Answer 19

Formula sheet

Question 20

Management decisions (3 categories)

Answer 20

Operating decisions:
– Product mix
– Pricing
– Dividends
Financing decisions:
– The mix of debt and equity
Investment decisions:
– Whether to undertake a new project
– Research and development
– Take-over / disposal decisions

Question 21

What are variable costs?

Answer 21

-Costs that change in direct proportion to changes in activity =e.g. ouput volume, time)

As the level of production/activity varies the
material and labour costs also vary. These costs
are variable costs.

Question 22

What are fixed costs?

Answer 22

-costs that remain unchanged for a given time period regardless of changes in activity levels.

As the level of production/activity varies the
factory rent remains fixed. The factory rent is a
fixed cost.

Question 23

Describe how variable and fixed costs behave in total and per unit

Answer 23

Formula sheet

Question 24

What are stepped fixed costs?

Answer 24

If activity is expanded to the point where
further investment in fixed costs is needed,
e.g. a new factory premises is to be rented
then the rent cost will increase to a new,
higher level

As the level of production/activity varies the
machinery hire costs remain fixed up to a certain
level of production, when we have to hire another
machine the cost rises.

Question 25

What are semi-variable costs?

Answer 25

-cost containing both fixed and variable components and which is thus partly affected by a change in the level of activity.

As the level of production/activity varies some of
the packaging costs vary and some may even be
fixed (e.g. fixed cost of running the equipment)

ex: In the billing structure for a mobile phone, there is
a flat-rate therefore it is a fixed cost.
For extra usage of texts, calls or internet data are
variable costs.

Question 26

What are manufacturing costs?

Answer 26

Direct materials: Those materials that become an integral part of the product and that can be conveniently traced directly to it.

Direct Labour: Those labour costs that can be easily traced to individual units of production.

ex: wages paid

Manufacturing overheads: Manufacturing costs that cannot be traced directly to specific units produced

ex: indirect material (materials used to support the production purpose, ex: oil, protective equipment, cleaning supplies), indirect labour (wages paid to employees who are not directly involved in the production work: maintenance workers, cleaners and security guards), factory overheads

ex:Electricity used to operate the factory
equipment
• Depreciation on the factory equipment and
building
• Factory supplies and factory personnel
(other than direct labour)

Question 27

Why does MO have an important role in the profitability of a product?

Answer 27

How these costs are assigned to products has
an impact on the measurement of an
individual product’s profitability.

Question 28

What are prime costs?

Answer 28

Direct material+Direct Labour

Question 29

What are conversion costs?

Answer 29

Direct labour+MO

Question 30

Give examples of non-manufacturing costs

Answer 30

-marketing and selling costs, administrative costs (all executive, organisational and clerical costs)

Question 31

Describe the income statement of trading and manufacturing businesses

Answer 31

Formula sheet

Question 32

Describe the balance sheet of a trader and a manufacturer

Answer 32

formula sheet

Question 33

Describe manufacturing cost flows

Answer 33

FSH

Question 34

Manufacturing costs calculation

Answer 34

DM+DL+MO=manufacturing cost incurred for the period

Question 35

Cost of goods manufactured for the month calculation

Answer 35

Beginning work in process stock+ MO = total work in progress during the period

-ending work in progress stock=cost of goods manufactured

Question 36

why are innovations good?

Answer 36

-innovations can help with efficiencies and competitive advantage

Question 37

How does the role of M accountants change of time?

Answer 37

Business IT allows move beyond routine work of
collecting information and preparing reports
(information provider)
• Management accountants today are part of the
management team (decision influencer)

Question 38

What are the technical roles of a management accountant? (9)

Answer 38

-Financial accounting and reporting
• Cost accounting: effectively challenge costs and inform decision making, advise on strategic cost transformation and value creation
• Business planning
• Management reporting and analysis
• Corporate finance and treasury management
• Risk management and internal control
• Accounting information systems.
• Tax strategy, planning and compliance
-Participate in waste elimination efforts with the
business to understand key drivers and cost
reduction opportunities

Question 39

What are M accountant skills and qualifications?

Answer 39

• understanding of finance and legislation
• knowledge of business strategy and methodology
• analytical skills
• critical thinking skills
• organisational skills

Question 40

In what decisions information about costs can help managers?

Answer 40

• prices and production level (cost of distribution, delivery)
• introduction of new technology (ex: robots)
• investment in a new project (ex: cost of development, marketing)
• make or buy, outsourcing/in-house operation