Week 4- Management Accounting, Cost and Cost Allocation

Question 1

Describe management accounting and its role in a business context

Answer 1

• Reports information relevant to making business decisions now and in the future to interested internal parties
• Used to control business operations to achieve short and long term objectives
• Carries out detailed analysis of individual costs to determine total product/service costs so that profitable selling prices can be set
• Summarises detailed information into budgets
• Compares actual outcomes to budgeted results

Question 2

Compare management and financial accounting

Answer 2

Management
- Used within the business
- For internal decision making and control
- Concerned with future performance
- Unregulated
- Future oriented
- Linked to strategy

Financial
- Used for external communication
- For external decision making, governance and control
- Concerned with past performance
- Regulated
- Past oriented
- Linked to accountability

Question 3

What must be done before selling prices can be set?

Answer 3

The cost of a product or service must be determined

Question 4

How must a profit be made?

Answer 4

The selling price must be higher than the total cost of a product

Question 5

Give some examples of costs

Answer 5

• Direct and indirect
• Relevant and irrelevant
• Opportunity
• Sunk
• Avoidable and unavoidable
  -Marginal

Question 6

Describe direct and indirect costs

Answer 6

Direct
- the costs of a product or service that vary exactly in line with each product or service
- reflect the additional costs incurred by a business in producing one more unit of a product or service

Indirect
- costs that cannot be attributed directly to units of products or service
- are also known as overheads

Question 7

Describe relevant and irrelevant costs

Answer 7

Relevant
- those costs that will incur if we decide to follow a particular course of action
- they influence our decision making

Irrelevant
- those costs that are not affected by the action we take
- they therefor do not affect out decision making

Question 8

Describe opportunity costs

Answer 8

• the loss that is incurred by choosing one alternative course of action over another
• only applies when resources are limited
• influence decision making
• are relevant costs
• the opportunity cost of a decision is the next best alternative use for the resource used in that decision

Question 9

Describe sunk costs

Answer 9

• are past costs
• have already incurred
• do not influence future decision
• are irrelevant cost
• fixed costs that a business incurs whether a particular course of action is taken or not

Question 10

Describe avoidable and unavoidable costs

Answer 10

Avoidable
- those costs that can be saved by taking an alternative course of action
- they influence our decision making

Unavoidable
- those costs that are not affected by the action we take
- they therefore do not affect our decision making

Question 11

What are cost objectives?

Answer 11

Any item for which a separate measurement of costs is desired

Question 12

Give 3 examples of cost objectives

Answer 12

• Cost of a product
• Cost of a service
• Cost of operating a particular department

Question 13

How can activity or volume be measured in

Answer 13

• Units of production
• Units of sale
• Units travelled
• Hours worked
• Clients seen

Question 14

What are 3 types of cost behaviours?

Answer 14

• Variable
• Fixed
• Semi fixed or stepped fixed

Question 15

Describe variable costs

Answer 15

• Direct costs that vary directly in line with production

Question 16

Describe fixed costs

Answer 16

• Do not vary in line with production
• They are incurred regardless of the level of production

Question 17

Fixed costs can be…?

Answer 17

• Direct costs of production incurred in the production of a particular product
• General overheads incurred in the running of the business

Question 18

Describe semi fixed costs

Answer 18

Fixed within specific activity levels but increase or decrease by a constant amount at various activity levels

Question 19

What 2 broad stages do cost collection systems account for costs in?

Answer 19

• Accumulates costs
• Assigns costs to cost objects

Question 20

How do you calculate total product costs?

Answer 20

Total product cost = Direct cost per product + Indirect cost per product

Question 21

Describe absorption costing

Answer 21

• Allocates manufacturing overheads to products

Recognises :
- at different levels of production, the average total cost for each product will be higher or lower, therefore:
- overheads are allocated to products on the basis of the normal level of production

Question 22

Define normal level

Answer 22

The expected level of production achievable within an accounting period

Question 23

How do you calculate overhead cost allocated to each product?

Answer 23

Overhead cost allocated to each product = Total overhead cost / Normal level of production

Question 24

Compare absorption and variable costing

Answer 24

Absorption costing
- Captures all costs associated with manufacturing a particular product, i.e. direct and indirect costs are taken into account under this method
- direct material
- direct labour
- variable manufacturing overhead
- fixed manufacturing overhead

Variable costing

Question 24

Compare absorption and variable costing

Answer 24

Absorption costing
- Captures all costs associated with manufacturing a particular product, i.e. direct and indirect costs are taken into account under this method

Variable costing
- Captures all costs associated with manufacturing a particular product but excludes fixed manufacturing overheads

Question 25

What are 3 limitations of absorption costing

Answer 25

• Is a traditional method which might not be well suited for allocating overheads in modern manufacturing environments
• May not provide accurate product prices
• It is important to recognise that additional absorption costing is not the only way in which costs can be allocated to products