Week 6 - Introduction to management accounting & costing concepts

Question 1

What is management accounting? (Horngren et al 2014, p.21)

Answer 1

• Is the branch of accounting that produces information for managers within an organisation
• Its the process of identifying, measuring, accumulating, analysing, preparing, interpreting and communicating information that helps managers fulfill organisational objectives

Question 2

Examples of management accounting uses

Answer 2

• Price setting
• Investment decisions
• Growth strategies - either new customer or product
• Cost leadership or differentiation strategy
• Recruiting new staff
• Undertake new marketing campaign

Question 3

3 processes of management accounting

Answer 3

• Planning
• Controlling
• Decision making

Question 4

Planning process of management accounting

Answer 4

• Establish goals
• Specify how goals will be achieved
• Develop budgets

Question 5

Controlling process of management accounting (2)

Answer 5

• Gather feedback to ensure that plans are being followed
• Feedback in the form of performance that compare actual results with the budget are an essential part of the control function

Question 6

Decision making process of management accounting (2)

Answer 6

• Involves making a solution among competing alternatives
• E.g what should we be selling

Question 7

The cost hierarchy

Answer 7

Question 8

Define cost object

Answer 8

Any activity for which a separate measure of cost is required (e,g a product, service, business unit etc)

Question 9

Define cost driver

Answer 9

The activity lies that consumes resources and hence incurs cost e.g labour hours, machine hours, order size, travel distance etc

Question 10

Define direct cost

Answer 10

Any cost which can be specifically and exclusively identified with a particular:

• direct materials
• direct labour

Question 11

Define indirect cost (overheads)

Answer 11

Any costs which cannot be specifically and exclusively identified with a particular cost object:

• indirect materials
• indirect labour

Question 12

Examples of manufacturing costs (3)

Answer 12

• Direct materials - are integral parts of the product
• Direct labour
• Manufacturing overheads - costs that cannot be directly traced to specific units produced

Question 13

Define indirect labour

Answer 13

Wages paid to employees who are not directly involved in production work e.g maintenance workers, janitors and security guards

Question 14

Define indirect materials

Answer 14

• Materials use to support the production process
• Example: lubricants and cleaning supplies used in the automobile assembly plants

Question 15

Types of non manufacturing costs (2)

Answer 15

• Marketing and selling costs - costs necessary to get the order and deliver the product
• Administrative cost - all executive, organisational and electrical costs

Question 16

Define variable costs

Answer 16

Any cost which varies indirect proportion to the activity level

Question 17

Define fixed costs

Answer 17

Costs which remain constant over a wide range of activity levels within a business

Question 18

Define mixed costs (semi-variable)

Answer 18

Costs which have both a fixed a variable element to them

Question 19

Define stepped fixed costs (semi-fixed)

Answer 19

Costs which remain constant within a given range of activity, but which increases or decreases by a set amount at various critical activities

Question 20

Gross profit formula

Answer 20

Sales revenue - manufacturing cost

Question 21

Contribution formula

Answer 21

Sales revenue - variable cost

Question 22

Total fixed cost graph

Answer 22

Question 23

Unit fixed cost graph

Answer 23

Question 24

Total variable cost graphs

Answer 24

Question 25

Unit variable cost graph

Answer 25

Question 26

Total cost formula

Answer 26

Fixed cost + (variable cost per unit x number of units)

Question 27

Mixed (semi-variable) costs graph

Answer 27

Question 28

Stepped-fixed (semi-fixed) costs graph

Answer 28

Question 29

Importance of separating fixed and variable costs with P&L accounts

Answer 29

To highlight the key decision making concept known as contribution

Question 30

How to workout variable cost from a graph

Answer 30

Find the Gradient

Question 31

High low method

Answer 31

1 - Identify high and low activity points and their related costs

2 - Calculate the difference in cost at these two levels which is the variable cost

3 - Calculate the variable cost per unit by dividing difference by a change in number of units

4 - Use variable cost per unit to extract fixed cost as the figure from either the high or low point

Question 32

High low method graph

Answer 32

Question 33

How to interpret the high low method

Answer 33

• Comment on there being two reference points
• Comment on whether the number of units falls within or outside the high-lo estimate range
• If it does it may be relatable if it doesn’t it may not be reliable