Wk 7 Introduction to Management Accounting

Question 1

What is management accounting?

Answer 1

Sourcing analysis, communication and use of decision relevant financial and non-financial information to generate and preserve value for organisations

Question 2

What are the management functions?

Answer 2

• planning (short and long term)
• directing and motivating
• control and monitor (feedback using various detailed reports)
• decision making (optimise all resources)
• requirements (information must be timely, relevant and accurate)

Question 3

What is cost?

Answer 3

Resource sacrificed/forgone to achieve a specific objective

Question 4

What is costing?

Answer 4

Gathering cost information and its attachment to cost objects

Question 5

What are cost objects?

Answer 5

Any item/activity which requires costing, separate measurement of cost is required, can be direct/indirect

Question 6

What is a direct cost?

Answer 6

A cost which can be traced back to the cost objective, e.g. direct material and direct labour - total direct costs = prime cost

Question 7

What is an indirect cost?

Answer 7

Cannot be easily and conveniently tried to a unit of product/other cost object, e.g. manufacturing overheads, rent, admin/marketing costs

Question 8

What are the 3 basic components of cost?

Answer 8

Materials (direct)
Labour (direct)
Production overheads (indirect)

Question 9

What are manufacturing/production overheads?

Answer 9

Indirect wages (wages paid to employees not directly involved in production, e.g. cleaners/security guards)
Indirect materials (used to support the production process, e.g. lubricants/cleaning supplies)

Question 10

What are non-manufacturing overhead costs?

Answer 10

Marketing/selling costs, administrative costs, etc

Question 11

What is cost behaviour?

Answer 11

Indicator of how costs will vary when business activity levels change, e.g. care home costs if another individual is admitted

Question 12

What are semi-variable costs?

Answer 12

Costs with a fixed and variable element, e.g. electricity (standing charge and a cost per unit)

Question 13

What are step fixed costs?

Answer 13

Costs that a constant for different levels of activity, e.g. for each 1000 chairs a company produces they will need to hire another inspector

Question 14

What are the issues and principles for decision making?

Answer 14

• past (sunk) costs are not relevant
• fixed costs are not relevant
• future costs/revenues are relevant where they differ under different scenarios
• costing for decision making is not the same as financial accounting for costs
• opportunity cost may be relevant
• non-financial factors are often important

Question 15

What are relevant costs?

Answer 15

Future costs affected by the decision (e.g. petrol costs), opportunity costs, replacement costs

Question 16

What are irrelevant costs?

Answer 16

Costs not affected by the decision (e.g. car/tax insurance costs), sunk cost

Question 17

What is the formula to calculate the break-even point?

Answer 17

fixed cost / (sales revenue per unit - variable cost per unit)

Question 18

What is the contribution per unit?

Answer 18

Selling price per unit - variable costs per unit, how much each sale of a unit contributes towards covering the running costs of a product/business