Management accounting 2022
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Management accounting 2022 - Leaderboard
Management accounting 2022 - Details
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| What is a cost? | A cost is a resource sacrificed or foregone to achieve a specific objective. Better known as something you used to produce a product. |
| What is a cost object? | A thing that costs are assigned to. I.e., A bike where the costs for producing the bike is traced to the bike. Hence, the bike is the cost object. |
| What is cost accounting | The costs are assigned to various cost objects. |
| What is cost accumulation | Is the collection of cost data in some organised way by means of an accounting system. Also known as the cost pool, where these costs are assigned to each cost object. |
| What is the difference between direct and indirect costs | Direct costs are costs that are related to the cost object directly and can be measured directly in money terms. I.e., tires used to produce a car. Hence, the costs can be put directly on the cost object. Indirect costs cannot be traced directly to the cost object; hence these costs are allocated to the cost object. |
| What is the 4 things that determines if it is a direct or indirect cost? | 1. Materiality of the cost in question (Is it rent, spare parts etc?) 2. Available information-gathering technology (Is there an accounting system in place to trace the cost directly to the cost object?) 3. Design of operation 4. Choice of cost object |
| What is the difference between fixed and variable costs? | A variable cost is a cost that changes depending on the number of units produced. A fixed cost does not change no matter the number of units produced. |
| What is a cost driver? | A cost driver is driver that affects the cost. For instance, number of bicycles produced drives the total cost of tires up or down. |
| What manufacturing costs do we have, and how are they defined? | 1. Direct materials cost: The acquisition cost of materials used to produce the cost object that can be traced directly in an economically feasible way. 2. Direct manuf. labor costs: The compensation spend on workers that can be traced directly to the cost object in an economically feasible way. 3. Indirect manuf. costs: Other manufacturing costs considered to be apart of the cost object, but cannot be traced in an economically feasible way. |
| What is capitalised costs, and how do they differ between types of companies? | For manufacturing companies, capitalized costs include direct materials, direct labor, and indirect manufacturing costs, hence they are included in WIP and finished stock and ultimately in the COGS account on the P/L statement. For merchandising-sector companies, capitalized costs are the costs of purchasing the products resold in their same form. For service sector companies, the absence of stock means there are no capitalized costs. |
| What is revenue costs, and how do they differ between types of companies? | For manufacturing companies, revenue costs are all non-manufacturing costs (R&D, distribution etc.) For merchandising companies revenue costs include all costs not related to COGS (Capitalized costs). For service sector companies, all costs are revenue costs. |
| What is the difference between prime costs and conversion costs? | Prime costs are all direct manufacturing costs (Direct materials and labor). Conversion costs are all costs other than direct materials cost e.g., manufacturing labor, indirect materials, energy, plant depreciation etc. |
| Why must unit costs be interpreted with care? | Unit costs are calculated as total costs / units. Hence, it is calculated including both fixed costs and at a certain level of activity. This is troublesome for effective decision making, as changes in both of those values are hard to compare with other changes. |
| What is an overhead cost? | Overhead costs, often referred to as overhead or operating expenses, refer to those expenses associated with running a business that can’t be linked to creating or producing a product or service. They are the expenses the business incurs to stay in business, regardless of its success level. |
| What is a variable and fixed overhead costs? Give examples of each. | A variable overhead cost is a cost that is variable depending on the cost driver, but is still a cost incurred by running the business but cannot be linked to a product. This could be water, electricity or other indirect materials/labor. A fixed overhead cost is a fixed cost incurred by running the business but cannot be linked to a product. This could be water, electricity or other indirect materials/labor. |
| What types of companies is there, what defines each and what is typically the most significant cost driver? | 1. Service companies: Provides services or intangible products to their customers. Labor is often the most significant cost category. 2. Merchandising companies: Sell goods without changing their basic form. COGS is often the most significant cost category. 3. Manufacturing companies: Purchases materials and components and produce a product. Materials and labor costs are often the most significant cost category. |
| What is an activity based cost driver and what are some examples of these? | An activity based cost driver is a cost driver that gives away of measuring a quantity of an activity. |
| What factors do we have to assess customer value? | 1. Short-run and long-run customer profitability. 2. Likelihood of customer retention. 3. Potential for customer growth. 4. Customer reputation. 5. Ability to learn from customers. |
| What is a cost system and what is its purposes? | The building block of costing systems is how to trace direct costs to the cost object and how to allocate indirect costs to the cost object. There are two basic methods of allocating costs to the cost object, the job-costing system and process-costing system. Purpose of cost allocation 1. Provide information for economic decisions (Should a new product line be introduced? Do we have to produce or outsource ourselves?) 2. Motivate managers and other employees (E.g., simplify processes, selling high-profit products) 3. Justify costs or compute reimbursement (E.g., consulting fees in relation to the expected cost reductions) 4. Measure income and assets for reporting to external parties (E.g., to determine the cost of stock, etc. |
| What is a job costing system? | A job is a singular product being individually produced each time. Such as a garage, specific windows for houses etc. A job costing system allocates costs to individual costs. |
| What are the 6 steps in a job costing system? | 1. Identify the chosen cost object 2. Identify the direct costs of the job 3. Identify the indirect costs associated with each cost-allocation base 4. Select the costs-allocation base 5. Compute the rate per unit of each cost-allocation base used to allocate indirect costs to the job (Actual costing vs normal costing) 6. Compute the cost of the job adding all direct and indirect costs assigned to it |
| What is actual costing vs normal costing, and how does it relate to step 5 in the job costing system? | Normal costing uses budgeted indirect-cost rates where’s actual costing method uses an indirect-cost rate calculated at the end of the year. The formula is Budgeted total costs in indirect cost pool / budgeted total quantity of cost allocation base. It is used in step 5 of the job costing system because we must compute the indirect cost rate, hence we must decide if we use normal or actual costing. |
| What does under and over allocated indirect costs mean, and why is it relevant for normal costing? | Normal costing uses a budgeted indirect cost rate to allocate indirect costs. Hence, as it is a forecast, they may allocate too much or too little depending on the actual result. If there is allocated too little compared to actual result, there is an under allocation. If there is allocated too much compared to actual result, there is an over allocation. |
| What are the two reasons for under/overallocation of indirect costs? | 1. Numerator reason: Actual manufacturing overhead costs are more than budgeted. 2. Denominator reason: Actual machine hours are more than budgeted. |
| How do you dispose of under- or over allocated overhead? | 1. Adjusted allocation rate approach Here, the indirect cost rate is adjusted to the actual indirect cost rate. Then, all jobs with the allocated indirect cost rate are recomputed. Hence, we go from normal costing --> actual costing. 2. Proration approach Here, the under- or overallocation is spread onto WIP, finished goods or COGS. There are 3 methods of doing so, see lecture 3 slide 30-33. 3. Immediate write-off to COGS approach Method 1 is the most accurate, while method 3 is by far the simplest and will often be the one to use. |
| What is process costing? | Process costing is a way of allocating costs when mass producing a product. The unit cost is found by allocating the same amount of direct and indirect manufacturing costs to each unit cost. Each unit is assumed to receive the same of the above costs. |
| What are the 5 steps of process costing? | Step 1: Summaries the flow of physical units of output Step 2: Compute output in terms of equivalent units Step 3: Compute equivalent unit costs Step 4: Summaries total costs to account for Step 5: Assign total costs to units completed and to units in ending WIP stock |
| What are equivalent units? | Two semi-finished goods are equivalent to one finished good. Hence, 10.000 units of 70% finished work equals 7.000 equivalent units. It is the idea that units in their production phase can be converted to equivalent units (I.e. finished products) to get a more true picture of how the costs are used if many units are not completely finished. |
| What are the two methods of process costing? | 1. WA-method: 2. FIFO-method: |
| What is the difference between single rate method and dual rate method of costing systems? | The single rate method uses one cost pool for fixed and variable costs. The dual rate method uses two cost pools, one for fixed costs and one for variable costs. |
| How do we allocate support department costs, and what are they called/defined as? | 1. The direct method. The direct method allocates support department costs to operating departments only. 2. Step-down method. Allocates support department costs to other support departments and to operating departments. This is the simplest method. 3. Reciprocal method Allocates costs by including the mutual services provided among all support departments. |
| What is a common cost? | A common cost is a cost that is not attributable to a specific cost object, such as a product or process. When a common cost is associated with the manufacturing process, it is included in factory overhead and allocated to the units produced. |
| How do we allocate common costs? | 1. Stand-alone method: Individual equal assessment – Weighted distribution 2. Incremental: additional cost activity. |
| What are joint costs? | Joint costs are the costs of a single production process that yields multiple products simultaneously. Joint costs are for allocating costs when companies produce two or more products simultaneously out of the same process. |
| What two products are produced in a joint production process? | 1. Joint products: are products with relatively high sales value at the split-off point. 2. By-products: are incidental products resulting from the processing of another product and has a normally relatively low sales value compared to the joint products. |
| What is the split-off point? | Split-off point is the point in a production process where the joint products and by-products become visible. |
| Why is it important to allocate joint costs proporly? | 1. To assign costs to the inventory 2. During cost reimbursement contracts, one might be able to get costs reimbursed during a project. However, one must be able to document their costs to get it reimbursed. 3. Insurance settlements. If the warehouse burns, one must be able to document the value of the product to get insurance pay. 4. To document the value of the goods in a lawsuit. |
| What are the 3 methods of allocating joint costs? | 1. Sales value at split-off method: The value of the product before split-off is allocated to each main and by-product. The most simple method. 2. The physical measurement method: Uses the physical units of production to allocate costs. This method is more applicable to products measured per kg, liters etc. But there is no common unit point for weighting. Hence, it is a problem when products have a much different value. 3. Constant gross-margin percentage NRV method: Allocates joint costs so that the overall gross-margin percentage is identical for each individual product. By far the most difficult method. |
| Why are joint costs irrelevant for decision making? | The costs incurred up to the split-off point are past costs, hence they are sunk costs. Sunk costs mean that these costs were incurred anyways and are therefore irrelevant to the decision to sell a joint (or main) product at the split-off point or to process it further. Decision making is forward-looking, and we must therefore focus on the future-oriented alternatives. |
| What is stock-costing method, what are the two methods of doing so and how do they impact profits? | 1. Variable costing: All variable manufacturing costs are assigned to production, and they become part of the unit cost. This highlights the distinction between variable and fixed costs, hence focusing more on the behavior of costs and the contribution margin. 2. Absorption costing: Absorption costing enables a manager to increase operating profit in a specific period by increasing the production schedule, even if there is no customer demand for the additional production. This highlights the distinction between manufacturing and non-manufacturing costs. Hence, the focus is on the gross margin, distinction made by the business function. |
| What is activity based costing? | Activity based costing traces costs to activities. This defers from traditional costing systems, where costs are traced to the product. Direct costs are traced directly to the cost object. Indirect costs are allocated based of the activities (Cost driver) and the cost of the activities. Individual activities = cost objects ABC-costing is advantageous for: • Companies with a large product portfolio and diversification • For companies with many indirect costs, such as maintenance, product development, advanced IT support and other services. • For companies with an advanced complicated customer portfolio. |
| What does over- and under costing mean? | Undercosting is when a product consumes a relatively high level of resources but is reported to have a relatively low total cost. Overcosting is when a product consumes a relatively low level of resources but is reported to have a relatively high total cost. |
| What is the 7-step process of ABC costing? | 1. Identify the chosen cost objects. 2. Identify the direct costs of the product. 3. Select the cost-allocation bases to use in allocating indirect costs to the products. 4. Identify the indirect costs associated with each cost-allocation base. 5. Compute the rate per unit of each cost allocation base used to allocate indirect costs to the products. 6. Compute the indirect costs allocated to the products. 7. Compute the costs of the products by adding all direct and indirect costs assigned to them. |
| What is activity based management (ABM) and what is it good for? | ABM describes management decisions that use activity-based costing information to satisfy customers and improve profits. • Product pricing and mix decisions - Insight into the cost structures and more accurate product cost information. • Cost reduction and process improvement decisions • Design decisions • Planning and managing activities |
| What are some advantages and disadvantages of implementing and having a ABC costing system? | Advantages: 1. Provides realistic costs of manufacturing for specific products. 2. Allocates manufacturing overhead more accurately if many processes are involved. 3. Is better for optimising processes and the costs associated with them. Is good for Activity based management. 4. Determines product profit margins more precisely. Disadvantages: 1. Collection and preparation of data is time-consuming and expensive to operate and analyze. 2. Source data can be hard to come by. 3. The data from ABC systems can rarely be used for external reporting as it does not comply with accounting standards. |
| What is a cost-volume-profit analysis? | Cost-volume-profit (CVP) analysis is a way to find out how changes in variable and fixed costs affect a firm's profit. Companies can use CVP to see how many units they need to sell to break even (cover all costs) or reach a certain minimum profit margin. |
| How is the break even point calculated and what does it say? | The breakeven point shows how many units must be produced and sold to break even (not loose any money but not earning any either). |
| What is a targeted operating profit and how do we calculate it? | The targeted operating profit is a way of calculating if we want our targeted operating profit to be for instance 1.200 EUR. |
| What is the margin of safety and how is it calculated? | The amount by which sales can drop before losses begin. |
| What is sensitivity analysis? | Sensitivity analysis is a “What if” technique that examines how a result will change if the original predicted data are not achieved or if an underlying assumption changes. These types of questions can often be answered by calculating if there is a loss or not. For instance, using the break-even point, margin of safety. |
| What is the operating leverage? | Operating leverage measures the relationship between a company’s variable and fixed expenses. It is greatest in organisations that have high fixed expenses and low per unit variable expenses. |
| What are the major influences on pricing? | 1. Customers - Different price and product preferences, willingness to pay - Dynamic pricing 2. Competitors - Pricing is influenced by competitors’ decisions and reactions. - Game theory 3. Costs - Costs affect supply and thus indirectly prices. - Product profitability depends on selling prices and costs. |
| What is the difference between short run and long run pricing decisions? | Short run decisions have a time horizon less than 1 year. Fixed costs are mostly irrelevant in short run decisions because you cannot change fixed costs in the short run. Long run decisions have a time horizon of more than 1 year. Fixed costs are taken into consideration because these can be changed in the long run. |
| What is the target cost pricing method? | All costs (Fixed + variable) are relevant because target costing operates on long run decisions. 1. Develop product that satisfies needs of potential customers. 2. Choose target price: estimated price that potential customers are willing to pay. 3. Choose target operating profit per unit. 4. Derive target cost per unit: estimated long-run cost per unit, which allows to earn the target operating profit. 5. Perform value engineering to achieve target costs. |
| What is value engineering? | Value engineering is the continuing evaluation of all value-added and non-value added costs and how to reduce these by for instance change product design, adjusting production volume etc. It's about reducing costs while satisfying customers needs. |
| What is the cost-plus pricing method and how do you use it? | This pricing method calculates the unit cost and add a mark-up to this. The mark up can be calculated as shown by the picture. |
| What are the three pricing methods? | 1. Target cost pricing method. Here we make the product, find an estimated price customers are willing to pay, choose target operating profit per unit, derive total cost per unit long-term, and perform value engineering to achieve those costs. 2. Cost-plus pricing method. Add a markup to the unit cost. 3. Life-cycle product costing ALL costs during the product entire lifespan are calculated into the price. Hence, costs are calculated all the way from R&D to when product is ready to be shipped. Early-stage costs are highlighted. |
| What is the difference between cost incurrence and locked-in costs? | Cost incurrence: Resources are sacrificed or used up. Locked-in costs: Not yet incurred but will be incurred based on past decisions. |
| What is customer profitability analys? | We analyze the profitability of each customer to see what customers to focus on. We do this by ranking each customer, depending on profit or revenue. This can answer the following questions: 1. How many profitable/unprofitable customers do we have? 2. Who are our most valuable customers? 3. What is the magnitude of losses of unprofitable customers? 4. How diverse are customers with respect to their profit contribution? |
| What is budgeting? | Budgets are a quantitative expression of a proposed plan of action by management for a future time and a tool to the coordination and implementation of the plan. |
| What is a master budget? | Comprehensive, organization-wide set of budgets. • Coordinates all financial projections in individual budgets. • Time coverage: usually 1 fiscal year, use of rolling budgets. • Embraces impact of operating and financing decisions. |
| What are the roles and functions of a budget? | 1. Planning: To distribute ressources, plan strategically and coordinate across the company. 2. Process: Having a budget can lead managers in the proper direction and make them act in the best interest of the company on a long term basis. 3. Accountability: Managers are accountable for fulfilling their budget, can be used to monitor managers and their performance and creates motivation by setting goals. |
| How can budgeting create motivation? And how can it harm the company long term? | By having achievable targets so managers can actually achieve the targets. However, this may cause managers to do things to achieve their budget that harm the company long term. |
| What is beyond budgeting? | Beyond budgeting is a regular budget, but a managers performance is also measured by subjective evaluations and evaluation of non-financial measures. |
| What are the two ways we determine budgeted numbers? And how does Zero-based budgeting fit in here? | 1. Based on past performance Easy and effective, but may incorporate suboptimal performance and ignores future expected changes. 2. Based on standards By evaluating each cost and justifying them annually. Zero-based budgeting is the extreme approach, evaluating all costs based on standards. |
| What 3 budgets does the master budget consist of? | The master budget consists of 3 parts: 1. The operating budget. (Detailed projection of expected revenue and costs) 2. The capital expenditure budget (Details planned purchases of fixed assets) 3. The cash or financial budget. (Estimation of cash flow) |
| What 3 budgets does the operational budget consist of? | The operating budget is decomposed into: 1. The sales budget (Estimates revenue) 2. The COGS budget (Estimate COGS) 3. The operating expenses budget (Estimate operating expenses, general and administrative expenses) |
| How would you typically calculate the revenue budget? | All product, their quantitaties and sales prices. Calculate revenue. |
| How would you typically calculate the production budget? | Budgeted sales + target closing finished goods stock - opening finished goods stock = Units to be produced |
| What methods of budgeting do we have? | 1. Kaizen budgeting Kaizen means continuous improvement. Hence, the kaizen budgeting is a budgetary approach that explicitly incorporates continuous improvement into the budget numbers during the budget period. 2. Activity-based budgeting (ABB) Activity-based budgeting focuses on the budgeted cost of activities necessary to produce and sell products and services. |
| What responsibility centers do we have? | 1. Cost center: Department or function that does not directly contribute to profit but still costs money to operate. 2. Revenue center: Department responsible for generating sales. 3. Profit center: A center that directly contributes to the company’s bottom line. 4. Investment center: An investment center is a business unit in a firm that can utilize capital to contribute directly to a company's profitability |
| What is variance analysis | Variance analysis is an analysis of differences between the budget and actual results. This evaluates effectiveness, efficiency and the manger himself. |
| Are variances expected? | Yes. Fluctuations will always happen between the budgeted and actual amount. |
| What does U and F mean in variance analysis? | U means the variance is unfavourable for the firm. F means the variance is favourable for the firm. |
| What does the level 0 variance analysis contain? | The level 0 variance analysis only looks at the operating profit. |
| What does the level 1 variance analysis contain? | The level 1 analysis looks at the variance between the actual results and the static budget. |
| What does the level 2 variance analysis contain? | The level 2 analysis splits the static budget variance into the flexible budget variance and the sales volume variance. |
| What does the level 3 variance analysis contain? | The level 3 analysis looks at the direct material costs. |
| What does the price and efficiency variance from level 3 variance analysis show? | Price variance Shows the differences between actual and budgeted input prices. Efficiency variance Shows the difference between actual and budgeted input. Formula: |
| What is 4-variance analysis? (Also known as three-way variance analysis) | This analysis tries to explain the variance in manufacturing overhead with a spending, efficiency and production volume variance. |
| What are the 5 steps in the decision making process? | Step 1: Gathering information - What is the problem, what is the objective of solving it, and what are our alternatives? Step 2: Making predictions - Calculate the costs of each alternative solution to the problem. Step 3: Choosing an alternative Both quantitative (Costs) and qualitative (employee morale etc.) considerations Step 4: Implementing the decision Step 5: Evaluating performance |
| What are relevant and irrelevant information in decision making? And why does short-term and long term decision making change this? | Relevant: Expected future costs, expected revenue Irrelevant: Historical costs from the past (May be useful as a predictor) Sunk costs (Ie. historical costs) are costs we have incurred/must incurre in the future (such as a lease). As we can do nothing about them, they are irrelevant. Fixed costs cannot be changed in the short term. Hence, they are irrelevant for short term decision making but relevant long term. |
| How do we most often answer decision making questions? | By calculating loss/gain of revenue and loss/gain of costs. These must also be incorporated into the full P/L statement with all products if there are multiple products. Remember to state why you include the costs you do in your calculations! |
| What must you be carefull with regarding one-off special orders? | Comparing unit costs! Comparing the unit cost of the one-off special order to your regular production might give incorrect interpretations regards what is best for operating profit. |
| What can choosing to outsource mean for the capacity of the company? | If we choose to outsource, we might have unused capacity meaning we have fixed costs that goes toward nothing! However, maybe the unused capacity can be used to manufacture more of the main product? If that earns more profit than the cost of purchasing the part externally, then we should outsource! REMEMBER, to state an assumption of this if you assume the unused capacity could be used toward producing more products. |
| What are the two approaches to an outsourcing decision? | 1. Total-alternatives approach Calculate all costs and profits in relation to each possible outcome. 2. Opportunity cost approach Here, we note that us choosing to manufacture the part ourselves means that we give up the opportunity of producing more products for sale. |
| What is an opportunity cost? | Opportunity cost is the potential loss from a missed opportunity—the result of choosing one alternative and forgoing another. |
| How does costs of stock relate to opportunity costs? | When buying and storing direct materials, there might be opportunity costs associated with doing so. We have a limited resource that is cash, and we must decide what is the best use for it. Is it in buying direct materials? Investment in materials stock? Government bonds? We must use the money for what generates most profit! |
| What are som qualitative considerations to make in relation to cost of stock and opportunity costs? | Qualitative things to consider: - We might not need all the stock we purchase in the beginning of the year! Recall from variance analysis: the budgeted budget rarely matches the actual budget! - If we purchase monthly, issues with delivery might mean we do not produce at full capacity. Goods can also be damaged. It is much easier to negate for this if all goods are delivered in the beginning of the year. Remember to assume that all deliveries will be on time etc. if you choose monthly delivery of goods! |
| What are som quantitative considerations to make in relation to cost of stock and opportunity costs? | For instance, we might consider buying all stock in the beginning of the year or buy stock monthly. Multiple quantitative things to consider regarding this: - If we buy all stock in the beginning of the year, we lose interest on the money we would normally have in the bank. - We might be able to get a cheaper purchase price due to us buying more stock. |
| How does capacity constraints affect product-mix decisions, and what is the decision rule under capacity constraints? | If there is a production constraint, we must find the optimal mix of products to produce under the constraint to maximize profits. For instance, if the firm cannot produce enough of the most profitable products, they must find what products to prioritize. Decision rule under capacity constraints: Prioritize the product with the highest contribution margin per unit of the constraining factor. |
| Can it make sense to produce a product, even if it is at a loss? | Sometimes it makes sense to produce a product even if that product has a loss. This is because you can allocate the fixed costs to the losing product as well as the profitable product. If you were to allocate all fixed costs to the profitable product, it might not be profitable anymore! Of course, important to look at overall profit here, but you might find this to be the difference of overall loss or overall profit. |