Accounting Managerial 1 - Tapis
What is a cost driver? Give one example
A cost driver is a variable, such as the level of activity or volume, which causally affects total costs over a given time span. A change in the cost driver results in a change in the level of total costs. For example, the number of vehicles assembled is a driver of the costs of steering wheels on a motor-vehicle assembly line.
Choose the correct definition of a cost object
A cost object is anything for which a separate measurement of costs is desired. Examples include a product, a service, and a customer.
"CVP analysis is both simple and simplistic. If you want realistic analysis to underpin your decisions, look beyond CVP analysis." Do you agree? Explain.
CVP analysis is simple, with its assumption of output as the only revenue and cost driver, and linear revenue and cost relationships. It is not necessarily simplistic, though, since the basic ideas can be expanded upon to provide useful insights in more complex decision-making cases.
Choose an example of how a manager can decrease variable costs while increasing fixed costs.
Changing a sales force compensation plan from a percent of sales dollars to a fixed salary.
How can management accountants help improve quality and achieve timely product deliveries?
Management accountants analyze and evaluate the costs and benefits of both financial and non-financial information, to suggest new quality initiatives such as TQM or providing faster customer service.
"Management accounting should not fit the straitjacket of financial accounting." Explain and give an example.
Management accounting does not have to comply with the same standards of financial accounting such as generally accepted accounting principles.
Where does the management accounting function fit into an organization's structure?
The controller is the chief management accounting executive. The corporate controller reports to the chief financial officer, a staff function. Companies also have business unit controllers who support business unit managers or regional controllers who support regional managers in major geographic regions.
Name the four areas in which standards of ethical conduct exist for management accountants in the United States. What organization sets forth these standards?
(1) Competence, (2) Confidentiality, (3) Integrity, and (4) Credibility. These standards are set by the Institute of Management Accountants (IMA).
What three guidelines help management accountants provide the most value to managers?
(1) Employ a cost-benefit approach, (2) Recognize behavioral and technical considerations, and (3) Apply the "different costs for different purposes" notion
Describe three methods that managers can use to express CVP relationships.
Equation, contribution margin, and graph method
"Knowledge of technical issues such as computer technology is a necessary but not sufficient condition to becoming a successful management accountant." Do you agree? Why?
Agree. A successful management accountant requires general business skills and people skills as well as technical skills.
How does an increase in the income tax rate affect the breakeven point?
An increase in the income tax rate does not affect the breakeven point.
"There is no such thing as a fixed cost. All costs can be 'unfixed' given sufficient time." Do you agree? What is the implication of your answer for CVP analysis?
Many items classified as a fixed in the short run may become variable costs with a longer time horizon (period of time for a decision). CVP is not made any less relevant when the time horizon lengthens.
Distinguish between operating income and net income.
Net income takes into account income taxes, whereas, operating income does not take income taxes into account.
"Management accounting deals only with costs." Do you agree? Explain.
No. Management accounting measures, analyzes, and reports financial and non-financial information that helps managers define the organization's goals, and make decisions to fulfill them.
Choose the correct description of variable and fixed costs.
A variable cost changes in total in proportion to changes in the related level of total activity or volume, such as a sales commission that is a percentage of each sales revenue dollar. A fixed cost remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume, such as a fixed annual leasing cost of a machine.
Why do managers consider direct costs to be more accurate than indirect costs?
Cost tracing, which is used when assigning direct costs to a particular cost object, is more accurate than cost allocation, which is used to assign indirect costs to the same cost object. Allocating indirect costs is more subjective and generally more difficult to assign to a cost object than are direct costs. Therefore, direct costs are deemed by managers to be more accurate costs than indirect costs. When costs are allocated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object, and therefore, direct costs are considered to be more accurate.
As a new controller, reply to this comment by a plant manager: "As I see it, our accountants may be needed to keep records for shareholders and Uncle Sam, but I don't want them sticking their noses in my day-to-day operations. I do the best I know how. No bean counter knows enough about my responsibilities to be of any use to me."
Demonstrate to the plant manager a good knowledge of the technical aspects of the plant and spend some time on the plant floor speaking to plant personnel to get a better understanding of the facility.
Distinguish direct costs from indirect costs.
Direct costs are related to the particular cost object and can be traced to that cost object in a cost-effective way while indirect costs are related to the particular cost object but cannot be traced to that cost object in a cost-effective way.
What are three different types of inventory that manufacturing companies hold?
Direct materials, work-in-process, and finished goods
Distinguish between inventoriable costs and period costs.
Inventoriable costs are all costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold when the product is sold. Period costs are all costs in the income statement other than cost of goods sold. Period costs are treated as expenses of the accounting period in which they are incurred because they are expected to not benefit future periods.
What is operating leverage? How is knowing the degree of operating leverage helpful to managers?
It describes the effects that fixed costs have on changes in operating income as changes occur in units sold and contribution margin. Knowing the degree of operating leverage at a given level of sales helps managers calculate the effect of fluctuations in sales on operating income.
How does management accounting differ from financial accounting?
Management accounting measures and reports financial and nonfinancial information that helps managers make decisions to fulfill the goals of an organization. Financial accounting measures and records business transactions and provides financial statements that are based on generally accepted accounting principles (GAAP).
Identify how manufacturing-, merchandising-, and service-sector companies differ from each other.
Manufacturing-sector companies purchase materials and components and convert them into various finished goods, for example automotive companies and textile companies. Merchandising-sector companies purchase and then sell tangible products without changing their basic form, for example retail stores and distribution companies. Service-sector companies provide services or intangible products to their customers, for example legal advice or audits.
Distinguish planning decisions from control decisions.
Planning decisions focus on selecting organization goals, predicting results under various alternative ways of achieving those goals, deciding how to attain the desired goals, and communicating the goals and how to attain them to the entire organization.Control decisions focus on taking actions that implement the planning decisions, deciding how to evaluate performance, and what related feedback to provide that will help future decision making.
The business functions in the value chain include:
Research and development, Design of products, services or processes, Production, Marketing, Distribution, and Customer service.
Select the description of sensitivity analysis and how the advent of electronic spreadsheets has affected its use.
Sensitivity analysis is the "what-if" technique that managers use to examine how an outcome will change if the original predicted data are not achieved or if an underlying assumption changes. The advent of the electronic spreadsheet has greatly increased the ability to explore the effect of alternative assumptions at minimal cost.
Choose an example of how a manager can increase variable costs while decreasing fixed costs.
Subcontracting a component to a supplier on a per-unit basis to avoid purchasing a machine with a high fixed depreciation cost.
Explain the term "supply chain" and its importance to cost management.
Supply chain describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in the same organization or in other organizations. Cost management is most effective when it integrates and coordinates activities across all companies in the supply chain as well as across each business function in an individual company's value chain.
Why is it more accurate to describe the subject matter of this chapter as CVP analysis rather than as breakeven analysis?
The breakeven analysis only denotes the study of the breakeven point. Cost-volume-profit is a more comprehensive term than breakeven analysis. The breakeven point is an incidental part of the relationship between cost, volume, and profit.
What is the relevant range? What role does the relevant-range concept play in explaining how costs behave?
The relevant range is the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question. Costs are described as variable or fixed with respect to a particular relevant range.
Why must unit costs often be interpreted with caution?
Unit costs are computed by dividing some amount of total costs by the related number of units. In many cases, the total costs include a fixed cost that will not change despite changes in the number of units. Therefore, it can be misleading to multiply the unit cost by activity or volume change to predict changes in total costs at different activity or volume levels.
Factors affecting the classification of a cost as direct or indirect include
materiality of the cost, available information-gathering technology, and design of operations.
A management accountant can help formulate a strategy by
providing information about the sources of competitive advantage, such as the cost, productivity, or efficiency advantage of their company relative to competitors.
Cost-volume-profit analysis examines
the behavior of total revenues, total costs, and operating income as changes occur in the output level, selling price, variable cost per unit, or fixed costs of a product.
The five-step decision-making process includes:
(1) Identifying the problem and uncertainties, (2) Obtaining information, (3) Making predictions about the future, (4) Making decisions by choosing among alternatives, and (5) Implementing the decision, evaluating performance and learning.
