EXAM 1
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
Identify the appropriate way(s) to dispose of under- or overallocated overhead costs.
(1) Proration to work in process, finished goods and cost of good sold, (2) Year-end write-off to cost of goods sold, (3) Restatement of all overhead entries using actual indirect costs rates rather than budgeted indirect cost rates.
Identify the ways in which a house construction company may use job-cost information.
(a) to determine the profitability of individual jobs, (b) to assist in bidding on future jobs, and (c) to evaluate professionals who are in charge of managing individual jobs
Four approaches to estimating a cost function.
1.) Account analysis method 2.) Conference method 3.) Industrial engineering method 4.) Quantitative Analysis of current or past relationships
What are three common features of cost accounting and cost management?
1.) Calculating the cost of products, services, and other cost objects. 2.) Analyzing the relevant information for making decisions. 3.) Obtaining information for planning and control and performance evaluation.
List the six steps in estimating a cost function on the basis of an analysis of a past cost relationship in the correct order.
1.) Choose the independent variable 2.) Identify the independent variable or cost driver 3.) Collect the data on the dependent variable and driver 4.) Plot the data 5.) Estimate the cost function 6.) Evaluate the cost driver of the estimated cost function
The coefficient of correlation between direct materials cost and units produced is nearest
1.00 The number of units produced is strongly and directly related to direct materials cost.
Which step is typically the most difficult for the cost analyst?
3.) Collect the data on the dependent variable and driver
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.
Define cost object and give three examples.
A cost object is anything for which a separate measurement of costs is desired. Examples include a product, a service, and a customer.
Define learning curve. Select two models that can be used when incorporating learning into the estimation of cost functions.
A learning curve is a function that measures how labor-hours per unit decline as units of production increase because workers are learning and becoming better at their jobs. Two models that can be used when incorporating learning into the estimation of cost functions are: 1.) Cumulative average-time learning model 2.) Incremental unit-time learning model
A job-order cost system uses a predetermined manufacturing overhead rate based on expected volume and expected fixed cost. At the end of the year, underapplied overhead might be explained by which of the following situations?
Actual Volume: Less than expected Actual fixed costs: Greater than expected If too little fixed overhead is applied at the predetermined rate (expected fixed cost /expected volume), the result is underapplied overhead (actual manufacturing overhead exceeds overhead applied). If the actual and expected fixed costs are the same, but the actual volume is less than the expected (denominator) volume, overhead will be underapplied. If the actual volume equals expected volume, but actual fixed costs exceed the expected (numerator) fixed costs, overhead is likewise underapplied.
Distinguish between actual costing and normal costing.
Actual costing and normal costing differ in their use of actual or budgeted indirect-cost rates.
"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.
Inventoriable costs
Are regarded as assets before the products are sold. Under an absorption costing system, inventoriable (product) costs include direct materials and conversion costs (direct labor and fixed and variable manufacturing overhead). Inventoriable costs are treated as asset until the products are sold because they represent future economic benefits.
How does a job-costing system differ from a process-costing system?
A job-costing system assigns costs to distinct units; a process-costing system assigns costs to masses of similar units.
"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.
All of the following are assumptions underlying the validity of linear regression output except
Certainty Regression is only a means of predicting the future. Certainty cannot be achieved.
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.
According to Statement on Management Accounting Number 1C (Revised), IMA Statement of Ethical Professional Practice, a member has a responsibility to recognize professional limitations. Under which standard of ethical conduct would this responsibility be included?
Competence The competence standard requires an IMA member to recognize and communicate professional limitations or other constraints that would preclude responsible judgement or successful performance.
Which of the following statements is not correct?
Corporate social responsibility is a process used by a company to identify risks relating to strategy, plan, and decision and develop responses to them that enable it to be reasonably assured of meeting its goals.
What assumption(s) are frequently made when estimating a cost function?
Cost behavior is approximated by a linear function within the relevant range. Variations in the level of a single activity explain the variations in the related total costs. Both of the above.
When using the high-low method, should you base the high and low observations on the dependent variable or on the cost driver?
Cost driver
Theoretically, cash discounts permitted on purchased raw materials should be
Deducted from inventory, whether taken or not. Cash discounts on purchases should be treated as reductions in the invoiced prices of specific purchases so that goods available for sale reflect net purchase prices. Any discounts not taken are recorded as losses in the income statement. The net method is preferable to recording inventories and payables at gross amounts because the net amounts are the most accurate exchange prices. Moreover, it measures management's stewardship by recording as financing charges any discounts not taken.
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.
Cost-volume profit (CVP) analysis allows management to determine the relative profitability of a product by
Determining the contribution margin per unit and the projected profits at various levels of production. CVP analysis studies the relationship among sales volume, sales price, fixed costs, variable costs, and profit. It allows management to determine the unit contribution margin (UCM), that is, the difference between unit sales price and unit variable cost. The UCM is used to project the breakeven point (BEP) as well as profits at various levels of production.
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.
Conversion costs do not include
Direct materials Conversion costs are necessary to convert materials into finished products. They include all manufacturing overhead costs, for example, direct labor and manufacturing overhead other than direct materials.
What are three different types of inventory that manufacturing companies hold?
Direct materials, work-in-process, and finished goods
Practical capacity as a plant capacity concept
Does not consider idle time cause by inadequate sales demand Practical capacity is the maximum level at which output is produced efficiently. It includes consideration of idle time resulting from holidays, downtime, change-over time, etc., not from inadequate sales demand.
Three criteria for evaluating cost functions and choosing cost drivers are:
Economic plausibility, goodness of fit, slope of regression line
Describe three methods that managers can use to express CVP relationships.
Equation, contribution margin, and graph method
At the breakeven point, the contribution margin equals total
Fixed costs At the breakeven point, the point at which no profit or loss occurs, fixed cost must equal the contribution margin (total revenue-total variable cost).
What are the four key assumptions examined in specification analysis in the case of simple regression?
Four key assumptions examined in specification analysis are 1. Linearity of relationship between the dependent variable and the independent variable within the relevant range. 2. Constant variance of residuals for all values of the independent variable. 3. Independence of residuals. 4. Normal distribution of residuals.
Jago Co. has two products that use the same manufacturing facilities and cannot be subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity. For short-run profit maximization, Jago should manufacture the product with the
Greater contribution margin per hour of manufacturing capacity Fixed costs do not vary in the short run. Consequently, the appropriate decision criterion considers revenues and variable costs only, for example, contribution margin per hour of manufacturing capacity (contribution margin= sales revenue- variable cost)
The breakeven point in units increases when unit costs
Increase and sales price remains unchanged. The breakeven point in units is calculated by dividing the fixed costs by the unit contribution margin (UCM). If selling price is constant and costs increase, the UCM declines, resulting in an increase of the breakeven point.
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.
Correlation is a term frequently used in conjunction with regression analysis and is measured by the value of the coefficient of correlation, r. The best explanation of the value r is that it
Is a measure of the relative relationship between two variables.
Life cycle costing
Is sometimes used as a basis for cost planning and product pricing. Life-cycle costing estimates a product's revenue and expenses over its expected life cycle. This approach is especially useful when revenues and related costs do not occur in the same periods. It emphasizes the need to price products to cover all costs, not just those for production.
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.
Why might an advertising agency use job costing for an advertising campaign by PepsiCo, whereas a bank might use process costing to determine the cost of checking account deposits?
Job costing enables all the specific aspects of each job to be identified, whereas process costing can be used to compute the cost of numerous identical or similar services.
Omaha Sales Company asked a CPA's assistance in planning the use of the multiple regression analysis to predict district sales. An equation has been estimated based upon historical data, and a standard error has been computed. When regression analysis based upon past periods is used to predict for a future period, the standard error associated with the predicted value, in relation to the standard error for the base equation, will be
Larger. The standard error associated with a predicted value is always larger because it considers two types of error.
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.
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.
"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.
In determining cost behavior in business, the cost function is often expressed as y= a + bx. Which one of the following cost estimation methods should not be used in estimating fixed and variable costs for the equation?
Multiple regression. Because multiple regression has more than one independent variable.
Distinguish between operating income and net income.
Net income takes into account income taxes, whereas, operating income does not take income taxes into account.
"High correlation between two variables means that one is the cause and the other is the effect." Do you agree? Explain.
No, you must also consider economic plausability before determining there is a cause and effect relationship.
"All the independent variables in a cost function estimated with regression analysis are cost drivers." Do you agree? Explain.
No. A cost driver is any factor whose change causes a change in the total cost of a related cost object. A cause-and-effect relationship underlies selection of a cost driver. Some users of regression analysis include numerous independent variables in a regression model in an attempt to maximize goodness of fit, irrespective of the economic plausibility of the independent variables included. Some of the independent variables included may not be cost drivers.
"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.
"Multicollinearity exists when the dependent variable and the independent variable are highly correlated." Do you agree? Explain.
No. Multicollinearity exists when two or more independent variables are highly correlated with each other.
How does an increase in the income tax rate affect the breakeven point?
None of the above. An increase in the income tax rate does not affect the breakeven point.
Describe the overtime-premium and idle-time categories of indirect labor.
Overtime premium is the wage rate paid to workers (for both direct labor and indirect labor) in excess of their straight-time wage rates. Idle time is a subclassification of indirect labor that represents wages paid for unproductive time caused by lack of orders, machine breakdowns, poor scheduling, etc.
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 relevance of a particular cost to a decision is determined by
Potential effect on the decision Relevance is the capacity of information to make a difference in a decision by helping users of that information to predict the outcomes of events or to confirm or correct prior expectations. Thus, relevant costs are those expected future costs that vary with the action taken. All other costs are constant and therefore have no effect on the decision.
Which one of the following categories of cost is most likely not considered a component of fixed manufacturing overhead?
Power A fixed cost remains unchanged within the relevant range for a given period despite fluctuations in activity. Such items as rent, property taxes, depreciation, and supervisory salaries are normally fixed costs because they do not vary with changes in production. Power costs, however are at least partially variable because they increase as usage increases.
If the coefficient of correlation between two variables is zero, how might a scatter diagram of these variables appear?
Random points If the coefficient of correlation is zero, the variables are unrelated and the points are randomly distributed.
The business functions in the value chain include:
Research and development, Design of products and processes, Production, Marketing, Distribution, and Customer service.
Cost-volume-profit analysis assumes that over the relevant range total
Revenues are linear
Which one of the following is least likely to be an objective of a cost accounting system?
Sales commission determination Determining sales commissions is not an objective because they are not based on costs.
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.
What is the journal entry for the purchase of $500 of direct materials and $250 of supplies for cash?
Stores Control $750 Cash $750 The correct entry to record the purchase of materials and supplies is to debit the stores control account for the combined cost of the materials and supplies ($750) and to credit cash.
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.
Describe the account analysis method for estimating a cost function.
The account analysis method estimates cost functions by classifying cost accounts in the subsidiary ledger as variable, fixed, or mixed with respect to the identified level of activity. Typically, managers use qualitative, rather than quantitative, analysis when making these cost-classification decisions.
How can a company with multiple products compute its breakeven point?
The breakeven point can be computed by assuming there is a constant sales mix of products at different levels of total revenue.
Describe the conference method for estimating a cost function. What are two advantages of this method?
The conference method estimates cost functions on the basis of analysis and opinions about costs and their drivers gathered from various departments of a company (purchasing, process engineering, manufacturing, employee relations, etc.). Advantages of the conference method include: 1. The speed with which cost estimates can be developed. 2. The pooling of knowledge from experts across functional areas.
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.
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.
Determine whether this statement is true or false. "In a normal-costing system, the amounts in the Manufacturing Overhead Control account will always equal the amounts in the Manufacturing Overhead Allocated account."
The statement is false
Which one of the following is true regarding a relevant range?
Total fixed costs will not change. The relevant range is the range of activity over which unit variable costs and total fixed costs are constant. The incremental cost of one additional unit of production will be equal to the variable cost.
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.
Why do managers consider direct costs to be more accurate 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. 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. 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. ALL OF THE ABOVE
In a job-order cost system, the application of manufacturing overhead is usually reflected in the general ledger as an increase in
Work-in-process control The entry to record the application of manufacturing overhead to specific jobs is to charge WIP control and credit manufacturing overhead applied (or manufacturing overhead control) using a predetermined overhead rate. The effect is to increase the WIP control account.
What is the advantage of using computerized source documents to prepare job-cost records?
accuracy of the recordslong dashincorrect recording of amounts, incorrect job numbers, materials being "borrowed" for another job
Identify three different debit entries to the Work-in-Process Control T-account under normal costing.
direct materials used, direct manufacturing labor billed to a job, manufacturing overhead allocated to a job
Multiple regression differs from simple regression in that it
has more independent variables.
Electronic Data Interchange (EDI) is helpful to managers because
it ensures that a purchase order is transmitted quickly and accurately to suppliers with minimum paperwork and costs.
A company might use budgeted costs rather than actual costs to compute direct-labor rates because
it may be difficult to trace direct labor costs to jobs as they are completed.
Identify three major source documents used in job-costing systems.
job cost record (sheet), materials requisition record, and labor time record
Factors affecting the classification of a cost as direct or indirect include
materiality of the cost, available information-gathering technology, and design of operations.
Select examples of two cost objects in companies using job costing.
products or jobs and responsibility centers or departments
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.
Managerial accounting is concerned with:
providing information for use within the organization.
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.
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).
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.
What steps should a management accountant take if established written policies provide insufficient guidance on how to handle an ethical conflict?
(a) Discuss the problem with the immediate superior (except when it appears that the superior is involved). (b) Clarify relevant ethical issues by confidential discussion with an IMA Ethics Counselor or other impartial advisor. (c) Consult your own attorney as to legal obligations and rights concerning the ethical conflicts.
"In CVP analysis, gross margin is a less-useful concept than contribution margin." Do you agree? Explain briefly.
Yes, gross margin calculations emphasize the distinction between manufacturing and nonmanufacturing costs. Contribution margin calculations emphasize the distinction between fixed and variable costs. Hence, contribution margin is a more useful concept than gross margin in CVP analysis.
What is the difference between a linear and a nonlinear cost function? Give an example of each type of cost function.
A linear cost function is a cost function where, within the relevant range, the graph of total costs versus the level of a single activity related to that cost is a straight line. An example of a linear cost function is a cost function for use of a videoconferencing line where the terms are a fixed charge of $10,000 per year plus a $2 per minute charge for line use. A nonlinear cost function is a cost function where, within the relevant range, the graph of total costs versus the level of a single activity related to that cost is not a straight line. Examples include economies of scale in advertising where an agency can double the number of advertisements for less than twice the costs, step-cost functions, and learning-curve-based costs.
Which of the following statements is not correct?
A plan is always expressed in formal quantitative terms.
Define product cost. Describe three different purposes for computing product costs.
A product cost is the sum of the costs assigned to a product for a specific purpose. Purposes for computing a product cost include (1) pricing and product mix decisions, (2) contracting with government agencies, and (3) preparing financial statements for external reporting under GAAP.
A fixed cost that would be considered a direct cost is
A production supervisor's salary when the cost object is the Production Department. A direct cost can be specifically associated with a single cost object in an economically feasible way. Thus, a production supervisor's salary can be directly associated with the department (s)he supervises.
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.
Which of the following are frequently encountered problems when collecting cost data on variables included in a cost function?
A. 1. Data are either not available for all observations or are not uniformly reliable. 2. Extreme values of observations occur. B. 1. A homogeneous relationship between the individual cost items in the dependent variable cost pool and the cost driver(s) does not exist. 2. The relationship between the cost and the cost driver is not stationary. C. 1. The time period used to measure the dependent variable is not properly matched with the time period used to measure the cost driver(s). 2. Fixed costs are allocated as if they are variable. D. All OF THE ABOVE ARE GREAT
Why is it more accurate to describe the subject matter of this chapter as CVP analysis rather than as breakeven analysis?
A. Cost-volume-profit is a more comprehensive term than breakeven analysis. B. The breakeven point is an incidental part of the relationship between cost, volume, and profit. C. The breakeven analysis only denotes the study of the breakeven point. D. ALL OF THE ABOVE
Identify the reason(s) why most organizations use an annual period rather than a weekly or monthly period to compute budgeted indirect-cost rates.
A. The numerator reasonlong dashthe longer time period, the less i influence of seasonal patterns. B. The denominator reasonlong dashthe longer the time period, the less the effect of variations in output levels on the allocation of fixed costs. D. Both A & B
A performance report:
A.) is part of the control process. B.) compares budgeted data to actual data in an effort to identify excellent performance. C) is prepared to identify unsatisfactory performance. D) IS ALL OF THE ABOVE
