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business
management accounting

Questions and Answers of Management Accounting

5 Assign costs to a cost object using a second-stage allocation.
4 Compute activity rates for cost pools and explain how they can be used to target process improvements
3 Assign costs to cost pools using a first-stage allocation
2 Distinguish between unit-level, batch-level, product-level, customer-level, and organization-sustaining activities
1 Explain the major differences between activity-based costing and a traditional costing system
5–8 How are service department costs assigned to products and services?
5–7 What is the difference between a service department and an operating department? Give several examples of service departments.
5–6 If a company fully allocates all of its overhead costs to jobs, does this guarantee that a profit will be earned for the period?
5–5 What factors should be considered in selecting a base to be used in computing the predetermined overhead rate?
5–4 Why do firms use predetermined overhead rates rather than actual manufacturing overhead costs in applying overhead to jobs?
5–3 Explain why some production costs must be assigned to products through an allocation process. Name several such costs. Would such costs be classified as direct or as indirect costs?
5–2 What is a predetermined overhead rate, and how is it computed?
5–1 Why are actual overhead costs not traced to jobs as are direct materials and direct labour costs?
5 Consider some pitfalls in the allocation of costs
4 Analyse the allocation of service department costs
3 Compute product cost in a simple manufacturing operation
2 Compute predetermined overhead rates
1 Understand the need for job-costing in a variety of industries
4–12 How will relating product contribution margins to the constrained resource they require help a company ensure that profits will be maximized?
4–11 Give four examples of possible constraints.
4–10 How does opportunity cost enter into the make or buy decision?
4–9 ‘If a product line is generating a loss, then that’s pretty good evidence that the product line should be discontinued.’ Do you agree? Explain.
4–8 Prentice Company is considering dropping one of its product lines.What costs of the product line would be relevant to this decision?Irrelevant?
4–7 ‘All future costs are relevant in decision making.’ Do you agree? Why?
4–6 ‘Variable costs and differential costs mean the same thing.’ Do you agree? Explain.
4–5 ‘Sunk costs are easy to spot – they’re simply the fixed costs associated with a decision.’ Do you agree? Explain.
4–4 The book value of a machine (as shown on the balance sheet) is an asset to a company, but this same book value is irrelevant in decision making. Explain why this is so.
4–3 Are variable costs always relevant costs? Explain.
4–2 Define the following terms: incremental cost, opportunity cost, and sunk cost.
4–1 What is a relevant cost?
6 Determine the most profitable use of a constrained resource
5 Prepare an analysis showing whether a special order should be accepted
4 Prepare a make or buy analysis
3 Prepare an analysis showing whether a product line or other organizational segment should be dropped or retained
2 Prepare an analysis showing whether to keep or replace old equipment
1 Distinguish between relevant and irrelevant costs in decisions
A nursing home, which is linked to a large hospital, has been examining its budgetary control procedures, with particular reference to overhead costs. The level of activity in the facility is
Linpet Ltd is to be incorporated on 1 June. The opening balance sheet of the business will then be as follows: Assets Cash at bank Share capital 1 ordinary shares 60,000 60,000 During June, the
Newtake Records Ltd owns a chain of 14 shops selling compact discs. At the beginning of June the business had an overdraft of 35,000 and the bank had asked for this to be eliminated by the end of
Prolog Ltd is a small wholesaler of personal computers. It has in recent months been selling 50 machines a month at a price of 2,000 each. These machines cost 1,600 each. A new model has just been
Brown and Jeffreys, a West Midlands business, makes one standard product for use in the motor trade. The product, known as the Fuel Miser, for which the business holds the patent, when fitted to the
Pilot Ltd makes a standard product, which is budgeted to sell at 5.00 a unit. It is made by taking a budgeted 0.5 kg of material, budgeted to cost 3.00 a kilogram, and working on it by hand by an
Antonio plc makes product X, the standard costs of which are: Sales revenue Direct labour (2 hours) Direct materials (1 kg) Fixed overheads Standard profit 31 (11) (10) (3) 7 The budgeted output for
You have recently overheard the following remarks: (a) When calculating variances, we in effect ignore differences of volume of output, between original budget and actual, by flexing the budget. If
Bradley-Allen Ltd makes one standard product. Its budgeted operating statement for May is as follows: Sales (volume and revenue): 800 units 64,000 Direct materials: 12,000 Type B 16,000 Direct
Mowbray Ltd makes and sells one product, the standard costs of which are as follows: Direct materials (3 kg at 2.50/kg) Direct labour (15 minutes at 9.00/hr) Fixed overheads Selling price Standard
Varne Chemprocessors is a business that specialises in plastics. It uses a standard costing system to monitor and report its purchases and usage of materials. During the most recent month, accounting
Brive plc has the following standards for its only product: Selling price: Direct labour: 110/unit 2 hours at 5.25/hour Direct material: 3 kg at 14.00/kg Fixed overheads: 27.00, based on a budgeted
Identify, discuss and apply the four main investment appraisal methods found in practice.AppendixLO1
Explain the methods used to review and control capital expenditure projects.AppendixLO1
Research indicates that the IRR method is a more popular method of investment appraisal than the NPV method. Why might this be?AppendixLO1
The directors of Mylo Ltd are currently considering two mutually exclusive investment projects. Both projects are concerned with the purchase of new plant. The following data are available for each
C. George (Controls) Ltd manufactures a thermostat that can be used in a range of kitchen appliances. The manufacturing process is, at present, semi-automated. The equipment used costs 540,000, and
The accountant of your business has recently been taken ill through overwork. In his absence his assistant has prepared some calculations of the profitability of a project, which are to be discussed
Arkwright Mills plc is considering expanding its production of a new yarn, code name X15. The plant is expected to cost 1m and have a life of five years and a nil residual value. It will be bought,
Newton Electronics Ltd has incurred expenditure of 5m over the past three years research- ing and developing a miniature hearing aid. The hearing aid is now fully developed, and the directors are
Simtex Ltd has invested 120,000 to date in developing a new type of shaving foam. The shaving foam is now ready for production and it has been estimated that the new product will sell 160,000 cans a
Kernow Cleaning Services Ltd provides street-cleaning services for local councils in the far south west of England. The work is currently labour intensive and few machines are employed. However, the
Discuss the nature and role of strategic management accounting.AppendixLO1
Explain how management accounting information can help a business gain a better understanding of its competitors and customers.AppendixLO1
Describe the techniques available for gaining competitive advantage through cost leadership.AppendixLO1
Explain how the Balanced Scorecard can help monitor and measure progress towards the achievement of strategic objectives.AppendixLO1
Discuss the role of shareholder value analysis and economic value added in strategic decision making.AppendixLO1
How does strategic management accounting differ from its more traditional counterpart?AppendixLO1
Both Customer A and Customer B buy 1,000 units of your business's service each year, paying the same price per unit. Why might your business regard Customer A as a desirable customer, but not
What is the principle on which shareholder value analysis is based?AppendixLO1
Aires plc was recently formed and issued 80 million 0.50 shares at par and loan capital of 24m. The business used the proceeds from the capital issues to purchase the remaining lease on some
You have recently heard someone making the following statement about competitor profitability analysis (CPA). CPA is an assessment of how profitable competitors are, that is carried out in an attempt
Sharma plc makes one standard product for which it charges the same basic price of 20 a unit, though discounts are allowed to certain customers. The business is in the process of carrying out a
(a) The shareholder value approach to managing businesses is different to the stakeholder approach to managing businesses. In the latter case, the different stakeholders of the business (employees,
Virgo pic is considering introducing a system of EVA and wants its managers to focus on the longer term rather than simply focus on the year-to-year EVA results. The business is seeking your advice
Leo plc is considering entering a new market. A new product has been developed at a cost of 5m and is now ready for production. The market is growing and estimates from the finance department
Pisces plc produced the following balance sheet and income statement at the end of the third year of trading: Balance sheet as at the end of the third year m m Non-current assets Goodwill Machinery
Aquarius plc has estimated the following free cash flows for its five-year planning period: Year Free cash flows 12345 m 35 38 45 49 53 How might it be possible to check the accuracy of these
What problems might be encountered when a business attempts to incorporate non-financial measures into its management reports?AppendixLO1
Westcott Supplies Ltd has an operating division which produces a single product. In addition to the conventional RI and ROI measures, central management wishes to use other methods of measuring
Jerry and Co. is a large computer consultancy firm which has a division specialising in robotics. Can you identify three non-financial measures that might be used to help assess the perform- ance of
A UK survey of decentralised businesses revealed that negotiated prices are the most popular form of transfer pricing method. Is this approach necessarily the best approach in theory? Why?AppendixLO1
In divisionalised organisations, complete autonomy of action is impossible when a substantial level of inter-divisional transfers take place. Required: (a) In this context, what is meant by
Measures are required to assess the performance of divisions and of divisional managers. Three financial measures are: contribution; controllable profit; and return on investment (ROI). Required: (a)
You have recently taken a management post in a large divisionalised business. A substantial proportion of the business of your division is undertaken through inter-divisional transfers. Required: (a)
The following information applies to the planned operations of Division A of ABC Corporation for next year: Sales revenue (100,000 units at 12) Variable costs (100,000 units at 8) Fixed costs
The following information applies to the budgeted operations of the Goodman division of the Telling Company. Sales revenue (50,000 units at 8) 400,000 Variable costs (50,000 units at 6) 300,000
Glasnost plc is a large business organised on divisional lines. Two typical divisions are East and West. They are engaged in broadly similar activities and, therefore, central management compares
The University of Devonport consists of six faculties and an administration unit. Under the univer- sity's management philosophy, each faculty is treated, as far as is reasonable, as an independent
AB Ltd operates retail stores throughout the country. The business is divisionalised. Included in its business are Divisions A and B. A centralised and automated warehouse that replenishes
Tariq is the credit manager of Heltex plc. He is concerned that the pattern of monthly sales receipts shows that credit collection is poor compared with budget. Heltex's sales director believes that
How might each of the following affect the level of inventories held by a business? an increase in the number of production bottlenecks experienced by the business; a rise in the level of interest
Hercules Wholesalers Ltd has been particularly concerned with its liquidity position in recent months. The most recent income statement and balance sheet of the business are as follows: Income
International Electric plc at present offers its customers 30 days' credit. Half the customers, by value, pay on time. The other half takes an average of 70 days to pay. The business is con- sidering
The managing director of Sparkrite Ltd, a trading business, has just received summary sets of financial statements for last year and this year: Sparkrite Ltd Income statement for years ended 30
Your superior, the general manager of Plastics Manufacturers Limited, has recently been talk- ing to the chief buyer of Plastic Toys Limited, which manufactures a wide range of toys for young
Mayo Computers Ltd has an annual turnover of 20m before taking into account bad debts of 0.1m. All sales made by the business are on credit, and, at present, credit terms are negotiable by the
Boswell Enterprises Ltd, an electrical wholesale business, is reviewing its trade credit policy. The business, which sells all of its goods on credit, has estimated that sales revenue for the
Delphi plc has recently decided to enter the expanding market for minidisc players. The business will manufacture the players and sell them to small TV and hi-fi specialists, medium-sized music
Goliath plc is a retail business operating in Ireland. The most recent financial statements of the business are as follows: Income statement for the year to 31 May 000 000 Sales revenue 2,400.0 Less
1 Describe what managers do and why they need accounting information 2 Appreciate the key characteristics of management accounting information
3 Review the impact on business of organizational and technological change, managing for value, the sustainability agenda and corporate governance
4 Appreciate that management accounting principles can be useful irrespective of who applies them or where they are located in an organization
1 Understand the need for costing for external financial reporting

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