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business
management accounting

Questions and Answers of Management Accounting

2 Identify each of the three basic cost elements involved in the manufacture of a product
3 Distinguish between product costs and period costs and give examples of each
4 Understand the basics of cost behaviour
5 Identify and give examples of variable costs and fixed costs
6 Define cost classifications used in making decisions: differential costs, opportunity costs and sunk costs
2–1 What are the three major elements of product costs in a manufacturing company?
2–2 Distinguish between the following: (a) direct materials, (b) indirect materials, (c) direct labour, (d) indirect labour, and (e) manufacturing overhead.
2–3 Explain the difference between a product cost and a period cost.
2–4 Why are product costs sometimes called stock-related costs? Describe the flow of such costs in a manufacturing company from the point of incurrence until they finally become expenses on the
2–5 What is meant by the term cost behaviour?
2–7 How do fixed costs create difficulties in costing units of product?
2–8 Why is manufacturing overhead considered an indirect cost of a unit of product?
2–9 Define the following terms: differential cost, opportunity cost, and sunk cost.
2–10 Only variable costs can be differential costs. Do you agree? Explain.
E2–1 The following are a number of cost terms introduced in the chapter:Choose the term or terms above that most appropriately describe the cost identified in each of the following situations. A
E2–2 Time allowed: 10 minutes A product cost is also known as a stock-related cost. Classify the following costs as either product (stock-related) costs or period (non-stock-related)costs in a
E2–3 Time allowed: 10 minutes Below are a number of costs that are incurred in a variety of organizations:1 X-ray film used in the radiology lab at Queens Medical Centre in Nottingham 2 The costs
E2–4 Time allowed: 20 minutes The following cost and stock data are taken from the accounting records of Mason Company for the year just completed:Required 1 Prepare a schedule of cost of goods
E2–5 Time allowed: 15 minutes Below are listed various costs that are found in organizations:1 Hamburger buns in a McDonald’s outlet 2 Advertising by a dental office 3 Apples processed and canned
P2–6 Cost identificationWollongong Group Ltd of New South Wales, Australia, acquired its factory building about ten years ago. For several years the company has rented out a small annex attached to
P2–7 Supply missing production and cost data Time allowed: 30 minutes Supply the missing data in the following cases. Each case is independent of the others. Case 1 2 3 4 Direct materials 4,500
P2–8 Cost classification Time allowed: 20 minutes Various costs associated with the operation of a factory are given below:1 Electricity used in operating machines 2 Rent on a factory building 3
P2–9 Cost identification Time allowed: 40 minutes The Dorilane Company specializes in producing a set of wooden patio furniture consisting of a table and four chairs. The set enjoys great
P2–10 Cost classification Time allowed: 25 minutes Listed below are a number of costs typically found in organizations:1 Property taxes, factory 2 Boxes used for packaging detergent 3
P2–11 Cost identification Time allowed: 20 minutes Tracy Beckham began dabbling in pottery several years ago as a hobby. Her work is quite creative, and it has been so popular with friends and
P2–12 Cost behaviour; manufacturing statement; unit costs Time allowed: 40 minutes Visic Company, a manufacturing firm, produces a single product. The following information has been taken from the
1 Explain how changes in activity affect contribution margin and profit
2 Compute the contribution margin ratio (CM ratio) and use it to compute changes in contribution margin and profit
3 Show the effects on contribution margin of changes in variable costs, fixed costs, selling price and volume
4 Compute the break-even point by both the equation method and the contribution margin method
5 Prepare a cost–volume–profit (CVP) graph and explain the significance of each of its components
6 Use the CVP formulas to determine the activity level needed to achieve a desired target profit
7 Compute the margin of safety and explain its significance
8 Compute the degree of operating leverage at a particular level of sales and explain how the degree of operating leverage can be used to predict changes in profit
9 Compute the break-even point for a multiple product company and explain the effects of shifts in the sales mix on contribution margin and the break-even point.
3–1 What is meant by a product’s CM ratio? How is this ratio useful in planning business operations?
3–2 Company A’s cost structure includes costs that are mostly variable, whereas Company B’s cost structure includes costs that are mostly fixed. In a time of increasing sales, which company
3–3 What is meant by the term operating leverage?
3–4 A 10 per cent decrease in the selling price of a product will have the same impact on profit as a 10 per cent increase in the variable expenses. Do you agree? Why or why not?
3–5 What is meant by the term break-even point?
3–6 Name three approaches to break-even analysis. Briefly explain how each approach works.
3–8 Al’s Car Wash charges £4 to wash a car. The variable costs of washing a car are 15 per cent of sales. Fixed expenses total £1,700 monthly.How many cars must be washed each month for Al to
3–9 What is meant by the margin of safety?
3–10 Companies X and Y are in the same industry. Company X is highly automated, whereas Company Y relies primarily on labour to make its products. If sales and total expenses in the two companies
3–11 What is meant by the term sales mix? What assumption is usually made concerning sales mix in CVP analysis?
3–12 Explain how a shift in the sales mix could result in both a higher break-even point and a lower profit.
E3–1 Time allowed: 20 minutes Menlo Company manufactures and sells a single product. The company’s sales and expenses for the last quarter follow:Required 1 What is the quarterly break-even point
E3–2 Time allowed: 20 minutes Lindon Company is the exclusive distributor for an automotive product. The product sells for £40 per unit and has a CM ratio of 30%. The company’s fixed expenses
E3–3 Time allowed: 25 minutes The Hartford Symphony Guild is planning its annual dinner-dance. The dinner-dance committee has assembled the following expected costs for the event:The committee
E3–4 Time allowed: 15 minutes Magic Realm Ltd has developed a new fantasy board game. The company sold 15,000 games last year at a selling price of £20 per game. Fixed costs associated with the
E3–5 Time allowed: 20 minutes Miller Company’s most recent profit and loss account is shown below:Required Prepare a new profit and loss account under each of the following conditions (consider
E3–6 Time allowed: 20 minutes Fill in the missing amounts in each of the eight case situations below. Each case is independent of the others. (Hint: One way to find the missing amounts would be to
E3–7 Time allowed: 25 minutes Olongapo Sports Corporation is the distributor in the Philippines of two premium golf balls – the Flight Dynamic and the Sure Shot. Monthly sales and the
E3–8 Time allowed: 25 minutes Outback Outfitters manufactures and sells recreational equipment. One of the company’s products, a small camp stove, sells for £50 per unit. Variable expenses are
P3–9 Basic CVP analysis; graphing Time allowed: 60 minutes The Fashion Shoe Company operates a chain of women’s shoe shops around the country. The shops carry many styles of shoes that are all
P3–10 Basics of CVP analysis; cost structure Time allowed: 60 minutes Due to erratic sales of its sole product – a high-capacity battery for laptop computers – PEM Ltd has been experiencing
P3–11 Sales mix assumptions; break-even analysis Time allowed: 35 minutes Gold Star Rice Ltd of Thailand, exports Thai rice throughout Asia. The company grows three varieties of rice – Fragrant,
P3–12 Basics of CVP analysis Time allowed: 20 minutes Feather Friends Ltd makes a high-quality wooden birdhouse that sells for£20 per unit. Variable costs are £8 per unit, and fixed costs total
P3–13 The case of the elusive contribution margin Time allowed: 30 minutes The Shirt Works sells a large variety of tee shirts and sweat shirts. Steve Hooper, the owner, is thinking of expanding
P3–14 Sensitivity analysis of profit; changes in volume Time allowed: 30 minutes Minden Company introduced a new product last year for which it is trying to find an optimal selling price. Marketing
P3–15 Graphing; incremental analysis; operating leverage Time allowed: 60 minutes Time allowed: 60 minutes Angie Silva has recently opened The Sandal Shop in Brisbane, Australia, a store that
P3–16 Sales mix; commission structure; break-even point Time allowed: 60 minutes Carbex Ltd produces cutlery sets out of high-quality wood and steel. The company makes a standard cutlery set and a
P3–17 Various CVP questions: break-even point; cost structure; target sales Time allowed: 60 minutes Northwood Company manufactures basketballs. The company has a standard ball that sells for £25.
P3–18 Changing levels of fixed and variable costs Neptune Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come onto the market that the company
Identify the purpose of a business and discuss the ways in which a business may be organised and managed.AppendixLO1
Discuss the issues to be considered when setting the financial aims and objectives of a business.AppendixLO1
Explain the role of management accounting within a business and describe the key qualities that management accounting information should possess.AppendixLO1
Explain the changes that have occurred over time in both the role of the management accountant and the type of information provided by management accounting systems.AppendixLO1
Identify the main users of accounting information for a university. Do these users differ very much from the users of accounting information for private-sector businesses? Is there a difference in
Assume that you are a manager considering the launch of a new service. What accounting information might be useful to help in making a decision?AppendixLO1
'Accounting information should be understandable. As some managers have a poor knowledge of accounting we should produce simplified financial reports to help them.' To what extent do you agree with
You have been speaking to a friend who owns a small business and she has said that she has read something about strategic management and that no modern business can afford not to get involved with
Jones Dairy Ltd (Jones) operates a 'doorstep' fresh milk delivery service. Two brothers carry on the business that they inherited from their father in the early 1960s. They are the business's only
Use the relevant costs to make decisions.AppendixLO1
Set out the analysis in a logical form so that the conclusion may be communicated to managers.AppendixLO1
To be relevant to a particular decision, a cost must have two attributes. What are they?AppendixLO1
Lombard Ltd has been offered a contract for which there is available production capacity. The contract is for 20,000 identical items, manufactured by an intricate assembly operation, to be produced
The local authority of a small town maintains a theatre and arts centre for the use of a local repertory company, other visiting groups and exhibitions. Management decisions are taken by a committee
SJ Services Ltd has been asked to quote a price for a special contract to render a service that will take the business one week to complete. Information relating to labour for the contract is as
A local education authority is faced with a predicted decline in the demand for school places in its area. It is believed that some schools will have to close in order to remove up to 800 places from
Rob Otics Ltd, a small business that specialises in building electronic-control equipment, has just received an order from a customer for eight identical robotic units. These will be completed using
A business places substantial emphasis on customer satisfaction and, to this end, delivers its product in special protective containers. These containers have been made in a department within the
Distinguish between fixed costs and variable costs and use this distinction to explain the relationship between costs, volume and profit.AppendixLO1
The management of a business is concerned about its inability to obtain enough fully trained labour to enable it to meet its present budget projection. Service: Alpha Beta Gamma Total 000 000 000 000
Lannion and Co. is engaged in providing and marketing a standard advice service. Summarised results for the past two months reveal the following: Sales (units of the service) Sales revenue ()
A hotel group prepares financial statements on a quarterly basis. The senior management is reviewing the performance of one hotel and making plans for next year. The managers have in front of them
Motormusic Ltd makes a standard model of car radio, which it sells to car manufacturers for 60 each. Next year the business plans to make and sell 20,000 radios. The business's costs are as follows:
A business makes three products, A, B and C. All three products require the use of two types of machine: cutting machines and assembling machines. Estimates for next year include the following:
Fixed costs for next year are expected to total 42,000. It is the business's policy for each unit of production to absorb these in proportion to its total variable costs. The business has cutting
Intermediate Products Ltd produces four types of water pump. Two of these (A and B) are sold by the business. The other two (C and D) are incorporated, as components, into another of the business’s
Gandhi Ltd renders a promotional service to small retailing businesses. There are three levels of service: the 'basic', the 'standard' and the 'comprehensive'. On the basis of past experience, the
Deduce the full (absorption) cost of a unit of output in a single-product environment.AppendixLO1
Deduce the full (absorption) cost of a unit of output in a multi-product environment.AppendixLO1
What is the point of distinguishing direct costs from indirect ones? Why is this not necessary in process costing environments?AppendixLO1
Are direct costs and variable costs the same thing? Explain your answer.AppendixLO1
Bodgers Ltd, a business that provides a market research service, operates a job costing system. Towards the end of each financial year, the overhead recovery rate (the rate at which overheads will be
Athena Ltd is an engineering business doing work for its customers to their particular require- ments and specifications. It determines the full cost of each job taking a 'job costing' approach,
Pieman Products Ltd makes road trailers to the precise specifications of individual customers. The following are predicted to occur during the forthcoming year, which is about to start: Direct
Promptprint Ltd, a printing business, has received an enquiry from a potential customer for the quotation of a price for a job. The pricing policy of the business is based on the plans for the next
Bookdon plc manufactures three products, X, Y and Z, in two production departments: a machine shop and a fitting section; it also has two service departments: a canteen and a machine main- tenance

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