CPA Intermediate Level
Management Accounting flashcards
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How is the total cost of a unit built up, layer by layer?
Prime cost = direct materials + direct labour + direct expenses. Production cost = prime cost + production overhead. Total cost = production cost + administration overhead + selling and distribution overhead. Selling price = total cost + profit. Inventory is carried at production cost; the non-production overheads are period costs.
How does the high-low method split a cost into its fixed and variable parts?
Take the observations with the highest and lowest activity (not the highest and lowest cost). Variable cost per unit = (cost at high - cost at low) / (high activity - low activity). Fixed cost = cost at high activity - variable cost per unit x high activity. Adjust the observations first for any step in fixed cost or for inflation between the two periods.
What is the economic order quantity, and what does it balance?
EOQ = sqrt(2 x D x Co / Ch): D is annual demand, Co the cost of placing one order, Ch the cost of holding one unit for a year. It is the order size that minimises ordering plus holding cost: larger orders mean fewer orders but more stock. At the EOQ the two annual costs are equal. Where a bulk discount is offered, compare total annual cost including the purchase price.
How is a predetermined overhead absorption rate set, and why is it predetermined?
Rate = budgeted overhead of the cost centre / budgeted activity of the cost centre: direct labour hours in a labour-intensive centre, machine hours in a machine-intensive one. It is set from the budget so that unit costs can be computed and quoted before the year's actual overhead is known, and so that seasonal fluctuations do not swing unit costs month by month.
How does activity-based costing charge overhead to a product?
1. Identify the major activities and collect the overhead of each in a cost pool. 2. Find the cost driver that best explains each pool's cost. 3. Cost driver rate = activity cost pool / total cost driver units. 4. Charge each product its own driver units at that rate, and divide by units produced for overhead per unit.
How are normal loss and abnormal loss treated in a process account?
Normal loss is expected under efficient operation and is not costed: cost per unit = (process cost - scrap value of normal loss) / (input units - normal loss units). Abnormal loss is valued at the same cost per unit as good output, credited out of the process account and written off to the income statement net of its scrap value. An abnormal gain is valued the same way and credited to the income statement, net of the scrap value not received.
When do marginal and absorption costing report different profits, and which is higher?
Production equals sales: the same profit. Production exceeds sales: absorption profit is higher, because fixed overhead is deferred in the rising closing inventory. Sales exceed production: absorption profit is lower, because fixed overhead carried in opening inventory is released. Marginal costing profit tracks sales volume only.
How are the break-even point in units and in sales value calculated?
Contribution per unit = selling price - variable cost per unit. Break-even units = fixed costs / contribution per unit. Break-even sales value = fixed costs / C/S ratio, where C/S ratio = contribution per unit / selling price. Example: price KES 500, variable cost KES 300, fixed costs KES 600,000 give 3,000 units, or KES 1,500,000.
How is the production budget in units derived from the sales budget?
Production = budgeted sales + desired closing finished goods inventory - opening finished goods inventory. The sales budget comes first because sales is usually the limiting factor; production then drives the materials usage, materials purchases, labour and overhead budgets.
How are the material price and usage variances calculated?
Price variance = (standard price - actual price) x actual quantity purchased. Usage variance = (standard quantity for actual output - actual quantity used) x standard price. Together they equal the total: standard cost of actual output - actual cost. The price variance uses the quantity purchased so that it is reported as soon as material is bought.
Give five differences between management accounting and financial accounting.
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How does cost accounting relate to management accounting?
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What are the limitations of management accounting?
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Distinguish a cost unit, a cost centre and a cost driver.
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Name the four types of cost behaviour, with an example of each.
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What is the difference between a product cost and a period cost?
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What makes a cost relevant to a decision, and which costs are irrelevant?
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What is the difference between a costing method and a costing technique?
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In the least-squares cost line y = a + bx, what do a, b and r tell you?
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How are the reorder, minimum, maximum and average stock levels calculated?
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In a period of rising prices, how do FIFO, LIFO and weighted average compare?
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Which costs are relevant to the order-size decision?
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How do the Halsey and Rowan premium bonus schemes calculate the bonus?
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Distinguish allocation, apportionment and absorption of overheads.
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What are the four methods of reapportioning service cost centre overheads?
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What causes over- or under-absorption of overhead, and how is it treated?
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Why does traditional absorption costing mis-cost products where overheads are high?
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What are the four levels of the ABC cost hierarchy?
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Distinguish transaction, duration and intensity drivers.
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How do job costing and batch costing work?
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What are equivalent units, and how is closing work in progress valued?
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How do the weighted average and FIFO methods treat opening work in progress?
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How are joint products and by-products accounted for?
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Why does service costing often use a composite cost unit? Give examples.
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How do you reconcile marginal costing profit to absorption costing profit?
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How are the margin of safety and the sales needed for a target profit calculated?
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How is break-even found when a business sells several products?
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What are the main assumptions of CVP analysis?
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When one resource is scarce, how should products be ranked?
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Which costs matter in make-or-buy and discontinue decisions?
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When should a one-off order below the normal price be accepted?
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What is the difference between a forecast and a budget?
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Why should actual results be compared with a flexible budget rather than a fixed budget?
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Distinguish basic, ideal and attainable standards.
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How are the labour rate and efficiency variances calculated?
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How does the total fixed overhead variance split?
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How are the sales price and sales volume variances calculated?
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Which variances are worth investigating, and why look at favourable ones too?
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