MANAGERIAL ACCOUNTING – Test No. 1
Q. What is the role of Managerial Accounting in the present day management system? Discuss.
A. Managerial accounting assists managers, whether commercial, government or social institution in using the entity’s resources comprising of people, money, inventory, fixed assets, investment, technology and equipment in the most effective way. The outcome of these decisions is reflected in better operating results which in turn enhances the owner’s wealth.
Some of the most common reports compiled by Management Accountants that may be helpful in operational excellence:
i) Comparing actual results to approved plans and identifying areas needed improvements/modifications.
ii) Updating the key indicators such as orders received, order backlog, capacity utilization, and sales for initiating timely actions.
iii) Other analytical reports to investigate specific problems such as a decline in profitability of a product line, and last but not least
iv) Analyze and explore new business opportunities.
Q. What is meant by business strategy?
A. Strategy is a game plan that enables a business entity to successfully position itself in a highly competitive market. The present day globalized market system is creating competition not only within the country but from several outside frontiers. In the 1980s American automobile manufacturers began losing market share to Japanese competitors who were offering American consumers high quality cars at lower prices.
A company, therefore, can only succeed if it creates a reason for customers to choose its products over a competitor on the basis of three important factors namely customer intimacy, operational excellence and product leadership.
Under customer intimacy, the company adopts a strategy that their customers should choose them because they understand and respond to their individual needs better than our competitors.
Operational excellence means offering the company’s product to the target customers, faster, more conveniently and at a lower price. Japanese manufacturer’s most pursue this type of strategy.
Q. Discuss the major points of difference between financial accounting and managerial accounting?
A. The managerial accounting is a branch of financial accounting, but managerial accounting differs not only in their user orientation but also in their emphasis on the past and the future. Some points of major difference are discussed below:
Emphasis on the future : The present day business world is highly dynamic. The manager’s decisions are influenced by factors like changes in economic conditions, customers needs, desire etc. All these changes demand planning that has a strong future orientation. In contrast financial accounting primarily summarizes past financial transactions. Although these summaries are also useful in planning but to a much lower level. It is managerial accounting which can help in making future decisions.
Relevance of Data : Financial accounting data should be objective and verifiable. As against this manager accounting data is furnished to internal users that should be relevant even not completely objective or verifiable.
Less Emphasis on Precision : Financial Accountants records all financial transactions with utmost accuracy. The recorded transactions are supported with documents which are further audited and verified by external auditors for the sake of accuracy. Managerial accounting information are not intended for precisions instead they are used to develop good estimates for timely decisions.
Managerial Accounting – Not Mandatory : Financial Accounting is mandatory: that is it must be done at regular interval. Various outside parties such as SECP, Tax authorities, Shareholders, Creditors requires financial statements. Managerial accounting, on the other hand, is not mandatory not it is based approved standards like IFAS. A company is completely free to compile data and develop reports as much as or as little as it wishes.
Q. What are the three major elements of product costs in a manufacturing company? Distinguish and elaborate.
A. The three major elements of product costs in a manufacturing company are direct material direct labour and manufacturing overhead.
a) Direct materials are an integral part of a finished product and their costs can be conveniently traced from several sources e.g cloth used in a garment factory, yarn in the weaving mill.
b) Direct labour includes labour cost that can be easily traced to a particular product. It is also termed as “touch labour”. Labourers working in an automobile assembly line or carpenters working in a furniture factory are examples of direct labour cost.
well as other manufacturing costs collectively is termed as manufacturing overhead. Supervisor’s salary is a good example of manufacturing overhead, because that is directly involved in the manufacturing process because the manufacturing process can’t be successfully completed without supervisor’s supervision and control.
Q. What is meant by the term of cost behavior?
A. Cost behavior means how a cost will change as the level of activity changes. For example cutting back production of a product line might result in far less cost savings than managers assume if they confuse fixed cost with variable costs that may lead to a drop in profits. To avoid such problems, managers must be able to accurately predict what costs would be relevant at various activity levels to make right decisions.
Q. Distinguish between a truly variable and step variable costs.
A. Not all variable costs have exactly the same behavior patterns. Some variable costs behave in a true variable or proportionately variable pattern. Other variable costs behave in a step variable pattern.
True Variable Costs : Direct materials is a true or proportionately variable cost because the amount used during a period will vary in direct proportion to the level of production activity. Moreover, any amounts purchased but not used can be stored and carried forward to the next period as inventory.
Step Variable Costs : The cost of a resource that is obtainable only in large block and that increases or decreases only in response to fairly wide changes in activity is known as step variable. For example, the wages of skilled technicians are often considered to be a step variable cost. Such a technician’s time can only be obtained in large chunks – it is difficult to hire a skilled technician on anything other than a full time basis. At the same time the technician’s time not currently used cannot be stored as inventory and carried forward to the next period.
Q. Distinguish between committed fixed cost and discretionary fixed cost.
A. Fixed costs are sometimes referred as capacity costs, since they relates to cost of buildings, equipments, skilled professional employees and other items needed to provide the basic capacity for sustained operations.
Committed Fixed Costs : Investments in facilities, equipments and the basic organization can not be significantly reduced even for short period of times without making fundamental changes are referred to as committed fixed costs. Examples of such cost are depreciation of buildings and equipment, taxes, insurance expenses and salaries of top management.
Discretionary Fixed Costs: This cost usually arise from annual decisions by management to spend on certain fixed cost items. Examples of discretionary fixed cost include advertising, research, public relations, training, entertainments etc.
Two key differences exist between discretionary fixed costs and committed fixed costs. Firstly, the planning horizon for a discretionary fixed cost is short term, usually single year. By contrast, committed fixed costs have a planning horizon that is spread over many years.
Secondly, discretionary fixed costs can be cut for short periods of time with minimal damage to the long run goals of the organization but committed fixed cost cannot be reduced even for short period without disrupting the entire operations of the entity.
Q. Larel Co. has provided the following data for the second quarter of the most recent years:
Sales $ 600,000 Fixed manufacturing overhead 110,000
Direct labour 145,000
Fixed selling expenses 92,500 Variable manufacturing overhead 82,000 Variable administrative expenses 96,000
Direct material 103,000
Fixed administrative expense 89,000 Variable selling expense 99,500
Assuming that direct labour is variable cost and that there were no beginning or ending inventories. Compute the total contribution margin of Larel Co. for the second quarter.
Q. Fill in the missing amounts in each of the four cases given below. Each case is independent of the other.
a. Assume that only one product is being sold in each of the four following case situation.
Unit sold Sales Variable C Margin Fixed Net Operating Case Expenditure per unit Expenses Income (loss) 1 15,000 $180,000 $120,000 ? $50,000 ? 2 ? $100,000 ? $10 $32,000 $ 8,000 3 10,000 ? $ 70,000 $13 ? $12,000
4 6,000 $300,000 ? ? $100,000 ($10,000)
Q. Define the following terms (a) Cost behavior and (b) Relevant range.
impact of changing level of production on their total cost succeed in their aims of improving profitability. Accordingly the decision of a manger to drop a product line without assessing the impact of fixed cost contributed by that product would lead to disaster.
The concept of relevant range relates with fixed cost. Fixed cost are of two types, committed fixed cost and discretionary fixed cost. A committed fixed cost comprises like buildings, equipment and salaries of key personal. This type of fixed cost remains fixed within a specified range and cannot be altered or changed without disrupting the entire production process. When production is further expanded, additional fixed cost is needed that will be effective for an enhanced range and so.
As against discretionary fixed cost relates for a short duration normally one year. They are easier to adjust than committed fixed cost. Advertising expenses as an example of discretionary fixed cost.
A committed fixed cost, therefore, remains fixed within a specified range and will move upward if the production level is revised upward.
Q. The following data relating to unit shipped and total shipping expense have been assembled by Archer Company, a wholesaler of large, custom built air conditioning units for commercial buildings:
Month Units shipped Total Shipping Expenses
January 3 $1,800
February 6 $2,300
March 4 $1,700
April 5 $2,000
May 7 $2,300
June 8 $2,700
July 2 $1,200
Required :
