Term Paper

Course Title: Management Accounting

Course Code: ACT303

Submitted To
Shahana Kabir
Assistant Professor
Department of Business Administration
Daffodil International University

Submitted By
S.M. Zobayer
191-11-6125
Section - B
Department of Business Administration
 Chapter 1
What are the scope of Management Accounting? /What type of decisions we can take
by using Management Accounting?
The scope of cost accounting goes beyond analyzing the expenses associated with a product or
activity. It takes various aspects into consideration, including the types of costs, potential
business ventures, budget preparation, profitability analysis, and more.
Managerial accounting can be used in short-term and long-term decisions involving the
financial health of a company. Managerial accounting helps managers make
operational decisions–intended to help increase the company's operational efficiency–while
also helps in making long-term investment decisions.

Chapter 2
Think about a situation where you have a business of making TV. For making this
product glue will be which type of cost and why? Explain.
Glue is indirect material for TV.
Indirect materials are materials that are used in the production process but that are not directly
traceable to the product. Such as glue. So, in that scenario glue is the indirect material of
manufacturing overhead. It is used in such insubstantial quantities on a per-product basis that it
is not worthwhile to track them as direct materials. It makes the production process safer or
more efficient.

1. Fixed cost is fixed per unit. Justify this statement.

Fixed cost is fixed per unit. Fixed costs do not vary with the production level. Total fixed costs
remain the same, within the relevant range. However, the fixed cost per unit decreases as
production increases, because the same fixed costs are spread over more units.

2. Variable cost is variable per unit. Justify.

Variable cost is variable per unit. Variable cost per unit is the production cost for each unit
produced that is affected by changes in a firm’s output or activity level. Unlike fixed costs, these
costs vary when production levels increase or decrease. For example, if it costs $60 to make
one unit of your product, and you've made 20 units, your total variable cost is $60 x 20, or
$1,200.
3. Why Factory guard's salary is indirect cost. Explain.
Factory guard's salary is indirect cost Indirect fixed cost is not traceable or directly related to
each unit of product and neither does it vary as per the output. Indirect costs are also referred
to as overheads, administrative costs, or facility costs. Indirect costs may be different for
different industries.

4. What are the basic characteristics of period cost?

There are some characteristics to find period cost:
• The cost that cannot be capitalized into prepaid expenses, inventory, or fixed assets.
• More closely associated with the passage of time than with a transactional event.
• Since a period, cost is essentially always charged to expense at once.
• Expensed on the income statement in the period incurred.

Why do salary and rent are fixed cost? Explain.

Salary and rent are fixed cost. A fixed cost is a cost that a business must pay whether it
produces one good or a million. Regardless of output, it must pay the same amount. Salary and
rent are an example of a fixed cost. It must be paid by the business regardless of how many
goods it makes and sells.

Chapter 5
1. Why raw material cost is called true variable cost?
The materials used as the components in a product are considered variable costs, because they
vary directly with the number of units of product manufactured. The most purely variable
cost of all, these are the raw materials that go into a product. Piece rate labor.

2. Cost of maintaining worker is step variable cost. Explain.

A resource that is obtainable only in large chunks and whose costs increase or decrease only in
response to fairly wide changes in activity is known as a step-variable cost. For example,
depreciation on delivery trucks is a fixed cost within a certain volume of deliveries.

Variable cost is fixed per unit. state the line.

Variable costs are the costs that change in total each time an additional unit is produced or
sold. With a variable cost, the per-unit cost stays the same, but the more units produced or
sold, the higher the total cost. Direct material is a variable cost.
Why is Contribution format income statement is used for Managerial decision
making? Explain.
A contribution margin income statement is an income statement in which all variable expenses
are deducted from sales to arrive at a contribution margin, from which all fixed expenses are
then subtracted to arrive at the net profit or net loss for the period. Thus, the arrangement of
expenses in the income statement corresponds to the nature of the expenses. This income
statement format is a superior form of presentation because the contribution margin clearly
shows the amount available to cover fixed costs and generate a profit (or loss).

Why is Traditional format income statement is used for external decision making?
Explain.
The traditional income statement approach is the dominant format used by nearly all
companies because it is required by the accounting standards for the reporting of financial
results to outside parties. Because the traditional income statement involves the use of cost
allocations within the cost of goods sold a block of information.
A traditional income statement employs absorption costing to arrive at a profit or loss figure.
This statement contains several blocks of revenue and expense information that's how it works
for external decision making.

How relevant range is related with fixed cost? Explain.

The relevant range is a kind of assumption outside which the fixed cost and variable cost might
changes. The relevant range for fixed costs: The relevant range applies to the fixed costs as well
because the assumption about the fixed cost will not remain constant at every level.
In accounting, the term relevant range usually refers to a normal range of volume or normal
amount of activity in which the total amount of a company's fixed costs will not change as the
volume or amount of activity changes. The term relevant range is included in the definition of
fixed costs because if a company's volume were to decline to an extremely low level, the
company would take action to decrease its total amount of fixed costs.

Why depreciation of machinery or equipment is a committed fixed cost? Explain.

Depreciation is a fixed cost, because it recurs in the same amount per period throughout the
useful life of an asset. Depreciation cannot be considered a variable cost, since it does not vary
with activity volume. However, there is an exception.
 Chapter 6
1.How you can explain CVP relationship?
CVP analysis helps managers understand how profits are affected by these key factors, it is a vital
tool in many business decisions. These decisions include what products and services to offer,
what prices to charge, what marketing strategy to use, and what cost structure to implement.
CVP analysis is based on a simple model of how profits respond to prices, costs, and volume. This
model can be used to answer a variety of critical questions such as what is the company’s break-
even volume, what is its margin of safety, and what is likely to happen if specific changes are
made in prices, costs, and volume.

2.Why it is said that higher the amount of margin of safety is better? Explain.
The margin of safety is the excess of budgeted (or actual) sales dollars over the break-even
volume of sales dollars. It is the amount by which sales can drop before losses are incurred. The
higher the margin of safety, the lower the risk of not breaking even and incurring a loss. The
margin of safety is the amount by which the company’s current sales exceeds break-even sales.

3.How degree of operating leverage shows the sensitivity between net operating
income and sales.
Operating leverage is a measure of how sensitive net operating income is to a given percentage
change in dollar sales. Operating leverage acts as a multiplier. If operating leverage is high, a small
percentage increase in sales can produce a much larger percentage increase in net operating
income. The degree of operating leverage allows quick estimation of what impact a given
percentage change in sales would have on the company’s net operating income. The higher the
degree of operating leverage, the greater is the impact on the company’s profit. The degree of
operating leverage is not constant—it depends on the company’s current level of sales.

How we can define Variable expense ratio?

The variable expense ratio is the ratio of variable expenses to sales. It can be computed by
dividing the total variable expenses by the total sales, or in a single product analysis, it can be
computed by dividing the variable expenses per unit by the unit selling price.
How CVP analysis helps in Managerial decision making? Explain.
CVP analysis is a powerful tool that helps managers understand the relationships among cost,
volume, and profit. CVP analysis focuses on how profits are affected by the following five factors:
1. Selling prices. 2. Sales volume. 3. Unit variable costs. 4. Total fixed costs. 5. Mix of products
sold. Because CVP analysis helps managers understand how profits are affected by these key
factors, it is a vital tool in many business decisions. These decisions include what products and
services to offer, what prices to charge, what marketing strategy to use, and what cost structure
to implement.

Chapter 7

1.What are the objectives of preparing financial statements using variable and
Absorption costing system?
Absorption costing determines the cost of the inventory at the end of an accounting period.
The closing inventory also consists of fixed costs, thus increasing the value of the inventory. This
method of inventory valuation increases the profit of the company. Variable costing is used for
comparing the profitability of different product lines. The organization can carry out an analysis
based on costs, volumes, and profits. Absorption costing is used for calculating per unit cost
based on all costs including fixed overhead costs.
However, with absorption costing, profit is a function of both sales volume and production
volume. The separation of fixed and variable costs helps to provide relevant information about
costs for making decisions.

2. Can any organization follow variable and absorption costing system at the same
time? Explain.
With absorption costing, profit is a function of both sales volume and production volume. The
separation of fixed and variable costs helps to provide relevant information about costs for making
decisions.

Yes, as long as the system computes the amount of fixed manufacturing overhead per unit. The total
amount can be expensed under variable costing and assigned to overhead produced during absorption
costing.
Which Costing system consider all types of production related cost in per unit cost
calculation? Explain.
Production or product costs refer to all the costs incurred by a business from manufacturing a
product or providing a service. Production costs can include a variety of expenses, such as
labour, raw materials, consumable manufacturing supplies, and general overhead.

Which costing system is accepted by external users and why? Explain.

Under generally accepted accounting principles (GAAP), absorption costing is required for
external reporting. The method includes direct costs and indirect costs and is helpful in
determining the cost to produce one unit of goods.