Strategic Management Accounting

Q&A Assignment

MBA-044: Strategic Management Accounting

Submitted to Md Alaul Haque
Assistant Professor
Department of Business Administration

Mohammad Mohin Uddin

221-126-005
MBA-55 Batch (General)
11. Define the following terms: joint products, joint costs, and split-off point.
Ans:
Joint products: are the products that use same production process and input at eh same time. There can be two or more
joint products. It is impossible to separate the cost between the joint products before its split off/separation point.
Example: crude oil to get petrol, diesel, gasoline. Milk: butter, cheese, and cream

Split-off point: The split-off point is the point in the manufacturing process at which the joint products can be
recognized as separate products.

Joint costs: The term joint cost is used to describe the costs incurred up to the split-off point.

12. What are unit-level, batch-level, product-level, customer-level and organization-sustaining activities? What is
meant by the term equivalent units of production?
Ans:
Unit level: Unit-level activities are performed each time a unit is produced. The costs of unit level
activities should be proportional to the number of units produced. For example, providing power to run processing
equipment would be a unit-level activity because power tends to be consumed in proportion to the number of units
produced.
Batch level: Batch-level activities are performed each time a batch is handled or processed, regardless of how many units
are in the batch.
For example, tasks such as placing purchase orders, setting up equipment, and arranging shipments to customers are
batch-level activities. They are incurred once for each batch (or customer order). Costs at the batch level depend on the
number of batches processed rather than on the number of units produced, the number of units sold, or other measures
of volume.
For example, the cost of setting up a machine for batch processing is the same regardless of whether the batch contains
one or thousands of items.

Product level: Product-level activities relate to specific products and typically must be carried out regardless of how many
batches are run or units of product are produced or sold. For example, activities such as designing a product, advertising
a product, and maintaining a product manager and staff are all product-level activities.

Customer level: Customer-level activities relate to specific customers and include activities such as sales calls, catalog
mailings, and general technical support that are not tied to any specific product.

Organization-sustaining activities:
Organization-sustaining activities are carried out regardless of which customers are served, which products are produced,
how many batches are run, or how many units are made. This category includes activities such as heating the factory,
cleaning executive offices, providing a computer network, arranging for loans, preparing annual reports to shareholders,
and so on.
Equivalent units of production (weighted-average method) The units transferred to the next department (or to finished
goods) during the period plus the equivalent units in the department’s ending work in process inventory.

13. Why is the first stage of the allocation process in activity-based costing often based on interviews?
Ans:
Because people are often engaged in more than one activity, some way must be discovered to estimate how much time
they spend in each activity. The most practical approach is often to ask employees how they spend their time. It is also
possible to ask people to keep records of how they spend their time or observe them as they perform their tasks, but
both of these alternatives are costly and it is not obvious that the data would be any better, people who know they are
being observed any change how they behave.
14. Why the activity-based costing is described in this chapter unacceptable for external financial reports?
Ans:
The activity-based costing approach described in the chapter is probably unacceptable for the external financial reports
for two reasons-

Firstly, activity-based products cost, as described in this chapter, excludes some nonmanufacturer costs.

Secondly, the first stage allocations are based on interviews rather than verifiable, objective data.

15. What are job-order and process costing? In what ways are job-order and process costing similar?
Ans:
Job-order costing and process costing are two common methods for determining unit product costs. Job-order costing is
used when many different jobs or products are worked on each period.

Examples of industries that use job-order costing include furniture manufacturing, special-order printing, shipbuilding,
and many types of service organizations.

By contrast, process costing is used most commonly in industries that convert raw materials into homogeneous (i.e.,
uniform) products, such as bricks, soda, or paper, on a continuous basis.

Examples of companies that would use process costing include Reynolds Aluminum (aluminum ingots), Scott Paper (toilet
paper), General Mills (flour), Exxon (gasoline and lubricating oils), Coppertone (sunscreens), and Kellogg’s (breakfast
cereals).

In addition, process costing is sometimes used in companies with assembly operations. A form of process costing may
also be used in utilities that produce gas, water, and electricity.

Similarities between Job-Order and Process Costing

The similarities between job-order and process costing can be summarized as follows:
• Both systems have the same basic purposes—to assign material, labor, and manufacturing overhead costs to
products and to provide a mechanism for computing unit product costs.
• Both systems use the same basic manufacturing accounts, including Manufacturing Overhead, Raw Materials,
Work in Process, and Finished Goods.
• The flow of costs through the manufacturing accounts is basically the same in both systems.

16. Define Segment Reporting. What is a segment of an organization? Give several examples of segments.
Ans:
Segment reporting: segment reporting is the disclosure of a public company’s financial data by its division, subsidiaries,
or other kinds of business segments. It provides an accurate picture of a company’s performance to its shareholders and
helps management evaluate the income, expenses, assets, and liabilities of each business division to assess its general
health.
A segment is a component of a business that generates its own revenues and creates its own product, product line, or
services offerings. Segments typically have discrete associated costs and operations. Usually if a unit of a business can be
separated or lifted out of the company as a whole and remain self-sufficient, it satisfies the criteria of being classified as
a business segment.
Example of segments:
A company may segment its business by region, product lines or services.
Apple has one segment for North and south America, another for Europe which includes all European, Middle East and
Africa countries.
17. What costs are assigned to a segment under the contribution approach?
Ans:
Under the contribution approach, costs that are assigned to a segment are those that are traceable to that segment.
Costs are traceable if they exist because of that segment and would not be incurred if the segment were eliminated.
Common fixed costs, which are not traceable to a specific segment, are not allocated to the segment under the
contribution approach.

18. Distinguish between a traceable cost and a common cost. Give several examples of each.
Ans:
A traceable cost:
There is a distinction between traceable and common costs. Costs that may be directly allocated to particular cost
objects based on the cause-and-effect connection between the cost object and the cost are known as traceable costs.
Costs that cannot be traced to individual cost items are referred to as common costs.
A traceable cost is a cost that can be directly attributed or traced to the products being produced. Examples of traceable
costs are direct materials cost, and direct labor cost.

A traceable cost of a segment is a cost that arises specifically because of the

existence of that segment. If the segment were eliminated, the cost woulddisappear ! common cost, by contrast, is a
cost that supports more than one segment, but is not traceable in whole or in part to any one of the segments.

If the departments of a company are treated as segments, then examples of the traceable costs of a department would
include the salary of the departments supervisor, depreciation of machines used exclusively by the department, and the
costs of supplies used by the department examples of common costs would include the
salary of the general counsel of the entire company, the lease cost of the headquarters building, corporate image
advertising, and periodic depreciation of machines shared by several departments

19. Explain how the segment margin differs from the contribution margin.
Ans:
Segment margin and contribution margin are both financial metrics used to evaluate the profitability of different
segments or products within a company. While they are related, they focus on different aspects of the financial analysis.
Contribution Margin:
The contribution margin represents the amount of revenue remaining after subtracting variable costs associated with
producing or delivering a product or service. It helps measure the profitability of individual products or services and
their ability to contribute towards covering fixed costs and generating profit.
The formula for contribution margin is:
Contribution Margin = Revenue - Variable Costs

The contribution margin ratio can also be calculated by dividing the contribution margin by the revenue:
𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝑴𝒂𝒓𝒈𝒊𝒏
Contribution Margin Ratio = ( ) × 𝟏𝟎𝟎
𝑹𝒆𝒗𝒆𝒏𝒖𝒆
Segment Margin:
The segment margin, also known as the operating margin or profit margin, evaluates the profitability of a specific
segment or division within a company.
It considers both variable costs and fixed costs associated with the segment, providing a broader view of its financial
performance.
The formula for segment margin is:
Segment Margin = Revenue - (Variable Costs + Fixed Costs)
The segment margin ratio can be calculated by dividing the segment margin by the revenue:
𝑺𝒆𝒈𝒎𝒆𝒏𝒕 𝑴𝒂𝒓𝒈𝒊𝒏
Segment Margin Ratio = ( ) × 𝟏𝟎𝟎
𝑹𝒆𝒗𝒆𝒏𝒖𝒆
Differences:
Contribution margin Segment Margin
Scope: Focuses on individual products or services Evaluates the profitability of a larger segment or
division within a company.
Cost considers only variable costs, which change considers both variable costs and fixed costs,
Consideration with the level of production or sales which remain constant regardless of the level of
production or sales.
Perspective provides insights into the profitability of provides a broader view of the financial
individual products or services, helping with performance of a specific segment or division
pricing decisions and identifying the most within a company.
profitable offerings
Usefulness is useful for assessing the incremental helps in evaluating the overall profitability and
profitability of different products or services, viability of a segment or division within the
particularly when deciding whether to company.
discontinue or expand offerings
Concisely we can say, contribution margin focuses on individual products or services and helps assess their profitability,
while segment margin evaluates the profitability of a larger segment or division within a company, considering both
variable and fixed costs.

20. How is it possible for a cost that is traceable to a segment to become a common cost if the segment is divided into
further segments.
Ans:
When a segment is divided into further segments, it is possible for a cost that was previously traceable to the original
segment to become a common cost. This can occur due to the way costs are allocated or shared among the newly
created segments.
Example:
Let's say there is a company with a single segment, Segment A. In this case, all costs incurred are directly attributable to
Segment A, and there are no common costs.
Now, if Segment A is divided into two new segments, Segment B and Segment C, the costs that were initially traceable
to Segment A may need to be allocated or shared between the two new segments.

For instance, if there was a manager who was previously dedicated solely to Segment A, their salary and associated
expenses would have been considered traceable costs.
However, when Segment A is divided into Segment B and Segment C, it might be reasonable to allocate a portion of the
manager's salary to each new segment based on the time or resources they devote to each segment.

In this case, the manager's salary would transition from being a traceable cost of Segment A to a common cost shared
between Segment B and Segment C.

Similarly, other costs that were initially directly associated with Segment A, such as utilities, rent, or administrative
expenses, may also need to be allocated or shared among the newly created segments based on some predetermined
allocation method.