SPV COosT MANAGEMENT AS ee ATR em CUT WEEMS ROMO IVa insSTRATEGIC COST MANAGEMENT gnd Edition ees LUZVIMINDA S. PAYONGAYONG, CPA RYAN C. ROQUE, CPA, MBA MARIA LUISA U. OLIVEROS, CPASTRATEGIC COST MANAGEMENT CHAPTER TOPIC PAGE 1 Strategic Cost Management and Management Accounting 1 2 Cost Concepts, Classifications and Behavior 5 3 Product Costing 50 4 Cost Volume Profit Analysis B 5 Activity-Based Costing and Service Costs 110 6 Standard Costing for Cost Control 137 7 Business Planning and Short-term Budgetary System 182 8 Differential Cost Analysis 25 9 Responsibility Accounting & Performance Measures nm 10 Transfer Pricing 314 u Balance Scorecards & Non-Financial Measures in Performance 338 Evaluation 2 Pricing Decisions usFierce global competition is expected to continue its acceleration, especially in this era of technology when most software replaces. typical accountants In order to survive this continuous revolution, future accountants will have a greater need than ever for effective management skills Decision making is definitely a process every individual will undertake... from a simple problem of what to wear to work to what are the risks we are willing to take in investing ten million pesos, Decision making involves critical evaluation and analysis of information at hand, ‘Thus, management accountants are vital in the role of decision making because they are the ones to provide reliable and reasonable information, wherein top level management could derive sound solutions to the problem, One objective of this 1M Edition of Strategic Cost Management is to help accounting students understand the role of a management accountant, and to become management consultants. This is also why the accounting education committee continuously updates curriculum to prepare accounting students to become a better and more competitive financial adviser or officer. One can achieve this goal by first passing the CPA Licensure Examinations, thus, discussions in this book is focused in preparing for the aforementioned test. The chapters of the text are not only consistent with the CPA Examinations, but nonetheless provide students with better appreciation of the course. This edition is presented in an outlined form with direct and simple explanations yet comprehensive in coverage through illustrative problems and solutions. More problems, true or false questions and multiple choices are included to familiarize them in the type of questions asked in the Licensure Examination, LSP RCR MLUOAbout the Authors LUZVIMINDA S. PAYONGAYONG Certified Public Accountant Master in Business Administration, Candidate Polytechnic University of the Philippines College of Business and Administration Graduate School Bachelor of Science in Commerce - Major in Accounting Polytechnic University of the Philippines Manila Assistant Professor II Polytechnic University of the Philippines Manila Formerly: Lecturer De LaSalle University Lecturer Colegio de San Juan De Letran CPA Reviewer UE CPA Review Center CPA Reviewer PUP CPA Review CenterRYAN C. ROQUE Certified Public Accountant Doctor in Business Administration in Progress Polytechnic University of the Philippines College of Business and ‘Administration Graduate School r in Financial Management Master in Business Administration majo’ College of Business and Polytechnic University of the Philippines Administration Graduate School Bachelor of Science in. Accountancy Polytechnic University of the Philippines Manila Faculty Researcher PUP Office of the Vice President for Research, Extension and Development Lecturer Polytechnic University of the Philippines College of Business and Administration Graduate School Instructor/MAS Reviewer Polytechnic University of the Philippines College of Accountancy and Finance MAS Reviewer National University Formerly: Assistant Professor 3 De La Salle University Associate Professor Level 10 La Consolacion College ManilaMARIA LUISA U. OLIVEROS Certified Public Accountant Certified Internal Auditor Real Estate Broker Master in Business Administration, Candidate Polytechnic University of the Philippines College of Business and Administration Graduate School Bachelor in Accountancy Polytechnic University of the Philippines Manila Full-Time Faculty Member Polytechnic University of the Philippines College of Accountancy and Finance Formerly: Lecturer Far Eastern University Lecturer De La Salle University| STRATEGIC COST MANAGEMENT AND MANAGEMENT ACCOUNTING This chapter aims that the student be able to: Define management and the objectives of management. Define strategic cost management Define Management Accounting and identify the objectives of Management Accounting. Know the relationship of Financial Accounting and Management Accounting. Know the relationship of Management Accounting with Cost Accounting. Understand the need for accounting information by the management. Understand the changing role of traditional accountant to financial managers. Understand the role of management accountant in controlling and evaluating performance and decision making. Understand the organizational structure and the role of accounting in the organization. Understand Financial Management Responsibilities. Differentiate the functions of a financial officer (controller) and a treasurer. Understand different management terms Understand the need for an information system. Know the definition, nature and objectives of management accounting systems. Know the qualities and essential components of an accounting system. Procedures and steps in setting up management accounting systems and design. Know the essential characteristics and qualities of good management information system. Know the different sources of accounting information, and elements of good internal control. * Set up Management Information and Control System. =. Introduction Management is the process of achieving organizational objectives. This involves planning, organizing, leading, and controlling, Planning and controlling are the two important functions of management. Planning is setting goals and developing strategies and tactics to achieve them. Some planning is routine, recurring, and relates mainly to a period of one year. Controlling is determining whether goals are being met, and if not, what can be done. Performance evaluation is a must in controlling. Managers must review the accomplishments and compare with what was planned. Both of these functions require decisions. Decision making is selecting one alternative from a set of choices. Making the best choice depends on the ‘manager's goals, the expected results from each alternative, and the information available when the decision is made. Decisions made are highly information dependent. This chapter focuses on: > how information should be generated > how information should be used by decision makerscoma mt it se a een | Id be organized > fo teem er a een eg information needed > Now decent accountant are involved in decision making Accountants develop ‘comm te much of the economic information ae Rar orc xizaone o ental ty by ees go ira wars ae cabd management accounting NOPTASS A We doy Figragement accountants. Management accounting isan incense ble part of the system ¥ ar orwvon to managers ~ the people whose decisions and actions determines gy ‘success ot failure of the organization. ‘Strategic Cost Management Defined cost management is the application of cost management techniques Which ‘Strategic ‘ i aims to reduse costs while strengthening the strategic position of a business, Strategic cog franagement methods can be applied in service, manufacturing, and notfor prof ‘This objective can be attained if the company could determine which costs support 1 company's strategic ition. In this case, it would be beneficial to increase costs that the strategic position of the business. It is not good to cut costs in strategically important areax Doing so reduces the customer satisfaction and experience. Eventually, it could lead to a decine in sales, ultimately, in profit. from the The company should also identify which costs either causes decline in the strategic position of the business or have no impact at all. Thus, management needs to fons on reduction initiatives on these types of cost so that they can provide input regarding how certain costs should be incurred to support the competitive position of the firm. ‘Three ways to institute cost management techniques that will not only manage costs, but aiso augment profit realization. are as follows: 1 Develop systems that would streamline the transactions between corporate suppott departments and the operating units. 2 Establish transfer pricing systems to coordinate the buyer-supplier interactions betwee decentralized organizational operating units 3. Un pedo profit center to create profi maximizing behavior in what were fom Management Accounting Defined Management Accounting focuses on the information needs of an organization's int managers that are related to their planning, controlling, and decision-making functions. Itis process of identifying, measuring, accumulating, analyzing, preparing, interpreting, wot communicating information that helps managers fulfill organizational objectives. Bea management accounting is designed to assist the organization's managers, relatively: = restrictions a ee by replay bodies, and not governed by generally accP) ). fore, a i i ‘accounting is GAAP, Tha manager must define which data are relevant— ee Ghani Stmteake Cost Menscement and Manegement Accounting > Some management needs are satistied by historical, monetary information based on generally accepted accounting principles » Other needs require forecasted, qualitative, and frequently non-financial information that has been developed and computed for their specific decision making functions, Management accountants should do all efforts possible or must strive harder to recognize: > What are the information needed by the managers; >» Why these information are needed; > How these information be presented in the best feasible form that will enhance the understandability character of these reports to the users; and, > How the information be given to the user in the earliest time possible to be more useful to decision making. Objectives of Management Accounting The four major objectives of management accounting activity are: Providing managers with information for decision making and planning, Assisting managers in directing and controlling operations. Motivating managers toward achieving organization's goals. Measuring performance of managers and sub-units within the organization, vyvy The Relationship of Management Accounting with Financial and Cost Accounting as provider of information Accounting information is supposed to address three different functions: 1. To provide information to external parties such as stockholders, creditors, and various regulatory bodies for investment and credit purposes; 2. Toestimate the cost of products produced or services rendered; and 3. To provide information useful for making decisions and controlling operations. Financial accounting is the field of accounting that develops information for external decision-makers such as stockholders, suppliers, banks, and government regulatory agencies. ‘The primary financial accounting reports are the balance sheet, statement of income, end the Gish flows. Since many businesses are complex, guidelines, known as the GAAP, are provided for the strict adherence of these financial accounting reports. Though management and financial accounting use accounting system as the source of information, they use them differently. Some basic differences of management ing and financial ooaieg Mibeone ee ing discussions NS Providing some of the quantitative, cost-based functions. The following statements define the> cost acountng focuses primarily on the determination of He ct of maKing pag, Cer nccountng determi services by direct of products oF measur ; eivary oo i erates seal allocation of such costs. emery > Cost accounting is an integral part of the broader field of management accou: Ning d its overlap causes the financial and management accounting systems to be a integrated to form a complete informational network. financial accounting and management accounting are wn in our flowchart on the next page. Accounting System (one part ofthe organization's Management information system.) ‘The boundaries between clearly and definitely drawn as sho Cost Accounting System (one part of the organization’s overall accounting system) Accumulates cost: MANAGEMENT ACCOUNTING FINANCIAL ACCOUNTING Preparation of information for Preparation of published Planning, directing, controlling financial statements and organization's operations, other financial reports. and decision-making INTERNAL USERS OF EXTERNAL USERS OF INFORMATION INFORMATION ‘Managers at all levels in the organization Stockholders, financial analysts, lenders, unions, consumer groups, and government agencies Management accounting, as defined earlier, is more concerned with individual segmens of the business rather than the organization as a whole, so management accounting information normally addresses specific concerns rather than the “big picture” of financial accounting ‘Management accountants are expected to be flexible in providing information that serves t needs of management and are useful to managers’ functions. It must provide the basis appropriate cost estimations that are needed for the financial statement presentations ike ® serenity an cont of f goods sold or services. It must also provide adequate and me cat ae in Performing the basic functions of planning, contro Managers must also see to it that in the provision of informati vpene analysis is being applied. Cost-benefit analysis ie the analytical eat mga 5 relative costs and benefits that result from a specifie course of action’ ‘That information s*°™be developed and provided only if the cost of producing the information is less than the benefit at having it. Management accountants, though, are not required to adhere to GAAP in providing such information for internal use of managers. Presented below is a summary of basic differences of management accounting and financial accounting: Basis Management Accounting Financial Accounting | As to Users of Internal Users External Users Information Not required and unregulated, | Required and must conform to As to Regulations to | since itis intended only for | (GAAP). Follow management. ‘The organization's _basic | Data are drawn almost exclusively accounting system plus | from the organization’s basic AstoSources of Data _| various other sources, such as | accounting _ system, which external information. accumulates the financial information. Reports often focus on sub- | Reports focus on the company in units within the organization. | its entirety. Reports are based As to Nature of| Reports are based on’ a| almost exclusively on historical Reports and | combination of historical data, | transactions or data. Procedures estimates and projections of future events. Aside from what has been outlined, the following could also be considered as distinguishing characteristics of management accounting: > Management accounting has no constraints, may be other than costs, as to benefits of improved management decisions. > Behavioral implication is evident, as it concerns how measurements and reports will influence managers’ daily behavior. > Management accounting is called to be “time focus”. The users of management accounting reports always compare the past and its relationship to the future. > Management accounting reports could vary in period coverage. It could be as long as 5 to 10 years or as short as daily. > Management accounting reports could be as detailed it could be. Sales could be presented in total or as detailed as to by product line, by territory, by department or as low as by agent.aca Sto ot nace ad asc Att —— heavily > Management accounting covers so many fields of discipline. Usually manson tse the Held of sconces decision teiences, behavioral sciences or sometime even Political science. The Need for Accounting Information managers need information. As Managers do make decisions; and in making decisions, ‘ a cen mentioned earlier, managers select one alternative from set of choices. Di 2 variety of sources, such as economics, nance, marketing, research, production, Porson and, definitely, accounting, Information is processed in a systematic way through the use of an information system. At present, many firms developed their own management information system, run by several ‘key personnel coming from different fields of discipline This department will provide all information needed by the firm in whatever form. However, this chapter focuses only on the accounting information needed by the management, which is provided by an accounting system. . ‘Accounting system is a formal mechanism for gathering, organizing, and communicating information about an organization's activities. This system is only one part of the entire Information System of the firm. Both management accounting and financial accounting use accounting system to accomplish their objectives. Without information, no decision will ever be made. Details of accounting information system are discussed in a separate chapter. Managers need information to make decisions about: ‘Acquiring and financing production capacity Determining which products to produce and market Pricing products, jobs or services Determining the best method of distributing goods and services to the target market Locating the best property for production facilities Financing the costs of production and operations YVVYVVY Management accountants should provide both quantitative and qualitative information to assist managers in decision making. Quantitative information allows managers to know the number impact of every alternative choice, while qualitative information furnishes the facts that help eliminate some of the inherent uncertainties related to such alternative choices. Managers are information users, while accountants are information providers. Management accountants play an important role in management functions : ‘These functions, as discussed in detail, are: or process. > Planning - is the process of translating the goals and objectives of eal developing a strategy for achieving those goals in a tic a —— baat depend heavily on management accountants when plan y ee ‘Manner. Mana are abstract achievements while, objectives are desired nie is pepeed Ce s period of time. These objectives must be logically desired result oe > Controlling - is the process of setting performance standards, . , periodically comparing actual performance with standard neat ang Performancemeasures or actions when operations do not conform with what is expected. Managers must exert their best efforts to achieve what was planned. > Peformance coaluation - is the process of determining the degree of success in accomplishing the plan. It is done to determine if the actual results materially differ with what was set by the firm. It tries to equate both effectiveness and efficiency. As the Performance has been measured by the control process, managers must evaluate the effectiveness and efficiency of that performance, * Effectiveness - is a measure of how well an organization's goals and objectives are achieved. It compares actual output results to desired results and determines the successful accomplishment of an objective. * Efficiency - is a measure of the degree to which tasks were performed to produce the best yield at the lowest cost from the resources available. This means that it ‘measures the degree to which a satisfactory relationship occurs when comparing outputs to inputs. v Decision making - is the process of choosing among the possible solutions available to a given problem situation. The manager's ability to choose the best solutions or the most acceptable alternative course of action depends on the manager's ability to make good decisions, Organizational Structure Organizational structures Vary from firm to firm, but the rolé of a finance officer is fairly the same. Organizational structure refers to how authority as well as responsibility for making decisions is distributed in the organization. Segments need to be organized according to their missions in order to effectively define Segments, manage resources, and implement strategies. This chapter limits its chart to the department that will show the flow of information as well as the functions of responsible officers for such information. The most common. officers involve in the financial information are: "Chief Executive Officer (CEO) * Chief Financial Officer (CRO) * The Treasurer * The Comptroller or Controller * The Chief Accountant ‘The CFO normally reports to the President ot to the CEO. ‘The CROs key subordinates are the treasurer and the controller, or the chief accountant. The treasurer has direct responsibilty for managing the firm’s cash and marketable securities, for planning its capital Structure, for selling stock and bonds to raise capital, and for Overseeing the corporate pension fund. The treasurer also handles the credit and collection, inventory management and capital budgeting. Although in some firms these are handled by the controller. The controller isstatis why, normally, responsible for the activities of the accounting and tax dep controller is a CPA by profession. jal functions are located: Presented is atypical business organization where the Board of Directors ‘The Changing Role of a Traditional Accountant's Function to a Financial Manager's Function Information system and financial management is now the name of competition among firms. Good financial management will help any business provide: > better products or services to its customers > pay higher wages and salaries to its workers and employees, and even managers > greater returns to the investors who put up capital needed to form the company afd then operate the firm. Since the economy, both national and worldwide, consists of customers, employees, a%4 ial management contributes to the success of any economic entity. OF way toe good financial officer or manager is to have a sound understanding offi i eae echo arc ta heed fi acciting information. The traditional accountant?function is to provide information about the firm's financial activities for decision making. Management accountants became users of this information and introduced many changes towards better management decisions. Some of these changes include: > A shift towards addressing the needs of service companies and improving practices to better serve and meet the needs of managers > Improved practices which include a focus on managing the value chain through techniques such as JIT (Just-in-time) system and ERP (Enterprise Resource Planning) > The use of balanced scorecard in order to attain a more comprehensive view of the company’s operations, Financial Management Responsibilities ‘The primary task of a financial manager is to plan for the acquisition and use of funds 50 as to maximize the value of the firm, that is, he or she makes decisions about alternative sources and uses of funds. Some of its specific activities are: > Forecasting and planning - The financial manager must coordinate or interact with other executives as they jointly look ahead and formulate plans, which will shape the firm’s future position. v Capital investment and financing decisions - On a long-term basis, the financial manager must raise the capital needed to support growth. A successful firm usually achieves a high rate of growth in sales, which requires increased investment in the plant, equipment, and current assets necessary to produce goods and services. The financial officer must help determine the optimal rate of sales growth, and decide on the specific investments to be made as well as on the types of funds to be used to finance these investments, such as the use of internal versus external funds; use of long term versus short term debt. > Controlling and coordinating - The financial manager must interact with other executives i.e, (CEO, COO) so that the firm could operate as efficiently as possible. All business decisions have financial implications and all managers whether financial, operation or marketing, need to take this into account. For instance, marketing decisions affect sales growth, which in turn changes in capital requirements. Therefore the marketing managers must consider the effect of their credit policies while production managers must consider plant capacity utilization. Basic Duties of Controller In some firms, a separate controller or comptroller is employed other than the financial manager. The basic duties of a controller are: > Planning, controlling, designing, installing, and maintaining the cost accounting system > Predicting future costs > Coordinating the development of the budget > Accumulating and analyzing actual costsPreparing and analyzing performance reports Preparing reports for external users Providing information for special decisions Internal auditing Tax administration Protection of assets Economic appraisal Basic Duties of Treasurer > > > > Consulting with management as to cost information > > > > . The treasurer who is, basically, one of the members of the board of directors i Positioned to the organization to handle the following basic duties: Financial planning or fund management Obtaining funds to finance the acquisition of fixed assets Evaluating the acquisition of fixed assets. Short-term finance sourcing or managing working capital needed Banking and custody Managing the pension fund Managing foreign exchange transactions Credits and collection Distribution of corporate earnings to owners VV VVVVVVY In summary, the major responsibilities of financial management whether they are financial managers, controllers, and treasurers involve decisions such as: 1. which investments the firm should make; 2. how their projects should be financed; and 3. how managers of the firm can most effectively protect and manage its existing resources. In line with these, future financial executives can perform their individual functions effectively if they are equipped with a better understanding of management accounting organizational structure and professional ethics as well as good management accounting systems. Professional Ethics for Management Accountants As discussed earlier, management accountants are both information providers and uset® whose main goal is to maximize shareholders wealth. Maximizing nen. be achieved subject to ethical constraints. Users of information generally assume that whateve! information the accounting systems generates, is presented and used in an ethii However, it was found to be otherwise, and in recent years, the magnitude & a “white collar crime” has increased almost global in nature. Thus, in the United states, t Sarbanes-Oxley Act of 2002 has been passed to reduce the apparent cts of interest dt satin many corporate structures. One ofthe major thrust of ths acts tp vegas ee ner Situations in which a conflict of interest can arise and to hold management more table forthe financial and operating information they communicate to the public. All corporations and their executives have been subjected to scrutiny. This resulted to force firms to establish corporate ethics guidelines and policies to cover employees and executives’ actions in dealing with all corporate constituents. The adoption of these high ethical standards strengthens companies’ competitive positions by reducing the potential losses on litigations, creating and maintaining positive image, and building stakeholders’ confidence. Companies developed guidelines for good corporate governance. Corporate governance is a system of organizational control that is used to define and establish lines of responsibility and accountability among major participants in the corporation. These participants include the shareholders, board of directors, officers and managers and other stakeholders. The organizational chart of the company shows the corporate governance. A more detailed job responsibilities and accountabilities will be done within each branch, center, departments or divisions. Ethical conduct is a necessary asset of a management accountant. The credibility of the information provided, analyses done, and opinions offered depends heavily on the reputation of the responsible accountant. As required and should be expected from all managers, management accountants in particular must maintain integrity and ethical behavior and must make top management aware of any unethical behavior done by the people within the organization. The management accountant must promote and encourage ethical behavior in all aspects of business life. The Institute of Management Accountants (IMA) believes ethics is a cornerstone of its organization and recognizes the importance of providing ethical guidelines. Standards of Ethical Conduct for Management Accountants, issued by IMA, formerly National Association of Accountants (NAA): Statements on Management Accounting: Objectives of Management Accounting, Statement No.1B, New York, N.Y., June 17, 1982 is outlined below, Adherence to these standards is integral to the achievement of management accounting objectives. Management accountants shall not commit acts contrary to these standards nor shall they condone the commission of such acts by others within the organization. Ethical Conduct 1. Competence - Management accountants have a responsibility to: > Maintain an appropriate level of professional competence by ongoing development of their knowledge and ski » Perform their professional duties in accordance with laws, regulations, and technical standards, » Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information 2 Confidentiality - Management accountants have the responsibility to: ® Refrain from disclosing confidential information acquired in the course of their work, except when authorized, unless legally obligated to do so > Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitor their activities to assure the ‘maintenance of that confidentiality.information acquired in the ta) Mage either personaly or > Refrain from using or appearing to use confident course of their work for unethical or illegal 24¥ through third parties. 3._ Integrity - Management accountants have the responsiblity iate parties of > Avoid actual or apparent conflicts of interest ‘and advise all appropna! Parti any potential conflict. aso their abili > Refrain from engaging in any activity that would prejudice theit ability to carry out their duties ethically. > Refuse any gift, favor, or hospitality that wo influence their actions. i > Refrain from either actively or passively subverting the attainment of the organization's legitimate and ethical objectives. 5 > Recognize and communicate professional limitations oF other constraints that would preclude responsible judgment or successful performance of an activity. > Communicate unfavorable as well as favorable information and professional judgments or opinions. > Refrain from engaging in or supporting any profession. 4. Objectivity - Management accountants have the responsibility to: yuld influence or would appear to activity that would discredit the > Communicate information fairly and objectively > Disclose fully all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, comments, and recommendations presented. Resolution of Ethical Conflict In applying the standards of ethical conduct, management accountants may encounter problems in identifying unethical behavior or in resolving an ethical conflict. When faced with significant ethical issues, management accountants should follow the established policies of the organization bearing on the resolution of such conflict. If these policies do not resolve the ethical conflict, management accountants should consider the following course of action: > Discuss such problems with the immediate superior except it appears that the superior is involved, in which case the problem should cena initially to the next higher management level. If satisfactory resolution cannot be achieved when the problem is initially presented, submit the issues to the next higher managerial level. > If the immediate superior is the chief executive offi valent, the seeds n cer, acceptable reviewing authority may be a group such as the audit commite2 board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with the superior’s knowleds assuming the superior is not involved. — > Clarify relevant concepts by confidential discussions wi tie aii obtain an understanding of possible courses of action So penta> If the ethical conflict still exists after exhausting all levels of internal review, the management accountant may have no other recourse on significant matters than {0 resign from the organization and to submit an informative memorandum toan appropriate representative of the organization Except where legally prescribed, communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate. Some basic terms to note in management process: > Administrative management - is an approach that focuses on principles that can be used by managers to coordinate the internal activities of organizations. > Functional authority ~ the authority of staff departmi matters related directly to their respective functions, > Functional managers ~ are managers who have responsibility for a specific specialized area of the organization and supervise mainly individuals with expertise and training in that area. > Functional structure - is a structure in which Positions are grouped according to their main functional or specialized area. Functionallevel strategy - is a type of strategy that focuses on action plans for managing a Particular functional area within a business in a way that supports the business-level strategy. > Con citi ~ is one's attachment to, or determination to reach. > Operating plans - contain the details necessary to implement and maintain an organization's strategies. > Stati goal - is broadly defined targets or future end results set by top management. > Strategic management ~ is a process through which managers formulate and implement strategies geared toward optimizing strategic goal achievement, with given available environmental and internal conditions. > Grand strategy - is a master strategy that provides the basic strategic direction at the corporate level. > Strategy formulation ~ is the process of identifying the mission and strategic goals, conducting competitive analysis, and developing specific strategies. It is the foundation level of organizational planning. > Strategy implementation ~ is the process of carrying out strategic plans and maintaining control over how those plans are carried out. Total Quality Management (TQM) - is a management system that is an integral part of an organization's strategy and is aimed at continually improving product and service quality 0 as to achieve high levels of customer satisfaction and build strong customer loyalty. ‘ents over others in the organization in v Management Accounting Information System “The new source of power is not money in the hands of the few, but information in the hands of the many." ~ John Naisbit “Knowledge is of two kinds. We know a subject ourselves or we know we can find information upon it” - Samuel Johnsons At this point in the history of computing and information processing, the most talked about information is management information system. Management infornation system has«vg a method, a function, an been defined by many information system experts. They SY tie below for whatever we approach or even as an organization. Some of which are enum aon: think would be best appropriate to the need of the organization oF , formation about > is a business system that provides past, present, and projected a . company and its envirorment ~ David M. Kroenke and Kal he accurate and timely > is a formal method of making available to management ‘and enable the information necessary to facilitate the decision-making Proorried out effectively . organization's planning, control, and operational functions to cal y James A F. Stoner ptures is the system that monitors and retrieves data from the environment, The firm's legal nature must be reflected in its organizational form (proprietorship, partnership, or corporation). neta > The firm's organizational structure refers to how authority and ibility for decision making are distributed (centralized or decentralized fom responsibilty > The firm’s organizational culture refers to the underlying set of assumpti - a sumptic it an entity and the goals, processes, practices, and values tutor shared by pte ‘The need to integrate an organization's present information , od tc 0 informal i consider in designing management accounting system. The systems doles ied should be evaluated to determine answers to the following questions ready in Pl 1. What data is being gathered and in what form? 2. What outputs are being generated and in what form? 3. How do the current systems interact with ‘ interactions? one another and how effective are thos? 4. Is the current chart of accounts appro ate a information desired? Priate for the management accounting5. What significant information issues are not presently being addressed by the information system and could those issues be integrated into the current system? Cost-benefit tradeoffs related to the design of the management accounting information system must also be the concern of the management. Proper incentives and reporting systems ust be incorporated into the system for managers to make appropriate decisions. The system must ‘be composed of the three primary elements: 1+ Motivational elements - includes performance measures, reward structure, support of Organizational mission and competitive strategy 2 Informational elements - includes all necessary information related to budgeting, cost control, value added and non-value added activities, and assessment of core competencies and analysis of make-or-outsource decisions, 3. Reporting elements - includes the preparation of financial statements for both financial and management accounting purpose (provision for the details of responsibility accounting system). Management control system (MCS) guides the organizations in designing and implementing strategies such that the organizational goals and objectives are achieved. It has four primary components: 1. a detector or sensor ~ is a measuring device that identifies what is actually happening in the process being controlled. 2 & assessor = is a device for determining the significance of what is happening. Significance is assessed by comparing the information on what is actually ‘happening with some standard or expectation of what should be happening. 3. a effector ~is a device that alters behavior ifthe assessor indicates the need for doing so. This is what we call “feedback”. 4. @ communications network - transmits information between the detector and the assessor and between the assessor and the effector. Cost Management System (CMS) consists of a set of formal methods developed for planning and controlling an organization's cost-generating activities relative to its goals and objectives. Its primary goal is to provide the means to develop reasonably accurate product or service costs, requiring that the system be designed to use cost driver information to trace costs to products and services. The product or service costs generated by the CMS constitute the input to managerial processes and such costs are used to: plan, prepare financial statements, assess individual product or service profitability, establish prices for cost-plus contracts, and determine the efficiency and effectiveness of the activities performed - performance measurement ® identify and evaluate new activities that can improve the future performance of the firm - investment management; anda ronment characterize > accomplishing the first three functions stated ae ny ecologies. by changing technology ~ adapting the frm in he Essential characteristics and qualities of information : ibe information We describe cars in terms of features, color, and fie, ja a terms of its accuracy and veriiability, completeness, relevance, an ; i the d > Accuracy and veifbility - The accuracy quality of information refers 1 TYE TCS le which information is free from error. Information is usually alk feasible to collet unless it is presented otherwise. Sometimes it is not economically ie information that is 100% accurate, For instance, in a market study being made by a market researcher, the researcher will only interview a fraction of the total target market and then apply the result to the entire potential consumers. At this point, the researcher can state that the information gathered from the sample can be applied to all consumers with a certain degree of confidence, say 90%, Accuracy and verifiability go hand in hand. A decision-maker is reluctant to assume that information is accurate unless it is verifiable. For instance, executives are usually comfortable with the accuracy of financial statements because this could be verified, usually by financial auditor. This is because records are kept of all transactions that impact the financial position of a company. Decision-makers may accept and use unverifiable information, but they do so with caution and skepticism. Too often, with the advancement of technology and use of computers, managers at all levels are quick to accept computer-generated information as free from errors. This can be a mistake, Information is only as good as the data from which it is derived. As the saying goes, "Garbage-in, Garbage-out' or GIGO. Thus, the need for a good information system is inevitable. > Completeness - Information can be completely accurate and verifiable, but it may not necessarily give the entire situation. The completeness quality of information refers to the degree to which it is free from omissions. The amount of information supplied to the decision-maker, of course, is not necessarily related to the completeness of information. Unfortunately, it is normally difficult to say if the information is really complete oF incomplete. Benefit-cost analysis is a good example of the importance of considering thé completeness of information in the decision-making process, ‘This is what we refer to 8 information must set guidelines to assess the completeness of information he > Relevance - The relevance quality of information refe ; information as input fora particular decision to be made, Nea op proprateness of could be relevant to the user, Information overload normally oe a s overload occurs when the volume of availabe informarg ne haPPens:_ information cannot distinguish relevant information from that which is ney too many that the use con to cane peg ant ten vat "i ion. For example, supplyin, limited capacity utilization, PPiying the full cost of production in a problem ofStacie Srnec Cont Manecomertend Mansanmeatécountng yn > Timeliness - The timeliness quality of information refers to the time sensitivity of information. Sensitivity refers to the effect of decision that should have been made ifthe information was given on time or not given on time. Up-to-date information on today's trends may be so significant or of great value to a decision-maker. The same information given today may be of less value now than if it has given a month earlier where the decision has to be made. The use of computer contributed a lot in improving the Emeliness quality of information than any of the other information qualities. The power of computers has made it possible for managers to have not only the right information, but also the right information at the right time. Today, data processed in weeks could now be processed in minutes. Components of Information Systems (Computer Based System) System, as defined, i a group of components (functions, people, activities, events, etc) that interface with and complement one another to achieve one or more predefined goals. Information system is a mixture or combination of hardware, software, people, procedures, and data. The term information system is normally referred to as a computer-based system that provides the following: a, Data processing (DP) capabilities of a department or perhaps an entire company, and b. Information - as people need to make better, more informed decisions is inevitable. Major components of a system are: > Inputs ~ are the various human, material, financial, equipment and informational resources put together required to produce goods and services, > Transformation processes - are the organization's managerial and technological abilities that are applied to convert inputs into outputs. > Outputs - are the products, services, information or any other outcomes produced by the organization. > Feedback - is the information about the results and organizational status relative to the environment. ‘Purpose of Accounting Information and Need for Accounting Systems Beneral-purpose accounting system that can supply appropriate information to all users of accounting information. Accounting system is also defined as an orderly, efficient scheme for Providing accurate financial information and controls. A well-defined and accounting system helps the firm achieve its goals and objectives generally classified as teinternal and external users i both > Operating results - Accounting information enables evaluate organizational performance. unting reports, enables the > ‘Seting prot Meee ing information by #2 e ons ‘roficencies, ani management to focus on operating problems, fe on important areas of ‘opportunities. Managers set priorities and concentral operations promptly enough for effective action. | non-recurring decisions > Problem solving - Problem solving is commonly relat ; recurring decisi or situations that require special accounting analyses a accounting that quantifies the potential results of possible recommends the best or the most acceptable course of action. Uses of Accounting System ‘Accounting system is useful for: > Routine reporting to management, primarily for planning and controlling current ‘operations; ? > Special reporting to management, primarily for long-range planning and short-term but non-recurring decisions; and > Routine reporting on financial and operating results, primarily for external parties. Components of an Accounting System Just like any system, accounting system is composed of: > Forms - are the documents on which the data is recorded. Examples are official receipts, sales invoices, checks and other similar business documents. > Equipment - consists of devices and machines such as computers, cash registers, and other business machines, vaults or even, filing cabinets. > Procedures - are series of operations or steps that must be performed to complete @ task, For example, sales order forms will be filled up by the sales person ‘suljet to the approval of the authorized person before any delivery will be made. The Procedure could be set up or documented by a narrative sales policy or sales flow chart. > People - no matter how sophisticated the other components of the ization have an accounting system can only function efficiently and cfectivey w the a are involved init perform their duties carefully and accurately, eee General Guidelines in Setting Good Accounting System Design In setting or installing accounting system, th | : general guidelines: we management must consider the followif’ > Flexibility - It is very important that the ; ; circumstances and demands. system is adaptable to meet changi"é > Reliability - Accuracy and timeliness, as we discussed evaluation of information. The system must also be geet Testive and subject’ misuse, both deliberate and accidental. strong and can stand up *‘Chanter 1 Strateaie Cost Management and Management Accounting == > Simplicity - As we refer to information overload, the system must be simple and easy to understand by the people in the organization. As normally observed, best ideas are always simple ones and this is true to systems. > Helpfulness - It is not just the achievement of goals and objectives, but also the usefulness of the system to those who have to work with it. As in this computer age, Software should be user-friendly to be useful. > Economy - It is always related to the idea of cost-benefit analysis. An accounting ‘system may be too good but too costly for an organization. > Control mechanisms - Accounting system must contain controls to ensure: * Accuracy - records are checked at various stages of the accounting cycle. * Honesty - effective controls are needed to prevent temptation of mishandling, theft and other possible commission of fraud and irregularities, * Efficiency and speed - it is essential that the records be designed so that more than one person can work on related records at the same time. This is normally refers to the theory of "check and balance’. Elements of Good Internal Control No matter how sophisticated the accounting system is, control can only be effective if it has the following essential elements: > Reliable personnel - Personnel should be given duties and responsibilities appropriate to their interests, experience, and capabilities. > Separation of duties - Recording and custodianship functions of assets should not be in the hands of one person. No one person must be in complete or total control of any activity. > Supervision - Each superior oversees and appraises the performance of his subordinates. Responsibility - Responsibility of every personnel must be clearly laid out to trace who should be praised and who should be punished. Document control - This means immediate, complete, and tamper-proof recording. Job rotations and forced leaves and bonds - key employees handling custodianship functions should be forced to take some vacation leaves and be rotated occasionally and if possible to place bonds. > Periodic review of te system - periodic review of all phases of the system by internal or external auditors are necessary. > Physical safeguards - Safe boxes, locks, and other safety measures must be installed, and limited access to authorized personnel will minimize asset and record losses. » Routine and spot checks - Routine but unscheduled checks must be done by authorized personnel to prevent commission of fraud at any time, Cot feasibility - Benefits should outweigh costs in setting up internal control systems inall cases. v vv v Sources of Accounting Data Accounting system served as the source of financial and non-financial data. systems accumulate, classify, store, and report relevant information and convert them into‘tetera: Cot aout nso transaction systems in meaningful information that will meet each user's needs. ‘The common a typical firm are: 7 on (sales or service) Entry System ~ sales ender from customers are processed anq * Cash Resp Stan ets om custome are recorded, and cash is deposited > Paras System - items for sale or for production use are ordered, received and > Pana Planning and Control System - in manufacturing firms, Leserarar Lorie are set, purchases are made; materials, labor, and equipment are schedules and production output is monitored. . > Cash Disbursement System - all payments for purchases and any other activities are made and recorded. secs bas > Personnel System - all personnel events are recorded. The major activities include hiring, giving benefits, evaluation, and payroll activities. > General Accounting System - data from all other transaction systems are brought together, and most management reports and financial statements are generated. Elements of a Computerized Accounting System Iny Output Input — > [_ Process SSE ton ‘The above flow of system indicates that raw data are entered into the system, (computer if computer-based or book of original entry if manual record keeping) then the system will necessary activities to convert such into a useful reports known as the information. See example below: DATA PROCESSING INFORMATION Customer's name, details of Invoice prepared and Sales reports generated. its ned by customer | -— | proved, reared and | _— Daily, wekly or (gty., unit price, etc.) terms billings prepared. monthly by product line of sale (delivery, payment, TOTAL sales or by territory whatever etc) summarized is avvllcable1. TRUE OR FALSE STATEMENTS, Write “True” ifthe statement is true and write “False” ifthe statement is false: 1. Reports prepared in management accounting are general-purpose reports, whereas Teports prepared in financial accounting are usually special-purpose reports. 2 Management accounting information generally pertains to an entity as a whole and is very detailed, 3. Management accounting applies only to manufacturing companies, 4. Determining the unit cost of manufacturing a product is an output of management accounting, 5. Management accounting internal reports are prepared less frequently than classified financial statements, 6 The management function of planning is mainly concerned with setting goals and objectives for the entity. 7. An organization chart in a manufacturing company replaces the chart of accounts, 8. Directing is the process of determining whether planned goals are being met. 9. Decision-making is an integral part of the planning, directing and motivating functions, but not of the controlling function. 10. The theory of constraints is used to measure performance, 11. The focus of a TQM system is to reduce defects in finished products. 12 Recognize and communicate professional limitations or other constraints that would Preclude responsible judgment or successful performance of an activity is an integrity ethical conduct of professionals. 13, Management accountants must refrain form disclosing confidential information acquired in the course of their work, except when authorized, unless legally obligated to do so. 16. In practice, the planning, organizing, and controlling functions of management are kept separate from the decision-making function, 17, Staff departments in an organization generally have direct authority over line departments. 18. The accounting information produced by a management accounting system does not include the expenses incurred in an operating department. 19. Future-oriented reports are not a basic feature of a financial accounting system. 20. Management accounting deals with providing economic information to internal constituencies, 21, The functions of management accounting information are: operational control, product and customer costing, management control, and external reporting, 22. The steps to be followed in implementing an organization’s objectives are set down through strategic planning. 23, Strategic planning is sometimes referred to as setting policy. 24. “Controlling” refers primarily to setting maximum limits on spending in an organization. 25. Management accountant must understand and anticipate the reactions of individual to information and measurements, 26-A balanced report is a measurement system for clarifying, communicating, and implementing business strategy.27. 28. 29, 31. 2 2 8 34. 35. 36. 37. 38. 4B. “4. 45. 46. 47. 48. 49. workers, manager, Management accounting produces information that oe thelr procesees a executives in organizations make better decisions 4% performance. ion i Internal reporting is the preparation of financial reports ba: generally acceptej accounting principles. ing data to aid and coordinat Accounting system is often the principal means of ga ng oe decsions in light of te the process of making the best collective operating OF 70 overall goals or objectives of an organization. = internal managers for An effective accounting system provides information only to anne Bets Tor Use in planning and controlling routine operations nd in euch ‘as checks and invoices), Data processing includes the preparation of docu ide accounts and the flow of the data contained in these documents through the maj ting steps of recording, classifying, and summarizing. = Information generated or processed by computers 15 said to be free from any errors, thus, it possesses the quality of accuracy. . Computers can make decisions in the sense of exercising judgment and can choose : ; ecinaeatt in the program. among alternatives by following the specific instructions contained in ; Designing a good accounting system is a specialized job requiring 4 high degree of skill ‘Accounting system must contain controls to achieve accuracy, teliability and efficiency. Information system is a combination of hardware, software, people and events to provide information for decision making. - ; Data collection via an accounting system facilitates the best collective decision making, A program is a series of steps planned to carry out a certain process, such as the preparation of a payroll. ‘Accounting machines is usually applied to mechanical or electronic equipment capable of performing arithmetic functions and not used to produce a variety of accounting records and reports. ‘The input in a computer-based system corresponds to the journals in a manual system. | One of the first steps in the development of an accounting system is the preparation of a chart of accounts. Accounting system must contain controls to achieve accuracy, honesty, and efficiency, and speed. The accuracy quality of information refers to the degree to which information is free from error. Information is said to be complete if the user could accumulate as many information 3s possible. Information is said to be timely if t still useful to the decision makers before a decision has been made. Management control systems guides the organizations in designi implementi strategies to achieve its objectives, a as {A detector is a measuring device that identifies what is actually happening in the proce! being controlled. a beppenting inthe Communications network is a part of cost management identi resources of the firms. gement system that identifies the cost of ‘The firm’s organizational structure refers to how ' _ decision making are distributed. authority and responsibility f Costs-benefits trade-offs may be considered by managers in designs information system. by managers in designing managem‘Ghani 1 Sites Cost Manacoment and Manaoament Acouting lg 1. MULTIPLE CHOICE QUESTIONS. Encircle the letter that corresponds tothe best answer: Strategic Cost Management and Management Accounting 1. Management accounting a. isconcemed with costing products. b. is governed by generally accepted accounting principles. . pertains to the entity as a whole and is highly aggregated. . places emphasis on special-purpose information, 2. What broad functions do the management of an organization perform?. a. Directing, manufacturing, and controlling b. Planning, directing, and controlling c. Planning, directing, and selling d. Planning, manufacturing, and controlling 3. Management accounting information is generally prepared for a. stockholders, b. managers. c. regulatory agencies. d. investors. 4. Management accounting information a. pertains to the entity as a whole and is highly aggregated. b. must be prepared according to generally accepted accounting principles. ©. pertains to subunits of the entity and may be very detailed. d. is prepared only once a year. 5. Which of the following is not an internal user? a. Corporate officers b. Staff employees © Stockholders d. Department manager 6. _ Which of the following is not part of management accounting? . Determining whether plarined goals are being met Reporting financial information to the shareholders Calculating product costs Controlling costs pos 7. _ Which ofthe following uses management accounting? a. Manufacturing and service entities, but not merchandising _ b. _Profit-oriented businesses only © Service, manufacturing, and merchandising entities d. Only manufacturing entitiestater +i cot Nananmon on Manone og 10. 11. 12. 13. 14. 15. a management Which one ofthe following tasks would not be performed PY accountant? sts a. Being concerned with the impact of cost and volume on profit b. Strategic cost management ©. Assisting in budget planning d. Preparing reports primarily for external users How often are internal management reports commt a. As frequently as needed b. Annually . During every audit by the company’s CPA d. Monthly wunicated? 2 Which description identifies financial statements that are prepared for external users? a. External reports b. Special-purpose c. User-specific d. General-purpose Which term describes management accounting reports? a. GAAP reports b. Special-purpose . General-purpose Which one of the following involves coordinating a company’s activities to produce a smooth-running operation? Auditing Controlling Planning Directing poop Which of the following statements about internal reports is true? a. Most internal reports are summarized rather than detailed. b. Internal reports focus on general purpose needs of users. c. The content of internal reports extends beyond the double-entry accounting system. d, Internal reports are often very general. Which one of the following describes internal reports? a. They are often audited by CPAs. b, They are highly regulated by the SEC. c. They are aggregated. Which one ofthe following does the planning function involve? a. Analyzing financial statementsGhsater 1 Sratwat: Cast Management and Mangement Accounting OS 1b. Setting goals and objectives for an entity Hiring the right people for a particular job d, Coordinating the accounting information system. 16, Which one of the following is true concerning the managerial function of controlling? a, It includes performance evaluation by management. db. Itisconcemed mainly with operating a manufacturing segment. cts performed only by the controller of a company. d._Ttincludes hiring and training employees. 17, Which of the following represents two management functions? a. Regulating and directing b Controlling and directing ¢. Controlling and auditing d. Auditing and planning 18. Which management function is a manager performing when objectives are being established? Regulating Planning Motivating a 19. Which one of the following shows the delegation of responsibility within a company? a. Authority outline b. Organization chart Company's charter d. Sarbanes-Oxley Act 20. Management and financial accounting are used for which of the following purposes? Management accounting —_ Financial accounting internal Bore a b. external internal « internal internal a external external 21. Management accounting a. Ismore concerned with the future than financial accounting. b. _Isless concerned with segments of a company than financial © Is more consuaind by rales and regulations than financial acounting’ d. all of the above are true. 22. Which of the following statements is false? a. A primary purpose of cost accounting is to determine valuations needed for external financial statements. b. A primary purpose of management accounting is to provide information to managers for use in planning, controlling, and decision making. c. The act of converting production inputs into finished products or servicesnecessitates cost accounting, cost, ae d. Two primary hallmarks of cost and macs EN standardization of procedures and une of gener Principles, an ongpriaation 6 23. The key link between managing resources and managing are @. responsibility accounting. b. information. ©. strategies. 4. conversion activities. A. In comparing financial and management accounting, which of the followiei, more accurately describes management accounting information? . historical, precise, useful required, estimated, internal budgeted, informative, adaptable comparable, verifiable, monetary pose 25, One major difference between financial and management accounting, is that a. financial accounting reports are prepared primarily for external users b. management accounting is not under the jurisdiction of the SEC. government regulations do not apply to management accounting, d. all of the above are true. 26. Which of the following statements about management or financial accounting is falae? a. Financial accounting must follow GAAP. b. Management accounting is not subject to regulatory reporting standards. ¢. Both management and financial accounting are subject to mandatory recordkeeping requirements. d. Management accounting should be flexible. 27. Broadly speaking, cost accounting can be defined as a(n) a. external reporting system that is based on activity-based costs, b. system used for providing the government and creditors with information about a company's internal operations. c. internal reporting system that provides product information used by managers in performing thet fanctona al d. internal reporting system needed by manufacturers to be in with Cost Accounting Standards Board pronouncements, ton 28. Cost accounting is directed toward the needs of a. Regulatory agencies. b. external users. internal users. d. stockholders. 29. Financial accounting, a, is primarily concerned with internal reporting.‘hacia Mtelenks Cox Monaooment and Management Adcoutng == b, © d, 30, Which of the following topics is of more concern to ma accounting? aoce 31. The pose {is more concerned with verifiable, historical information than is cost accounting, focuses on the parts of the organization rather than the whole. 's epecifically directed at management decision-making needs. inagement accounting than to cost generally accepted accounting principles inventory valuation cost of goods sold valuation impact of economic conditions on company operations ethical standards established for management accountants are in the areas of competence, licensing, reporting, and education, budgeting, cost allocation, product costing, and insider trading. competence, confidentiality, integrity, and objectivity, disclosure, communication, decision making, and planning. 32. Management accounting a. b. ° d. must follow generally accepted accounting principles. information should be developed within the same general accounting system as. financial accounting, deals primarily with the needs of parties external to the firm such as investors and creditors, is just another financial accounting term. 33. Which of the following is a true statement? b. « 4. Neither financial nor management accounting are mandatory. Both financial and management accounting emphasize relevance and flexibility. Both financial and management accounting place more emphasis on the past. | Both financial and management accounting are based upon the concept of stewardship, 34, Financial accounting is concerned with: eose The company as a whole rather than with the segments of a company. ‘The needs of stockholders and creditors. Meeting the requirements of internal users only . Recording the financial history of an organization. 35. The basic difference between management and financial accounting is that: Financial accounting is a division of accounting that is concerned with Providing Information to stockholders whereas management accounting is concemed with Providing information to managers for their use in directing the activities of the organization. Financial accounting relies on information gathered from sources outside the business whereas management accounting relies on internally generated information. Financial accounting system relies on accounting information whereas management accounting does not.a Management accounting elles upon the concept of FPORSPY ting Whereas financial accounting does not. 36. Financial accounting statements must be prepared in accordance With BODY accepted accounting principles. Managers of a company . iin ue laces a sree follow GAAP shy wiz accuting moran” decisions, b. can disregard GAAP only for non-financial accoun' 4 ! =) © net er argon rales on the form and content of information Which ob a. canoe thei com ground rules onthe form and content of information which soe =. used internally and externally tothe firm. . Concerning the management process of an organization: . a "A chart detailing the organizational relationships of a company is commonly called b. ‘The controller usually has "staff authority" in his own department and line authority* elsewhere. c. The implementation of objectives is called strategic planning , 4. Principles of management accounting relate to private profit-oriented businesses but not to public non-profit entities. 38. Management accounting differs from financial accounting in that management accounting: a. Is internal and future oriented, and governed by GAAP, whereas financial accounting is not. b. Is future oriented and focuses on the organization as a whole, whereas financial accounting is not. c. Emphasizes relevant and flexible information whereas financial accounting does not. d._ Emphasizes relevant historical information about the whole firm, whereas financial accounting does not. 39. Which of the following is a false statement? ‘a. Financial accounting is governed by generally accepted accounting principles whereas management accounting is not. pene b. Management accounting places more emphasis on the past than does financi accounting. financial c. Financial accounting tends to emphasize precision while | emphasizes relevance and flexibility. Precision while management accounting d. Management accounting draws heavily from other discipli 40. Management accounting is primarily concerned with providing is 7 a. Stockholders of the firm. Providing information to: b. Decision makers inside the firm c. Creditors of the firm d. The publicChaoter 1 Strategic Gost Management and Menacement Accounting Management Accounting Information System . A management information system should do which of the following? Collect Organize data Analyze data data formanagers for management a yes no yes b. yes yes no © no no yes d. yes yes yes ‘A management information system should emphasize satisfying a. external demands for information. b. external and internal demands for information. . internal demands for information. d. the Accounting Department's demands for information. |. Who of the following are external users of data gathered by a management information system? editors Regulatory Bodies Suppliers a. yes yes b. no no no © no yes yes d. yes yes yes . Which of the following would be considered a detector? a. computer program. b, source document variance report d. all of the above . Feedback is reflected in which component of a management control system? Sensor Assessor Effector Detector pose . Reactions to information provided by the management control system are formulated in the organization's strategic plan. judgmental, and are based on interpretations and circumstances. assessed by the communications network of the MCS. determined as those activities that will be most efficient and effective given the organization's available technology. ‘management accounting system should provide information to all functional areas of the organization. only the accounting area of the organization. only the production area of the organization. |. organizational managers, but not to staff personnel. poop ao ee > .. Which of the following is not a primary goal of a cost management system?10. 11. 12. 13. 14. . use cost drivers to develop product costs . improve understanding of acti develop organizational strategies |. measure performance peop at . A cost management system will provide the means to develop a. the most accurate product or service costs. . it analysis. b. areasonably accurate product or service cost given cost beneft ded overhead. . a product or service cost that does not include any Rom-¥) products or services. 4. acosting system that traces all costs directly to individual The costs generated by the cost management system are used to a. assess product/service profitability. 7 b. establish prices for products with significant competition. c. determine underlying reasons for variations from standards. d. all of the above. Information about the life-cycle performance of a product or service should be provided in the Financial accounting system Cost management system a. yes yes b. yes 0 © no yes 4. no no Which of the following organizational characteristics critically affect the design of a cost Culture Critical success factors Mission Form a. yes yes yes yes b. yes no yes no « no yes no yes d. no yes yes no ‘A management accounting system a. is finalized when the information currently being ced is information currently desired. 6 Produced Is the same as the b. can be generically designed to fit the information domestic (but not global) organizations. of the majority of c. must be continuously improved to adapt to changes i Sete and external environment. ‘ man organization's internal 4 Senge inka tactea donee ae ee nat need tobe Which of the following statements is true? ; * Sattar masen TS 8 Serato in dteminng an SC ee cn heinty mat c. Knowledge an tion's critical success factors helps to clarify‘Chanter 1 Strateaie Gost Management and Management Accounting =a organizational mission and develop a cost management system. d. An organization must establish a position of cost leadership to compete in a global business environment. 15. An increase in the use of technology has caused a. fewer costs to be susceptible to short-run control, b. companies to be more flexible in responding to changing short-term conditions. managers to be less concerned about capacity utilization because of the increased ability to produce in large quantities, d. a decline in the amount of fixed costs in an organization. . Inconjunction with a cost management system, gap analysis refers to comparing a. the information being received by competitors’ managers to the information being received by in-house managers, b. the information needed to what is available. ¢. current cost information to projected cost information. a. budget figures to actual spending. 17, Which of the following is considered a "feeder" system to the cost management system? Payroll Budgeting Inventory valuation a. yes no yes b. yes yes yes © no no no d. yes yes no 18, Which of the following is a primary element of a cost management system? Information Reporting Motivation Evaluation a. yes yes yes yes b. no yes yes no Yes Ro no yes d. Yes yes yes no 19. Organizational form directly affects which of the following? Decision- making Cost of capital Taxation Mission Authorit a. no yes yes yes b. yes yes yes no © no yes no yes d. yes yes no no 20. Asan organization moves to decentralizeits operations, an effective reporting system will have centralized. when the organization was a. about the same importance as b. less importance than ©. more importance than d. + @ level of importance that depends on organizational size as compared totoact ina manner 21. The performance measurement system should encourage exch manaBer tha a. makes the manager's units profits as high a8 POSSI’ 4 aettve strategies. most positively supports the organization's mission Os acing, « increases his/her performance reward in the form of of the manager's Planning 4. reduces the need for informational elements in supPoTt function. 22. Pxormance eos ae wefan tthe exe hat perorares meas SE . a meaningful benchmark. the performance of all other units or managers. the budget as adopted for the period. 23. The accountng function in an orgaization is expected to support managers in which ofthe Planning Controlling Evaluating performance no aos a yes yes b. 20 yes r0 © 70 no yes dyes yes yes 24. The reward system for subunit managers of mature businesses should emphasize a. Long-term competitive prospects. b. near-term profit and cash flow. ¢. success in product design and development. d._ exceeding last year's subunit profit. 25, Most managers evaluate decision alternatives based on how ‘a. much the decision will increase or decrease organizational profits. b. the outcomes may affect selected performance measurement and reward criteria. c much the outcome will reduce the organization's cost of capital. d. easily the decision impacts can be quantified in the organization's cost management system. 26, Performance measurements and a reward system i titel system are part of which cost management element” b. Informational c. Reporting d._all of the above 27, Focus on cost control and assessing core ‘ . 2 Competencies are part of which cost management ‘a. Motivational b Informational c. Reporting d. all of the above28. Which of the following should be able to provide the financial information needed for budget Cost management Financial accounting Cost accounting preparation? system, system a. no yes b. no yes © yes no d. yes yes system yes no yes yes 29. A responsibility accounting system provides information to top management about the a. organizational responsibilities of each subunit manager. b. performance of each organizational subunit and its manager. ¢. ability of each subunit manager to ensure a satisfactory cost to revenue relationship. 4d. alll of the above. 30. Which of the following should be considered in a cost management system design? Cost Personnel a. yes yes b. no yes no no d. yes no Investment management principles yes yes no yesPROBLEMS 11 Ethical Conduct for Managemen Enumerate the four areas covered by Standards of : Accountants and how these areas are defined? 12 Consider the following short descriptions. Indicate whether each description more closely relates to a major feature of financial accounting (use FA) or management accounting (use MA) a, Behavioral impact is secondary b. Isconstrained by generally accepted accounting principles c. Hasa future orientation d. Is characterized by detailed reports e. Field is more sharply defined £. Hasless flexibility 13 For each of the following, indicate whether the employee has line (L) or staff (§) ‘bility . Production superintendent Cost accountant Market research analyst District sales manager Head of the legal department —_ President _ mp poop 44 Financial accounting information and mana; ct ; number of distinguishing characteristics. igement accounting information have * ‘ Reporting standard is relevant to the decision to be made 2. Classified financial statementsShaatee | Salant: Cost Management and Manawoment Aout = Reports generally pertain to the company as a whole Reports generally pertain to subunits Reports issued quarterly or annually Goneral-parpose reports Reports are usest internally Prepared in accordance with generally accepted accounting principles 9% Special purpose reports —— 10. Limited to historical cost data een ane ye Instructions: For each of the characteristics listed, indicate which characteristics are more closely related to financial accounting by placing the letter "F" in the space to the left of the item and indicate those characteristics which are more closely associated with management accounting by placing the letter "M" to the left of the item. 15 Jan Harry, a mechanical engineer, was informed that she would be promoted to assistant factory manager. Jan was pleased but uncomfortable. In particular, she knew little about accounting. She had taken one course in “financial” accounting. Jan planned to enroll in a management accounting course as soon as possible, Meanwhile she asked you, as the ‘company’s cost accountant, to state four of the principal distinctions between financial and management accounting. Prepare your response to Jan HarryL OO — ICA’ © COST CON Cost BTANON This chapter aims that the students be able to: * Define and identify the key cost concepts. ich classificati Identify how are costs + Tact to tts appropriate use and Why are SU ions useful. . Distinguish between manufacturing and non-manufacturing costs. Distinguish between product costs and period costs. Distinguish between direct and indirecteosts, Distinguish between controllable and non-controllable costs. . Understand how cost behavior affects planning and controlling fonctions and distinguish the three major kinds of cost behavior - variable, fixed AX axcc * Define the relevant range and explain its significance in cost behavior analy=ts- = Formulate cost function and know its purpose. * Identify costs relevant to decision making. Introduction To understand management accounting, the need for cost accounting information is inevitable. As explained in Chapter 1, the functions of management are (1) planning which includes setting of objectives and outlining the means of attaining those objectives; and controlling, which includes the steps taken or the means used to ensure that objectives are realized. In order to discharge these functions, managers need information, which mostly often. relate to the costs of the organization. The word "cost" can have different meanings depending ‘on the context in which it is used. But in plain and simple, cost is sacrifice. Sacrifice is something of value for an expected benefit greater than its cost. Sacrifice may be measured in cash expended, property transferred, service rendered and any other thing that has value to the giver of cost. For example, you pay the amount of P10 for a product with the intention of reselling it at P15. The P10 is the cost or value you sacrificed with the expectation of getting @ profit of P5 which is higher than what you gave away. The important point is that different cost concepts and classification are used for different purposes. The reason is that there are many different types of costs, and these costs are classified differently according to the immediate needs of the managers and understanding these concepts and classifications enables the management to use cost data more appropriately: This chapter will discuss some of the most common types of costs and how these costs are classified by managers that will best serve their needs in their decision making.‘Chapter 2 Cost Concent Classifctions and Behavior a Cost classified by the functional areas of the organization to which the costs relate. A company engaged in manufacturing is more complex than a merchandising or service organizations, These companies involve in the conversion of goods they purchased into another finished goods requiring them to incur both manufacturing and nonmanufacturing costs. * Manufacturing cost - is a cost incurred in the production of the product or service. Manufacturing cost is composed of three elements; direct material, direct labor and manufacturing overhead. Direct materials plus direct labor are called prime cost. Direct labor plus manufacturing overhead are called conversion cost. Manufacturing overhead includes indirect materials, indirect labor and other factory burdens. * Nonmanufacturing cost - is a cost incurred in administering the operation of the business and commercializing the product or service of the company. It is commonly called operating expenses which are charged to revenues for the period. ‘The distinctive difference in a manufacturer of goods and manufacturer of service is that, a service is consumed as it is produced, whereas a manufactured product can be stored in inventory. A manufacturing firm could have both manufacturing costs and operating costs, while a service firm will have operating costs only. Cost classified as to timing of charges to revenue in an accounting period. Proper matching of costs and revenues in a given period raises the question on whether a cost is to be charged to revenues for the current period or defer for the future period. That is, the timing in which the costs of acquiring assets or services are recognized as expenses. An expense is defined as the cost incurred when asset is used up or sold for the purpose of generating revenue. These costs are: * Product cost - is a cost assigned to goods or services until sold. ‘Thus, it is also known as inventoriable cost, since the product is stored as inventory until sold. Product cost is viewed as “attaching” to units of product as the goods are purchased or manufactured and they remain to be the cost of goods in inventory awaiting sale. AAs goods are sold, these costs will be released from inventory as expenses (called cost of goods sold) and matched against sales revenue. © Period cost ~ is a cost that is matched against revenues in the time period in which it is incurred. As such, this cost is not included as part ofthe cost of goods purchased for sale (in merchandising concern) nor goods to be manufactured (in manufacturing concern). These costs are the normal operating expenses such as selling, administrative, and general expenses of the firm. These costs are identified with the Period of time in which they are incurred and are recognized as expenses, Product cost and period cost classifications are very useful in financial statement Presentation, particularly, income statement using variable costing method, Variable costing method will be discussed in detail in a separate chapter.rticularly in managing cost Cost classified in relation to management controlling, functions, Pa Cost Classified as to Tracenbility ater or sub-unit in which the costs wer Tracing cost to the department or work ce! - he-¢ incurred facifates cost contol, ‘They are called direct oF indirect costs. asst Cost as being. direct or indirect would be meaningless, unless, he frm fist identifies sme organizational segment to which these costs are to be related or associated. segment could be a product line, a functional department, a division, @ ranch, or some other sub-unit ofthe organization. These costs are: plant or department. It is ticular segment under consideration. For ‘on is a production department which bor is a direct cost of every > Direct cost - is a cost that can be traced to @ particular obviously or physically traced to the par example, if the segment under considerati produces different products, materials and direct Jal product line as well as that production department. The salary of the production department head is equally a direct cost as far as the production department is concern but an indirect cost as far as the different product lines are concern. This is because the production supervisor is in-charge of all the product lines being produced, and it is difficult to specifically trace his salary cost to those products. ‘Thus, allocation is necessary as most of the factory overhead costs are being allocated using any applicable methods of allocation. > Indirect cost -is a cost that is not directly traceable to a particular department ot sub- unit. As explained earlier, the salary of the production supervisor needs to be allocated to the product lines as this is classified as indirect cost with respect to the product lines, but direct as to production department. But, for example, the Gepreciation expense of the entize building where both office and production are located is an indirect cost of the production department and an indirect cost also of the product lines. Whether a cost is a direct or an indirect cost of a work center often depends on which work center is under consideration. A cost can be a direct cost of one work center or sub-unit in the organization but an indirect cost of a sub-unit or work center if such it is further subdivided into smaller units. a Cost classified as to direct or indirect is useful to cost mana; i gement system. The objective of a Cost Management System is to trace as many costs as possible directly to the hes Sihich costs are incurred. This is sometimes called "Activity accounting". This process is vital 1's objective of eliminating "non-value added costs". Non-value added costs are cos ‘of activities that can be eliminated without deterioration of service quality, formance of perceived value. This concept is achieved by the so-called Activity-Based Costing (ABC) B. Cost Classified as to Controllability ‘Another cost classification that can be helpful in cost control i ibty ofa cost item by a particular manager. Like direct and indirect ee of a sable of a cost depends onthe pont of reference or level of authority in the org aioShaoler2 Cos! Concent. Classitoaions end Behe ag The need for a well defined organizational chart and job responsibilities is a must before these costs could be properly classified, ‘These are: > Controllable cost - is a cost that the manager can significantly or heavily influence the level of incurrence of such cost. A cost is considered to be “controllable” if the manager has the power to authorize the incurrence of such cost. The manager can decide on the price, quantity, quality, and from whom they are going to buy the materials or services his department needs. > Uncontrollable cost - is a cost that the manager cannot significantly influence its incurrence. Normally, these are costs that are allocated to his department by the higher authority, But in most cases too, these are direct costs incurred by his area but decisions to incur such costs are made by higher authority. Many costs are not completely under the control of any individual. In this case, the analysis must be focused on a manager's ability to influence costs. The question is not who controls costs? But who is in the best position to influence the level of a cost item? Some costs may be controllable in the long-run but not in the short run. For example, the long-term costs associated with lease agreement are controllable when a 10 year lease is negotiated. In the short-run, however, after the lease is signed, the rental costs are uncontrollable until the lease period ends, Costs classified in relation to decision making Economic concepts also classify costs. Such concepts are often useful in helping managers decide what cost information is relevant to the decisions they have to make, such as the incremental decision making function of management. These costs are: > Opportunity cost - It is the benefit sacrificed when the choice or one action precludes taking an alternative course of action. In other words, these are benefits forgone in choosing one alternative over the other competing alternative. Opportunity cost is not usually entered on the books of an organization, but it is a cost that must be explicitly considered in every decision a manager makes, > Differential cost - It is the amount by which the cost differs under two alternative actions. This is also known as incremental costs. Although technically, incremental costs would mean only to increase in cost from one alternative to another; decreases in cost should be referred to as decremental costs. Differential cost is a broader term, encompassing both cost increases and cost decreases between alternatives. This could be compared to the marginal cost concept of the economists, » Relevant cost - It is the cost incurred in one alternative but will not be incurred inanother alternative. As costs incurred in both alternatives, such costs would be irrelevant in making a decision. > Marginal cost - It is the extra cost incurred when one additional unit is produced. Marginal costs typically differ across different ranges of production quantities because the efficiency of production process changes. This could determine the quantity that would be most efficient to produce. > Average cost per unit - It is the result if the total cost to produce the products is divided by the number of units manufactured or produced,7 Consequently, > Sunk cost «It isa cost that has been paid or incurred. Cone ee nm affect future costs and cannot be changed by any CUT se willbe incuned historical costs or future committed costs. Though commit sready committed in the future, itis considered a sunk cost as managemen’ © Example is alo, such costs and a decision not to incur such may be more Fy too cost nee term lease contacts. Cancellation ofthe unexpired fer ny ite form of ties or damages for breach of contract. ‘ > Ouro pelt ent It va ot tat requires the payment of cash or other asses in future as a result oftheir incurrence. Costs classified in relation to organization's activity and its behavior In the planning and controlling function of a manager, the most important thing to understand is the cost behavior. Cost behavior means how a cost will react OF respond to changes in the level of company's activity. Activity refers to a measure of the organization's output of products or services. Activity can be expressed in many ways, such as units produced, units sold, miles driven, rooms occupied, etc. As the activity increases or decreases, a particular cost may also increase or decrease or some may remain constant. The manager must be able to predict or anticipate which of these costs will change and which are not and up to what extent. ‘The manager as well must identify the cost drivers to which the changes of this cost is associated. Cost driver is the activity that cause costs to change or activity that incur costs. These costs are: > Variable cost - is a cost that changes, in total, directly proportional to the changes in the level of activity (or cost driver). If an activity increased by 20%, total variable cost increases by 20% also, and vice versa. Variable cost by its observed nature isa rate per unit of activity or output. The cost per unit remains constant across a reasonable range of activity. Since it is a rate, it is a function of an independent variable, the activity or output level. Reasonable range, is what we call “relevant range", the normal activities of the firm. Relevant range - is the assumed range of activity, which reflects the company's normal operating levels and the relationship of cost behavior is valid. Generally, the relationship between variable cost and activity is stable enough within this rang? that an assumption of strict linearity can be used with insignificant loss of Though economists emphasized that accountants’ view that many variable cos's really behave in curvilinear way rather than linear is correct, Strictly lineat relationship between cost and activity or volume dk Ree or lowest levels of activity. ie does not exist either at the highest > Fixed cost - is a cost that remains unchanged, in t : driver) varies within the relevant range ai a ee ok ati on total fixed cost remains the same. Fixed cost by its observed nature is a lump &> Mixed cost or semi variable cost - is a cost that is composed of a fixed and variable behavior or nature. Mixed cost is always present in all organizations however, management always assumes that mixed cost has been segregated using the lifferent cost segregation technique. Mixed cost cannot be managed unless the fixed portion and variable portion were segregated or identified. Classifying costs as to variable or fixed is useful in planning or predetermining total costs as in planning or budgeting, As discussed earlier, the manager must be able to anticipate ‘what will happen to these costs in case of changes in activity, and if a cost is expected to change, the manager must know how much or up to what extent. Predicting costs could be achieved by developing a cost function. As the third cost, mixed cost has been segregated to its variable and fixed component, total costs of the firm is equal to the sum of total fixed cost and total variable cost, However, the variable cost is expressed on a per unit basis and its total cost will depend on the level of activity, the firm must develop its cost function. Cost function is the formula to which total cost of the firm will be computed. It is an algebraic equation used by managers to describe the relationship between a cost and its cost driver. This is better expressed in a formula: Y= A+BQ) = the total costs = the total fixed costs = the variable cost per unit = the number of units produced or activity done or the cost driver meres For example: Total fixed costs is P10,000; Variable cost per unit is P10 Total costs could be predetermined at 1,000 level as: Y¥ = A+BX) Total cost = P10,000 + P10 (1,000) = P10,000 + P10,000 = P20,000 All of these cost classifications were analyzed and observed for the very reason of planning operations and evaluating the results of operations, whether by segment or as a whole. Planning, controlling and performance evaluation will be discussed in detail in the next chapters where the uses of classification of costs are applicable. These are Variable Costing, Cost-Volume Profit Analysis (Breakeven Point), Budgeting (hort-term or long term), anil Standard costing for variance analysis, Further, it is very important in Short-term decision making, responsibility reporting and even about pricing decisions, Other Terms Commonly Used in the Study of Management Accounting » Cost Allocation = the process of assigning costs in a cost pool to the appropriate cost objectives. Tracing and reassigning costs to one or more cost objectives such asit of costs is i Cat ccc ei bh desire, Examples include departments, products, and $1 Reape inde dpa ha a one , Cont Mencrement™ the fs step inestimating or pricing core © = cost drivers. Cost Accounting = ig the calculation of costs for the activities, improving quality and efficiency, and making Control - is the management's systematic effort ‘° performance to plans and acting to correct differences bela ane Coot Estimate ete proces of determining how a particular c= oe Cost Estimate - isthe proces > te assigned t a set of, cost oben A group of Cost Po 8 ei ated to cont objectives using 2 single cost drive individual cots tat it eco of facts and services tat are Shared users. Capacity Costs «the ied coats of being able to achieve a desired level of Production te ar ci rel opr whe maintaining product oF service ati ich quality. Committed Fixed Costs «the expenditures that requir a series of payments over a longer, period of time. ‘Common Costs — pontraceabe costs incurred forthe benefit of more than. one functorl classification or business unit. Discretionary Fixed Costs ~ also called programmed costs are expenditures a result of management policy. Mrinal Costing also called variable cosing which assigns only variable manuiocarng costs to products. re Costing ~ a costing method in which costs are accumulate for each job, bach customer order. case cing ~ a costing method in which materials, labor, and factory overhead 2 charged to cost centers. ‘The cost assigned to each unit of product manufactured is Sree ned by dividing the total cost charged to the cost center by the number of unis produced. decisions. |. ‘achieve objectives by comparing them. which are fixed as‘Chaoter 2 Cost Concept, Classifications and Behavior I. TRUE OR FALSE Write “True” if the statement is true and write “False” if the statement is false. Manufacturing overhead combined with direct materials is known as conversion cost. Non-manufacturing costs consist of selling costs and administrative costs. A variable cost will change in total in proportion to changes in the level of activity. AA fixed cost is constant per unit of product. Manufacturing overhead is an indirect cost with respect to units of product. ; A cost object is the monetary measure of a resource used or foregone to achieve a specific aspen purpose. 7. The cost objective is defined as any purpose for accumulating costs. 8. The major purpose for using cost objects is to aid management planning and control. 9. Cost accumulation, cost allocation, and cost objects are interrelated. 10, An activity index is the activity that causes changes in the behavior of costs. 11. Fixed cost per unit remains constant at various levels of activity. 12. A variable cost remains constant per unit, though in total increases as activity levels increase, 13. If volume increases, both total variable and total fixed costs will increase. 14, Ifthe activity level decreases, fixed costs per unit will decrease. 15. Decreases in the level of activity will cause total variable and total fixed costs to decrease. 16. An assumption regarding cost behavior is that two cost drivers are used for a given cost. 17, Cost behavior is the impact that a cost driver has on a cost 18. Variable cost changes in total in direct proportion to changes in activity or output. 19, When graphed, total variable costs and total fixed costs are both assumed to be linear within the relevant range. 20. Fixed cost is constant in total amount regardless of changes in activity level within the relevant range. 21. Cost function is an expression that mathematically links costs, their behavior, and their cost driver. 22. As volume decreases within the relevant range, variable cost per unit remains the same and fixed cost per unit increases, 23. When making predictions, variable costs and fixed costs should be thought of on a per unit basis. 24, Within the relevant range, the amount of variable cost per unit remains constant at each volume level. 25.The relevant range of activity is the activity level at which the company makes the highest amount of profits. 26.Fixed costs per unit decline as the activi activity. 27.The variable cost element of a mixed cost is the amount that total costs increase for each additional unit of activity. 28.A period cost is defined as the cost incurred when asset is used uy ty level increases within the relevant range of d P or sold for the purpose of generating revenue, 29. Average cost is the total cost to produce the products is dividéd by the number of units manufactured or produced. 30.Opportunity costs could be defined as the revenue I lost when one alternative is not taken i favor of another alternative “I. MULTIPLE CHOICE QUESTIONS tor Identify the letter ofthe choice that best completes the statemer answers the question, which 1 ‘The term *elevan range in cost accounting mears the fae °F a. costs may fluctuate. b. cost relationships are valid. © Production may vary. d. relevant costs are incurred. 2. Whichof the following defines variable cost behavior? ‘Total cost reaction Cost per unit react” ; nao a. remains constant remains constant 'b. remains constant increases c ‘increases increases d, increases remains constant 3. When cost relationships are linear, total variable prime costs will vary in Proportion to changes in ‘a. direct labor hours. b. total material cost. c. total overhead cost. d. Production volume. 4 Which of the following would not generally be considered a fixed overhead cost? Straight-line Factory _Units-of-production depreciation insurance Depreciation a 10 no no byes no yes eyes yes no da 10 yes no 5. Acost that remains constant in total but varies on a per-unit basis with in activity is called a(n) cane a. expired cost. b. fixed cost. c. variable cost. d. mixed cost. 6. When the number of units manufactured i oo nee will be reflected as a(n) increases, the most significant change in urit o8 a. increase in the fixed element. b. decrease in the variable element. c increase in the mixed element. d. decrease in the fixed element.10. 1 7: 13, - Which of the following always has a direct cause-effect relationship to a cost? Cost driver yes a yes byes 0 © to yes d. no no cost driver Causes fixed costs to rise because of production changes. has a direct cause-effect relationship to a cost. can predict the cost behavior of a variable, but not a fixed cost. is an overhead cost that causes distribution costs to change in distinct increments with changes in production volume. Product costs are deducted from revenue a. as expenditures are made. b. when production is completed. & as goods are sold. d. to minimize taxable income. BoE > Period costs a. ae generally expensed in the same period in which they are incurred. b are always variable costs. c. _ remain unchanged over a given period of time. d. are associated with the periodic inventory method. The distinction between direct and indirect costs depends on whether a cost a. iscontrollable or non-controllable. b. _Isvariable or fixed. can be conveniently and physically traced to a cost object under consideration. 4. will increase with changes in levels of activity. a byes © no dno yes yes Good Service, In. is a construction company that builds houses on special juest. is proper classification ofthe cost of the cement building slab used? test: Whatis Direct Fixed no no no yes yes yes yes noChaote2 cos conent,CssteatonsandBetwwion <<< # 14. All costs related to the manufacturing function in a compary 2° a. prime costs. b. direct costs. c product costs. d. Conversion costs. oduce units of output. 15. The term "prime cost refers to a. all manufacturing costs incurred to pr ost b. all manufacturing costs other than direct labor and raw material c Taw material purchased and direct labor costs. 4. the raw material used and direct labor costs. 16. In relationship to changes in activity, variable overhead changes in total ‘per unit a no no b. no yes c yes yes a. yes no 17. In relationship to changes in activity, fixed overhead changes in total Per unit a. yes yes b. no no no yes a. yes no the level of activity increases, a. variable cost per unit and total fixed costs increase. b. fixed cost per unit and total variable cost increase. c. total cost will increase and fixed cost per unit will decrease. d. variable cost per unit and total cost increase. 19. Weaknesses ofthe high-low method include all of the following except a. _ only two observations are used to develop the cost function. b. _ the high and low activity levels may not be representative. c. _ themethod does not detect if the cost behavior is nonlinear. d. the mathematical calculations are relatively complex. . 20. If there is no "a" value ina linear cost equation, this indicates that the cost is a. fixed. b. mixed. c. variable. d. either fixed or mixed. 21. Which ofthe following statements about indiect costs is false? ‘a. They cannot be traced easily to products or servi b. They are also referred to as support costs c. They are actually a subset of direct costs