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business
management cost accounting
Management and Cost Accounting 10th edition Colin Drury - Solutions
Classify each of the following as being usually fixed (F), Variable (V), Semi-fixed (SF) or Semi-variable (SV):(i) Direct labour;(ii) Depreciation of machinery;(iii) Factory rental;(iv) Supplies and other indirect materials;(v) Advertising;(vi) Maintenance of machinery;(vii) Factory manager’s
Explain responsibility accounting.
Distinguish between incremental and marginal costs.
Explain the meaning of the term ‘sunk cost’.
Distinguish between relevant (avoidable) and irrelevant (unavoidable) costs and provide examples of each type of cost.
Explain the meaning of each of the following terms:(a) Variable costs, (b) Fixed costs, (c) Semi-fixed costs,(d) Semi-variable costs. Provide examples of costs for each of the four categories.
Provide examples of decisions that require knowledge of how costs and revenues vary with different levels of activity.
Explain the meaning of the terms: (a) Prime cost, (b) Overheads,(c) Cost allocations.
Provide examples of each of the following: (a) Direct labour, (b) Indirect labour, (c) Direct materials, (d) Indirect materials,(e) Indirect expenses.
Define the meaning of the term ‘cost object’ and provide three examples of cost objects.
Describe the different functions of management accounting.
Explain why firms are beginning to concentrate on social responsibility and corporate ethics.
Describe each of the key success factors that companies should concentrate on to achieve customer satisfaction.
Explain how the business environment that businesses face has changed over the past decades and discuss how this has had an impact on management accounting.
Explain each of the elements of the decision-making, planning and control process.
Describe the differences between management accounting and financial accounting.
Identify and describe the different users of accounting information.
A large organization, with a well-developed cost centre system, is considering the introduction of profit centres and/or investment centres throughout the organization, where appropriate. As management accountant, you will be providing technical advice and assistance for the proposed scheme.You are
1. Can you provide examples of accounting adjustments required to compute EVATM)?2. Why is EVATM) preferred to ROI?The financial mission of a company should be to invest and create cash flows in excess of the cost of capital. If an investment is announced that is expected to earn in excess of the
1. Can you think of factors that might affect production, procurement, storage or transportation costs as referred to above?2. Given the apparently large number of factors taken into account by the optimizer in SNP, do you think the business and/or the system can run the optimizer programme
Can you think of the additional costs of holding increased rice stocks as suggested above?Safety or buffer stocks are held for many reasons. For example, road authorities might want to hold sufficient stock of grit salt in case of bad weather, or firms might build stock of key materials if a price
1. Can you think of business reasons why increasing inventories in advance of a busy period is a good idea? What other busy periods might electronic/technology companies experience?2. Can you think of any potential problems not mentioned which could/do arise when inventory is increased in this
1. As a management accountant, do you think you would have a role in evaluating use of technologies such as IoT devices?2. Can you think how costs might be reduced by such technologies?Just-in-Time (JIT) manufacturing and inventory systems have been operated by many companies to reduce
1. Based on the information given, do you think it possible to develop a cost model to estimate costs of large scale projects such as the Lake Charles project?2. When the plant is operational, do you think it is possible to develop a cost estimation model for production outputs?South African energy
A company is proposing the introduction of an activity-based costing (ABC) system as a basis for much of its management accounting information:(a) Briefly describe how ABC is different from a traditional absorption approach to costing and explain why it was developed.(b) Discuss the advantages and
1. Do you think a learning curve effect is at play in the manufacture of the PW1000G engines?2. Can you think of any reasons why any learning curve effect may have been slower than predicted?Modern day aircraft are complex pieces of engineering, increasingly using more technology, composite
1. Do you think environmental costs and benefits can be accurately measured?2. Do issues such as the environment help management accountants become more strategically important members of the organization?According to a US Congressional enquiry, this accident apparently partly resulted from local
1. Do you think technological developments will always be an issue for management accountants?2. Based on the brief summary above, what kinds of skills other than technical accounting training do management accountants need?In the March 2012 edition of CIMA’s Financial Management journal,
1. Provide examples of companies where most of their value can be attributed to intellectual capital rather than physical assets.2. What do you think are the key intellectual capital drivers of corporate value?In the March 2016 edition of CIMA’s Financial Management journal, Lawrie Homes
Research on performance measurement in service businesses, reported in Management Accounting, found that ‘performance measurement often focuses on easily quantifiable aspects such as cost and productivity whilst neglecting other dimensions which are important to competitive success’.You are
1. What practical difficulties might arise from determining the target cost using EVA(TM) target costing?2. Does the use of conventional (non-EVA(TM)) target costing mean that the cost of capital is ignored?Taylor, Woods and Cheng Ge Fang (2014) reported on how one UK company moved its target
How might activity costs for Insteel differ from departmental costs?Insteel Industries decided to implement ABM at the Andrews, South Carolina, plant. The ABM team analysed operations and identified 12 business processes involving a total of 146 activities. The ABM study revealed that the 20 most
1. Do you think Boeing made changes to its assembly line to assist its lean manufacturing efforts?2. How might the JIT approach at Boeing help its customers (i.e. airlines)?The Boeing 737 jet is the world’s most popular and reliable commercial airliner. The company has manufactured over 8000 jets
1. What are the advantages and disadvantages of Apple adopting a JIT system?2. What should be the main features of a management information system for a company that adopts a JIT manufacturing philosophy?Every time Apple releases a new device it can-not satisfy immediate demand. This is a result of
1. Can management accountants do anything to help engineers and designers focus more on considering the cost of failures in quality and quality control?2. Can you list some of the internal and external failure costs for the two issues described above?In recent years, two global companies have had
How can an organization reduce its own costs and that of other organizations by sharing information within the value chain?For many companies their focus on cost reduction has been limited to the costs of their internal activi-ties. This internal focus has resulted in companies adopting JIT
1. Provide examples of how performance measures might promote the wrong behaviours.2. Why must performance measures be regularly reviewed and updated?The Globe and Mail(Canada) quotes an article written by Professor Pietro Micheli in Industry Weekin which he listed seven myths about
1. Do you think management accountants are involved in tax planning decisions such as those referred to above?2. Do you think tax avoidance is ever ethical? Is it sustainable?Across Europe, just how much – or little – US multi-national firms are paying in taxes is coming under intense scrutiny
1. Do you think it is always possible to establish an arm’s length/ market price?2. Would an arms’ length price be more difficult to establish in the provision of services?According to an article in the Financial Timesthe UK tax authority (HMRC – HM Revenue & Customs) raised £1.1bn
1. How does the transfer pricing system overcome the limitations of marginal cost transfer pricing?2. Why is it important that capacity costs are taken into account when making pricing and product mix decisions?Teva Pharmaceutical Industries Ltd reorganized its pharmaceutical operations into
1. Based on the above, is time waiting for or being processed through airport security a shorter term target or longer term? Could it ever be a shorter term performance measure?2. Do you think performance on an issue such as airport security should be measured and rewarded by performance-based
1. Why might measures such as ROCE (also called ROI) continue to be used to determine executive remuneration even though the limitations of such measures have been highlighted for many years?2. Why is the use of additional non-financial measures recommended to determine executive remuneration and
1. If the performance of a divisional manager at Siemens falls short of target due to external factors such as economic recession, should the manager be held accountable?2. How might the actual assessment of divisional performance differ in recessionary times?You know that Siemens operates in many
1. What advantages does a divisionalized structure have for decision-making at Siemens?2. Would a divisionalized structure be suited to fast-food giant McDonalds?German global company Siemens AG had a turn-over of almost €76 billion in 2015, recording a profit after taxes of €7.4 billion,
What are the major issues to be addressed in developing a framework for managing organizational performance?
1. Looking at the internal key answer of €˜fast turnaround time€™, can Southwest always control this?2. Do you think performance measures like those in the Southwest scorecard are more useful to non-accountants and managers?Southwest Airlines set €˜operating
1. Based on ZYSCO€™s BSC and strategy map, create a BSC for either the finance or sales departments.2. What problems might arise with ZYSCO seeking to link its compensation system with its new system and measures?An article by Chen et al. (2015) published in Strategic Finance described
1. In industries like those described above, do you think the mix of ingredients used for products in monitored?2. Can you think of any reasons why a recipe including starch might produce different yields from time to time?Recipes are used in the manufacturing processes of many sectors. In the
Why has there recently been renewed interest in ZBB?
1. Can you think of an example of a business process/area where data analytics could help a small/medium company budget/plan better and achieve cost savings?2. Could big data/data analytics help in the preparation of production budgets in small/ medium companies?
1. Identify three significant advantages of rolling budgets.2. Identify three problems that are likely to be encountered when using rolling budgets.
(a) In the context of budgeting, provide definitions for four of the following terms:Aspiration level;Budgetary slack;Feedback;Zero-base budgeting;Responsibility accounting.(b) Discuss the motivational implications of the level of efficiency assumed in establishing a budget.
1. Can you think of any advantages of schemes or tools like those mentioned above?2. Can you think of any disadvantages? In a BBC documentary called Power to the People, Michael Portillo visited a ‘You Decide’ session organized by the local council in Tower Hamlets, London. At this
What are the limitations of linking bonuses to meeting cost targets?Because of the previous lack of effective control of expenditure by the Han Dan Company, a system of responsibility accounting and standard costing was introduced. The basic principles underlying the responsibility cost control
How might the dysfunctional effects of the performance system in the police force be minimized?Government crime-fighting targets are a shambles and should be scrapped, claims Chief Superintendent, Ian Johnston. Mr Johnston was speaking ahead of the Police Superintendents’ Association’s annual
1. What are the advantages and disadvantages of using a fixed budget as outlined above?2. What approaches can be taken to overcome the problems relating to fixed budgets?The British government has pledged to spend 0.7 percent of national aid resulting in £12 billion being allocated to the
1. Can you think of any type of business that might need to frequently update the standard cost of its materials?2. Do you think variance reporting would be more relevant to managers if standard costs are regularly updated?Once standard costs have been established and used by a business, they
1. Do you think it is plausible to set standards for delivery of services, which are primarily dictated by cost?2. Is it possible to measure the delivery of a service (e.g. a mortgage application) against a set standard?Setting standards in an organization may be pri-marily to assist in the
1. Do you think standards can be applied to procedures in hospitals?2. Do you think standard cost variance reports are useful in healthcare?Meditech South Africa (Pty) Ltd provides software solutions to meet the information needs of healthcare organizations in Africa and the Middle East. According
The basic ideas justifying the use of activity- based costing (ABC) and activity-based budgeting (ABB) are well publicized, and the number of applications has increased. However, there are apparently still significant problems in changing from existing systems.Requirements:(a) Explain which
1. Assuming a non-African construction company is submitting its first ever price to bid for a road construction project in Africa, what special considerations might it need to consider in forming the price?2. Assuming less profitable road maintenance projects are available in its home country, how
1. Assuming the uranium by-product of a gold mine could be sold, how would an accountant consider whether or not it is worthwhile financially?2. What factors apart from cost might be considered in the decision?
1. Assuming paper mills decide to sell their sludge for a small fee, how might they account for the revenue generated?2. Can you think of any other ‘waste’ by-products that are re-used rather than disposed of?
1. Can you provide some examples of cost objects and activities that might be applicable to a swimming pool?2. How might the information produced by an ABC system be used in a leisure centre?
1. In some countries revenues may be received in a lump sum and are not assignable to individual diagnosis related groups. What role can ABC play in such organizations?2. Do you think many business organizations utilize ABC techniques? Why or why not?
1. The first step in designing an ABC system is to identify the major activities in an organization. What are the major activities in a restaurant?2. What action should an organization take when the ABC analysis identifies loss-making activities?3. What are the factors that might prevent the
1. Do you think Xu Ji Electric Co Ltd is a good example of a business where ABC might be useful?2. Can you think of some activities of Xu Ji Electric Co Ltd other than those stated above?
1. What do you think would be the risk appetite of a high technology company?2. What role might management accountants have in preparing a risk appetite statement?
1. Do you think management accountants should spend a lot of time trying to evaluate different risks?2. Do you think an assessment of effects would be a better approach to risk assessment and management?
1. Can management accountants/managers always identify and assess all risks a business may face?2. How can management accountants help boards better understand the risks an organization may face?
1. When evaluating an investment in energy generation solely on cost considerations, can a manager make the right decision?2. Thinking about the International Ferro Metals example given above, what non-financial benefits might arise other than protecting against power outages?
1. Why has the company used both net present value and internal rate of return, but ignored the payback, when undertaking the prefeasibility study?2. What steps can the company take to ensure that there is less likelihood that incorrect estimates will result in the project not having an acceptable
1. What might affect the payback calculations on wind energy investments for a business and/or a household?2. In making a decision, should the business or householder look beyond the payback period?
1. Can you provide some examples of the costs and benefits that would be included in the investment appraisal?2. What are the disadvantages of using IRR and payback to evaluate the above alternatives?
1. Should low tax rates be the sole concern of businesses engaging in capital investments? List some other important factors.2. Should a company consider evaluating investments based on differing tax rates, assuming all other factors being equal?
1. How can more extensive and less extensive forms of forecasting be applied to appraising capital investment projects?2. What is the difference between estimates based on a range of key parameters and single-point estimates?
1. Other than the volume of oil or gas found, what factors might affect the return on investment for a particular drill site?2. Do you think oil and gas exploration companies are likely to continuously use sensitivity analysis in exploration activities, developing oil/gas finds or both?
The traditional methods of cost allocation, cost apportionment and absorption into products are being challenged by some writers who claim that much information given to management is misleading when these methods of dealing with fixed overheads are used to determine product costs.You are required
1. Can you think of any reason why two customers who purchase equal volumes of equivalent products might be more or less profitable?2. What actions should a company take with its unprofitable customers?
1. To what extent did cost-plus pricing contribute to the decline in total sales revenues?2. How might City Steel determine the price at which it sells steel?
1. Do devices like iPhones have differing prices during various stages of their life cycle?2. Can companies like Apple adopt price skimming policies? Why or why not?
1. Do you think large-scale providers like Amazon, Microsoft and IBM can influence prices of cloud computing in the longer term?2. What is your opinion on a long-term price of zero, as currently offered by some cloud providers of accounting software? Is this model sustainable in the long run?
1. Provide examples of firms in the retail and merchandising sectors where supply capacity constraints should be taken into account when making product mix decisions.2. What are the scarce/limiting factors that apply in the examples cited above?
1. How can outsourcing change the cost structure of an organization?2. What are the major benefits and limitations of outsourcing?
1. How might management of the above supermarkets determine which stores should be closed?2. How might Asda management determine which stores to open?
How could the approach described above be applied in a service organization, such as the National Health Service?
Provide examples of other companies that have high and low degrees of operating leverage.
1. Is break-even a good performance monitor over the longer term?2. How do decreasing margins affect the break-even point and margin of safety?
1. Why will a decline in production have a positive impact on oil prices?2. Why does the break-even price in the above chart differ according to the location of the oil wells?3. Is the break-even price of crude oil more important than the break-even volume?
1. Is it true to say that any A380 aircraft sold before break even has been achieved is making a loss?2. Can you think of some major fixed costs likely to be incurred on the A380 by Airbus?
1. If your business wanted to improve profits by focusing on first fixed costs and then variable costs, what form of profit report might you use internally: one based on absorption costing or one based on variable costing?2. What do you think would be the main variable cost for a paper company like
1. Do you think variable costing is more likely to be used by manufacturing or service sector firms?2. Do you think integrated accounting information system would be able to produce internal profit statements using variable costing?
1. When does the ‘product’ materialize in the brewing process described above?2. Would you imagine there is any waste in the brewing process?
1. Why is job costing not appropriate to a process such as whiskey production?2. Do you think losses of spirit might occur during the maturation process?
1. Do you think waste which is regarded as ‘normal’ in a process should remain unchallenged?2. How would you value waste in the UHT milk production described above?
1. Why did the company apply the change in valuation method retrospectively for some of its segments but did not make retrospective changes to its International Marketing and Distribution segment?2. What do you think is meant by the term ‘specific identification method’ of tracking inventories?
1. Can you think of some examples of overhead costs that might be incurred by cafés such as those described above?2. How would these overheads affect profit if sales declined?
1. Why might increasing the number of cost centres (pools) result in the reporting of more accurate product costs?2. What other factors, besides product diversity, might enable a simplistic product costing system to report reasonably accurate product costs?
1. Explain how applying each of the above three myths can lead to bad decisions.2. What changes should be made to cost allocations to avoid the bad decisions?
1. Why do you think absorption costing is more likely to be used by larger businesses?2. What difficulties might be faced by smaller firms who may want to utilize absorption costing?
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