BASIC CONCEPT IN MANAGEMENT ACCOUNTING

Decision making Management advisory services

 The main focus of managerial accounting is  It involves decision for the future
 It us broader in scope and varied in nature
Planning
 It relates to specific problems where an
 Most directly related to management by experts help is required
objective
The primary purpose of management advisory
 Setting of objective and the identification of
service is to
methods to achieve those objectives
 Improve the clients use of its capabilities
Primary objective of management accounting is to
and resources to achieve the objectives of
provide
the organization
 Management with information useful for
Relevance
planning and control of operations
 The major reporting standard for presenting
Management accounting information
managerial accounting information
 Should be develop and provided only if the
In the contemporary business environment cost
benefits exceeds it costs
management focus on
Which of the following statements is true when
 Development and implementation of the
comparing managerial accounting to financial
business strategy
accounting?
As needed
 Both rely on the same accounting
information system  Internal reports must be communicated

Which of the following is true of managerial Which consideration influences the frequency of
accounting rather than financial accounting? internal report?

 The accounting system would be unique to  The wishes of the managers receiving the
each company reports
 The frequency with which decisions that
Management accounting role in the control
require the information are made
process is to provide
 The cost of preparing the report
 Managers with relevant information to
Which of the following characteristics is inherent to
compare actual results with expectations
management accounting?
For internal users, managers are more concerned
 Contribution approach income statement
with receiving information that is
In order to be useful to managers, management
 Relevant flexible and immediately available
accounting reports should possess all of the
following characteristics except:
  Be prepared in accordance with GAAP

Which ethical standard of conduct requires that a In a broad sense, cost accounting can be identified
managerial accountant be responsible to prepare within the accounting system as
complete and clear reports and recommendations
 Internal reporting for use in management
are based on appropriate of relevant and reliable
planning and control, and external
information?
reporting to the extent its product-costing
 Competence function satisfies external reporting
requirements
Which ethical standard of conduct requires the
managerial accountant have to communicate The cost management function is usually under the
information fairly and objectively?
 controller
 Objectivity
The managerial function of controlling
Under which ethical standard of conduct does the
 includes performance evaluation by
managerial accountant have the responsibility to
management
refuse any gift, favor or hospitality that would
influence or appear to influence his or her Which of the following is a staff position?
decision?
 Vice president of finance
 Integrity
Which management position is responsible for
Under which ethical standard of conduct does the raising capital?
managerial accountant have the responsibility to
refrain from either actively or passively subverting  Treasurer
the attainment of an organization legitimate and
Each of the following would be considered a staff
ethical objective?
function EXCEPT the
 Integrity
 Vice president of marketing
Under which ethical standard of conduct does the
Management accountants generally exercise which
managerial accountant have the responsibility to
type of authority?
disclose fully all relevant information that could
reasonably be expected to influence an intended  Staff
user’s understanding of the reports comments and
The treasure function is usually not concerned with
recommendations presented?
 Financial reports
 Objectivity
Which of the following duties is usually assigned to
For the managerial decision purposes, the volume
the controller?
of information should be evaluated on the basis of
 Tax planning
 Cost benefit relationship
Developing a company strategy for responding to If a predetermined overhead rate is not employed
anticipated new markets is an example of and the volume of production is increase over the
level planned, the cost per unit would be expected
 Planning
to
Deciding whether to sell a product or process it
 Decrease for fixed costs and remain
further is an example of a
unchanged for variable cost
 Operating activity
Which of the following describes the behavior of
Obtaining feedback is generally identified most the variable cost per unit?
directly with the management function of
 Remains constant with changes in the
 Controlling activity level

A staff position A cost that remains constant on a per unit basis in a

given period despite changes in the level of activity
 Is supportive in nature, providing service should be considered
and assistance to other parts of the
organization  Variable cost

Which of the following statements is true regarding When production increases, variable
ethics in decision making? manufacturing costs react in which of the following
ways?
 Decision making can have an ethical as well
as an economic impact  Unit variable cost remains same
 Total variable cost increase

When the number of units manufactured

ACTIVITY COST AND COST ANALYSIS increases, the most significant change in unit cost
will be reflected as an
Cost behavior analysis is a study of how a firm’s
costs  Decrease in the fixed element
 Respond to changes in activity levels within As volume increases
the company
 Total fixed cost remain constant and per
The term “relevant range” as used in cost unit fixed cost decrease
accounting means the range over which:
Which of the following best describe a fixed cost?
 Cost relationships are valid
 It may change in total when such change is
An item or event that has a cause-effect unrelated to changes in production
relationship with the incurrence of variable cost is
called a

 Cost driver
Lamang Company changes its cost structure by Which of the following methods may be used to
increasing fixed cost and decreasing its per-unit estimate costs?
variable cost. The change
 All of the following
 Increase risk and increase potential profit
For analysis purposes, the high low method usually
A management’s preference for a very low degree produces a
of operating leverage might indicate that
 Reasonable estimate
 A decrease in sales volume is expected
The high low method is criticized because it
Management is considering replacing its existing
 Ignores much of the available date by
sales commission compensation plan with a fixed
concentrating on only the extreme points
salary plan. If the change is adopted the company’s
The high low method may give satisfactory result if
 Operating leverage must increase
 The points are not representative
The indifference point is the level of volume at
which a company Weakness of the high low method include all of the
following except
 Earns the same profit under different
operating scheme  The mathematical calculations are relatively
complex
Operating leverage is the relative mix of
Which of the following methods estimates costs by
 Fixed and variable cost
identifying costs as variable or fixed based on
The increased use of automation and less use of qualitative analysis?5
the work force in companies has cause a trend
 Account analysis
towards an increase in
Account analysis as compared to the engineering
 Fixed cost and a decrease in variable cost
method
Cost that increase as the volume of activity
 Relies on past data
decrease within the relevant range are
Which of the following methods may be used to
 Average cost per unit
estimate cost by using time and motion studies to
Within the relevant range the difference between approximate labor time?
variable cost and fixed cost is
 Engineering method
 Variable cost per unit is constant and fixed
The cost estimation method that gives the most
cost per unit fluctuates
mathematically precise cost prediction equation is
Cost estimation is the process of
 Regression analysis
 Estimating the relationship between cost
and the cost drivers that cause those costs
In regression analysis, what does the variable X  Develop an equation to predict future costs
stand for in the model Y=a+bX+e
The relative composition of a company’s fixed and
 The value for the independent variable the variable costs is referred to as:
cost driver for the cost to be estimated;
 Operating leverage
there may be one or more cost drivers.
A flatter slope in the variable cost line indicates a
Simple regression is a regression
 Low influence of activity on total variable
 That considers all unknown factors
costs
In a method of least squares, the deviation is the
When predicting cost behavior the volume of
difference between the
production for which the fixed and variable cost
 Predicted and actual cost relationships are assumed to hold true is called the

Which of the following method would be best for  Relevant range

estimating cost for totally new activities?
Which of the following statement is false regarding
 Engineering method regression analysis?

The engineering method of estimating costs:  It is used to predict whether or not a cost is
a product or period cost
 All of the given choices
When using regression analysis to predict mixed
The correlation coefficient or R squared is
cost behavior which of the following would be the
interpreted as the
dependent variable?
 Proportion of the variation in the
 The mixed cost at a given level of
dependent variable explained by the
production
independent variable
COST VOLUME PROFIT ANALYSIS
The closeness of the relationship between the cost
and the activity is called To which function of management is CVP analysis
most applicable
 Correlation
 Planning
R squared is a measure of
The systematic examination of the relationships
 How well the regression line accounts for
among selling prices, volume of sales and
the changes in the independent variable
production, costs and profits is termed:
The principal advantage of the scatter diagram
 Cost volume profit analysis
method over the high low method of cost
estimation is that the scatter diagram method

 Considers more than two points The term contribution margin is best defined as the

The major objectives of preparing a scatter diagram  Amount available to cover fixed costs and
is to profit
Cost volume profit analysis allows management to Which of the following assumptions is inherent to
determine the relative profitability of a product by CVP analysis?

 Determining the contribution margin per  In manufacturing firms the beginning and
unit and projected profits at various levels ending inventory levels are the same
of production
Operating leverage is high in firms with
Firms with a high degree of operating leverage
 A high proportion of fixed cost, a small
 Will have a more significant shift in income proportion of variable costs, and the
as sales volume changes resulting high contribution margin per unit

The most useful information derived from a Advocates of cost volume profit analysis argue that
breakeven chart is the
 Differentiation between the patterns of
 Relationship among revenues, variable cost variable costs and fixed costs is critical
and fixed cost at various levels of activity
With respect to fixed costs, CVP analysis assumes
In multiproduct situations, when sales mix shifts that fixed cost:
toward the product with the highest contribution
 In total remains constant changes in volume
margin then:
Which of the following is not a limiting factor of
 Breakeven quantity will decrease
cost volume profit analysis?
At the breakeven point, fixed cost is always
 The process assumes variable costs per unit
 Equal to the contribution margin are variable

At the breakeven point: As projected net income increases the

 Net income will increase by the unit  Degree of operating leverage declines
contribution margin for each additional
A company’s breakeven point in sales pesos may
item sold above breakeven
be affected by equal percentage increases in both
In cost volume profit analysis, the greatest profit selling price and variable cost per unit. The equal
will be earned at percentage changes in selling price and variable
cost per unit will cause the breakeven point in sales
 The point at which marginal cost and
peso to
marginal revenue are equal
 Remain the same

As the company sells more of higher-contribution

Which of the following is not an assumption
margin product in relation to other products, the
underlying CVP analysis?
 Breakeven in units declines
 The number of units produced exceeds the
number of units sold
The amount by which sales revenue could drop Assuming a company has net income, which of the
until a loss occurs is referred to as the following statement is true regarding the
contribution margin per unit?
 Margin of safety
 It indicates the amount that net income will
As the variable cost increase but the selling price
increase……
remains constant, the
A company with a high level of operating leverage
 Degree of operating leverage declines
will
A very high degree of operating leverage indicates
 Experience wider fluctuations in income as
that a firm
sales fluctuates that a company with a low
 Is operating at a level close to its breakeven level of operating leverage
points
In planning product mix for maximum profit, CVP
With the aid of computer software, managers can analysis would stimulate sales of the product by
vary assumptions regarding selling prices, costs and increasing the:
volume and can immediately see the effects of
 Contribution margin
each change on the breakeven point and profit
A relatively low margin of safety ratio for a product
 What if or sensitivity analysis
is usually an indication that the product
If a company raises its target peso profit its
 Is riskier than higher margin of safety
 Required total contribution margin product
increases
Within the relevant range, total revenue and total
On a breakeven chart the breakeven point is costs
located at the point where the total
 Can be graphed as straight line
 Revenue line crosses the total cost line
In CVP analysis when the number of units changes,
Which of the following best describe the impact of which one of the following will remain the same?
selling more units?
 Total fixed costs
 The increase in sales volume increases total
As fixed cost for a firm rises, all other things held
variable cost
constant, the breakeven point will

 Increase

Which of the following would not affect the

A fixed cost is the same percentage of sales in breakeven point?
three different months. Which of the following is
 Number of unit sold
true?
The margin of safety is a key concept of CVP
 The company had the same sales in each of
analysis. The margin of safety is the
those moths
  Difference between budgeted sales and A cost volume profit graph reflects relationship
breakeven sales
 That are expected to hold over the relevant
The most likely strategy to reduce the breakeven range
point would be to
An increase in the income tax
 Decrease the fixed costs and increase the
 Increase sales required to earn a particular
contribution margin
after tax profit
Which of the following best describe the impact of
If the sales mix shifts toward higher contribution
an increase in fixed cost?
margin products, what would happen to the break-
 The increase in fixed cost causes net income even point?
to decrease and the breakeven point to
 Decrease
increase
Target costing is
If a company is operating at a loss
 Used in decision to offer a new product or
 Selling price is less than the average total
enter a new market
cost per unit
In order for the breakeven computation to be
If all goes according to plan except that unit
meaningful to management, sales mix should be
variable cost falls
computed using the
 Profit will be higher than expected
 Expected mix
Which of the following decrease per unit
contribution margin the most for a company that is
currently earning a profit?

 A 10% decrease in selling price

If a variable cost as a percentage of sales increases,

the

 Break-even point in pesos increase

VARIABLE COSTING AND SEGMENTED REPORTING

Introducing income taxes into cost volume profit
analysis A basic of direct costing is that period costs should
be currently expensed. What is the rationale
 Increase unit sales needed to earn a behind this procedure?
particular target profit
 Because period cost will occur whether or
If a company is earning a profit, its fixed costs not production is made, it is improper to

 Are less than total contribution margin

 allocate these costs to production and defer A manufacturing company prepares income
the current costs of doing business statements using both absorption and variable
costing methods. At the end of the period, actual
Which of the following must be known about
sales revenues, total gross profit and total
production process in order to institute a direct
contribution margin approximated budgeted
costing system?
figures, whereas net income was substantially
 The variable and fixed components of all greater than the budgeted amount. There were no
costs related to production beginning or ending inventories. The most likely
explanation of the net income increase is that,
Under the direct costing concept, unit product cost compared to budget, actual
would most likely be increase by a
 Selling and administrative fixed expense
 Decrease in the remaining useful life of had decreased
factory machinery depreciated on the units
of production method When absorption costing is used, all of the
following costs are considered product cost except
Which of the following statements nis true for a
firm that uses variable (direct) costing?  Variable selling and administrative cost

 Profits flunctuate with sales Which of the following is not true of variable
costing?
Which of the following is an argument against the
use of direct (variable) costing?  Profits may increase though sales decrease

 Fixed factory overhea is necessary for the When variable costing is used, fixed manufacturing
production of a product overhead is recognized as an expense when the:

The primary difference between variable and  Cost is incurred

absorption costing is the inclusion of
When variable costing is used, the income
 Fixed factory overhead in product costs statement is usually prepared using:

Which of the following statement is true?  A contribution margin format

 Absorption costing net income exceeds Variable costing can be use for
variable costing net income when units
 Internal reporting
produced are greater than unit sold

Absorption costing of inventories, as required by

PFRS, has been criticized for encouraging mangers In a variable costing system, product cost includes
to increase year-end inventories in order to boosr
 Direct materials direct labor variable
reported profits. Which of the following techniques
overhead
is the most effective in resolving this problem?
Variable costing net income is
 Adoption of just in time production system
 Higher than absorption net incoe when
more units are sold than produced
  Lower than absorption net incoe when absorption costing and net earnings computed
more units are produced than sold using variable costing?
 The same as absorption net income when
 Absorption costing allocated fixed
all units produced are sold
manufacturing cost between cost of goods
The level of production affects incoe under which sold and inventories and variable costing
of the following methods? considers all fixed costs to be period costs

 Absorption costing Segment profitability analysis may be used to

evaluate the profitability of
Unabsorbed fixed overhead cost in an absorption
costing system are  Divisions
 Sales territories
 Fixed factory costs not allocated to units
 Product lines
produced
STANDARD COST AND VARIANCE ANALYSIS
Net earnings determined using full absorption
costiong can be reconciled to net earnings
determined using direct costing by computing the Which of the following statement is true regarding
difference between “management by exception”

 Inventoried fixed cost in the beginning and  It requires the use of flexible budget
ending inventories and any deferred over or
When managers use the process called
underapplied fixed factory overhead
management by exception
Net profit under absorption costing may differ from
 They take action when there is a significant
net profit determined under direct costing. How is
variance between planned actual results
this difference calculated?
Managers who properly apply the concept
 Change in the quantity of all units in
management by exception will
inventory times the relevance fixed costs
per unit  Investigate only variance of a certain size or
scope
Why is income statement under variable costing
diverse? The primary purpose of using a standard cost
system is to:
 Income may still increase though unit sales
decrease  Provide distinct measure of cost control

Which of the following is not true about absorption Which of the following statement is true
costing? concerning standard cost?

 Over applied factory overhead is reflected  If properly use, standards can help motivate
in the income statement as a reduction cost employees
of goods sold
Which of the following is a pirpose of standard
What factor related to manufacturing costs causes costing?
the difference in net earnings computed using
  Control costs  Most variance will be unfavorable

When evaluating the operating performance If the total material variance (actual cost of
management sometimes uses the difference materials used to compared with the standard cost
expected and actual performance. This refers to of the standard amount of material required) fpr a
given operation is favorable, why must this
 Management by Exception
variance be further evaluated as to price and
Which of the following contains the twoi levels that usage?
standard may be set at
 To allow management to evaluate the
 Normal and ideal efficiency of the purchasing and production
functions
In most companies machines break down
occasionally and employees are often less than Which department is customarily held responsible
perfect. Which type of standard acknowledges for an unfavorable material usage variance?
these characteristics when determining the
 Production
standard cost of a product?
Standard that represent level of operation that can
 Practical standard
be attained with reasonable effort are called
Which of the following should be least considered
 Normal standards
when deciding whether to investigate a variance?
Which of the following is most probable reason
 Whether the variance is favorable or
why a company would experience an unfavorable
unfavorable
labor rate variance and favorable labor effiency
When standard costs are use in process costing variance?
system how it at fall are equivalent units involved
 Normal standards
or use in the cost report at standard?
Templo manufacturing has an unfavorable direct
 The actual equivalent units are multiplied
labor rate variance. Which of the following would
by the standard cost per unit
be the most likely reason for this variance
When performing input/output variance analysis in
 The company give employee an unexpected
standard costing “standard hours allowed” is a
raise due to union negotiations
mean of measuring
Brochure Inc has favorable direct labor rate
 Actual output at standard hours
variance. Which of the following would be the most
The absolute minimum cost possible under the likely reason for the variance ?
best conceivable operating condition is description
 The company used lower paid workers in
of whicj type of standard?
the production process more than they
 Theoretical have expected

A company employing very tight standard in The budget variance for fixed factory overhead for
standar cost system should expect that the normanl volume practical capacity and
expected activity levels would be the same
  For all threee activity levels The fixed overhead volume variance is calculated
by taking the difference between
The fixed overhead applocation rate is a function of
a predeterminded normal activity level. If standard  Budgeted fixed overhead and applied fixed
hours allowed for good output equal this overhead
predetermined activity levelfor a given period, the
Favorable fixed overhead volume variance occurs
volume variance will be
if:
 Zero
 Production is greater than planned
A company uses a two way analysis for overheadn
The unfavorable volume variance may be due to all
variance: budgeted and volume. The volume
but which of the following factors?
variance is based on the
 Unexpected increase in the cost of utilities
 FOH application rate
The variance least significant for purposes of
The choice of production volume as a denominator
controllung cost is the:
for calculating its factory overhead rate has
 Fixed overhead volume variance
 No effect on the fixed factory overhead
budget variance The variance most useful in evaluating plant
utilization is the
The overhead controllable variance is calculated as
the difference between actual overhead cost  Fixed overhead volume variance
incurred and the budgeted
In analyzing manufacturing overhead variance, the
 Overhead cost for standard hours allowed volume variancr is the difference between the
New public products has a favorable fixed  Budget allowance base on standard hours
overhead spending variance. Which of the allowed for actual production for the period
following would be the most likely reason for the and the amount budgeted to be applied
variance? during the period
 Actual FOH was less than predicted

Rigor Ltd. Uses direct labor hours as the cost driver How will a favorable volume variance affect net
for variable overhead. In order to calculate the income under each of the following methods?
variable overhead efficiency variance, Which of the
following items does not need to be known?  Increase absorption
 No effect in variable
 Actual overhead cost
Favorable volume variances may be harmful when:
The variable overhead efficiency variance:
 Production in excess of normal capacity
 Measures the efficient use of the cost driver cannoy be sold
used in the flexible budget
To measure controllable production inefficiences
Which of the following is the best basis for a
company to use in establishing the standard hours
allowed for the output of one unit of product?

 Engineering estimates based on ideak

performance

A difference between standard cost used for cost

control and the budgeted cost representing the
same manufacturing effort can exist because

 Standard cost represent what costs should

be while budgeted costs represent
expected actual costs