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Questions and Answers
What is the main purpose of standard costing in managerial accounting?
What is a key characteristic of normal costing as opposed to standard costing?
Which of the following scenarios best illustrates the concept of controllability in management?
What is budgetary slack and why might it be created?
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What is the primary focus of value engineering in the management process?
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In the context of budgeting and human behavior, what dynamic can result from bottom-up budgeting?
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What differentiates value-added activities from non-value-added activities?
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Which of the following statements about overhead costs in normal costing is true?
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Why might managers engage in creating budgetary slack?
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How does the concept of controllability affect managerial responsibilities?
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Study Notes
Normal Costing
- Indirect costs are assigned to work-in-progress (WIP) using predetermined overhead rates based on budgeted activity levels.
- Budgeted rates are used because actual overhead costs are unknown until the end of the period.
- Any over or under-applied overhead is accounted for later.
Standard Costing
- Direct costs, including direct materials and direct labor, are assigned using predetermined standard rates.
- The standard rate is multiplied by the standard quantity expected for actual production.
- This method does not adjust for actual costs until the end of the period.
- Its primary purpose is to identify variances between expected (standard) costs and actual costs, helping in performance evaluation.
Controllability
- Controllability refers to the degree of influence a manager has over the costs, revenues, or other items for which they are accountable.
- Managers should only be responsible for factors they can control.
- For example, labor costs (number of employees) are not always controllable, while payroll tax increases affect labor costs but are beyond a manager's control.
Budgeting and Human Behavior
- Employees' behavior in relation to budgeting needs careful consideration.
- Controllability should not be overused, as some variances are beyond an individual's control.
- Managers might intentionally create false cost estimates by overestimating or underestimating costs to present a favorable picture or buffer against uncertainties.
- Participatory budgeting, where junior managers contribute to the budget process, can encourage them to work towards achieving targets.
- Incentives can also influence junior managers' behavior.
Budgetary Slack
- Budgetary slack occurs when revenues are deliberately under- or overestimated to make budget goals (profits) easier to achieve.
Value Engineering
- Value Engineering is a systematic process for evaluating all aspects of the value chain to minimize costs while enhancing quality and meeting customer needs.
- Managers must distinguish between value-added activities and costs and non-value-added activities and costs.
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Description
Explore key concepts in cost accounting with a focus on normal costing, standard costing, and controllability. This quiz will help you understand how indirect and direct costs are managed and evaluated in production. Test your knowledge on the principles that guide effective cost management.
