Cost Accounting Techniques
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Questions and Answers

What is the main purpose of standard costing in managerial accounting?

  • To predict future overhead costs based on past data
  • To allocate actual costs to finished goods
  • To minimize direct material costs for production efficiency
  • To evaluate performance by identifying variances between expected and actual costs (correct)

    • What is a key characteristic of normal costing as opposed to standard costing?

  • Normal costing uses budgeted rates with actual activity to allocate overhead. (correct)
  • Normal costing assigns direct costs based on expected production quantities.
  • Normal costing relies solely on historical overhead rates.
  • Normal costing does not account for over or under-applied costs.

    • Which of the following scenarios best illustrates the concept of controllability in management?

  • A manager decides to outsource production despite price fluctuations in materials.
  • A manager is held responsible for a sudden increase in utility costs due to a natural disaster.
  • A manager is evaluated on the performance of a product line they did not oversee.
  • A manager reduces costs by hiring fewer staff without affecting quality. (correct)

    • What is budgetary slack and why might it be created?

    <p>It's the practice of overestimating costs to make financial targets easier to achieve.</p> Signup and view all the answers

    What is the primary focus of value engineering in the management process?

    <p>To minimize the total production costs without compromising quality</p> Signup and view all the answers

    In the context of budgeting and human behavior, what dynamic can result from bottom-up budgeting?

    <p>It may lead to inflated estimates to meet desired goals.</p> Signup and view all the answers

    What differentiates value-added activities from non-value-added activities?

    <p>Value-added activities increase customer satisfaction while non-value-added do not.</p> Signup and view all the answers

    Which of the following statements about overhead costs in normal costing is true?

    <p>Overhead costs are allocated based on budgeted rates times actual activity.</p> Signup and view all the answers

    Why might managers engage in creating budgetary slack?

    <p>To provide a cushion against unforeseen circumstances.</p> Signup and view all the answers

    How does the concept of controllability affect managerial responsibilities?

    <p>It ensures managers are only held accountable for what they can influence.</p> Signup and view all the answers

    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.

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