Question

Answers to questions in this section of the test must be answered briefly.

Q.1 An organization cannot be profitable if it does not have a clear understanding of the

      difference between its fixed and variable costs. Why is this important for management?

Q.2 List some of the changes that can be expected in Management Accounting as a result

        of the increase in on-line commercial activity. [3]

Q.3 Why is it necessary to have a pre-determined overhead application

        rate in manufacturing?

Q.4 Assume you have just been hired as a management accountant at a manufacturing

        plant, list some of the tasks you can be expected to perform [2]

Q.5 An organization cannot be profitable if it does not have a clear understanding of the

      difference between its fixed and variable costs. Why is this important for management? [4]

Q.6 Explain the Planning and Control Cycle [4]                                                                                 

Q.7 Why is it necessary to have a pre-determined overhead application

        rate in manufacturing? [3]

Q.8 Assume you have just been hired as a management accountant at a manufacturing

        plant, list some of the tasks you can be expected to perform [2]

  

Answer 1

1. One fundamental priority for every business owner is to understand the difference between fixed and variable costs in the business. Business expenses (i.e. costs) are generally categorized either as fixed or variable.

Fixed costs are those that do not change even when the company’s sales volumes or production levels increase whereas variable costs, on the other hand, are those that are directly impacted by changes in activity levels or the volume of products or services your company generates.

Importance of Fixed and Variable cost

The reason it’s so important to understand fixed costs in your business is that they stay the same, even if your new revenues grind to a halt. Covering fixed costs is a necessary fundamental in order to keep your business alive. The important point about variable costs is that they do not rise and fall based upon the company’s activities. In fact, they can rapidly increase, decrease or eliminate your profit margin and lead your company into a sudden profit or a steep loss.

A solid understanding of your company’s fixed and variable costs is what allows us to identify the profitable price level for its products or services. You can use this knowledge to identify your break-even point, which is the number of units or dollars at which total revenues equal total costs.

You can also use this information to identify economies of scale, which is rooted in the fact that as output increases, fixed costs are spread over a larger number of output items (products or services).

Break-even analysis is an important assessment method that all business owners should perform.

2.Changes that can be expected in management accounting are:

First, accountants will use increasingly sophisticated and smart technologies to enhance their traditional ways of working, and these technologies might even replace the traditional approach. Smart software systems (including cloud computing) will support the trend toward outsourcing services (including more overseas outsourcing), and greater use of social media via smart technology will improve collaboration, disclosure, engagement with stakeholders and broader communities. Social media (including Facebook, Twitter, and Google search) will reveal more data (including alternative reporting) than any corporate assurance report and stakeholders will use tools to interpret “big data”.

Second, continued globalization will create more opportunities and challenges for members of the accounting profession. While globalization encourages the free flow of money from one capital market to another, enhanced overseas outsourcing activities and the transfer of technical and professional skills will simultaneously continue to pose threats to resolving local problems (with different cultural, financial, and tax systems). Accounting firms in the US, EU, and Australia are outsourcing services to India and China for the purpose of cost minimization, which will create a shift in employment within the accounting industry in the West. As globalization has already been negatively impacted by Brexit and Trump’s presidential victory, accounting professionals are likely to see themselves having a role in this transformation.

Third, increased regulation, and the associated disclosure rules, will have the greatest impact on the profession for years to come. For example, increased regulation is imminent because of massive tax avoidance, transfer pricing, and money laundering as exposed via the panama papers. Many professional (tax) accountants will be affected by intergovernmental tax action to limit base erosion and profit-shifting.

3.Most company use a predetermined overhead rate (or estimated rate) instead of actual overhead for the following reasons:

Predetermined rates make it possible for companies to estimate job costs sooner. Using a predetermined rate, companies can assign overhead costs to production when they assign direct materials and direct labor costs. Without a predetermined rate, companies do not know the costs of production until the end of the month or even later when bills arrive. For example, the electric bill for July will probably not arrive until August. If Creative Printers had used actual overhead, the company would not have determined the costs of its July work until August. It is better to have a good estimate of costs when doing the work instead of waiting a long time for only a slightly more accurate number.

4.a. The role of management accountant include collecting, recording and reporting financial data from several units of an organization, observe and analyze their budget and suggest their funding and allocation. This includes estimation of cost of raw material, labor, manufacturing, sales and advertising, social media networking, lobbying and company’s internal operation cost.

b. A management accountant need to coordinate with all concerned departments to make an overall analysis of company’s functioning capital and availability of funds and then he or she has to report all the information to senior management and board of directors.

c. Management accounting’s main role is budgeting. For a small company budgets are guide to all expenditures. Small businessmen decide a budget every year to fix their expenses on each process that is operation and production cost and then further investment. Thus here a management accountant has to review historical data to prepare an accurate prediction of a year’s future expenses.

d. A management accountant need to be aware of everything, be it political situation that affect market, inflation, other exposures in market, competition, cost of labor, raw material, internal operations, coordination among different departments within a company as well as its interaction with rest of the business world and social media. Thus, he should be master of everything.

5.Same as answered in question 1 above.

6.Planning sets in motion activities to accomplish the planned objectives. Control functions direct and monitor activities for deviations from plans (i.e., attainment of objectives). Planning uses feedback from controls to improve/alter plans and implement corrective actions where necessary.

The Planning Cycle is an eight-step process that you can use to plan any small-to-medium sized project: moving to a new office, developing a new product, or planning a corporate event, for example.

The tool enables you to plan and implement fully considered, well-focused, robust, practical, and cost-effective projects. It also helps you to learn from any mistakes you make, and to feed this knowledge back into your future planning and decision making.

The control cycle is the iterative process of planning, monitoring outcomes, assessing results, and making revisions. The control cycle is commonly applied to the ongoing revision of corporate budgets and process flows.

When applying the control cycle to budgeting, the expectation is that each successive version of the budget will be improved, based on the information gleaned when the initial budget is compared to actual results. This approach works well in an environment where the level of competition is relaxed and few new products are released. The results are more problematic in a fast-paced environment, since business models may be radically revised on a regular basis, so there is little time to gain the benefits of an iterative feedback loop.

The control cycle works best for process flows, since they tend to change less than business models - that is, there will still be a need to pay suppliers, issue invoices, ship goods, and so forth, irrespective of changes in the business model. Given the higher stability level of processes, one can continually work through the steps in the control cycle to make processes more efficient, while also more closely monitoring risks.

7.Same as answered in question 3 above.

8.Same as answered in question 4 above.