BA 225 Managerial Accounting Final Exam

Managerial Accounting exam

QUESTION 1

What is the difference between financial ACCOUNTING and managerial accounting?

Financial accounting is the accounting field that is concerned with summarizing, analyzing and reporting of financial transactions relating to an organizations/business, mainly for external stakeholders. It focuses on financial statements which are then distributed to shareholders, lenders, the government and other external agents. Managerial accounts deals with identifying, measuring, analyzing, interpreting, and communicating accounting information for the sole purpose of achieving the organizational goals and objectives. This information is circulated within the organization, for the aim of improving the performance of the organization in terms of achieving the goals and objectives of the organization. Also, financial accounting in some cases is required by law, and it covers all aspects of the organization, while managerial accounting information is only an organizational initiative, and could be suited to aim at particular areas of the organization.

QUESTION 2

Explain the two reasons why the shorter the payback period the more attractive the investment is when the payback technique is used?

A short payback period may have a lower net present value but may turn out to be of more material importance due to it having a higher short-term value. This is because Investment costs are recovered within a shorter period of time, therefore become available again for further use. When the resources that are put into use are recovered within the shortest time possible, then they can be used as many times as possible within a given period of time, as opposed to investments with longer payback periods.

As payback periods are a measure of risk, shorter payback periods are considered the less risky, as compared to long payback periods. It is a common assumption that the longer periods it takes to recovering funds used in investments, the higher the levels of uncertainties. Shorter payback periods are therefore less risky; since uncertainties are reduce by the short period.

QUESTION 3

Distinguish between a master budget and a sales forecast.

A sales forecast is different from a master budget, mainly because of their usage, and the data they contain. While a forecast represents the events that no control can be exercised over them, a budget is a representation of a state of control. This means that with the knowledge of the market forces, a manager can use sales forecast (along other factors) to come up with a budget. A forecast is not only made for budgeting reasons, but also for other reasons beyond budgeting, e.g. for deciding on the best available option among many alternatives. In the operational dimension, a forecast is a can be made by anybody in the organization, but a budget is a plan that requires the management’s authority.

QUESTION 4

Explain the nature and importance of a JOB cost sheet.

A job cost sheet is a document prepared to record all the costs of a specific job. Depending on the type of job, it includes costs such as direct materials, shipping and handling, sales taxes, supplies, direct labor, payroll taxes, etc. Every Inventory of work in progress entry must be accompanied by a posting to one or more job cost sheets that is corresponding. It is important because it is used to come up with the total costs as well as the unit costs of a particular completed job, for important managerial decisions. Despite being a manufacturing guide, by providing a comparative analysis of the various factors of cost in the past results and standard costs, one can find out the causes of variation in costs try to eliminate the factors and conditions that might increase the total cost.

QUESTION 5

Distinguish among operating, investing, and FINANCING activities.

Operating activities are activities that include production, sales, and delivery of the company’s product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising, and shipping the product.

Investing activities include purchases or sales of an asset (assets can be land, building, equipment, marketable securities, etc.), loans made to suppliers or received from customers, payments related to mergers and acquisitions, and dividends received.

Financing activities include the inflow of cash from investors, as well as the outflow of cash to shareholders as dividends as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities.

QUESTION 6

Managers’ activities and responsibilities can be classified into three broad functions. List and discuss each function.

There are three main functions and responsibilities of a manager in any given company. That includes leadership, administration and delegation. Leadership entails being able to direct people in the direction you would want them to go. A manager’s effectiveness is measured by how well he can get others to accomplish much. Administration is the ability to oversee day-to –day operations in the office to ensure that all requirements are met. A great manager is also one who understands that he can’t do it all on his own but understands the capability of his subordinates and be able to delegate work as he supervises to make sure that what is required is done.

QUESTION 7

Identify and discuss the relevant costs in accepting an order at a special price. 10 points

Identify and discuss the relevant costs in accepting an order at a special price. Special order pricing can be defined as a technique or means to calculate the lowest price of a product or a service at which a special order may be accepted or below which a special order may be rejected. Some relevant costs that determine if a special order should be accepted or rejected include direct materials, direct labor, and variable overhead. Direct materials are those supplies and materials that are consumed directly in the production of a product and that can be directly linked to a final product. Direct labor is the labor that can be assigned to a specific product or cost center such as a machine operator in a production company.

QUESTION 8

Smith & Company claims that the relevant range concept is only important for variable costs. Explain the relevant range concept and discuss whether you agree with Smith & Company.

Relevant range is the normal range of production that can be explained of a given company or product. It can also be explained as the volume of production for which the variable and fixed costs hold true. Smith &Company are wrong to say that relevant range concept is only important for variable costs because the behavior of both variable costs and fixed costs are only linear up to a certain range of activities. For example if a company’s sales are increasing by 50% each quarter it is unlikely to remain in the same relevant range from one quarter to another, variable and fixed costs must be done regularly.

QUESTION 9

Cost-volume-profit analysis is the examination of cost behavior patterns that underline the relationship between cost, revenue and volume and how they affect profits. This analysis helps one to know what product to offer and at what price, whether to add or drop a product line and in making decisions about accepting or rejecting special orders. CVP analysis also helps the managers to project profit at different levels of activity and this enables them to develop budgets and evaluate the performance of every department.

QUESTION 10

What is the difference between: unit-level, batch-level, product-level, and facility-level activities?

According to Albrecht (2002) Unit level activities are those that occur every time a product is made or a service is given. This may include the direct materials, direct labor and machine maintenance cost .Batch -level activities on the other hand are those costs that are incurred every time a series of steps is performed or a batch of units is produced. For instance; machine setups, purchase orders are some batch-level activities. Product-level activities are those activities that support an entire line but are not tied or linked to each individual unit, for instance, changes made in the design of a product line, the storage and warehousing of a product line. Finally, facility-level activities are essential for production and development to take place .This activities are mainly concerned with administration issues such as tax, insurance, salaries, plant maintenance and management.