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MANAGEMENT ACCOUNTING -
FUNDAMENTALS OF ACCOUNTING AND
FINANCE QUESTIONS WITH DETAILED
VERIFIED ANSWERS
Fixed cost Ans: A cost that remains constant as output increases, until
capacity has been exceeded
Stepped fixed cost Ans: A cost that changes as a step function at certain
levels of activity
Variable cost Ans: A cost that increases with output
Semi-fixed cost Ans: A cost that can be both fixed and variable e.g.
electricity and telephone costs (which are fixed) as well as number of
minutes/hours used (which is variable)
Break even point Ans: The quantity at which revenue is equal to costs
(profit = 0)
Equation for break-even point Ans: Break-even point = Fixed
cost/Contribution per unit
Margin of Safety Ans: The extent to which planned volume of output or
sales lies above break-even point
Margin of safety equations Ans: Margin of safety (in units) = budgeted
sales - Break-even point
Margin of safety (as percentage) = ((Budgeted sales - Break-even
point)/(Budgeted sales)) x 100
Steps for key factor analysis Ans: 1. Identify the limiting factor
2. Calculate the contribution per unit of limiting factor
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3. Rank the products in order of contribution per unit of limiting factor
4. Develop an optimal production plan
profit equation Ans: Profit = Total contribution - Fixed cost
Direct cost Ans: Costs which can be directly attributed to the production
of a specific product or service e.g. direct materials, direct labour, direct
expenses
indirect costs Ans: Costs which cannot be attributed to the production of
a specific product or service but must be allocated to all units produced
e.g. rent, utilities, depreciation
Overhead per unit Ans: indirect cost to produce one unit of a product
Marginal costing Ans: A costing method where only the variables are
charged to the product and fixed costs are just written off in total against
the contribution
total absorption costing Ans: Used to identify the true cost of a product
or service by including a fair share of the organization's overheads
3 steps of total absorption costing Ans: 1. Allocation and apportionment
of overheads
2. Reapportionment of service costs center overheads into production
cost centers.
3. Absorption of overheads into product.
Overhead absorption rate (OAR) equation Ans: OAR = Budgeted
Overhead/Budgeted Absorption Base
Budgeted overhead Ans: the estimated overhead costs likely to be
incurred during the upcoming period
Budgeted absorption base Ans: the estimated level of activity for the
period e.g. labor hours, machine hours, or volume of production
MANAGEMENT ACCOUNTING -
FUNDAMENTALS OF ACCOUNTING AND
FINANCE QUESTIONS WITH DETAILED
VERIFIED ANSWERS
Fixed cost Ans: A cost that remains constant as output increases, until
capacity has been exceeded
Stepped fixed cost Ans: A cost that changes as a step function at certain
levels of activity
Variable cost Ans: A cost that increases with output
Semi-fixed cost Ans: A cost that can be both fixed and variable e.g.
electricity and telephone costs (which are fixed) as well as number of
minutes/hours used (which is variable)
Break even point Ans: The quantity at which revenue is equal to costs
(profit = 0)
Equation for break-even point Ans: Break-even point = Fixed
cost/Contribution per unit
Margin of Safety Ans: The extent to which planned volume of output or
sales lies above break-even point
Margin of safety equations Ans: Margin of safety (in units) = budgeted
sales - Break-even point
Margin of safety (as percentage) = ((Budgeted sales - Break-even
point)/(Budgeted sales)) x 100
Steps for key factor analysis Ans: 1. Identify the limiting factor
2. Calculate the contribution per unit of limiting factor
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3. Rank the products in order of contribution per unit of limiting factor
4. Develop an optimal production plan
profit equation Ans: Profit = Total contribution - Fixed cost
Direct cost Ans: Costs which can be directly attributed to the production
of a specific product or service e.g. direct materials, direct labour, direct
expenses
indirect costs Ans: Costs which cannot be attributed to the production of
a specific product or service but must be allocated to all units produced
e.g. rent, utilities, depreciation
Overhead per unit Ans: indirect cost to produce one unit of a product
Marginal costing Ans: A costing method where only the variables are
charged to the product and fixed costs are just written off in total against
the contribution
total absorption costing Ans: Used to identify the true cost of a product
or service by including a fair share of the organization's overheads
3 steps of total absorption costing Ans: 1. Allocation and apportionment
of overheads
2. Reapportionment of service costs center overheads into production
cost centers.
3. Absorption of overheads into product.
Overhead absorption rate (OAR) equation Ans: OAR = Budgeted
Overhead/Budgeted Absorption Base
Budgeted overhead Ans: the estimated overhead costs likely to be
incurred during the upcoming period
Budgeted absorption base Ans: the estimated level of activity for the
period e.g. labor hours, machine hours, or volume of production
