ACCA - Association of Chartered Certified Accountants Management Accounting Techniques Questions and Answers — Questions and Answers
Question 1: A company is developing a new product in a highly competitive market. The marketing department has determined a likely selling price of $150 per unit. The company requires a profit margin of 30% on the selling price. What management accounting technique is being described, and what is the target cost per unit?
- Lifecycle Costing; $105
- Activity-Based Costing; $115.50
- Throughput Accounting; $150
- Target Costing; $105 (Correct answer)
Correct answer: Target Costing; $105
Target costing is a market-driven approach that starts with a competitive market price and a desired profit margin to establish a target cost. The calculation is: Target Cost = Selling Price - Desired Profit. In this scenario, the Target Cost is $150 - (30% of $150) = $150 - $45 = $105.
Question 2: Which of the following statements best describes a key principle of Throughput Accounting?
- All factory costs, including direct labor, are treated as variable costs in the short term.
- The primary goal is to maximize the contribution per unit for all products.
- Inventory is considered an asset, and increasing it can improve profitability.
- In the short term, only direct material costs are considered truly variable. (Correct answer)
Correct answer: In the short term, only direct material costs are considered truly variable.
A fundamental concept of Throughput Accounting is that in the short run, most factory costs (including direct labor and overheads) are considered fixed. Only direct material costs are treated as truly variable. The focus is on maximizing throughput, which is sales revenue minus total direct material cost.
Question 3: A manufacturing company is reviewing its overhead allocation. It produces a standard, high-volume product and a customized, low-volume product. The customized product requires frequent machine setups and significant engineering support, which are currently absorbed into a single, volume-based overhead rate. Which management accounting technique would provide a more accurate product cost for the customized product?
- Lifecycle Costing
- Relevant Costing
- Activity-Based Costing (ABC) (Correct answer)
- Target Costing
Correct answer: Activity-Based Costing (ABC)
Activity-Based Costing (ABC) is designed to address the shortcomings of traditional costing systems. It allocates overheads based on the specific activities that drive those costs (e.g., machine setups, engineering hours). This provides a more accurate cost for products that consume a disproportionate amount of these activities, such as the customized, low-volume product.
Question 4: A company is evaluating a special one-time contract. In considering the costs associated with the contract, which of the following would be considered a 'relevant cost'?
- Depreciation on machinery that will be used for the contract.
- The cost of raw materials already in inventory that have no alternative use and would otherwise be scrapped.
- The salary of the factory manager who will oversee the production.
- The future cost of additional materials that need to be purchased specifically for this contract. (Correct answer)
Correct answer: The future cost of additional materials that need to be purchased specifically for this contract.
Relevant costs for decision-making are future, incremental cash flows that arise as a direct consequence of the decision. The future cost of purchasing new materials is a direct cash outflow caused by accepting the contract. Depreciation is a non-cash expense, the cost of materials already in inventory is a sunk cost (unless they have an opportunity cost), and the manager's salary is a committed cost that will be paid regardless of this contract.
Question 5: The management of a technology company wants to assess the total profitability of its new tablet device, from the initial research and development phase through to the costs of disposal and environmental cleanup at the end of its useful life. Which management accounting technique is most appropriate for this purpose?
- Target Costing
- Lifecycle Costing (Correct answer)
- Throughput Accounting
- Activity-Based Costing
Correct answer: Lifecycle Costing
Lifecycle costing tracks and accumulates all costs and revenues attributable to a product over its entire life, from inception to abandonment. This includes costs from the design, manufacturing, operation, and end-of-life phases, providing a comprehensive view of the product's total profitability.
Question 6: Which of the following techniques, when applied to environmental management accounting, focuses on the principle that 'what comes in must go out or be stored' by reconciling material inflows with outflows to highlight waste?
- Activity-Based Costing
- Lifecycle Costing
- Flow Cost Accounting
- Input/Output Analysis (Correct answer)
Correct answer: Input/Output Analysis
Input/Output analysis is a technique used in environmental management accounting that records material flows with the idea that 'what comes in must go out – or be stored'. It balances purchased inputs against outputs (sold goods and waste), forcing a focus on the quantity and cost of waste, which is considered an environmental cost.
ACCA - Association of Chartered Certified Accountants Management Accounting Techniques Questions and Answers
A company is developing a new product in a highly competitive market.
The marketing department has determined a likely selling price of $150 per unit.
The company requires a profit margin of 30% on the selling price.
What management accounting technique is being described, and what is the target cost per unit?