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   The Institute of Cost and Management Accountants of BangladeshProfessional Level-II202. Management AccountingKnoledge Assessment Test202.0! 01. In a just-in-time system, whatis meant by the pull approach tothe fow o goods as compared tothe push approach used inconventional system? Ans: In a just in time environment, the flow of goods is controlled by a pull approach. The pull   approach can be explained as follows. At thefinal assembly stage a signal is sent to the precedingwork station as to the exact amount of parts andmaterials that would be needed over the next fewhours to assemble products to fill customer orders,and only that amount of materials and parts is provided. The same signal is sent back to each preceding workstation so a smooth flow of parts andmaterials is maintained with no appreciableinventory buildup at any point. Thus all workstationsrespond to the pull exerted by the final assemblystage, which in turn respond to customer orders. Asone worker explained, !nder just in time systemyou don t produce any thing, any where, for any body unless they ask for it some where downstream.Inventories are evil that we are taught to avoid.The pull approach  described above can becontrasted to the push approach  used inconventional manufacturing system. In conventionalsystem, when a workstation completes its work, the partially completed goods are pushed forward to thenext work station regardless of whether thatworkstation is ready to receive them. The result is anunintentional stockpiling of partially completedgoods that may not be completed for days or evenweeks. This ties up funds and also results inoperating inefficiencies. #or one thing, it becomesvery difficult to keep track of where every thing iswhen so much is scattered all over the factory floor. 0. ! plain how the plan-do-chec#-act cycle applies the scienti$c method to problem solving? Ans: $%&A was made popular by %r  '. (dwards%eming   , who is considered by many to be thefather of modern )uality control* however, healways referred to it as the +hewhart cycle.ater in %eming s career, he modified $%&A to$lan, %o, +tudy, Act -$%+A because he feltthat check emphasi/ed inspection over analysis. 012 The concept of $%&A is based on the scientificmethod, as developed from the work of #rancis3acon - 4ovum 5rganum   , 6789. The scientificmethod can be written ashypothesisexperimentevaluation or plan,do and check. +hewhart described manufacture under control;under statistical control;as athree<step process of specification, production,and inspection.=e also specifically related this to the scientificmethod of hypothesis, experiment, and evaluation.$%&A -and other forms of scientific problemsolving is also known as a system for developingcritical thinking. At Toyota this is also known as3uilding people before building cars. 0>2  Toyotaand other eancompanies propose that anengaged, problem<solving workforce using $%&Ais better able to innovate and stay ahead of thecompetition through rigorous problem solving andthe subse)uent innovations. This also creates aculture of problem solvers using $%&A andcreating a culture of critical thinkers. 0%. &hy does the theory o constraints '()*+ emphasie managing constraints? Ans The Theory of Constraints is an organizational changemethod that is focussed on profit improvement. The essentialconcept of TOC is that every organization must have at leastone constraint. A constraint is any factor that limits theorganization from getting more of whatever it strives for, whichis usually profit. The Goal   focuses on constraints as bottleneckprocesses in a jobshop manufacturing organization. !owever,many nonmanufacturing constraints e ist, such as marketdemand, or a sales department#s ability to translate marketdemand into orders.The $ive %teps of the Theory of Constraints 6.Identify the +ystem &onstraint8.%ecide =ow to (xploit the &onstraint1.+ubordinate (verything (lse?.(levate the &onstraint@.eturn to +tep 5ne, 3ut 3eware of Inertia ! # Page   The Institute of Cost and Management Accountants of BangladeshProfessional Level-II202. Management AccountingKnoledge Assessment Test 0.00. &hy are product costssometime called inventoriablecost? escribe the fow o suchcosts in a manuacturing companyrom the point o incurrenceuntil they $nally becomee penses on the Income/tatement. Ans :$roduct costs are sometimes referred to as inventoriable costs because they   are initially assigned to inventories. $roduct costs are initially   assigned   to an inventory   account on the balance sheet. 'hen the goods are sold, the costs are released   from inventory   as expenses -typically   called cost of goods sold and   matched against sales revenue. 05. “A variable cost is a cost that varies perunit of product whereas a fixed cost is constantper unit of product” – Do you agree? xplain. Unit cost = the cost to produce, store and sell one unitof a particular product. It includes all fixed costs (i.e.rent) *and* variable costs. UC = FC + VC  _______________________ Fixed Cost is the part of the budget that stays the sameregardless of whether you produce a lot, a little bit, oreven if you produce zero. Overhead, rent on buildings,and interest on loans are in fixed cost. In other words,no matter how many units you sell, the amount you oweon rent (a fixed cost) *total* fixed cost won’t change (it'sconstant). On the other hand, the more units you sell, the per unitcost allocated to the rent (fixed costs) will change. Itvaries with the cost driver (usually sales) Total fixed cost (TFC) is constant. Total fixed cost per unit varies inversely with cost driver(usually sales). 0!. “ un# costs are easy to spot$ they aresi%ply the fixed costs associated with adecision” Do you agree? xplain. &hat is thedanger in allocating co%%on fixed costsa%ong product levies on other seg%ents of anorgani'ation? Ans: No, not all fxed costs are sunk costs. Sunkcosts are the costs that have been incurred in thepast and cannot be recovered in the uture. Thesecosts are not considered in the decision makingprocess because these are historical costs andcannot be altered in the uture. However it is notnecessary that all fxed costs are sunk costs (0(.0)0*. +o%pany , and - are in the sa%eindustry. +o%pany , is highly auto%atedwhereas +o%pany - relies pri%arily on laborto %a#e its product. f sales and total expensesin the two co%panies are about the sa%e/which would you expect to have the lower%argin of safety? &hy. Ans Com$an% &' ith its higher ()ed costs and loer varia*le costs' ould have a higher *rea+-even $oint than Com$an% ,. ence' Com$an% & ould also have the loer margin of safet%. 0. &hat is %eant by sales %ix? &hatassu%ption is usually %ade concerning sales%ix in +12 analysis? xplain how a shift inthe sales %ix could result in both a higherbrea#even point and a lower net inco%e. Ans: +ales mix is the proportions of different products and services that comprise the total salesof a company. The concept is used to understandthe reasons for changes in net profits, even whentotal sales remain approximately the same from period to period. In many cases, each product or service that a company provides has a different profit, so changes in sales mix -even if sales levelsremain the same usually result in differingamounts of profit from period to period. 2 # Page   The Institute of Cost and Management Accountants of BangladeshProfessional Level-II202. Management AccountingKnoledge Assessment Test i sales mix shited rom high contributionmargin products to low contribution marginproducts. Such a shit would cause the averagecontribution margin ratio in the company todecline, resulting in less total contributionmargin or a given amount o sales. Thus, netoperating income would decline. ith a lowercontribution margin ratio, the break!even pointwould be higher because more sales would bere uired to cover the same amount o fxedcosts. 03. n what funda%ental wages does A4+differ fro% traditional costing %ethods?&hen actively based costing is used/ why are%anufacturing overhead costs shifted fro%high$volu%e products to low$volu%e products?Ans  Activity<based costing is more accurate because it takes important factors into account before assigning a cost to a product. =owever, for this same reason, it is a bit more complicated andtime<consuming. It s also more thorough andconsiders nonmanufacturing expenses as well,such as administrative and managerial costs.Traditional costing is a much easier way of determining the cost of a product, since it reliessolely on assigning average overhead rates. Thisalso means it wonBt always be as accurate, because it doesnBt factor in nonmanufacturingexpenses or determine which overhead costsactually affect specific products.A simple example of these costing methods can bedemonstrated with the costs of living in anapartment with roommates. Two roommates in anapartment will typically split the costs of rent,utilities and groceries, and they have a couple of options for doing so. They could simply total thecost of all of the bills and divide it exactly in two.This would be similar to traditional costing.The roommates also have the option of determining who uses specific utilities and payingonly for what each one uses. They can then createan itemi/ed bill for each roommate. #or example,if one roommate doesnBt use the internet and theother doesnBt use cable, they wonBt have to paythose parts of the bill. This method is similar toactivity<based costing.Canufacturing overhead costs often shift fromhigh<volume to low<volume products in anactivity<based costing system because intraditional costing systems batch<level and product<level costs are assigned using volume<related allocation bases. This leads to their high<volume products being over<cost, and their low<volume products being under<cost. (0(.0670. &hat is %eant by the ter%decentrali'ation? &hat benefits result fro%decentrali'ation? 8ow is it possible for a costtraceable to a seg%ent to beco%e a co%%oncost if the seg%ent is divided into furtherseg%ent? Decentralization refers to a company's topmanagement delegating authority to subunits of thecompany. Subunits include divisions, subsidiaries,profit centers, investment centers, and so on.The extent of decentralization varies. For example, aprofit center is likely to have authority to makedecisions involving revenues and expenses, but will not have authority to make investment decisions orenter into banking relationships.A benefit of decentralization is having the decisionmakers closer to the markets in order to make betterand faster decisions. Another benefit ofdecentralization is having more individuals share thework involved in decision making. This in turnprovides excellent training and development of futureleaders of the company.  # Page   The Institute of Cost and Management Accountants of BangladeshProfessional Level-II202. Management AccountingKnoledge Assessment Test 11. In what way can the use of ROI as aperformance measure for investment centerslead to bad decision? How does the residualincome approach overcome the problem?   Ans: If 5I is used to evaluate performance, amanager of an investment center may reject a profitable investment opportunity whose rate of return exceeds the company s re)uired rate of return but whose rate of return is less than theinvestment center s current 5I. The residualincome approach overcomes this problem becauseany project whose rate of return exceeds thecompany s minimum re)uired rate of return willresult in an increase in residual income. (0(.057(. &hat is %eant by an invest%ent pro9ectsinternal rate of return? 8ow is the :: co%puted? f a fir% has to pay interest of 76;on long ter% debt/ then its cost of capital is76;. Do you agree? xplain. ns Internal rate of return -I is a metric used in capital budgeting measuring the profitability of   potential investments. Internal rate of return is a discount rate that makes the net present value -4$D of all cash flows from a particular  project e)ual to /ero. I calculationsrely on the same formula as 4$D does.The following is the formula for calculating 4$D: where:& t  E net cash inflow during the period t& o E total initial investment costsr E discount rate, andt E number of time periods   To calculate I using the formula, one would set 4$D e)ual to /ero and solve for the discountrate r  , which is here the I. 3ecause of thenature of the formula, however, I cannot becalculated analytically, and must instead becalculated either through trial<and<error or usingsoftware programmed to calculate I. The cost o capital is not simply the interestpaid on long!term debt. The cost o capital is aweighted average o the costs o all sources o fnancing, both debt and e uity. (0(.0!7). “As a practical %atter/ planning andcontrol %ean exactly the sa%e thing” Do youagree? xplain. 8ow does 'ero based budgeting differ fro%traditional budgeting? Ans: $lanning and control are different< $lanninginvolves developing goals and budgets to meetthose goals control is management attempting toensure goals established are met.Traditional 3udgeting vs Fero< based budgeting.#ollowing are the points of difference betweentraditional budgeting and /ero based budgeting:6. Traditional budgeting is accounting oriented.Cain stress happens to be on previous level of expenditure. Fero<based budgeting makes adecision oriented approach. It is very rational innature and re)uires all programmes, old and new,to compete for scarce resources.8. In traditional budgeting, first reference is madeto past level of spending and then demand for inflation and new programmes. In /ero based budgeting a decision unit is broken intounderstandable decision packages, which areranked according to importance to enable to topmanagement to focus attention to only on decision packages, which enjoy priority to others.1. In tradition budgeting, some managersdeliberately inflate their budget re)uest so thatafter the cuts they still get what they want. In/ero<base budgeting, a rationale analysis of  budget proposals is attempted. The managers, whounnecessarily try to inflate the budget re)uest, arelikely to be caught and exposed. Canagementaccords its approval only to a carefully devisedresult<oriented package.?. Traditional budgeting is not as clear and asresponsive as /ero base budgeting is.@. In traditional budgeting. Its for top managementto decide why a particular amount should be spenton a particular decision unit. In Fero<base / # Page
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