Leaving Certificate Higher Management Accounting: Pattern of questions Product Costing: 1998, 2000, 2003 Job Costing: 2002, 2005 Stock Valuation: 2000, 2003 Marginal Costing: 1997,1999, 2001, 2004, 2006 Production Budgeting: 1998, 2001, 2005 Cash Budgeting: 1997, 2000, 2002, 2004 Flexible Budgeting: 1999, 2003, 2006 €€€€€€€€€€€€€€€€€€€€€€€€€€€€€€€€€€€€€€€€€€€€ Theory 1998 and 2000 Give two reasons for Product Costing and explain each (10 Marks) To establish the selling price of an item for the purpose of tendering. To control costs – budget versus actual. To ascertain the value of closing stock in order to prepare final accounts. 1999 Indicate why a Flexible Budget is prepared and what it shows (10 Marks) A Flexible Budget is prepared: To show budgeted costs and actual costs at the same level of activity. To compare like with like. To help in controlling costs or to plan product levels. Flexible Budgets show whether actual costs were exceeded or were less than budgeted costs (Variances) 2003 Explain Principal Budget factor. Why prepare a Flexible Budget and what does it show? (16 Marks) The principal Budget Factor is the factor that limits output and therefore limits expansion. Usually it is sales demand. It could be some other limiting factor such as availability of materials. 2004 List and explain two limitations/assumptions of marginal costing. (12 Marks) Assumptions: All costs can be divided into fixed and variable: It may not always be possible to separate mixed costs into fixed and variable even using techniques such as the High-Low method. Fixed costs are constant: Most fixed costs are step fixed costs i.e. they are only fixed within a certain range of output. Once that range is exceeded fixed costs rise to a new level. Variable costs vary directly with changes in level of activity: Variable costs per unit may fall due to economies of scale. Firms sell only one product or a constant product mix: Most firms sell a variable mix of products each giving a different contribution per unit. Selling price per unit is constant: In order to boost sales, discounts may be offered to bulk customers. Sales = Production (or stocks are valued using marginal costing): There are always unsold stocks at the end of any trading period and they must be valued using absorption techniques. 2005 Name three overhead absorption rates and state why they are based on budgeted rather than actual figures. (8Marks) Absorption rates: Per machine hour, Per labour hour, Per unit, Per % of Prime Cost. Actual costs are not available until after production but selling price is needed before production is complete. Therefore absorption rates are based on budgeted costs rather than actual costs. Prepare a note on the factors taken into account in arriving at the expected sales in production budgeting. (6 Marks) Historical sales patterns, Market research, Projections of Sales managers and Sales Reps., General economic conditions, Actions of competitors, Changes in legislation. 2006 Outline the differences between Marginal and Absorption Costing. Indicate which method should be used for financial accounting purposes and why. (10 Marks) Assumptions of Marginal Costing. Realities of Absorption Costing Fixed costs are constant. Step-fixed costs. Variable costs vary directly. Economies of scale. A Constant product mix. Varied product mix. Constant selling price. Discounts. All stock sold. Unsold stocks. Absorption costing should be used for financial accounting purposes as it agrees with SSAP 9 and matches costs with revenues for the period in question. Marginal costing is a management tool only. What is an adverse variance? State why adverse variances may arise in Direct Material costs. Explain with examples, “Controllable” and “ Uncontrollable” costs. (12 Marks) An adverse variance is where actual results are worse than budgeted figures. An adverse variance in Direct Material costs may be a Price variance where the price paid is higher than budgeted or a Usage variance where the quantities used are greater than budgeted. Controllable costs are those costs that can be influenced by a manager of a cost centre or department. Uncontrollable costs are those costs associated with a cost centre or department over which the manager has no influence. Example: The Sales Manager has control over the rent paid for a showroom but has no control over the rates paid to the local authority on that showroom. Rent is negotiable but rates are set by the local authority.
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