MANAGEMENT

INFORMATION CLASS

Prepared By: A.K.M Mesbahul

(i) Variable cost – is a cost that varies as the level of activity changes. An example of a variable cost is the
cost of materials. As production is increased the materials requirement will increase and therefore the cost
of materials will increase.

(ii) Fixed cost – is a cost that remains the same irrespective of the level of activity. The cost of renting a
building is classified as fixed cost. The rent would be paid periodically and would not vary with the level
of activity.

(iii) Mixed cost – is a cost that is partly fixed and partly variable. An example of a mixed cost is the
remuneration package of a sales representative. The basic salary of the sales representative is fixed
element and the sales commission / incentives paid is the variable element. The commission / incentive
payable would depend on the volume of sales achieved.
No.
- Traditional systems contain smaller and fewer cost distortions when the traditional systems' unit-
level assignments and the alternative activity-cost drivers are relatively similar in proportion to each
other.
- Still, the use of unit-level measures to assign indirect costs is more likely to under cost low-volume
products and more complex products.
- Both traditional product-costing systems and ABC product-costing systems seek to assign all
manufacturing costs to products.
- Cost distortions occur when a mismatch (incorrect association) occurs between the way support costs
are incurred and the basis for their assignment to individual products.
- When the operating budget is used as a control device it can lead to behavior that is actually detrimental
to the organization.

- The major problem with the budget performance report is not the report itself, but rather the way it is
used.

- In general, managers are rewarded for favorable variances, and disciplined for unfavorable variances.
This encourages managers to set lax standards for both sales and costs so favorable variances result. It
can also lead to "budget games."

- Another drawback is that once the budget is established, if there is any variance between budget and
actual, it is assumed to be because of actual. However, as we know, the budget will never be totally
accurate due to the uncertainties of predicting the future.
Control is an essential feature of any organization which can be supported by management accounting
techniques and information. In the context of Standard costing, variance analyses are used to highlight
differences between actual and standard costs to prompt corrective or reactive action. Standard costing can
also be used as a performance management tool as it provides benchmarks and targets to assist the
organization in determining if it is meeting its objectives.

There are three distinctive types of control:

1. Action or behavioral control: This involves observing or supervising actions of individuals involved
in production to ensure that quantity and quality targets are met.

2. Personnel and cultural control: This involves establishing expected values, behaviors and norms which
are used to support achievement of targets.

3. Results or Output control: This involves collecting and reporting information on outputs. This type of
control is focused on quantitative information and can be most closely related to management accounting
information produced. Such information may include variance analysis and other key targets statistics.
- The NPV formula solves for the present value of a stream of cash flows, given a discount rate. The
IRR on the other hand, solves for a rate of return when setting the NPV equal to zero (0).

- In other words, the IRR answers the question “what rate of return will I achieve, given the following
stream of cash flows?”, while the NPV answers the question “what is the following stream of cash
flows worth at a particular discount rate, in today’s dollars?
- The variable overhead spending variance is the difference between the actual variable overhead cost
per unit of the cost-allocation base and the budgeted variable overhead cost per unit of the cost-
allocation base, multiplied by the actual quantity of the variable overhead cost-allocation base used
for the actual output.

- If a favorable variable overhead spending variance had been obtained by the managers of the
company purchasing low-priced, poor-quality indirect materials, hired less talented supervisors, or
performed less machine maintenance there could be negative future consequences.

- The long-run prospects for the business may suffer as the company ends up putting out a lower
quality product, or it may end up having very large equipment repairs as a result of cutting corners in
the short term.
- Factors affecting the level of markups include the strength of demand, the elasticity of demand, and
the intensity of competition. In addition, strategic reasons also may influence the level of markups.

- For instance, a firm may either choose a low markup to penetrate the market and win market share
from established products of its competitors, or employ a high markup if it employs a skimming
strategy for a market segment in which some customers are willing to pay higher prices for the
privilege of owning the product.
- An automated production line would increase fixed costs through extra depreciation on the new
machinery and also decrease variable costs due to the elimination of direct labor as a result of
automation.

- This would increase the breakeven point.

- This could possibly have a negative effect on the firm if demand for the product produced by this
production line is expected to decline in the future.

- With high fixed costs and low demand, a decline in profits might be more severe due to the presence
of unchanging fixed costs as volume drops.