Strategic Management Accounting, Cost Behavior, and CVP Analysis

Flashcards covering Chapters 1, 2, and 3 on management accounting, business value creation, the AMPS data analytics framework, cost classifications, data sources, CVP analysis, operating leverage, and variable versus absorption costing.

How do for-profit companies create value?

By designing, manufacturing, selling, or trading products and services to customers at a price greater than the cost of creating and distributing them.

What is a business process?

A coordinated, standardized set of activities conducted by both people and equipment to accomplish a specific task.

What are the five primary activities in a value chain?

Inbound logistics, Operations, Outbound logistics, Marketing and sales, and Service.

What are the four secondary (support) activities in a value chain?

Procurement, Information technology (IT), Human resource (HR) management, and Infrastructure.

How does a cost advantage strategy differ from a product differentiation strategy?

Cost advantage offers goods or services at lower prices than competitors to stimulate demand and generate higher profits through higher sales volume, while product differentiation offers distinct goods or services valued by customers.

What is the primary role of a management accountant when collaborating with data scientists and decision makers?

The management accountant serves as an expert interpreter between the decision maker and the data scientist.

How does raw data progress to a business decision along the information value chain?

Raw data is combined with context to become information, which leads to knowledge through learning, which ultimately informs a business decision.

What do the four letters in the AMPS data analytics framework stand for?

Ask the question, Master the data, Perform the analysis, and Share the story.

What are the four common types of data analytics questions?

Descriptive analytics ("What happened?"), Diagnostic analytics ("Why did it happen?"), Predictive analytics ("Will it happen in the future?"), and Prescriptive analytics ("What should we do?").

What is the difference between static data and dynamic data in visualizations?

Static data remains unchanged for one-time presentations, whereas dynamic data updates on a regular basis for continuous monitoring.

How do planning and control relate to the cyclical nature of the AMPS model?

Planning involves asking questions, mastering data, and performing analysis to prepare for the future, while control involves implementing decisions, evaluating performance, and using feedback to adjust actions.

What are the key differences between management accounting and financial accounting?

Financial accounting produces mandatory, audited information governed by standards for external users, whereas management accounting produces discretionary, internal information without fixed rules to support managerial decision making.

Which professional designations are primarily associated with management accounting compared to financial accounting?

Certified Management Accountant (CMA) and Chartered Global Management Accountant (CGMA) are associated with management accounting, while Certified Public Accountant (CPA) is more associated with financial accounting and auditing.

What are the four overarching principles of the IMA Statement of Ethical Professional Practice?

Honesty, Fairness, Objectivity, and Responsibility.

What are the four main standards of conduct in the IMA Statement of Ethical Professional Practice?

Competence, Confidentiality, Integrity, and Credibility.

What is a cost object?

A cost object is anything for which a measurement of costs is wanted or needed, such as a product, process, service, department, or customer.

What is the difference between cost tracing and cost allocation?

Cost tracing assigns direct costs directly to a specific cost object based on actual costs, whereas cost allocation estimates and assigns indirect costs to a cost object based on estimated costs.

What is manufacturing overhead?

Manufacturing overhead consists of all indirect production costs that are essential to manufacturing goods but are not easily or clearly traceable to a specific cost object.

How do variable costs and fixed costs behave on a total level versus a per-unit level?

Total variable costs change in proportion to production volume while per-unit variable costs remain constant; total fixed costs remain constant while per-unit fixed costs decrease as production volume increases.

What is the difference between prime costs and conversion costs?

Prime costs consist of direct materials and direct labor ($\text{DM} + \text{DL}$), whereas conversion costs consist of direct labor and manufacturing overhead ($\text{DL} + \text{MOH}$).

When are product costs expensed on the income statement compared to period costs?

Product costs are capitalized in inventory assets and expensed as cost of goods sold when the inventory is sold, whereas period costs are expensed as incurred in the current period.

Which five principal enterprise systems serve as internal data sources for a company's cost accounting system?

Financial reporting systems (FRS), Manufacturing systems (MS), Human resource management (HRM) systems, Customer relationship management (CRM) systems (or POS systems), and Supply chain management (SCM) systems.

How can management accountants use Consumer Price Index (CPI) data in business planning?

To assess whether costs are increasing overall, including the costs of providing products to customers.

In a relational database, what are the distinct roles of a primary key and a foreign key?

A primary key uniquely identifies each record in a specific table, while a foreign key is a column in another table that references the primary key to create a relationship between the two tables.

What is the primary advantage of Tableau Desktop and Power BI over Microsoft Excel?

Advanced data visualization and interactive dashboard creation capabilities.

What is the relevant range in cost accounting?

The range of production volume over which variable costs remain constant per unit and fixed costs remain constant in total.

What is the mathematical equation for total costs?

$y = a + b \times x$, where $y$ is total costs, $a$ is total fixed costs, $b$ is variable cost per unit, and $x$ is production volume.

How is variable cost per unit calculated using the high-low method?

$$\text{Variable Cost per Unit} = \frac{\text{Total Cost for Highest Volume Data Point} - \text{Total Cost for Lowest Volume Data Point}}{\text{Highest Volume Data Point} - \text{Lowest Volume Data Point}}$$

What is the main drawback of using the high-low method to estimate costs?

It relies on only two data points (highest and lowest volume), ignoring all other data points and making the estimate vulnerable to outliers.

In regression analysis output, what do the coefficient of correlation ($R$) and coefficient of determination ($R^2$) represent?

$R$ measures the strength and direction of the linear relationship between variables, while $R^2$ measures goodness-of-fit, or how much of the variance in the dependent variable is explained by the independent variable.

How is contribution margin defined and calculated?

Contribution margin is the amount of revenue available to cover fixed costs and increase operating income, calculated as revenue minus all variable costs ($\text{Contribution Margin} = \text{Revenue} - \text{Variable Costs}$).

What is the formula to calculate break-even point in units?

$$\text{Break-Even Point in Units} = \frac{\text{Fixed Costs}}{\text{Contribution Margin per Unit}}$$

How is the contribution margin ratio calculated, and how is it used to find break-even revenue?

$\text{Contribution Margin Ratio} = \frac{\text{Contribution Margin}}{\text{Sales}}$, and $\text{Break-Even Point in Revenue} = \frac{\text{Fixed Costs}}{\text{Contribution Margin Ratio}}$.

What is the formula for target after-tax profit point in units?

$$\text{Target After-Tax Profit Point in Units} = \frac{\text{Fixed Costs} + \frac{\text{Target After-Tax Profit}}{1 - \text{Tax Rate}}}{\text{Contribution Margin per Unit}}$$

How is the margin of safety ratio calculated?

$$\text{Margin of Safety Ratio} = \frac{\text{Current Sales} - \text{Break-Even Sales}}{\text{Current Sales}}$$

How should a firm optimize production decisions when facing constrained resources?

Maximize the contribution margin per unit of constrained resource.

How is the degree of operating leverage calculated?

$$\text{Degree of Operating Leverage} = \frac{\text{Contribution Margin}}{\text{Operating Income}}$$

How does high operating leverage influence a company's profitability when sales change?

A higher proportion of fixed costs creates higher operating leverage, making percentage changes in operating income significantly greater in response to changes in sales.

How is fixed manufacturing overhead treated under absorption costing versus variable costing?

Under absorption costing, fixed manufacturing overhead is treated as a product cost (capitalized in inventory), whereas under variable costing, it is treated as a period cost (expensed immediately).

Under what inventory condition will operating income be higher under absorption costing than under variable costing?

When production volume exceeds sales volume (ending inventory increases), because a portion of fixed manufacturing overhead is deferred in inventory under absorption costing.