question archive Please can someone help me to answer this question? Thank you Subject: Strategic Management Accounting Cost Concepts & Cost Allocation 1) Respond to this comment from an economist friend: ‘You cost-management analysts use an overabundance of cost terms to cover up the fact that you really do not understand opportunity costs
Please can someone help me to answer this question? Thank you Subject: Strategic Management Accounting Cost Concepts & Cost Allocation 1) Respond to this comment from an economist friend: ‘You cost-management analysts use an overabundance of cost terms to cover up the fact that you really do not understand opportunity costs
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Please can someone help me to answer this question? Thank you
Subject: Strategic Management Accounting
Cost Concepts & Cost Allocation
1) Respond to this comment from an economist friend: ‘You cost-management analysts use an overabundance of cost terms to cover up the fact that you really do not understand opportunity costs. You create jobs for yourselves based on unintelligible jargon. Not that that’s a bad thing.’
2) Evaluate this criticism of the financial management of processes: ‘All this emphasis on operating income, regardless of how you measure it, contributes to our continuing, short-term outlook. If we focus only on operating income, managers will do whatever they can to increase that measure, regardless of long-term impacts. This is what is wrong with modern business. We need to look beyond this period’s operating income and focus on the only term.’
3) A colleague challenges you. ‘What do you mean that there is no such thing as a fixed cost? Pick up any microeconomics or cost accounting book and you will see the term used all the time. We have lots of fixed costs in our organization, don’t we? What about your salary and the depreciation of your computer? Why do you want to replace fixed cost with the committed cost?’
4) For the relevant cost data in items (1)–(7), indicate which of the following is the best classification.
(a) sunk cost (d) fixed cost (g) controllable cost
(b) incremental cost (e) semi-variable cost (h) non-controllable cost
(c) variable cost (f) semi-fixed cost (i) opportunity cost
(1) A company is considering selling an old machine. The machine has a book value of £20,000. In evaluating the decision to sell the machine, the £20 000 is a ...
(2) As an alternative to the old machine, the company can rent a new one. It will cost £3000 a year. In analysing the cost–volume behaviour the rental is a ...
(3) To run the firm’s machines, here are two alternative courses of action. One is to pay the operator a base salary plus a small amount per unit produced. This makes the total cost of the operators a ...
(4) As an alternative, the firm can pay the operators a flat salary. It would then use one machine when the volume is low, two when it expands, and three during peak periods. This means that the total operator cost would now be a ...
(5) The machine mentioned in (1) could be sold for £8000. If the firm considers retaining and using it, the £8000 is a ...
(6) If the firm wishes to use the machine any longer, it must be repaired. For the decision to retain the machine, the repair cost is a ...
(7) The machine is charged to the foreman of each department at a rate of £3000 a year. In evaluating the foreman, the charge is a …
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Q1)
Opportunity Cost
Opportunity cost is the benefit that is foregone by not choosing the next best alternative. Ex: Cost savings that will be lost by choosing one machine over another.
In theory opportunity cost involves the comparison of benefits among alternatives to identify the best. This may seem like a simple concept but evaluating the costs and benefits associated with every possible alternative is practically difficult.
Q2)
OPERATING INCOME
Operating income is the income earned as a result of the company’s operations. It is computed by reducing all operating costs from sales revenues.
Operating income is used as a measure for several things, for managers it may be used a basis for bonus, for the creditors it is a measure of how well the company is doing, for investors it is indicative of future value that will flow to them.
It is for these reasons that management is sometimes forced to adopt legal and illegal routes to improve this number. So much focus is kept on this that the overall goals and objectives of the organisation are lost.
Q3)
COST
Cost can be defined as the sacrifice made in terms of resources given up to achieve a purpose. Based on cost behaviour they are divided into two types variable and fixed.
Costs which do not change with change in the activity level are called fixed costs. Some examples of fixed costs are: depreciation, rent, supervisor salaries etc.
Committed costs are costs which will be incurred irrespective of the decision. Fixed costs on the other hand can be changed. Depreciation, a fixed cost can be changed by altering the method of depreciation used or estimate of useful life. Change in terminology from fixed costs to committed costs will provide an opportunity for the management to question these costs and consider their relevance.
