Certainly, let's address the questions in the image you provided:

1. How does managerial accounting differ from financial accounting?

Managerial Accounting focuses on providing financial information for internal decision-
making within an organization. It uses both financial and non-financial information to aid
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in planning, controlling, and decision-making. It is not bound by GAAP (Generally

Accepted Accounting Principles) and can be tailored to the specific needs of the
business.
Financial Accounting is primarily concerned with providing financial information to
external stakeholders, such as investors, creditors, and regulatory agencies. It adheres
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to GAAP and produces financial statements like the income statement, balance sheet,
and cash flow statement.
Key Differences:

Feature Managerial Accounting Financial Accounting

Focus Internal decision-making External reporting

Time Period Future-oriented Past-oriented

Detail Detailed information Summarized information

Flexibility Flexible in reporting Rigid in reporting

GAAP Adherence Not bound by GAAP Adheres to GAAP

2. What is the basic difference between absorption costing and variable costing?
Absorption Costing includes all manufacturing costs, both fixed and variable, in the 3

product cost. This means that fixed manufacturing overhead costs are allocated to each
unit of product produced.
Variable Costing only includes variable manufacturing costs in the product cost. Fixed
manufacturing overhead costs are treated as a period expense and are not allocated to
products.
Key Differences:
 Feature Absorption Costing Variable Costing

Includes all manufacturing Includes only variable

Product Cost
costs manufacturing costs

Fixed Manufacturing
Allocated to products Treated as a period expense
Overhead

Includes fixed manufacturing Excludes fixed manufacturing

Inventory Valuation
overhead in inventory overhead from inventory

Shows gross profit and net Shows contribution margin and

Income Statement
operating income net operating income

3. What is CM ratio? Difference between Traditional Income Statement and

Contribution Margin Income Statement.
CM (Contribution Margin) Ratio is a profitability ratio that shows the percentage of
each sales dollar that contributes towards covering fixed costs and generating profit. It
is calculated as:
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CM Ratio = (Contribution Margin / Sales) * 100%

Traditional Income Statement is organized by function (cost of goods sold, selling and
administrative expenses). It is used for external reporting and tax purposes.
Contribution Margin Income Statement is organized by cost behavior (variable costs
and fixed costs). It is used for internal decision-making and highlights the contribution
margin.
Key Differences:

Traditional Income Contribution Margin Income

Feature
Statement Statement

Organization By function By cost behavior

Contribution margin and net operating

Focus Gross profit and net income
income

Purpose External reporting Internal decision-making

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 Certainly, let's address the questions in the image you provided:

4. What is inventory control?

Inventory control is a process used to manage and monitor the levels of inventory
(stock) within a business. It aims to ensure that the right amount of inventory is available
at the right time to meet customer demand without incurring excessive costs. This
involves balancing the costs of holding too much inventory (carrying costs) with the
costs of not having enough inventory (stockout costs).

5. What are the various inventory models?

There are several inventory models used to determine optimal inventory levels and
ordering quantities. Some of the common models include:

 Economic Order Quantity (EOQ): This model helps determine the optimal order
quantity to minimize the total cost of inventory, considering ordering costs and holding
costs.
 Just-In-Time (JIT): This inventory strategy aims to minimize inventory levels by
producing or purchasing goods only when they are needed.
 ABC Analysis: This method categorizes inventory items based on their value or usage
to prioritize inventory management efforts.
 Reorder Point Model: This model helps determine when to place an order for inventory
replenishment based on the lead time and demand rate.
6. Why is standard cost important? What are the potential problems with the
standard cost?
Importance of Standard Cost:
 Cost Control: Standard costs provide a benchmark for comparing actual costs to
planned costs, helping identify variances and take corrective actions.
 Pricing: Standard costs can be used to set selling prices and determine profit margins.
 Inventory Valuation: Standard costs are used to value inventory for financial reporting
purposes.
Potential Problems with Standard Cost:
 Outdated Standards: If standards are not updated regularly, they may not accurately
reflect current costs, leading to misleading variances.
 Inaccurate Assumptions: If the assumptions used to set standards are unrealistic,
they may not provide a reliable basis for comparison.
 Lack of Flexibility: Rigid adherence to standards may hinder the ability to adapt to
changing circumstances or take advantage of cost-saving opportunities.
7. Define Activity-Based Costing (ABC). What is the difference between ABC and
traditional costing systems?
Activity-Based Costing (ABC) is a costing method that allocates overhead costs to
products or services based on the activities that consume those costs. It recognizes that
different products or services may consume resources in different ways.
Key Differences between ABC and Traditional Costing:

Feature ABC Traditional Costing

Cost Based on activities and Based on a single cost driver (e.g., direct
Allocation cost drivers labor hours or machine hours)

More accurate cost

Accuracy Less accurate cost allocation
allocation

More complex to
Complexity Less complex to implement
implement

Cost Provides detailed cost

Provides less detailed cost information
Information information

8. Define Relevant Cost. All future costs are relevant in decision making. Do you
agree? Why?
Relevant Cost is a cost that differs between alternative courses of action and is
relevant to a specific decision. It helps in making informed decisions by focusing on the
costs that will change based on the chosen option.
I disagree with the statement that "All future costs are relevant in decision
making." Only future costs that differ between alternatives are relevant. For example,
 sunk costs, which are costs that have already been incurred and cannot be recovered,
are not relevant for decision-making.
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Let me know if you have any other questions!

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7. Define Cost-Volume-Profit (CVP) analysis. Explain CM ratio.

Cost-Volume-Profit (CVP) analysis is a managerial accounting technique that
examines the relationship between costs, volume, and profit. It helps businesses
understand how changes in these variables affect profitability.
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CM (Contribution Margin) ratio is a profitability ratio that shows the percentage of

each sales dollar that contributes towards covering fixed costs and generating profit. It
is calculated as:
2

CM Ratio = (Contribution Margin / Sales) * 100%

8. What do you understand by ABC?

ABC stands for Activity-Based Costing. It is a costing method that allocates overhead
costs to products or services based on the activities that consume those costs. It
recognizes that different products or services may consume resources in different ways.
9. Self-imposed budget, what is the difference between standard and budget?
 Self-imposed budget: This is a budget that is set by the individuals or departments
responsible for the activities being budgeted. It encourages ownership and
accountability for achieving the budget targets.
 Standard: A standard is a predetermined level of performance or achievement, often
used as a benchmark for comparison.
 Budget: A budget is a financial plan that outlines expected revenues and expenses for
a specific period.
10. What do you understand by terms operating leverage and break-even point?
 Operating leverage: This refers to the extent to which a company's operating income
changes in response to a change in sales volume. It measures the proportion of fixed
costs in the cost structure.
 Break-even point: This is the point at which total revenue equals total costs, resulting
in neither profit nor loss.
 11. What is the basic difference between absorption costing and variable
costing?
 Absorption Costing includes all manufacturing costs, both fixed and variable, in the 3

product cost. This means that fixed manufacturing overhead costs are allocated to each
unit of product produced.
 Variable Costing only includes variable manufacturing costs in the product cost. Fixed
manufacturing overhead costs are treated as a period expense and are not allocated to
products.
12. Explain how manufacturing overheads are shifted from one period to another
in absorption costing.
In absorption costing, fixed manufacturing overhead costs are allocated to units of
production based on a predetermined overhead rate (e.g., overhead rate per direct
labor hour or machine hour). If production exceeds sales in a period, some of the fixed
overhead costs are deferred to the next period as part of the ending inventory.
Conversely, if sales exceed production, some of the fixed overhead from prior periods is
released from inventory and recognized as an expense in the current period.

13. Explain the three basic guidelines followed in cost and management
accounting.
The three basic guidelines followed in cost and management accounting are:

1. Relevance: Information should be relevant to the decision at hand. It should be timely,

accurate, and specific to the decision being made.
2. Objectivity: Information should be free from bias and based on verifiable facts.
3. Cost-benefit analysis: The cost of gathering and analyzing information should be
justified by the benefits it provides in decision-making.
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14. What are the characteristics of standard cost?

 Standard cost is a predetermined cost that is used as a benchmark for comparison with
actual costs. It is calculated based on estimated costs for materials, labor, and
overhead.

Key Characteristics of Standard Cost:

 Predetermined: It is set in advance before the production process begins.
 Based on Estimates: It relies on estimated costs for materials, labor, and overhead.
 Benchmark for Comparison: It serves as a standard for comparing actual costs to
planned costs.
 Used for Decision Making: It is used to set prices, evaluate performance, and make
other management decisions.
15. What situation is unfavorable in case of standard costing?
An unfavorable situation in standard costing occurs when the actual cost exceeds the
standard cost. This can be due to various reasons, such as:

 Higher-than-expected material costs: This could be due to increased material prices,

inefficiencies in material usage, or spoilage.
 Higher-than-expected labor costs: This could be due to increased labor rates,
inefficiencies in labor utilization, or overtime pay.
 Higher-than-expected overhead costs: This could be due to increased overhead
costs, inefficiencies in production processes, or under-absorption of overhead.
16. Describe how management accountants affect strategic decisions.
Management accountants play a crucial role in strategic decision-making by providing
relevant financial and non-financial information. They help analyze the financial
implications of different strategic options and evaluate the potential risks and rewards
associated with each option.

Key ways management accountants affect strategic decisions:

 Financial Analysis: They analyze the financial performance of the business and
identify areas for improvement.
 Cost Analysis: They provide detailed cost information to help management make
informed decisions about pricing, product mix, and resource allocation.
 Risk Assessment: They assess the financial risks associated with different strategic
options and help develop strategies to mitigate those risks.
 Forecasting and Budgeting: They develop budgets and forecasts to help
management plan for the future and make informed decisions about resource allocation.
 Performance Measurement: They develop and implement performance measurement
systems to track progress towards strategic goals.
17. To be successful management accountants must possess certain values and
behaviors that reach beyond basic analytical abilities. What are those values and
behaviors?
To be successful, management accountants should possess the following values and
behaviors:

 Integrity: They should be honest and ethical in their work.

 Communication Skills: They should be able to communicate effectively with people
from different backgrounds and levels of expertise.
 Problem-Solving Skills: They should be able to analyze problems, identify solutions,
and implement them effectively.
 Critical Thinking Skills: They should be able to think critically and evaluate information
from different perspectives.
 Adaptability: They should be able to adapt to changing circumstances and learn new
skills and technologies.
 Teamwork: They should be able to work effectively with others to achieve common
goals.
18. Elements of Product Cost and Period Cost
 Product Cost: These costs are directly associated with the production of goods or
services. They are typically capitalized as inventory and then expensed when the goods
are sold. Examples include direct materials, direct labor, and manufacturing overhead.
 Period Cost: These costs are not directly related to the production process and are
expensed in the period they are incurred. Examples include selling expenses,
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administrative expenses, and interest expense.

19. Different Variable Cost and Fixed Cost
 Variable Costs: These costs change in direct proportion to the level of activity or
production. Examples include direct materials, direct labor, and variable overhead. 2

 Fixed Costs: These costs remain constant within a relevant range of activity or
3

production levels. Examples include rent, property taxes, and salaries of fixed
personnel.
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