Question 6–1

Management accounting information is not regulated by law or by accounting standards. Managers can do whatever they like when preparing management accounts. Why is this? Why do you think management accounts are not regulated?

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Question 6–2

There are many types of costs such as direct costs, indirect costs, fixed costs, variable costs, period costs and product costs. There are also many ‘systems’ and techniques accounting can use to move these costs around within a firm, such as job-costing, process-costing, functional-based costing, activity-based costing, absorption and variable costing and predetermined overhead absorption rates. Why is it all so complex? Why isn’t keeping track of costs in a firm simpler than this?

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Question 6–3

How do the concepts of fixed and variable costs and break-even points help or hinder managers lead and manage a firm?

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Question 6–4

Why do we usually use the word ‘allocate’ to refer to attaching direct costs to cost objects such as production and service departments? Why do we usually use the word ‘apportion’ to refer to attaching indirect costs to cost objects such as production and service departments? Why do we usually use the word ‘absorb’ to refer to attaching costs to products? Does any of this make sense to you? Why or why not?

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Question 6–5

There are two identical firms, B1 and B2. One firm (B1) uses absorption costing to value its products and thus its inventory; the other firm (B2) uses variable costing. The inventory levels of both firms increase significantly during the year (by the same amount). Although the economic and business realities of each firm are identical in every respect, one firm achieves a significantly higher profit than the other during the year. Which firm achieves the higher profit? Why?

Given different accounting treatments can result in different profit figures for our firms B1 and B2, even though the underlying economic and business realities of each firm are the same, what does this say about the idea of ‘profit’? Is a firm’s profit the profit? Why or why not? Is profit something real, or is it simply a construct, something we make up based on several ideas and concepts in accounting? What does your answer to the last question suggest to you is the role of accounting in business? Indeed, does it even have a role?

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