managment acounting 2

7/28/2019 Managment Acounting 2

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Management accounting: basic terms and

concepts


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Management accounting

information

Components

Costing system

Budgeting system

Performance measurement system

Cost management system

Conventional versus contemporary

approaches


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Conventional vs. contemporary

management accounting systems


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Emphasis on cost

Why do management accountants pay somuch attention to costs?

Historic focus on production costs, to value

inventory and COGS for external reporting Ready availability of cost data within the

transaction-based accounting system

Importance of cost information in managers

decisions

Non-financial information has assumedincreased importance in contemporary

management accounting systems


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Cost classifications

Before classifying costs, need to consider

how managers intend to use the cost

information in decision making

Different cost and classifications are used

for different purposes

The same cost can be classified in a

number of ways depending on the

intended use of the cost informationcontinued


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Cost classifications

What are costs?

Resources given up to achieve a particular

objective

If the benefit extends beyond the current

accounting period these costs are classified

as assets

If the benefit is used, the costs are classifiedas expense

Measured in monetary terms


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Cost behaviour

Managers must understand how costschange as the as the level of activity in thebusiness changes

The level of activity is the level of workperformed in the organisation

Variable costs

Change in total in direct proportion to achange in the level of activity

Sometimes referred to as unit-level costs inproduct costing as they incurred for each unit

of product/service produced

continued


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Cost behaviour

Fixed costs

Remain unchanged in total despite changes

in the level of activity

Can be described as committed costs

Result from an organisations ownership or use of

premises and its basic organisation structure, and

is difficult to change in the short-term

or as discretionary costs

Result from managements decision to spend a

particular amount of money for some purpose, and

can be easily changed

continued


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Cost behaviour

Cost drivers

Any activities or factors that drive (cause)

costs

Conventional approaches focus on

production volume as the level of activity

(or cost driver)

Costs are classified as variable or fixed withrespect to production volume

Contemporary approaches recognise that

other (non-volume) cost drivers exist


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Direct and indirect costs

An important function of managementaccounting is to measure the cost of costobjects

Cost objects are the items for whichmanagement wants a separate measure ofcosts

Products, projects, contracts and departments

are common cost objects in conventionalcosting systems

Contemporary costing systems may alsoinclude activities and customers as cost

objects


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In responsibility centres

The costing system may measure the costs of

managers individual areas of responsibility

Costs that can be traced to a particular

responsibility centre are direct costs of that

centre

Costs that relate to responsibility centres, butcannot be traced precisely to specific

responsibility centres are indirect costs of

those centrescontinued


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Product costs

Manufacturing costs that can be traced to

product in an economic manner are direct

product costs

Indirect costs are manufacturing costs that

cannot be traced to products in an economic

manner Whether a cost is classified as direct or

indirect depends on the nature of the cost

object


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Controllable and uncontrollable

costs Managers performance evaluation can be

enhanced by classifying responsibility

centre costs as eithercontrollable by the

manager oruncontrollable

Ideally, managers should be held

responsible only for costs they can control

or significantly influence

continued


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Controllable and uncontrollable

costs


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Costs across the value chain

The value chaina set of linked

processes or activities that begins with

acquiring resources and ends with

providing and supporting product orservices that customers value

Provides a useful framework for examining

the areas where costs are incurred withina business

continued


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Upstream costs

Research and development costs include the

costs involved in developing new products

and processes

Design costs include the costs associated

with designing a product or production

process Supply costs are the cost of sourcing and

managing incoming parts, assemblies and

suppliescontinued


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Production costs

The costs incurred to collect and assemble

the resources used to produce a product or

service

Downstream costs

Marketing costs are the cost of selling

products and the cost of advertising andpromotion

Distribution costs are the cost of storing,

handling and shipping finished products

Customer service costs are the costs of


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Manufacturing costs

Manufacturing costs are incurred within

the factory area, whereas upstream and

downstream costs are sometimes called

non-manufacturing costs

Manufacturing costs include three

categories: direct material, direct labour

and manufacturing overhead This classification assumes that products are

the relevant cost objects continued


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Manufacturing costs

Direct material

Material that is consumed in themanufacturing process

Physically incorporated into the finishedproducts; and

Can be traced to products conveniently

Direct labour

The cost of wages and labour on-costs of staffwho work directly on manufacturing a product

However, contractual arrangement sometimes

means that such labour is a committed cost

continued


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Manufacturing costs

Manufacturing overhead

All manufacturing costs other than directmaterial and direct labour

Also called indirect manufacturing costs orfactory burden

Includes the cost of indirect material andindirect labour, depreciation and insurance on

factory equipment, utilities and the costs ofmanufacturing support departments

Also includes cost of overtime premium andidle time

continued


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Manufacturing costs

Conversion costs

The total of direct labour and manufacturing

overhead costs

The cost of converting material into product

Prime costs

The total of direct material and direct labour

costs

The major cost associated with producing a

product continued


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Manufacturing costs

Contemporary costing systems analyse

costs in greater detail than under

conventional costing systems

Labour costs, and upstream and downstream

costs may be classified within an activity

framework

In general, direct material tends to be thelargest proportion of manufacturing cost,

and direct labour costs the smallest


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Product costs

Managers need estimates of product costs

for different purposes

In financial accounting reports

To determine cost of goods sold

To value inventory on hand

For decision making

Definitions of product costs that include non-

manufacturing costs may be used


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Cost flows in a manufacturing

business

1. Material is purchased: cost is added to

raw materials inventory

2. Direct materials are consumed in

production: cost is removed from raw

materials inventoryand added to work in

process inventory

3. Direct labour and manufacturing

overhead are accumulated in work in

process inventorycontinued


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Cost flows in a manufacturing

business

4. Products are completed: costs are

transferred from work in process

inventoryand added to finished goods

inventory

5. Products are sold: costs are transferred

from finished goods inventoryto cost of

goods soldexpense

6. Cost of goods sold is deducted from sales

revenue to determine gross profitcontinued


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Cost flows in manufacturing

business

Raw materials, work in processes andfinished goods inventories balances arefound in the Statement of Financial

Position Cost of goods sold expense can be found

in the Statement of FinancialPerformance

The Schedule of Cost of GoodsManufacturedand Schedule of Cost ofGoods Soldsummarise the flow of

manufacturing costs


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Cost and benefits of information

Must determine which cost concepts are

most appropriate in each situation

Benefits of measuring and classifying

costs can be realised through

improvements in the quality of managers

decisions

Information overload occurs when

managers receive more information than

they can use efficiently

managment acounting 2

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