Introduction to Management Accounting Revision

What is the role of management accounting?

1. Developing plans and analysing alternatives. 2. Communicating plans to key personnel. 3. Evaluating performance. 4. Reporting the results of activities. 5. Accumulating, maintaining, and processing an organisation's financial and non-financial information.

Unit variable cost =

Change in cost divided by the change in units

What is direct labour?

Those labour costs that can be easily traced to individual units of product.

What are direct materials?

Those materials that become an integral part of the product and that can be conveniently traced directly to it.

Fixed cost =

Total cost - Total variable cost (unit variable cost times units)

Define variable costs?

Total costs that change in direct proportion to changes in productive output are called variable costs. On a per unit basis, however, variable costs remain constant as volume changes.

What is a cost object?

"Anything for which cost data are desired" Examples include: - units of product/service - organisational departments/sections

What is Management accounting?

"The process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources."

What is the process of cost objectives and cost classifications?

1. Assigning costs to cost objects - traceability (direct or indirect). 2. Financial reporting - inventoriable or expensed (product or period). 3. Predicting cost behaviour in response to changes in activity (fixed or variable). 4. Assessing performance (controllable or uncontrollable). 5. Making decisions (differential, sunk, opportunity).

What are mixed costs?

A mixed cost has both fixed and variable components. Part of the cost changes with volume or usage, and part of the cost is fixed over time.

What is a predetermined rate?

A set rate which, when applied to cost units passing through the cost centre, will absorb or "pick up" all the overheads attributable to that cost centre. Rate =estimated OH costs for period estimated productive capacity for period Use different rates for each department.

Absorption versus Variable Costing

Absorption - All manufacturing costs must be assigned to products to properly match revenues and costs Depreciation, taxes and salaries are just as essential to products as variable costs Variable - Fixed costs are not really costs of any particular product These are capacity costs and will be incurred if nothing is produced

Difference between an absorption and variable costing system?

Absorption costing the fixed mfg. overhead is included in product costs. Variable costing the fixed mfg. overhead is included in the period costs.

How can we reconcile the difference between absorption and variable income?

Add: Fixed mfg. overhead costs deferred in inventory.

What is a cost objective?

Any activity for which a separate measurement of costs is required.

What is Continuous order costing?

Applicable where goods/services are mass produced from repeated procedures Process costing: Outputs are identical/nearly identical Cost units rarely separable Costs attributed to process and averaged over units

What is Specific order costing?

Applicable where the output is produced to the customer's specification Job and contract costing: Many products separately identifiable Costs attributed to individual jobs/contracts Cost records maintained for each job/contract Job costing smaller scale and shorter term than contract costing

Code of ethics for management accountants

Avoid activities that could affect your ability to perform duties Refrain from activities that could discredit the profession Communicate unfavourable as well as favourable info Refuse gifts or favours that might influence behaviour

Similarities between two types of accounting?

Both predominately quantitative Share certain data sources Both are key elements of the MIS

Types of fixed cost?

Committed (can't be reduced in the short term) Discretionary (may be altered in short term)

What is the manufacturing overhead?

Consists of indirect labour and materials: wages paid to employees who are not directly involved in production - materials used to support the production process.

What is cost behaviour?

Cost behaviour refers to how costs change in relation to volume or activity. - Some costs vary with volume or operating activity. - Others remain fixed as volume changes. - Some costs exhibit characteristics between these two extremes.

What is Cost Clarification?

Cost clarification is essentially a matter of grouping together costs which share the same attribute(s) relative to a stated cost objective. Note: The cost objective should determine the classification to be used. Changing the cost objective may alter the categorisation of a specific cost within a given classification.

Explain the cost/benefit criterion.

Cost of obtaining information should not outweigh the benefit of possessing it.

What are Differential costs and revenues?

Costs and revenues that differ among alternatives.

Differences between two types of accounting? (financial - managing)

Decision: external person financial decisions - managers plan for and control organisation. Time focus: Historical perspective - future emphasis. Emphasis: verifiability and precision - relevance for planning and control. Frequency: prepared on regular basis - on ad hoc basis. Focus: primary focus on whole organisation - focus on segments of organisation. Format: must follow GAAP and prescribed formats - flexible based on users' needs.

Examples of fixed costs?

Depreciation Rent Supervisory salaries Auditors' fees

How do we allocate Employees ticket time?

Direct labour - job cost sheets Indirect labour - manufacturing overhead account

Examples of absorption rates

Direct labour hour rate = Estimated overheads for the year over Estimated direct labour hours for the year = Rate per hour. Direct material percentage = Estimated overheads for the year x 100 over Estimated direct material costs = The rate.

3 elements of Job-Order costing?

Direct material Direct labour Both are traced directly to each job Manufacturing overhead All costs that are necessary for production but can't be directly attributed have to be attached

What are the manufacturing cost factors?

Direct materials Direct labour Manufacturing overhead

How do we allocate Materials requisition?

Direct materials - job cost sheet Indirect materials - manufacturing overhead account

Examples of variable costs?

Direct materials. Direct and indirect labour (hourly). Operating supplies. Sales commissions.

Ethics in accounting

Ethical accounting practices build trust and promote loyal, productive relationships with users of accounting information. Many companies and professional organizations, such as the Chartered Institute of Management Accountants (CIMA), have written codes of ethics which serve as guides for employees.

What is Financial accounting?

Financial accounting provides information to shareholders, creditors and others who are outside the organization.

Define fixed costs?

Fixed costs are costs that remain constant within a relevant range of volume or activity. On a per unit basis, however, fixed costs vary inversely with changes in volume.

Factors that increase the need for management accounting info

Increasing complexity of org Regulatory environment World-wide competition Rapid development and implementation of tech Increase emphasis on quality

Explain the trend towards fixed costs?

Increased automation. Increase in salaried knowledge workers who are difficult to train and replace.

New tools for managers

Just-In-Time Total Quality Management Process Reengineering Theory of Constraints

What are the bases for selecting absorption rates?

Machine hours Direct labour hours Direct wages Direct materials Prime cost No. of units.

Why is a predetermined rate useful?

Makes it possible to estimate total job costs sooner as actual overhead for the period isn't known until the end of the period.

Advantages of the contribution approach

Management find it easier to understand Consistent with CVP analysis Net income is closer to net cash flow Consistent with standard costs and flexible budgeting Easier to estimate profitability of products and segments Profit is not affected by changes in inventories Impact of fixed costs on profits emphasised

Explain the management cycle?

Managers use their knowledge of cost behaviour to estimate future costs and the impact of operational changes on future profitability. Managers use assumptions about cost behaviour in almost every decision they make. Managers must understand cost behaviour patterns to anticipate cost ramifications of alternatives in order to decide correctly.

Difference of costs and inventories for manufacturers vs retailers

Manufacturers - must accumulate the costs of manufacturing products and their inventory consists of materials, work in progress and finished goods. Retailers - accumulate the purchased cost of the goods and they only have one type of inventory (merchandise inventory).

What are the non-manufacturing costs?

Marketing and selling costs . . . Costs necessary to get the order and deliver the product. Administrative costs . . . All executive, organisational, and clerical costs that cannot be reasonable assigned to manufacturing or marketing

info used for organisational objectives however what problems can occur?

Objective(s) may be poorly defined there may be several objectives in conflict objectives could change over time.

Stage 2 (absorption)?

Once costs have been allocated / apportioned to departments, they must then be charged out to units - using a fair and logical basis. Information needed: 1. OH cost for the period 2. Productive capacity available in that period Total overhead costs must be charged to all units produced in proportion to the amount of productive capacity used up in making each unit.

Examples of activity base?

Petrol cost varies with the miles driven. Petrol cost is fixed w.r.t. how many people are driven in the car. Road tax is fixed w.r.t. miles driven. Road tax varies with the size of the vehicle.

How can we combine manufacturing costs?

Prime cost - direct labour and direct materials Conversion cost - direct labour and manufacturing overhead

What is the difference between product costs and period costs?

Product costs include direct materials, direct labour, and manufacturing overhead. Inventory - goods sold - Sale - Balance sheet - P/L account/IS Period costs are not included in product costs. They are written off to the P/L account Expense P/L account/IS

Two types of cost centre in a manufacturing company?

Production cost centres and service cost centres. Expenses are allocated to those cost centres to which they obviously belong.

Impact of JIT Inventory Methods in a JIT inventory system

Production tends to equal sales so the difference between variable and absorption disappears

How does production and sales effect the relationship between variable and absorption income?

Production>Sales Inventory increases Absorption>Variable Production<Sales Inventory decreases Absorption<Variable Production=Sales No change in inventory Absorption=Variable

Examples of appointment to cost centres?

Rent of building - floor area Lighting - floor area Power for machines - number of machines Canteen costs - number of employees

Difference between retail and manufacturing activity?

Retail - buys finished goods and sells finished goods Manufacturers - buy raw materials and produce and sell finished goods

What appears on balance sheet retail vs manufacturer?

Retailer: Current Assets, Cash, Debtors, Prepayments, Stocks, Manufacturer: Current Assets, Cash, Debtors, Prepayments, Stocks (Raw Materials, Work in Process, Finished Goods)

Variable Costs change for Different Types of Organisation, how?

Retailers Costs of goods sold Manufacturers Direct material, direct labour and variable manufacturing overhead Service organisations supplies and travel Retailers and Manufacturers sales commissions and shipping costs

What is the relevant range?

Seldom is a fixed cost fixed over all levels of activity. The relevant range is the volume range within which actual operations are likely to occur.

How are overheads assigned to each job?

Stage 1: Overheads are assigned to departments or cost centres. Stage 2: Costs accumulated in cost centres are assigned to products.

What are Sunk costs?

Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when making decisions.

The contribution format

The contribution margin format emphasizes cost behaviour. Contribution margin covers fixed costs and provides for profit.

What do both manufacturing and retail report?

The cost of unsold goods on the balance sheet. The cost of goods sold on the profit and loss account/income statement.

What are Opportunity costs?

The potential benefit that is given up when one alternative is selected over another.

What is the Job cost sheet

The primary document for tracking the costs associated with a given job.

What is an activity base?

The thing a variable cost differs with. cost may be variable to one activity base but fixed to another.

What happens if expenses cannot be allocated?

They are apportioned (divided up on a fair logical basis). Costs apportioned to service cost centres are re-apportioned to production cost centres. Total overhead costs of each production cost-centre are absorbed within products by means of absorption rates as they pass through the cost centres.

What is the predetermined overhead rate (POHR) used for?

To apply overhead to jobs. POHR = estimated total manufacturing overhead cost for the coming period over estimated total units in the allocation base for the coming period.

Why do we need to separate mixed costs?

To produce income statements under both methods, variable costs need to be distinguished from fixed manufacturing overhead.

What are the two costs and how do they react differently?

Total variable costs change when activity changes. Total fixed costs remain unchanged when activity changes.

Methods to correct under-applied and over-applied overheads

Under-Applied - increase cost of goods sold (Close to cost of goods sold) or increase either WIP FG or cost of goods sold (allocation) Over-Applied - decrease cost of goods sold (Close to cost of goods sold) or decrease either WIP FG or cost of goods sold (allocation)

Stage one of allocation and appointment?

Where a cost is directly attributable to a department, allocation can take place. Non-allocable costs, however, must be apportioned on some logical basis. The basis of apportionment varies from department to department.

How do we show overheads flow summary?

employee time ticker, other OH charges and material requisition ---- manufacturing overhead ------ job cost sheet

What method can we use to super the mixed costs?

high-low method

Characteristics of useful info.

relevance understandability timeliness comparability reliability completeness