Chapter 1 - Introduction To Management Accounting Flashcards
Purpose of management accounting
Enables the managers of a business to know the cost of the firms output and revenues from sales. This helps managers with decision making, planning for the future, control of expenditure.
Management and financial accounting
These two types of accounting obtain their data from the same set of transactions however they produce different reports and statements.
Costs units and composite cost units
Costs units are units of output to which costs can be charged.
Composite cost units are units of output which comprise two variables
Responsibility centres
Different managers will have responsibilities at different levels, for example: controlling costs, profit, return on money invested and revenue.
Responsibility centres are segments of a business for which a manager is accountable.
Examples: Cost centres, profit centres, investment centres and revenue centres.
Cost centres
Cost centres are segments of a business to which costs can be charged.
A cost centre in a manufacturing business can be a department in a factory or for a college the cost centres can be the teaching departments.
Profit centres
Profit centres are segments of a business to which costs can be charged, revenue can be identified, and profit can be calculated.
Many cost centres can’t become profit centres as they might provide support services which means they do not have any significant revenue.
Revenue centre
Revenue centres are segments of a business where sales revenue is measured. Examples are shop departments, restaurants and cafes.
Investment centres
Investment centres are segments of a business where profit is compared with the amount of money invested in the centre.
Profit is compared with money invested by means of a percentage.
Classification of costs
In order to prepare information for the managers of a business costs must be classified. This can be done in four ways: By element, by nature, by function, by behaviour.
Classification of costs by element
The most basic way of splitting up costs is according to expenditure type.
The different types are materials, labour and expenses. These are often referred to as the three elements of cost.
Classification of costs by nature
Some costs can be indentified directly with each unit of output. For example:
The cost of components used in making cars, the wages of workers on a production line in a factory.
These are direct costs. The total of all the direct costs is called the prime cost of the output.
Classification of costs by function
Looking at the costs incurred in different sections of the organisation according to their function.
When costs are classified by function, the main headings generally used are:
Production, administration, selling and distribution, finance.
In a manufacturing business the main function is production of the goods. Administration, selling and distribution and finance are still all functions however they are known as non production costs.
Classification of costs by behaviour
By behaviour, costs in the short term are fixed, semi variable and variable.
Fixed costs
Fixed costs remain constant over a range of output levels. For example, insurance, rent and business rates.
For fixed costs, the cost per unit falls as output increases.
Fixed costs do not remain fixed at all levels of production. They are also sometimes described as stepped fixed costs because they increase by a large amount all at once.
Semi variable costs
These combine both a fixed and a variable cost. For example an electricity bill includes the fixed charge and the variable amount for each unit of electricity.
Variable costs
Variable costs alter directly with changes in output levels. As output increases variable cost increases.
The cost per unit remains the same at different levels of output.
Costs in the long term
All costs are variable in the long term and the cost behaviours of fixed, variable and semi variable are all short term concepts.
Reasons for classifying costs
By element - looking for the high cost elements to make savings
By nature - looking at the direct and indirect costs to see where savings could be made
By function - Looking at different departments to see which are the high spending ones
By behaviour - looking at the fixed, semi variable and variable costs so that the business might be able to make savings by altering the balance between fixed and variable costs.
These all help with decision making, planning and control.
Calculating the cost of goods and services
When the cost of producing each unit of output is known a business can make decisions about the selling price.
The steps towards calculating the cost of goods and services are:
To indentify the units of output
Calculate the number of units of output for a particular time period
Calculate the direct costs and indirect costs
Calculate the total cost of a unit of output
Total cost statement
Brings together all the costs involved in producing the output of a business.
Once total cost is calculated from the total cost statement we can create a statement of profit or loss.
Difference between product cost and period cost
Product cost are costs that become part of the manufactured product. These are direct materials, direct labour, direct expenses and production overheads.
Product costs are included in the closing inventory of the of the product at the year end.
Period cost are costs that are not part of the manufactured product and cannot be assigned to products or closing inventory.
Period costs which are incurred in a period of time are expensed to the statement of profit or loss in the period in which they are incurred.
The use of spreadsheets in management accounting
Using spreadsheets to present management accounting information will be beneficial as it makes the process of producing management information more efficient and flexible as well as business managers may be able to understand the information more easily due to a clear format.
Integrity
Ethical principle requiring accounting staff to be straightforward and honest in all professional and business relationships.
