chapter 32 Flashcards
management accounting
the process of preparing reports and accounts that can be used by managers as a basis for making decisions about the future performance of the business
cost accounting
a method of accounting where all the costs associated with a particular activity or product are collected together, classified and recorded
how is data organized in management accounting
the organisation is gathering and analysing information that will be used as a basis for making decisions affecting the future performance and profitability of the firm.
what information do manufacturing accounts provide
They provide us with information about prime cost, overheads and the cost of producing goods. This information is also used substantially in cost accounting to establish costs per unit and give information to managers to help them make informed decisions
cost unit
the unit of output of a business to which costs can be charged, such as a computer for a computer manufacturer or an item of clothing for a dressmaker.
what does direct costs include
direct materials (those materials from which goods are made, and carriage inwards paid on the materials)
direct labour (the wages of workers who actually make goods)
direct expenses (will vary with the number of products such as royalties and license fees).
what do indirect costs include
indirect materials purchased for the factory, (e.g. cleaning materials, lubricating oil for any machinery)
indirect wages- the wages of all factory workers who do not actually make the finished goods (such as factory managers, supervisors, store staff and cleaners)
indirect expenses (will not vary with the number of products such as rent, heating and lighting, depreciation of machinery).
direct materials
the resources used to make a product
indirect materials
goods that, while part of the overall manufacturing process, are not integrated into the final product
first in, first out (FIFO)
a method of inventory valuation that assumes that the first items to be purchased will be the first to be used in production and sold.
average cost (AVCO)
a method of inventory valuation that uses a weighted average to calculate the value of inventory each time new inventory is purchased.
weighted average cost of inventory formula
total cost of inventory/number of units of inventory
perpetual inventory
a method of inventory valuation that maintains a continuous balance of inventory available after each financial transaction.
Periodic inventory
a method of inventory valuation that only shows the balance of inventory at intervals, such as each week or each month.
effect of method of inventory valuation on profits
FIFO and AVCO give different inventory valuation figures, therefore, the method chosen by a business will affect its financial statements. While the profits reported each period will be affected, the profit made over the whole life of a business is not changed by the choice of method of valuing inventory.
advantages of FIFO
It is realistic. Materials are used in FIFO order and goods will be sold in that order, especially perishable goods.
Prices used are those that have actually been paid for goods.
Closing inventory is valued on current price levels.
It is relatively simple to calculate.
disadvantages of FIFO
When prices are rising, the closing inventory in the financial accounts will be priced at the latest (higher) prices. This results in lowering cost of sales and increasing gross profit. This is not consistent with the concept of prudence, although is acceptable under IAS 2.
Identical items of inventory from batches bought at different times may be used for similar jobs, with the result that job A may be charged for the item at a different price from job B. Therefore, quotations for jobs when materials are based on FIFO may be unreliable.
advantages of AVCO
The use of average prices avoids the inequality of identical items being charged to different jobs at different prices.
AVCO recognizes that identical items purchased at different times and prices have identical values.
Averaging costs may smooth variations in production costs, and comparisons between the results of different periods may be more meaningful.
Averaged prices used to value closing inventory may be fairly close to the latest prices.
disadvantages of AVCO
the average price must be recalculated after every purchase of inventory
the average price does not represent any price actually paid for inventory
Just in time (JIT)
a system of manufacturing that uses the principle that supplies should be received exactly when they are needed in the production process and do not need to be stored by the business beforehand.
when does FIFO and AVCO method become unnecessary
If a business does not hold any materials from suppliers in storage, but instead always sends the materials directly to production as soon as they arrive, then the value of inventory of the raw materials or components purchased is zero. As a result, the FIFO and AVCO methods become unnecessary,
why is FIFO and AVCO needed
When inventory is received from a supplier, it is kept temporarily in storage. The inventory will then be issued for use in production as and when it is needed. FIFO and AVCO methods of inventory valuation are typically used by manufacturers to value the raw materials and components that are held before being used in production.
what happens when JIT inventory management is met
then the manufacturer holds no inventory of raw materials or components
challenges of JIT
In particular, the business must be confident that its suppliers are completely reliable and will always deliver good quality raw materials and components on time. If this does not happen it will lead to a shortage of suppliers, which will stop production.
benefits of JIT
Businesses that do use JIT successfully have lower levels of inventory. These businesses will then benefit from having less cash tied up in inventory and lower storage costs, and the inventory is less likely to be stolen or become damaged.
piece rate
a wage rate paid to workers based on the number of units of output produced
overtime payment
an amount paid to an employee for working longer than the time they are contracted to work
bonus payment
the additional amount paid to an employee for reasons such as producing goods more quickly than the time allowed
overtime premium
the additional amount given to employees for overtime working. some business treat it as as indirect labour
For example, if an employee is paid overtime at a rate of 50% above their normal hourly rate (or time and a half), the extra 50% is the overtime premium.
direct labour cost
If the wages paid to employees can be linked directly to the cost unit then they are regarded as direct labour
indirect labour cost
the cost of labor that is not directly related to the production of goods and the performance of services
three ways in which a worker can be paid
an hourly rate
piece rate
a salary (the most common method for paying indirect labour)
additional amount paid to employees
overtime payment or bonus payment
problem with piece rate
A possible problem with piece rate is that work may be rushed, meaning the quality of the finished article may be an issue. Alternatively, workers may take longer than expected to complete the work, which may cause problems with a customer. Where the piece rate method is used, it is up to management to carefully consider both the time taken and the quality of work produced by the worker.
