Functions Of Management Accounting Flashcards
The managers of business carry out functions of
Planning, decision making and control
Decision making
- central to management of an enterprise
- decisions on resources (people, products, services) and activities (how to undertake them)
Control
- once a decision has been made management must be in a position to control the activity
- to carry out the control function, a management control system is needed
Planning
- strategic planning- preparing, evaluating and selecting strategies for long term plan of action
- operational planning- detailed plans by which those working within and organisation are expected to meet the short term objectives
- corporate strategic planning
- business strategic planning
Management accounting supports management functions by
Directing attention, keeping the score and solving problems
Contingency theory
Explains how management accounting methods have developed in a variety of ways depending on the judgements of decisions required
Strategic management accounting
Pays particular attention to the provision and analysis of financial information on the firms product markets and competitors’ costs and cost structures, and the monitoring of the enterprises strategies and those of its competitors in these markets over a number of periods
Costs may be classified using the definitions
- fixed/variable cost
- direct/indirect cost
- product/ period cost
The choice of cost classification
Should be matched to the management function of planning, decision making or control
Cost coding
Is essential to make the cost classification system operational in a computer-based recording system
Cost classification must be relevant to
The responsibility level for which the costs are reported, which may be a cost centre or a profit centre or an investment centre
Variable costs
One in which varies directly with changes in the level of activity over a defined period of time
Total product cost
Consisting of direct materials, direct labour and production overheard cost
Prime cost
Cost of direct materials, direct labour and other direct costs of production
The purchasing, storage and use of materials are controlled by
Documentation and processes that are designed to safeguard the assets and ensure the accuracy of recording systems
FIFO (first in first out)
LIFO (last in first out)
Methods of pricing the issue of goods from inventory, and the valuation of inventory, in times when prices are changing
What is important in accounting for materials
- documentation
- the distinction between direct and indirect costs of materials
- fixed and variable costs of materials
Direct cost
Cost directly traceable to an identifiable unit, such as a product or service or department of the business, for which costs are to be determined
Indirect cost
Cost that is spread over a number of identifiable units, such as a product or service or department of the business, for which costs are to be determined
The cost of waste and scrap are indirect costs that form part of the total
Production cost
Any cash received for scrap should be deducted from the cost of buying the materials
Labour costs
Recorded and controlled in a way that ensures employees are paid correctly for work done and labour costs of activities are recorded accurately
Scrap
Waste material to be sold at a very low price in relation to original cost
Labour costs
Recorded and controlled in a way that ensures employee are paid correctly for work done and labour costs of activities are recorded accurately
Accounting for labour
Concerned with whether costs are direct or indirect and distinction between fixed and variable costs of labour
Total product cost
Defined as consisting of direct materials, direct labour and production overhead costs
Production overhead costs
Comprise indirect materials, indirect labour and other indirect costs of production
Allocation
Of indirect costs to cost centres means that the entire cost item is identified with one cost centre
Apportionment
Of indirect costs across cost centres means that the cost item is shared across those cost centres on some basis which is a fair representation of how the cost item is used by each cost centre
Absorbtion
The process by which overhead costs are absorbed into units of output or ‘jobs’
To ensure the best results the scheme of apportionment and absorption must be
- fair to all parties involved in the process
- representative of the benefit each party gains from the shared cost
- relatively quick to apply so that the provision of information is not delayed; and understandable by all concerned
Traditional approach to product costing
Sequence of allocate, apportion and absorb
Activity based costing (ABC)
Traces overhead costs to products by focusing on the activities that drive costs (cause costs to occur).
Provides a method of spreading overhead costs
Process of product costing
Costs are collected in cost pools then spread over products based on cost per unit of activity for the activity in question
Costs are then allocated to products on the basis of a cost per unit of activity
Cost drivers
have taken on an increasingly important role in apportioning indirect costs to cost centres
Contemporary management accounting practise
Focuses on the accountant becoming part of the operational team so as to ensure that the job costs derived are understood and reflect the factors that drive the costs to be incurred
Job costing system
A system of cost accumulation where there is an identifiable activity for which costs may be collected. The activity is usually specified in terms of a job of work or a group of tasks contributing to a stage in the production or service process
Job-cost record
Shows the costs of materials, labour and overhead incurred on a particular job
Prime cost of production
Is equal to the total of direct materials, direct labour and other direct costs
Total product cost
Comprises prime cost plus production overhead cost
Absorption costing (full costing)
All production costs are absorbed into products. The unsold inventory is measured at total cost of production
Fixed production overhead costs are treated as a product cost
Marginal costing (variable costing)
Only variable costs of production are allocated to products. The unsold inventory is measured at variable cost of production
Fixed production overhead costs are treated as a period cost of the period in which they incurred
What may arise in absorption costing
Under absorbed or over absorbed fixed overhead
It is reported in the profit and loss statement as an adjustment to cost of sales
Profit under absorption costing differs from profit under marginal costing when
Inventory levels are changing. If total production equals total sales there is no difference in total profit
When inventory levels are falling
Profit under absorption costing is lower than profit under marginal costing
The difference is equal to the decrease in inventory levels multiplied by the fixed overhead cost rate
When inventory levels are rising
Profit under absorption costing is higher than profit under marginal costing
The difference is equal to the increase in inventory levels multiplied by the fixed overhead cost rate
When is absorption costing usually required
For inventory valuation in financial accounting standards or other regulations
Those using such financial statements need to be aware that reported profit can be affected by the change in the volume of inventory over the period
Marginal costing
May be more useful for decision making because it treats fixed production overhead costs as a cost of the period
Reported profit is not affected by the changes in inventory held
