Introduction to Management Accounting and Cost Classification Flashcards
What is cost accounting?
CIMA definition?
Aka (3)
The establishment of budgets, standard costs and actual costs of operations, processes, activities or products; and the analysis of variances, profitability or the social use of funds. (CIMA)
Aka cost control, budgeting and decision-making
Major Themes in Management Accounting (3/2,1,2)
- CONTROL - one of many control systems within an organisation, e.g. product, quality, stock etc.
However it is the key financial control system because it monitors the results of all activities and all other control systems.
- DECISION MAKING - cost information provides the basic information from which management decisions are made.
- PLANNING - here cost information is used in two ways;
1. to estimate future costs for planning purposes 2. to establish standards against which to compare actual costs
Financial Accounting Perspective (1)
Emphasis on (2)
Broader, overall view of the organisation,
emphasis on:
- type of transaction e.g. sales, purchases and
- type of expense e.g. salaries, material
Management Accounting Perspective
Emphasis on (6)
Note - Strategic Management Accounting also looks at ___________ __________.
Emphasis on:
- functions,
- activities,
- products,
- processes and on
- internal planning and
- control information.
Note – Strategic Management Accounting also looks at external elements.
Essential Requirements of a Management Accounting System (5)
Relevant
- Appropriate to the organisation, to cover all areas required
Timely
- To produce information at the right time (both long-term and short-term plans)
Accurate
- As far as possible
(Economically)
Flexible
- Capable of expansion or change
Relevant
- To managers
Financial and Management Accounting Comparison
Users (3,2)
Scope
Timeliness
Focus (3,2)
Nature (1&2)
Rules (3,1)
Users
Financial:
Outsiders:
- Investors - Bankers - government
Management:
Insiders:
- Managers - employees
Scope
Financial
- Consolidated
Management
- Segmented
Timeliness
Financial:
- Past
Management:
- Past/Present/Future
Focus
Financial:
- Define by Companies Act & Regulatory Bodies - External focus
Management:
- On specific areas for decision making - Internal focus
Nature
Financial:
- Mainly financial
Management
- Both financial & non-financial
Rules
Financial:
Strict:
- FASB(UK) - ASB (UK) - IASB
Management:
- No legal requirement
Management Information System
A combination of:
- ___________ procedures,
- suitably designed _____,
- an appropriate _____________structure and
- managers who are capable of __________the _________which is ____________, to assist them in the ______________ and use of available ___________.
A combination of:
- planned procedures,
- suitably designed forms ,
- an appropriate organisation structure and
- managers who are capable of utilising the output which is produced, to assist them in the administration and use of available resources.
Costs
Drury definition, cost refers to?
One product may have many different costs such as it’s ______cost, _________ cost, _________ ______ cost, etc. depending on the __________ __________ used or required
Different costs will be required to make _________ __________, e.g. buy or make decision will require the __________ ______ info
“Cost refers to the monetary measure of resources sacrificed or foregone to make a product or provide a service” – Drury
One product may have many different costs such as it’s total cost, variable cost, activity based cost, etc. depending on the costing system used or required
Different costs will be required to make different decisions, e.g. buy or make decision will require the variable costs info
Costs and Cost Behaviour terminology
What is a cost object?
What are direct costs?
What are indirect costs?
What are cost drivers
Cost object:
- any activity for which cost information is required, eg. Product (such as the daily newspaper) or service (such as the cost of operating a government agency)
Direct Cost:
costs that can be directly traced to a cost object (e.g. materials for manufacturing a product)
Indirect cost:
costs which cannot be specifically or directly traced to a cost object (salary of the manufacturing plant’s supervisor). Therefore a cost allocation method is required
Cost driver: any factor which causes a change in cost of an activity e.g. orders received
Cost Behaviour
Definition?
A number of cost behaviour patterns are possible, ranging from __________ costs whose cost level varies directly with the level of activity, to _______ costs, where changes in output have no effect upon the cost level. (CIMA)
The variability of input costs with activity undertaken.
A number of cost behaviour patterns are possible, ranging from variable costs whose cost level varies directly with the level of activity, to fixed costs, where changes in output have no effect upon the cost level. (CIMA)
What is a fixed cost
What can it also been known as and why?
2 examples?
Diagram?
The cost which is incurred for an accounting period, and which, within certain output and turnover limits, tends to be unaffected by fluctuations in the levels of activity output or turnover)
(CIMA)
Also known as Period Cost to highlight the fact that a fixed cost is incurred according to the time elapsed, rather than according to activity
e.g. rent and insurance
What is a variable cost
2 examples?
A cost which tends to vary with the level of activity (CIMA)
e.g. direct labour, direct material
Semi Variable Cost
What is a Semi - Variable Cost
And 2 examples
aka (2)
Diagram?
A cost containing both fixed and variable components and which is thus partly affected by fluctuations in the level of activity
(CIMA)
eg. gas, electricity
Also known as semi - fixed or mixed cost
What is Stepped Fixed Cost
1 example
The cost is constant within the relevant range for each activity but when a critical level of activity is reached, the total cost incurred increases to the next step.
eg. equipment rental
Non - Linear Variable Costs
What is it sometimes called?
2 types and their description and names?
Sometimes called curvi - linear variable costs
Accelerating Bonus graph becomes steeper as activity increases, each successive unit is adding more to the costs than the previous one
Quantity discount graph becomes less steep as activity increases, each successive unit adds less than the previous one
Analysis of Semi - Variable Costs
What 3 methods can establish the separation of the fixed and variable elements?
The separation of the fixed and variable elements can be established via:
a. the high - low method
b. the scattergraph method
c. the least squares method
The high-low method
What would variable and fixed costs be?
How to Analyse Costs
When comparing costs at two activity levels:
If the same amount of cost is shown ______, then clearly it is a ______ cost.
If, when dividing the amount of cost by the number of _____, if the answer is the same ______, then it is a __________cost, if it differs, then it is a _____ _________ cost.
When comparing costs at two activity levels:
If the same amount of cost is shown twice, then clearly it is a fixed cost.
If, when dividing the amount of cost by the number of units, if the answer is the same twice, then it is a variable cost, if it differs, then it is a semi variable cost.
Costs and Cost Behaviour
Relevant and irrelevant costs
Avoidable and unavoidable costs
Sunk costs
Opportunity costs
Incremental costs
Relevant and Irrelevant Costs:
Relevant Costs are costs that will be directly affected by a specific managerial decision. These costs are future-oriented and differ between alternatives.
Irrelevant Costs are costs that will not be impacted by the decision at hand and will remain unchanged regardless of the alternative selected.
Avoidable and Unavoidable Costs:
Avoidable Costs are expenses that can be eliminated if a decision is made to discontinue an activity or project.
Unavoidable Costs are expenses that will continue to be incurred regardless of the decision taken.
Sunk Costs:
Sunk Costs are past expenditures that cannot be recovered and should not influence current decision-making since they will not change regardless of the outcome.
Opportunity Costs:
Opportunity Costs represent the value of the next best alternative that is forfeited when a decision is made to pursue a certain action. This concept emphasizes the potential benefits missed out on when choosing one option over another.
Incremental Costs:
Incremental Costs (or Marginal Costs) are the additional costs incurred when producing one more unit of a product or service. These costs can be directly linked to a change in the level of activity or production.
Organisation as a Value Chain
What is a Value Chain?
- All organisations are providing a service or product for profit or otherwise
- The organisation has a sequence of activities in providing that product or service
- The series of activities can be called a Value Chain
Organisation as a Value Chain
Activities will include: (4/6,4,5,3)
INPUT ACTIVITIES
- Product Design,
- process design,
- purchasing,
- receiving,
- hiring,
- training.
PROCESSING ACTIVITIES
- Making,
- moving,
- storing and
- inspecting
ADMIN ACTIVITIES
- Personnel,
- finance,
- legal,
- accounting,
- research
Output activities
- selling,
- shipping,
- AS service (after-sales) service)
Accounting for these Organisational Activities
- Costs must be _______________ to all of the ______________ resulting in a final ___________ ___________.
- The process of attributing costs to the activities is called _____ _____________ and there are various methods used by companies to do this.
- These methods include ___ costing, _________ costing, _________ ________ costing.
- Costs must be attributed to all of the activities resulting in a final income statement.
- The process of attributing costs to the activities is called cost accounting and there are various methods used by companies to do this.
- These methods include job costing, process costing, activity based costing.
Income statements/Balance sheets (3)
In ______________ the _________ for a __________________ _______________ the income statement and balance sheet will differ in certain respects
What will the balance sheet include?
What will the income statement contain?
In ascertaining the profits for a manufacturing organisation the income statement and balance sheet will differ in certain respects
The balance sheet will include raw materials (not yet used in production), work in progress (ongoing production) and finished goods (not yet sold)
The income statement will contain a term ‘cost of goods manufactured’ as well as ‘cost of goods sold.’
Cost Classification Framework - Total Cost Build Up (picture)
Product Cost (Example) (picture)
