Management Accounting and Analysis of Cost Flashcards
who is the audience for management accounting
someone, a manager, inside the organisation
what information does management accounting provide
costing, decision making, planning, performance evaluation
what are the basis for financial decisions
accounting numbers
what is the difference in users between MA and FA
MA applies to internal managers and staff
FA is for all other external users but also internal
what is the difference in the nature of the report between MA and FA
MA reports are for a specific purpose, group or decision
FA is more general in purpose
what is the difference in the level of detail between MA and FA
MA often provides considerable detail - very specific and focused
FA provides a more general overview - lacks detail
what is the difference in availability of MA and FA reports
MA reports are often prepared quickly for current decision making
FA must be reported annually legally and sometimes semi-annually
what is the difference between regulations in MA and FA
MA - there are no regulations on the standard content and formats
FA - legally regulated by external parties
what is the difference in focus between MA and FA
MA - area, division, department, responsibility, product, service, customer, manager
FA - reported for the whole organisation
what is the difference in the time horizon between MA and FA
MA looks to the future using past and present information - forward looking
FA uses past and present information to show what has happened - backward looking
what are some of the types of cost
direct/indirect
production/non-production
fixed/variable
avoidable/unavoidable
relevant/not relevant
sunk
opportunity
incremental
what cost must we know to calculate a selling price
total cost
what is overhead absorption
the process of determining the allocation of indirect costs to a product or service
what are the types of direct costs
direct materials, direct labour, direct expenses, total direct costs/prime cost
what are the types of indirect costs
indirect materials, indirect labour, indirect expenses, total indirect costs
what costs are not considered direct or indirect
non production costs/other overheads
together, what do the direct and indirect costs make up
production costs
direct materials
parts of the finished product, plastic, metal, electronics
direct labour
cost of staff who worked in production
direct expenses
additional linked-to-product expenses
what is the formula for prime cost (total direct cost)
direct materials + direct labour + other direct expenses
indirect materials
materials not part of the finished product, eg machine oils
indirect labour
factory staff not associated with production
indirect expenses
all other factory overheads eg rent, lighting, heating
what is the formula for total production costs
direct + indirect production costs
non-production costs (other overheads)
selling and distribution, administration overhead
what is the formula for total cost
direct + indirect + non-production
what is a contribution
some costs are incurred making a second ‘batch’ of a product but it might be less than the original batch
a contribution contributes towards the costs that will be incurred anyway whether another batch is produced or not
what factors should managers consider before agreeing to a sale
will the order impact current production
will the price lead to more orders in the future
could something else be sold or produced instead
do you want to be associated with the customer you are selling to
(more general: environmental, social, ethical, political, legal, long term prospects, company direction, industry or market risks, reliability of numbers)
absorption
process of sharing out indirect costs over several products or services (very arbitrary)
what is allocated cost per product
some cost incurred/ number of products produced by cost
why do we absorb overheads (main reasons for allocation)
product pricing and to match cost with revenue when calculating profit
why must we allocate for product pricing
to get a good estimate of full cost to set selling price
what are customers willing to pay vs what supplier wants to charge
what is cost-plus pricing
selling price = total cost + profit %
how are indirect costs absorbed
based on a chosen allocation rate
why do we allocate to match cost with revenue
accruals concept and carrying forward inventory (recorded at full cost including allocated overheads) then full cost matched against revenue when sold
what is the traditional allocation rate per product
overhead per unit = total production overhead/number of units
what is traditional allocation rate per direct labour hour
overhead rate per DLH = total production overhead/total number of DHLs
what is traditional allocation rate per machine hour
overhead rate per MH = total production overhead/total number of MHs
what are departmental overhead rates
applying a unique rate to different departments
why might you use departmental overhead rates
different products spend different times in each department
some may be more machine intensive or labour intensive so use different rates
in theory it is a better allocation method to give a more accurate cost
what are the steps in ABC design
1 identify major activities that take place in organisation
2 assign costs to cost pools for each activity
3 determine cost drivers for each activity
4 assign costs of activities to products according to demand for activities
is ABC considered more or less accurate than the traditional method
more
criticisms of ABC
arbitrary cost allocation is still involved in deciding on cost pool
how to decide on best cost driver, and can they be accurately recorded
unused production space will have no activities but still have costs
data: rubbish in/rubbish out
determination of cost pools and cost drivers is complicated and time consuming
