Management Information Flashcards
What is the cost accountant tasked with?
Providing;
- the cost of goods or services
- the cost of operating a department
- revenues
Cost accounting is concerned with providing information to assist what?
- establishing inventory valuations, profits or losses and balance sheet items
- planning
- control
- decision making
Financial accounting vs management accounting
F-> external, must comply with regulations, created annually, focus on company as a whole, historic over past year, accurate and audited
M-> internal, no rules or regulations, created when needed, focus on specific area, past and forward looking, flexible and timely can be approximate
Production department vs non-production department
Production department are actively involved in the production, non-production departments provides a service or back-up to the production departments
Cost objects
Any activity for which a separate measurement of cost is desired e.g. the cost of a product, the cost of a service, the cost of operating a department
Cost unit
A unit of product or service to which costs can be related e.g. patient in hospital, Barrera in brewing industry, room in hotel
Composite cost units
Two part cost units
Used often in service organisations and can provide a more useful measure
Direct costs
Costs directly attributable or identified with a cost object
Indirect costs
Costs that are derived from overheads and aren’t directly linked to making products or delivering services
Prime cost
Is the total direct cost
Direct material cost+ direct labour cost+ direct expenses
Fixed cost
A cost that is not affected by changes in the level of activity e.g. rent, salary
They are fixed in total costs but variable in unit costs ( decreases as volume increases (economies of scale))
Variable cost
Cost that is affected as the level of activity changes e.g. raw materials and direct labour
They are variable in total cost but fixed in unit cost
Semi-variable cost
Costs that include a mixture of fixed and variable costs e.g. electricity bills with a standing charge and commission on sales generated of sales personable who get a basic salary
Relevant range
The range of activity levels within which assumed assumptions about variable and fixed costs are valid
Responsibility accounting
A type of management accounting in which a company’s management, budgeting, and internal accounting are all held accountable
Responsibility centre
An organisational unit headed by a manager, who is responsible for its activities and results
Controllable cost
Costs that can be influenced or regulated by the manager
Uncontrollable cost
An expense over which a person has no direct control
ICAEW fundamental principles
- integrity
- objectivity
- professional competence and due care
- confidentiality
- professional behaviour
Planning decision making and control process
Set objectives-> identify alternatives-> make decision-> implement decision-> compare actual results with plans-> revise objectives or take control action
Strategic planning
Long term, setting the broad objectives in the long term e.g. achieving a return on an investment. It is the responsibility of top management
Tactical planning
Short term, operational planning for the running dat-to-day operations of the business. It is the responsibility of the middle and low level management
Production costs
Those identified with goods produced for resale
Non-production costs
Costs deducted as expenses such as admin, selling, distribution and finance
Period costs
Costs that are deducted as expenses during a specific period of time without being part of the inventory value
Revenue centre
Collecting place for revenues before they are analysed further
Cost centre
A collecting place for costs
Profit centre
Similar to a cost centre->Managers are responsible for costs and revenues
Investment centre
Profit centre with extra responsibilities
Estimating elements in semi variable costs
Total ,mixed cost Y=a +bx
High low method
High low method
Change in cost (H-L)/change in units (H-L)
Regression
Involves modelling and estimating the relationships between variables
Use to predict the value of one variable based on the value of another variable
Independent variable
The one that is used to predict the values of the other variable. Plotted along the x axis
Dependent variable
The one whose values are predicted by the independent variable. Plotted along the y axis
Linear regression
A statistical method used to establish a straight-line equation showing the relationship between 2 variables
Correlation
The degree to which one variable is related to another- the closeness of the relationship
+1 strongly positively correlated
0 no correlation
-1 strongly negatively correlated
The coefficient of determination
R^2
Measures the proportion of change in one variable that is explained by variations in the value of the other variable
Regression analysis linear model assumptions
-the dependent and independent variables show a linear relationship between the slope and intercept
- the independent variable is not random
-the value of the residual is zero
- the value of the residual is constant across all observations
-the value of the residual is not correlated across all observations
-the residual values follow the normal distribution
Residual
The distance between each point on the scatter diagram and the line of best fit
Cost of sales equation
Opening inventory + purchases - closing inventory
What does inventory include
Raw materials used in production process
Work in progress
Finished goods
Products bought for resale
Office consumables or stationery
First in first out (FIFO)
Oldest items always sold first
Ensures good inventory rotation
Last in first out (LIFO)
Assumed that inventory is always issued from the most recent delivery
Advantageous as it charges up to date prices to jobs but the material in inventory will be valued at out of date prices
Weighted average cost (AVCO)
Total cost of goods in inventory/ total units in inventory
2 types;
Periodic weighted average
Cumulative weighted average
Periodic weighted average
Based on the whole of the periods purchases
Total cost/total units
Cumulative weighted average
Recalculates the weighted average price every time a receipts occurs
Why overhead cost is important
Understand and control cost
Inventory valuation
Decision making
Total production cost
Prime cost + indirect/ overhead cost
Types of overhead costs
Production overheads
Admin overheads
Selling overheads
Distribution overheads
Costing systems
Absorption costing
Marginal costing
Activity based costing (ABC)
Absorption costing
Method of accounting for sharing out overheads incurred amongst units produced
Used in financial accounting
Three stages of absorption
Allocation
Apportionment
Absorption
Allocation
Direct materials costs are allocated to products
Direct labour costs are allocated to products
Apportioned
Indirect materials and indirect labour costs are allocated and apportioned to cost centres
- production cost centre-> directly involved in production
- service cost centres-> supports production activity
Total indirect costs of service cost centres are appointed over production cost centres
Total overheads costs of production cost centres are absorbed into products
Overhead apportionment stages
1- identification of all overheads as production, service, administration or selling and distribution
2- to appoint the costs of service centres to production cost centres; known as reapportionment
3- the absorption of overheads into product costs using overhead absorption rates
Basis of apportionment
Done by selecting a fair base for the calculation something which is common to all the company’s products and services for that cost e;.g. For rent and rates the possible basis of appointment is area of department
Apportioning costs
Total overhead cost/ total value of apportionment base X value of apportionment base of the cost centre being calculated
Overhead absorption rate (OAR)
Budgeted overheads allocated and apportioned to production cost centres/ budgeted activity levels on which rate to be based or
Cost centre overhead/ absorption basis
Problems with under/over absorption
Under-> managers have been working with unit rates for which overheads are too low. Prices may have been set too low and decisions based on inaccurate information
Over-> managers may have set prices too high which may have reduced sales
Activity based costing
A system of overhead allocation which allows us to calculate a number of ratios based on activity cost drivers
Basically attempts to eliminate overhead costs by allocating almost all to cost objects
Activity cost driver
Actions that cause variable costs to increase or decrease
Marginal costing
Treats fixed costs as relating to the period of time rather than to the products
Marginal cost= the part of the cost of one unit of product or service that would be avoided if the unit were not produced
Contribution
Difference between sales price and variable cost
= sales - variable costs
Break even
Fixed costs = contribution
In units= total fixed costs/ contribution per unit
Contribution margin ratio
Total contribution margin/ total revenue X 100
Margin of safety
The difference, measured in volume or sales values, between the break even point and current volume of sales
Budgeted sales units- breakeven sales units
Margin of safety %
Budgeted sales- breakeven sales/ budgeted sales X 100
Comparing marginal costing and absorption costing
In marginal costing only variable costs of production are allocated to products and the unsold stock is measured at variable cost of production
In absorption costing, all production costs are absorbed into products and the unsold stock is measured at total cost of production
Cost definition
The amount of resources, usually measured in monetary terms, sacrificed to achieve a particular objective
Relevant cost
Cost that differs between alternatives
Irrelevant cost
Those that will not change in the future when you make one decision versus another
Sunk cost
A cost that has already been incurred and that cannot be avoided regardless of what a manager decides to do
Differential cost
A difference in cost between any 2 alternatives
Opportunity cost
Return on the best option not chosen (relevant)
Committed cost
One that has to be paid for whether or not the management makes a specific decision (non-relevant)
Net book value
The value of an asset, taking into account any depreciations, and other accounting charges, as recorded in the accounts of the owner
Assumptions behind relevant costing model
- cost behaviour patterns are known
- the amount of fixed costs, unit variable costs, sales price and sales demand are known with certainty
- the objective of decision making in the short term is to maximise satisfaction which is often known as short term profit
- the information on which a decision is based is complete and reliable
Decision rules for project decisions
Extra benefits>extra costs; ACCEPT
Rev-costs=profit
Extra benefits<extra costs; REJECT
Rev-costs=loss
Extra benefits=extra costs; INDIFFERENT
Decision rule for make or buy
If relevant production cost is lower than purchase price; PRODUCE
If the purchase price is lower than the relevant production cost; PURCHASE
Advantages of making an item internally
- reduced dependence on suppliers
- quality control may be easier
- profits can be realised on the parts and materials
Advantages of buying an item from an external supplier
- a supplier can realise economies of scale and may be able to move quicker up the learning curve
- a specialised supplier may respond quicker and at less cost to changing future needs
- changing technology may make producing ones own parts riskier than purchasing from the outside
Mark up (cost plus) pricing
Costs are used as the starting point to define the price
Gross profit mark up = gross profit/sales - gross profit
Margin pricing
Set a price to deliver a certain profit margin
Selling price - cost of sales/selling price X 100
Gross profit margin = gross profit / cost of sales +gross profit
Full cost pricing
- sales price is determined by calculating the full cost of the product and then adding a % mark up
Full cost pricing advantages
Price is easy and quick to calculate
should ensure cover all costs
Price increases as costs rise
Full cost pricing disadvantages
Doesn’t reflect any impact of price on sales demand
Reduced incentives for cost control
Marginal cost plus pricing
Sales price is determined by calculating the marginal (variable) cost of the product and then adding a % mark up
Marginal cost plus pricing advantages
Simple to use
Avoids arbitrary absorption and apportionment of overheads
Good for decision making in the short term
Marginal cost plus pricing disadvantages
Doesn’t guarantee recovery full costs in longer term
Doesn’t reflect any impact of price on sales demand
