Week 1 Flashcards
What is management accounting?
The management function that is heavily involved in providing accurate and internal financial reports, allowing to implement strategy.
What is cost management information?
A combination of financial information about costs and non-financial information about success factors related to an organization, like quality and productivity. For internal use.
The four functions of management that a management accountant provides info for:
1) Strategic management - the development and implementation of a sustainable competitive position in which the firm’s competitive advantage provides continued success.
2) Planning and decision making - budgeting and profit planning, cash flow management.
3) Management and operational control - the former focuses on evaluating mid-level managers by upper, and latter mid-level managers monitor operating-level managers.
4) Preparation of financial statements
Major types of organisations:
Merchandising firms - firms who purchase goods for resale, use CMI to manage stocking, distribution and customer service
Manufacturing firms - use raw materials, labour and facilities to produce, then sold to merchandising firms or to other manufacturers. CMI used to manage production costs.
Service firms - provide services that offer convenience, freedom, safety or comfort. Common examples are transportation, health care, etc. CMI used to identify most profitable services and to manage costs of providing them
The contemporary business environment:
Increased global competition - consumers benefit as they can own high quality for low costs products, overall diminishing trade barriers.
Lean manufacturing - firms are innovating in different ways to remain competitive. Reduces cost of waste and storage.
Advances in IT - innovations have allowed firms to be able to reduce time in processing or widening a firm’s information base
Focus on customer - focus on the customer and their satisfaction
Management - more flexible less hierarchical firms, profit based to performance based.
Methods to implement the strategy:
Balanced scorecard:
Includes both financial and nonfinancial success factors relevant to the firm. Non-financial factors consist of customer satisfaction, internal processes, learning and growth. Strategy map to sum-up the factors.
Value chain: goes through the steps necessary to provide competitive products, allows to discover irrelevant steps where costs can be reduces.
Activity based costing and management - tracking costs to products or individual customers in order to improve product value and firm competitiveness.
Business analytics: Simply the use of information from statistical analysis to analyze performance via factors such as consumer satisfaction.
Target costing: laying out a desired cost for production based on competitive pricing
Life-Cycle costing - overseeing the cost of a product throughout its life-cycle.
Methods to implement strategy, by focusing on process improvement:
Benchmarking: identifying CSFs and comparing them with the competitors.
Business process improvement: implementing continuous improvement in quality and other CSFs
Total quality management: policies and practices in order to exceed customer expectations of quality.
Lean accounting: used in tandem with lean manufacturing: analysing value streams to pinpoint where manufacturing methods lead to improved profitability.
Theory of constraints: improving the rate at which raw materials are converted to finished goods.
Sustainability: balancing social, environmental and financial performance indicators.
Enterprise risk management: using a framework to balance risks that include hazardous, financial, operating and strategic risks.
Cost assignment:
process of assigning resource costs to cost pools, and from cost pools to cost objects.
1) Direct tracing - used for assigning direct costs, or costs that can be easily traced to a cost pool or object
2) Allocation - which is used for assigning indirect costs
Since indirect costs cannot be traced to a single cost pool or object the assignment is down by using cost drivers (aka allocation bases)
Direct and indirect costs:
Direct materials cost - cost of materials associated with the cost object (also allowance for scrap and defective units)
Direct labour hours - the cost of labour that can be easily associated with the cost object.
Indirect materials cost - the cost of materials not included in the final product but still used in the production
Indirect labour costs - the costs associated with overseeing the process of product creation.
Factory overhead - single cost pool that combines all indirect costs.
Prime costs - direct labour and direct materials
Conversion costs - direct labour and factory overhead.
Cost drivers:
allows to allocate indirect costs to cost pools and objects, demonstrates how changes in cost drivers changes the TC.
1) Activity based - determined through an analysis of the firm’s operations and specific activities performed.
2) Volume-based - in which the cost drivers are simply the quantity of product or service produced.
3) Structural - strategic cost drivers like scale, experience, technology complexity, all of which have long term effects on planning and decision-making
4) Executional - include factors that the firm can manipulate in the short-term. Includes operations-related decisions like workforce empowerment, production process design and supplier relations.
Cost concepts for product and service costing:
Product inventory is treated as an asset until the inventory is sold. Then, the cost of the inventory is transferred to the income statement, where it is listed as the COGS.
Product costs include only the costs necessary to complete the product at the manufacturing step in the value chain, namely materials, labour and factory overhead.
All other costs are period costs, which are managing and selling the product expenses, expensed at the period incurred.
Inventory accounts:
Materials inventory: the cost of supply of materials for production
Work-in-process inventory: which includes all costs put into the manufacturing of the products, but are not completed at the financial statement date
Finished goods inventory
Beginning inventory + costs added = cost transferred out + ending inventory
Step 1: Materials Inventory
Beginning Inventory: Start with $5,000 worth of wood and other materials at the beginning of the period.
Cost Added: During the period, the company purchases an additional $2,000 worth of materials.
Cost Transferred Out: $6,000 worth of materials are used in the production of chairs.
Ending Inventory: Calculated as Beginning Inventory ($5,000) + Cost Added ($2,000) - Cost Transferred Out ($6,000) = $1,000 remaining in Materials Inventory.
Step 2: Work-in-Process Inventory
Beginning Inventory: Assume $1,000 worth of chairs that were partially completed at the start of the period.
Cost Added: Includes $6,000 of materials used, $3,000 in labor costs, and $1,000 in overhead costs (totaling $10,000 added during the period).
Cost Transferred Out: Once chairs are completed, $9,000 worth of goods is transferred to the Finished Goods Inventory as Cost of Goods Manufactured.
Ending Inventory: Beginning Inventory ($1,000) + Cost Added ($10,000) - Cost Transferred Out ($9,000) = $2,000 remaining in Work-in-Process Inventory.
Step 3: Finished Goods Inventory
Beginning Inventory: Start with $2,000 worth of completed chairs at the beginning of the period.
Cost Added: $9,000 worth of chairs moved from Work-in-Process Inventory once completed.
Cost Transferred Out: $8,000 worth of chairs are sold during the period (Cost of Goods Sold).
Ending Inventory: Calculated as Beginning Inventory ($2,000) + Cost Added ($9,000) - Cost Transferred Out ($8,000) = $3,000 in Finished Goods Inventory at the end of the period
Attributes of cost information:
Accuracy: internal accounting controls to restrict and guide activities in financial data processing help avoid decision making base on inaccurate data
Timeliness: the cost of delayed data can be significant in decisions
Cost and value of cost management information - thinking that CMI information has costs and value in the process of acquiring helps to view accounting manager as information specialist
Periodic and perpetual information systems:
The perpetual system updates the finished goods inventory account for each sale transaction.
The periodic inventory system consists of a count of inventory at the end of each accounting period to determine the ending balance of the account.
