Week 1 Everything Flashcards
What is accounting
The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information. Accounting provides both financial and non-financial information and helps managers with decision making.
Who are the users of accounting information?
Users of accounting information can be divided into two groups. External users which are parties outside the organisation, such as owners, potential investors, creditors, government and so on. internal users which are parties within the organisation such as managers, employees.
accounting can be divided into two branches
Financial accounting
Management accounting
Financial accounting
prepares reports most frequently used by decision makers external to the organisation
Management accounting
prepares reports most frequently used by decision makers internal to the organisation
Cost accounting
Cost Accounting is a sub-division of management accounting. It is concerned with cost accumulation for inventory valuation to meet the requirements of external reporting and internal profit measurement.
Financial Accounting involved
Preparing annual financial reports
External use
Regulations apply
Recording the past
Stewardship
Management accounting involves
Understanding costs, budgeting, etc.
Internal uses: Planning and control, Performance evaluation
Do whatever is most useful
Past and future
Decision-making
In particular cost accounting is concerned with establishing costs of:
Operations
Processes
Activities
Products
To successfully operate in today’s competitive environment companies are:
Making customer satisfaction an overriding priority.
Adopting new management approaches.
Changing their manufacturing systems (E.g., Robotics).
Increasingly using information technologies in their business activities (E.g., use of artificial intelligence).
Management accounting information can be used in:
Achieving cost efficiency
Accurate determination of product costs and prices
Effective cost management
Product comparisons decisions.
The functions of management accounting:
Cost allocation for inventory valuation and profit calculation
Provision of relevant information for better decisions
Provision of relevant info for planning, control and evaluation
Cost allocation for inventory valuation and profit calculation
Matching principle requires to match costs with revenues to calculate profit. To determine cost of goods sold we need to know the cost of unsold finished goods or partly completed stock (work in progress). Therefore, it is necessary to trace costs to each individual job or product to allocate costs between cost of goods sold and inventories.
Provision of relevant information for better decisions
Provide relevant information to help managers in making better decisions such as profitability analysis, product pricing, make or buy (Outsourcing), product mix and discontinuation
Provision of relevant info for planning, control and evaluation
Provide information for planning, control and performance measurement such as budgeting and periodic performance reports.
Costing
Costing is understanding and identifying the costs of particular activities and decisions. It is a key part of management accounting
Cost
The amount of resource, usually measured in monetary terms, sacrificed to achieve a particular objective.
Cost object
A cost object is any activity for which a separate measurement of cost is required such as the cost of making a product and the cost of providing a service.
Three different cost classifications
Direct and Indirect costs
Variable and Fixed costs
Product and Period costs
Direct v indirect costs
Direct costs can be specifically and exclusively identified with a given cost object such as direct materials and direct labour. Indirect costs cannot be specifically and exclusively identified with a given cost object such as rent of factory and administration costs. Indirect costs (also called as overheads) are assigned to cost objects on the basis of cost allocations.
Product and period costs
Financial reporting standards require that inventory valuations are made based on only manufacturing costs. Therefore, in manufacturing organisations accounting system distinguishes between two types of costs. Manufacturing costs known as product costs and non-manufacturing costs, known as period costs.
Product costs
Product costs are those costs that are attached to the products intended for sale and included in the stock (inventory) valuation. Such as direct or indirect materials.
Period costs
Period costs are those costs which are treated as expenses of the period and are not carried forward as part of the inventory. Such as telephone or storage expenses.
Example of a product v period cost
10/3/19
Cost behaviour
Costs and revenues vary with different levels of activity. It is important to predict costs and revenues at different activity levels for many decisions and for planning and control purposes. Therefore, accountants usefully classify costs into fixed and variable costs.
Variable costs
A variable cost is one which varies directly with changes in the level of activity. They vary in proportion to volume of activity (direct materials).
Fixed costs
A fixed cost is one which is not affected by changes in the level of activity, over a defined period of time. They remain constant irrespective of volume of activity, (rent).
semi variable cost
Part of semi-variable costs change depending on the level of activity, but a part of this cost is fixed (sales representative’s salary plus a commission)
Step cost
fixed cost increases by steps
Graphical illustration of variable and fixed costs
10/3/19
Total fixed cost and unit fixed cost
10/3/19
Semi-fixed costs
Semi-fixed costs are fixed within specified activity levels, but they eventually increase or decrease by some constant amount at critical activity levels. For example additional labour or salary of another manager
Note: in the long-term
all costs are variable
Graphical illustration of variable and fixed costs
10/3/19
Total fixed cost and unit fixed cost
10/3/19
Semi-fixed costs
Semi-fixed costs are fixed within specified activity levels, but they eventually increase or decrease by some constant amount at critical activity levels. For example additional labour or salary of another manager
Note: in the long-term
all costs are variable
