Week 1: Introduction Flashcards
“Management accounting” definition
Management function that is heavily involved in providing accurate & internal financial reporting. Allowing management to implement the organisation’s strategy.
Cost management information
Combination of financial info about costs and non-financial info about success factors (quality, productivity etc.)
Information is processed in 5 stages…
- business event–>
- data (collect data regarding the event)–>
3.information (data is transferred into info)–> - knowledge
- decision
4 functions of management
- Strategic management-
development and implementation of a sustainable competitive position, in which firm’s competitive advantage provides continued success. - Planning and decision making-
budgeting and profit planning, CF management, other decisions related to firm’s operations. - Management and operational control-
involves evaluation of mid-level management by the upper level managers. Operational control takes place when mid-level managers monitor the activities of operating level managers. - Preparation of financial statements- management seeks to comply with reporting standards.
Major types of organisations
- Merchandising firms- purchase goods for resale
- Manufacturing firms- use cost management info to manage production costs.
- Service firms- use cost management info to identify the most profitable services and manage costs of providing them.
2 competitive strategies
*Product differentiation:
firm offers a superior/unique product or service relative to the products or services of its competitors.
(Leads to brand loyalty and the willingness of customers to pay high prices)
ex. “Walmart”
*Cost leadership:
firm outperforms competitors in producing products or services at the lowest costs. Focus on productivity and efficiency improvements, elimination of waste, and tight cost control
(Leads to lower selling prices)
ex. “Samsung”
“Cost driver” definition
A cost driver is a factor that causes a change in TC (e.g. production volume)
“Cost object” definition
Cost objects are the things we want to know the cost of. Costs tied to a specific product, service, customers, activities etc.
“Cost pool” definition
Costs are grouped in cost pools. Organised by type of costs, source, responsibility.
Cost assignment
Assigning resource costs to cost pools and from pools to cost objects.
2 types of cost assignment:
1)Direct tracing-
used for assigning direct costs. Easily traced to cost pool or cost object, like the associated materials to produce product.
2)Allocation -
used to assigning indirect costs or costs that can’t be easily, monetary traced to cost pool or object.
ex. electricity costs in factory
That is why for assignment of indirect costs allocation, is used associating them with cost drivers. (Allocation bases)
Direct vs. Indirect costs
Direct costs can be easily traced to cost objects.
Overhead costs (aka indirect costs) can’t be traced; instead they must be allocated to cost objects using a cost driver (aka cost allocation base).
Factory overhead is one cost pool for all indirect costs!!!
Direct vs. Indirect MATERIAL costs
*Direct material costs
–>the costs of material associated with cost object, with allowance for scrap and defective units.
*Indirect material costs
–>the costs of material not included in the final product but still used in production
Direct vs. Indirect LABOUR costs
*Direct labour
the cost of labour that can be directly associated with cost object.
*Indirect labour
the costs associated with support function in creating a product, like supervision or inspection
Conversion costs
direct labour +factory OH
–>converting product into final good.
Prime costs
direct materials + direct labour
–>pool of direct costs
Variable vs. Fixed cost
Variable cost-
do change in proportion with volume of a cost driver, such as production or sales quantity.
ex. Material costs such as tires and engines are variable costs, they increase with the number of cars produced
Fixed cost-
do not change in proportion with volume of a cost driver, at least not within the relevant range.
ex. insurance or taxes for production plant
(Independent of whether 1 or 1000 cars are produced and sold)
Relevant range of cost function
Relevant range—range in which the relationship between the activity/volume level and the respective cost is constant. It is possible to approximate as linear function in this range.
Cost behaviour is approximated by a linear cost function within the relevant range.
When to invest or divest? Are the fixed costs always constant?
When business activity declines, firms divest to eliminate excess capacity.
When business activity increases, firms invest to increase capacity.
Over the long-term fixed costs behave like step-functions.
Product costs vs. Period costs
*Product costs- include only the costs necessary to complete the product at the manufacturing step in the value chain (manufacturing) or to purchase and transport the product to the location of sale (merchandising)
Direct M. + Direct L. +Factory OH
*Period costs- (also called non-product costs) include all other costs incurred by the firm in managing or selling the product (costs outside the manufacturing step of the value chain)
Selling Expenses + Administrative Expenses
4 Major “Cost drivers”
- Activity based
determine through analysis of firm’s operations and a specific activities performed - Volume based
cost driver is quantity of products produced/services provided. Associate with FC and VC, sometimes mixed costs. - Structural
Strategic cost drivers like scale, expertise, technology, complexity. All of them have long-term effects on planning and decision making. - Executional
Include factors that firm can manipulate in short term. Operation related decisions- workforce empowerment, production process design, supplier relations.
Must have elements in cost information
*Accuracy
*Timeliness
*Cost & value of cost management info
Perpetual vs. Periodic inventory systems
Perpetual inventory systems–>
updates finished good inventory account for each sales transaction
Periodic inventory systems–>
consists of count of inventory at the end of each accounting period to determine the ending balance.
Inventory formula relating to inventory accounts
Beg. inventory + costs added = costs transferred out +ending inventory
