Week 1-Introduction to management accounting and cost terminology Flashcards
What is management accounting?
- application of principles of accounting and financial management to create, preserve and increase value for the stakeholders
- supports value creation in organisations
- inform strategic decisions
- plan and control activities
- ensure the efficient use of resources
- develop incentive structures
- implement corporate governance procedures, risk management and internal controls
Management Accounting covers both financial
and non-financial information to set goals and
forecast performance. Focused on the analysis of
future projections with short and long term planning;
but it depends on cost accounting systems which
need to be reliable.
What is cost accounting?
Cost Accounting covers recording, classifying and
summarising of cost data of an organisation. It
deals with the identifying, correctly classifying,
allocating and recording of cost. It does not depend
on management accounting.
What is the purpose of FA? MA?
FA: Help users to monitor managerial
stewardship and make decisions about the
provision of resources. External reporting to outside parties. Makes decisions about ressource allocation.
MA: Help managers to make decisions to fulfil
the organisation’s objectives. Internal collection and communication of accounting information
Primary users of FR? and MA?
Fr: External, including investors, creditors,
regulators, and others
(publicly available)
Ma: Internal managers of the organisation (confidential, because commercially and politically sensitive)
Timing FA/MA
Frequency of reporting
FA: Mostly historical (e.g. 2019 reports
prepared in 2020)
Some predictive value
-annual/quartely
MA: Forward-looking and Future emphasis
(e.g. 2020 budget prepared in 2019)
Based on historical information and
estimates
-Frequency of reporting as often as required
Regulation Ma and Fa
fa: Financial statements:
In accordance with Accounting Standards
(IFRSs)
Subject to independent audit
-directed by authorative guidelines (accounting standards, law)
Ma: Internal measures and reports:
Do not have to follow specific Accounting
Standards
Based on cost-benefit analysis (not governed by external regulations)
-confidetial
Verifiability vs relevance Fa and ma
FA: Primary focus is on verifiability
MA: Primary emphasis is on relevance and
timeliness
What kind of data is management accounting based on? Where is financial and non-financial data collected from?
- MA:statistics, mathematics, economics, laws, psychology, financial and quantitative, detailed, complied for a specific purpose.
- FA is mainly focused on financial inf (monetary terms, general purpose, less detail)
Financial information is based on accounting systems
Non-financial information is collected from production
processes and market research (e.g. consumer behaviour,
analysis of competitors etc.)
What should Ma satisfy? Is there a standardised format of MA reports?
-serve the purpose that it is intended for
No standardised formats Reports tend to be more
detailed, are compiled for a specific purpose.
describe the convergence of FR and MA
• Traditional financial reporting required basic cost
accounting information for inventory valuation methods.
• Modern financial reporting (contained in annual reports)
increasingly integrates information on:
– Strategy, business models, and KPIs (strategic management accounting)
– Executive pay (incentive compensation systems)
– Social and environmental performance (sustainability accounting)
Dividing line between management accounting and
financial accounting gets increasingly blurred.
1) Overlapping information needs
- managers can be interested in historical overview
- detailed inf relating to the future (planned level of profit, no-financial information, states of salas/orderbook, extent of profuct innovation)
2) mutual influences
- management tend to gather similar observations
- managers decide what inf to provide to users, yet they also have to be aware of external users’ expectations
- external reportig cycles have some influene on MA (ex: type of costing adopted)
3) Data convergence in reports
- traditional financial reporting requires Ma information for inventory valuation
- annual reporst increasingly integraes information on:
strategy, business models, stategig management, executive pay (incentive compensation systems), socail and environment accounting (sustainability accounting)
What is a cost objective?
A cost object is any ‘product, service, centre, activity,
customer or distribution channel in relation to which
costs are ascertained.’
A cost object is any item for which cost
measurement is required, for example, a product or
a customer.
What is a cost driver?
A cost driver is any factor that causes a change
in the cost of an activity.
What are capitalised costs? Expensed costs?
Capitalised costs:
recognised as assets in Statement of Financial
Position (SoFP).
Expensed costs:
recognised on periodic basis as expenses in
Income Statement (IS)
What are product costs?
total cost of purchasing or producing goods / delivering
services to customers.
ex: raw material, work in progress
What are period costs?
All other selling and administrative costs that are not
included in product cost, such as advertising, salaries etc.
ex: selling and administrative expenses, depreciation, operating expenses,
What does cost of sales include?
– Cost of sales includes:
• Cost of materials used in the finished product
• Cost of labour directly involved in the production of the product
• Manufacturing overhead
What does inventory held include?
– Inventory held includes:
• Materials held for use (raw materials)
• Finished goods held for sale
• Unfinished goods (work-in-progress)
Difference between the financial statements of trading business and service business
Trading businesses
– Cost of sales (I/S)
– Inventory held (SoFP)
– Examples: retail companies, wholesaling businesses
Service businesses
– Operating expenses related to provision of services in IS
(income statement)
– No inventory or Cost of Sales
– Examples: Investment Banks, Stock Exchange, professional
service firms (law, accounting, consulting)
Flow of costs in a manufacturing business
Formula sheet
Management decisions (3 categories)
Operating decisions: – Product mix – Pricing – Dividends Financing decisions: – The mix of debt and equity Investment decisions: – Whether to undertake a new project – Research and development – Take-over / disposal decisions
What are variable costs?
-Costs that change in direct proportion to changes in activity =e.g. ouput volume, time)
As the level of production/activity varies the
material and labour costs also vary. These costs
are variable costs.
What are fixed costs?
-costs that remain unchanged for a given time period regardless of changes in activity levels.
As the level of production/activity varies the
factory rent remains fixed. The factory rent is a
fixed cost.
Describe how variable and fixed costs behave in total and per unit
Formula sheet
What are stepped fixed costs?
If activity is expanded to the point where
further investment in fixed costs is needed,
e.g. a new factory premises is to be rented
then the rent cost will increase to a new,
higher level
As the level of production/activity varies the
machinery hire costs remain fixed up to a certain
level of production, when we have to hire another
machine the cost rises.
What are semi-variable costs?
-cost containing both fixed and variable components and which is thus partly affected by a change in the level of activity.
As the level of production/activity varies some of
the packaging costs vary and some may even be
fixed (e.g. fixed cost of running the equipment)
ex: In the billing structure for a mobile phone, there is
a flat-rate therefore it is a fixed cost.
For extra usage of texts, calls or internet data are
variable costs.
What are manufacturing costs?
Direct materials: Those materials that become an integral part of the product and that can be conveniently traced directly to it.
Direct Labour: Those labour costs that can be easily traced to individual units of production.
ex: wages paid
Manufacturing overheads: Manufacturing costs that cannot be traced directly to specific units produced
ex: indirect material (materials used to support the production purpose, ex: oil, protective equipment, cleaning supplies), indirect labour (wages paid to employees who are not directly involved in the production work: maintenance workers, cleaners and security guards), factory overheads
ex:Electricity used to operate the factory
equipment
• Depreciation on the factory equipment and
building
• Factory supplies and factory personnel
(other than direct labour)
Why does MO have an important role in the profitability of a product?
How these costs are assigned to products has
an impact on the measurement of an
individual product’s profitability.
What are prime costs?
Direct material+Direct Labour
What are conversion costs?
Direct labour+MO
Give examples of non-manufacturing costs
-marketing and selling costs, administrative costs (all executive, organisational and clerical costs)
Describe the income statement of trading and manufacturing businesses
Formula sheet
Describe the balance sheet of a trader and a manufacturer
formula sheet
Describe manufacturing cost flows
FSH
Manufacturing costs calculation
DM+DL+MO=manufacturing cost incurred for the period
Cost of goods manufactured for the month calculation
Beginning work in process stock+ MO = total work in progress during the period
-ending work in progress stock=cost of goods manufactured
why are innovations good?
-innovations can help with efficiencies and competitive advantage
How does the role of M accountants change of time?
Business IT allows move beyond routine work of
collecting information and preparing reports
(information provider)
• Management accountants today are part of the
management team (decision influencer)
What are the technical roles of a management accountant? (9)
-Financial accounting and reporting
• Cost accounting: effectively challenge costs and inform decision making, advise on strategic cost transformation and value creation
• Business planning
• Management reporting and analysis
• Corporate finance and treasury management
• Risk management and internal control
• Accounting information systems.
• Tax strategy, planning and compliance
-Participate in waste elimination efforts with the
business to understand key drivers and cost
reduction opportunities
What are M accountant skills and qualifications?
- understanding of finance and legislation
- knowledge of business strategy and methodology
- analytical skills
- critical thinking skills
- organisational skills
In what decisions information about costs can help managers?
- prices and production level (cost of distribution, delivery)
- introduction of new technology (ex: robots)
- investment in a new project (ex: cost of development, marketing)
- make or buy, outsourcing/in-house operation
