Week 1: Overview Of Managment Accounting And Costing Flashcards
What is it used for?
- Provides information to managers of a business
- Improves effectiveness and efficiency
- Make informed decisions
What is management accounting?
It refers to the processes and techniques that focuses on the effective and efficient use f organizational resources, to support managers in their tasks of enhancing both costumers value and shareholder value.
What is shareholder value?
Maximizing future cash flows, generates returns for shareholders. In two ways: - Through dividends/share price.
What type of information does management accounting use?
Qualitative and Quantitative
Who is management accounting for?
Internal users
Fundamental business decisions?
Investing, financing, operating and distribution.
Strategic Plan
Process + what its made up
1) Identify where we are
2) Identify where we want to be
3) Develop an actionable plan to get from where we to get from the origin
Cost leadership
Product differentiation
Cost leadership and Product differentiation
Cost - when a business establishes a competitive advantage by having the lowest cost of operation in the industry. When a product costs less to produce, the business can offer the product to customers at a lower price than competitors.
Product differentiation - when a higher price is charged for a product for a product relative to competitors, but it’s justified by the quality of the product or the presence of a valuable feature.
How strategic plan and fundamental. Decisions. Come together?
- 1 - Strategic plan
- 2 - (Investment decision) Management decide on the assets to be acquired
- 2 - (Financing decision) Where funds are obtained
- 3 - (Operational decisions) Management decide the price of goods, number and extent of advertising =, number of employees required, incentives)
- 4 - (Distribution decisions) How much should go to the owners and how much should be retained [influenced by financing]
Examples and explanation of Short and Long Term?
Long term - Investment could be be related to the acquisition of property and the building
Short term - Could be the acquisition of additional inventory which may be required to meet an expected in demand [may be short-term overdraft or loan]
Examples of financing management decisions
1) Deciding whether to to outsource production
- Current employees may need to be retrenched
- What if quality is low and no timely
- What if prices are raised in the future
2) Deciding whether to pay bonuses
- Can they afford to in the future
- What impact would it have on morale?
- If management doesn’t pay bonuses, how will morale be affected?
Differences between management accounting and financial accounting
1) M = For internal users: Managment
F = For external users: Investors, creditors, SARS
2) M = No legal requirements
F = Statutory requirements in terms of Companies Act/IFRS
3) M = Focus on business segments, operating divisions and individual products/services
F = Focus on the whole business
4) M = No GAAP/IFRS
F = Governed by GAAP/IFRS
5) M = Forward looking
F = Historical
6) M = Produced daily, weekly or monthly
F = Produced annually
What does:
[Cost classification, Cost behavior, Relevant costing and decision making]
[Cost-volume-profit analysis (CVP), Income statement approaches]
[Budgeting]
DO?
- allocate costs for inventory valuation and internal and external reporting (costing)
- Provide relevant and useful information for decision making
- Provide information for long and short term planning, monitoring, control and performance evaluation.
What is costing? How is it useful
How expenditure is allocated
- Managers need to plan future costs, monitor current costs and manage costs by understanding and focusing on their underlying cause.
— Help plan for future
— Help make decisions
— Help evaluate the performance of services, products, divisions or employees
What is a cost and how are they allocated?
Cost - A resource sacrificed in order to achieve a certain objective.
— Category and Objective
Examples of cost objects?
Product - coffee
Service - Airline passengers
Division - Shoprite store
Allocating cots by Category
What question do we ask?
Manufacturing - Costs which are incurred in getting the inventory to the condition and location for sale.
Non - Manufacturing -Other costs besides manufacturing -bank charges
- Interest
“Was this cost incurred in getting the inventory to the condition and location for sale”
“Can I trace this back to a specific cost object”
Direct vs Indirect taxes
Direct —> Costs which can be specifically and exclusively identified within a particular cost object
Indirect —> Costs that cannot be specifically identified within a particular cost object.
Depreciation vs coffee bean
Groups of indirect and direct costs
Direct materials
- All materials used or consumed in the production process
Direct Labour
- This would include the salaries or wages of employees directly involved in the manufacturing the product, like the factory assembling workers
Indirect Costs (overheads)
- This could be split into manufacturing overhead and non-manufacturing overheads
- An example of a manufacturing overhead would be a production managers salary, or depreciation on a machine used in production.
- An example of a non-manufacturing overhead would be admin staff salaries.
Labour
All labour costs that are involved in the manufacturing process and contributes to the physical transformation of the product. Labour can either be classified as direct or indirect.
More complex as:
- Payment of reasonable compensation
- Job satisfaction
- Security (Both job security and physical security)
- The opportunity to develop full potential
Productivity
A major concern for a business is the level of productivity of each worker. Productivity is the ratio between output ad input. It is affected by:
- Employees attitude towards work
- Employees attitude towards superiors
- Corporate Culture
- At what capacity an employee is working
- The standard required is set too high which results in demotivated employees
- Work environment: Lighting, temperature, humidity, noise, time, political unrest and economic stability
- Employees skills and ability to do work
Methods of remuneration
Fixed salary: The employee receives a fixed salary irrespective of the quantity of hours worked. This form is usually found in administrative and supervisory positions.
Hourly wages: The employee is remunerated based on exact amount of hours worked
Normal time: Money paid to employees for work done during normal working hours
Overtime: Extra compensation paid to an employee for hours spent on work beyond the normal working hours.
Allocating costs by Cost Behavior
What happens to costs when there are changes in the levels of activity of the business
Fixed cost - Costs that don’t vary with output
Variable cost - Cost that vary without output
Why is rent expense both a manufacturing and non-manufacturing overhead?
A portion of the space is used to get the resource to its present condition and location for sale [ Manufacturing]
A portion of the space that is not used to get the resource to its condition and location for sale would be classified as a non-manufacturing cost.
