Week 4- Management Accounting, Cost and Cost Allocation Flashcards
Describe management accounting and its role in a business context
- Reports information relevant to making business decisions now and in the future to interested internal parties
- Used to control business operations to achieve short and long term objectives
- Carries out detailed analysis of individual costs to determine total product/service costs so that profitable selling prices can be set
- Summarises detailed information into budgets
- Compares actual outcomes to budgeted results
Compare management and financial accounting
Management
- Used within the business
- For internal decision making and control
- Concerned with future performance
- Unregulated
- Future oriented
- Linked to strategy
Financial
- Used for external communication
- For external decision making, governance and control
- Concerned with past performance
- Regulated
- Past oriented
- Linked to accountability
What must be done before selling prices can be set?
The cost of a product or service must be determined
How must a profit be made?
The selling price must be higher than the total cost of a product
Give some examples of costs
- Direct and indirect
- Relevant and irrelevant
- Opportunity
- Sunk
- Avoidable and unavoidable
-Marginal
Describe direct and indirect costs
Direct
- the costs of a product or service that vary exactly in line with each product or service
- reflect the additional costs incurred by a business in producing one more unit of a product or service
Indirect
- costs that cannot be attributed directly to units of products or service
- are also known as overheads
Describe relevant and irrelevant costs
Relevant
- those costs that will incur if we decide to follow a particular course of action
- they influence our decision making
Irrelevant
- those costs that are not affected by the action we take
- they therefor do not affect out decision making
Describe opportunity costs
- the loss that is incurred by choosing one alternative course of action over another
- only applies when resources are limited
- influence decision making
- are relevant costs
- the opportunity cost of a decision is the next best alternative use for the resource used in that decision
Describe sunk costs
- are past costs
- have already incurred
- do not influence future decision
- are irrelevant cost
- fixed costs that a business incurs whether a particular course of action is taken or not
Describe avoidable and unavoidable costs
Avoidable
- those costs that can be saved by taking an alternative course of action
- they influence our decision making
Unavoidable
- those costs that are not affected by the action we take
- they therefore do not affect our decision making
What are cost objectives?
Any item for which a separate measurement of costs is desired
Give 3 examples of cost objectives
- Cost of a product
- Cost of a service
- Cost of operating a particular department
How can activity or volume be measured in
- Units of production
- Units of sale
- Units travelled
- Hours worked
- Clients seen
What are 3 types of cost behaviours?
- Variable
- Fixed
- Semi fixed or stepped fixed
Describe variable costs
- Direct costs that vary directly in line with production
Describe fixed costs
- Do not vary in line with production
- They are incurred regardless of the level of production
Fixed costs can be…?
- Direct costs of production incurred in the production of a particular product
- General overheads incurred in the running of the business
Describe semi fixed costs
Fixed within specific activity levels but increase or decrease by a constant amount at various activity levels
What 2 broad stages do cost collection systems account for costs in?
- Accumulates costs
- Assigns costs to cost objects
How do you calculate total product costs?
Total product cost = Direct cost per product + Indirect cost per product
Describe absorption costing
- Allocates manufacturing overheads to products
Recognises :
- at different levels of production, the average total cost for each product will be higher or lower, therefore:
- overheads are allocated to products on the basis of the normal level of production
Define normal level
The expected level of production achievable within an accounting period
How do you calculate overhead cost allocated to each product?
Overhead cost allocated to each product = Total overhead cost / Normal level of production
Compare absorption and variable costing
Absorption costing
- Captures all costs associated with manufacturing a particular product, i.e. direct and indirect costs are taken into account under this method
- direct material
- direct labour
- variable manufacturing overhead
- fixed manufacturing overhead
Variable costing
Compare absorption and variable costing
Absorption costing
- Captures all costs associated with manufacturing a particular product, i.e. direct and indirect costs are taken into account under this method
Variable costing
- Captures all costs associated with manufacturing a particular product but excludes fixed manufacturing overheads
What are 3 limitations of absorption costing
- Is a traditional method which might not be well suited for allocating overheads in modern manufacturing environments
- May not provide accurate product prices
- It is important to recognise that additional absorption costing is not the only way in which costs can be allocated to products
