Week 6 - Introduction to management accounting & costing concepts Flashcards
What is management accounting? (Horngren et al 2014, p.21)
- Is the branch of accounting that produces information for managers within an organisation
- Its the process of identifying, measuring, accumulating, analysing, preparing, interpreting and communicating information that helps managers fulfill organisational objectives
Examples of management accounting uses
- Price setting
- Investment decisions
- Growth strategies - either new customer or product
- Cost leadership or differentiation strategy
- Recruiting new staff
- Undertake new marketing campaign
3 processes of management accounting
- Planning
- Controlling
- Decision making
Planning process of management accounting
- Establish goals
- Specify how goals will be achieved
- Develop budgets
Controlling process of management accounting (2)
- Gather feedback to ensure that plans are being followed
- Feedback in the form of performance that compare actual results with the budget are an essential part of the control function
Decision making process of management accounting (2)
- Involves making a solution among competing alternatives
- E.g what should we be selling
The cost hierarchy
Define cost object
Any activity for which a separate measure of cost is required (e,g a product, service, business unit etc)
Define cost driver
The activity lies that consumes resources and hence incurs cost e.g labour hours, machine hours, order size, travel distance etc
Define direct cost
Any cost which can be specifically and exclusively identified with a particular:
- direct materials
- direct labour
Define indirect cost (overheads)
Any costs which cannot be specifically and exclusively identified with a particular cost object:
- indirect materials
- indirect labour
Examples of manufacturing costs (3)
- Direct materials - are integral parts of the product
- Direct labour
- Manufacturing overheads - costs that cannot be directly traced to specific units produced
Define indirect labour
Wages paid to employees who are not directly involved in production work e.g maintenance workers, janitors and security guards
Define indirect materials
- Materials use to support the production process
- Example: lubricants and cleaning supplies used in the automobile assembly plants
Types of non manufacturing costs (2)
- Marketing and selling costs - costs necessary to get the order and deliver the product
- Administrative cost - all executive, organisational and electrical costs
Define variable costs
Any cost which varies indirect proportion to the activity level
Define fixed costs
Costs which remain constant over a wide range of activity levels within a business
Define mixed costs (semi-variable)
Costs which have both a fixed a variable element to them
Define stepped fixed costs (semi-fixed)
Costs which remain constant within a given range of activity, but which increases or decreases by a set amount at various critical activities
Gross profit formula
Sales revenue - manufacturing cost
Contribution formula
Sales revenue - variable cost
Total fixed cost graph
Unit fixed cost graph
Total variable cost graphs
Unit variable cost graph
Total cost formula
Fixed cost + (variable cost per unit x number of units)
Mixed (semi-variable) costs graph
Stepped-fixed (semi-fixed) costs graph
Importance of separating fixed and variable costs with P&L accounts
To highlight the key decision making concept known as contribution
How to workout variable cost from a graph
Find the Gradient
High low method
1 - Identify high and low activity points and their related costs
2 - Calculate the difference in cost at these two levels which is the variable cost
3 - Calculate the variable cost per unit by dividing difference by a change in number of units
4 - Use variable cost per unit to extract fixed cost as the figure from either the high or low point
High low method graph
How to interpret the high low method
- Comment on there being two reference points
- Comment on whether the number of units falls within or outside the high-lo estimate range
- If it does it may be relatable if it doesn’t it may not be reliable
