Management Accounting: Part I

| General | Recent Issues | Cost | Product Costing | ABC | Absorption & Variable Costing | Allocating Support Costs | Joint Costing | Part II | Part III |

Source:

Textbook: Managerial Accounting, Creating Value in a Dynamic Business Environment (Fifth edition), Ronald W. Hilton

Notes: Management Accounting A, 2003 Semester 1, University of Sydney

Web: http://www.mhhe.com/business/accounting/garrison/Student/olc/garrison9emgracct_s/index.htm

http://blackboard.econ.usyd.edu.au/bin/common/course_button.pl?course_id=_832_1&family=tools_area

General

What is Accounting ?

Accounting is a process of gathering, collating and disseminating information in a useable form to potential users (i.e. external, AASB and Internal, managers)

Necessary Information for Internal Users - Financial / Operating (physical)

(1) Example of Physical: Manufacturing, e.g. capacity of production, storage space needed for materials

(2) Example of Physical: Service organizations, e.g. hours per client

What is Management Accounting ?

Management Accounting is the process of identifying, measuring, analyzing, interpreting, and communicating information in pursuit of an organization's goals. It also serves as a tool to assist Planning and Control.

Planning: Deciding on goals, predicting results, deciding how to achieve goals

Control: Deciding on and taking actions that implement planning decisions; performance evaluation

Objectives of managerial accounting activity

Outcomes of managerial accounting activity

Key Management Accounting Guidelines (Page 14 - 16) | Top |

"Different costs for Different Purposes"

Different characteristics of costs can be important to understand in a variety of managerial circumstances.

No constraints on how to account for costs - measurement, collation and allocation based on the end purpose, info designed and delivered for specific purpose

Cost vs. Benefits

Activities must be profitable - Benefits must be weighted against costs. Difference must be considered as profit. More than 1 choice, how do we determine which is most profitable, think of the non-finanical factors

The desirability of any particular managerial accounting technique or information must be determined in light of its costs and benefits.

Behavioral and Technical Considerations

Management accounting information serves two functions: decision-facilitating and decision-influencing       

Information generated will influence behavior - seek to motivate, direct appropriately. Management is not limited to the technical.

For example, How will the GM react with the budget? It involve the behavioral tendencies of people and their cognitive limitations in using information. The better a Management Accountant's understanding of human behavior is, the more effective to be provider of information

MA provides additional data to aid in planning, controlling and providing feedback for management (to make more informed decisions). Remind that decision making is not the role of MA.

MA vs. FA, Cost Accounting System (Page 8 - 11)

MA: Focus on the needs of managers within the organization

FA: The use of accounting information for reporting to parties outside the organization

Cost Accounting System is a part of basic accounting system that accumulates cost data for use in both MA and FA.

The role of Traditional Management Accounting

Recent Issues     | Top |

Service vs Manufacturing firms

Key difference is that most services are consumed as they are produced. Most services cannot be inventoried like manufactured goods. Service organizations also tend to be more labor-intensive.

Planning international Operations

Managers of multinationals must take into account the different tax laws and rates in the countries where they do business. Multinationals must continually monitor the fluctuating values of foreign currencies

Focus on Customer

Managers are increasingly aware of their product's value to the customer, which is the customer's perceived difference between the benefits the customer receives and the sacrifice the customer incurs to receive the product.

Cross-Functional Teams

Cross-functional managerial teams bring together production and operations managers, marketing managers, purchasing and material-handling specialists, design engineers, quality management personnel, and managerial accountants to focus their varied expertise and experience on virtually all management issues.

Product Life Cycles and Diversity

Highly automated manufacturing systems enable manufacturers to produce an ever-more diverse set of products. That mean the life cycles of most products are becoming shorter.

Time-Based Competition (Time to Market Objective)

Response time, lead time, on time and downtime. By reducing the time it takes to develop a new product and getting the product on the market more quickly, a company can gain an important advantage over its competitors.

IT Issue

Managerial accountants often play significant roles in selecting software for their organizations or designing in-house software to meet the organization's unique needs.

Traditional vs. JIT Inventory Management (Page 21)

Traditional - Inventories of raw materials and parts, work in process and finished goods were kept as a buffer against the possibility of running out of a needed item. Large buffer inventories consume valuable resources and generate hidden costs.

JIT - raw materials and parts are purchased or produced just in time to be used at each stage of the production process. (Backward "pull" approach). It results in a smooth flow of production and significantly reduced inventory levels, considerable cost savings for manufacturer.

Cost Concepts     | Top |

Why focus upon costs ? To understand cost behavior in order to have a better cost management

In formulating the overall strategy (Page 36)

Cost - The sacrifice made usually measured by the resources given up, to achieve a particular purpose

Expense - The cost incurred when an asset is used up or sold for the purpose of generating revenue.

Product Cost - Cost assigned to goods either purchased or manufactured for resale. It is used to value the inventory of manufactured goods or merchandise until the goods are sold. Product costs for merchandise inventory acquired by a retailer or wholesaler for resale consists of the purchase cost of the inventory plus any shipping charges.

Another term for product cost is inventoriable cost - it is stored as the cost of inventory until the goods are sold.

Cost of Goods Sold - expense measured by the cost of the finished goods sold during a period of time.

Period Cost - expenses during the period in which they are incurred

Operating Expense - cost incurred to produce services

Variable Cost - changes in total in direct proportion to a change in the level of activity

Variable cost per unit - being consistent when the activity level changes

Fixed Cost - does not change in total as activity changes, e.g. depreciation of plant and equipment

Fixed Cost per unit - Decline when the activity level rise, vice versa. The amount of the change in unit fixed cost declines as the activity level increases. (Graph, Page 52)

Types of manufacturing inventory | Top |

Raw Material - material that will be entered into manufacturing process

Work in Process - partially completed products not yet ready for sale

Finished Goods - completed products awaiting for sale

Manufacturing Costs (Page 43) | Top |

Direct Material - raw material that is physically incorporated into the finished product

Direct Labor - cost of salaries, wages and fringe benefits for personnel who work directly on the manufactured products

Manufacturing Overhead - all manufacturing cost other than DM and DL

Indirect Material - required for the process but not become an integral part of the finished product or are materials consumed in production but insignificant in cost

Indirect labor - Cost of personnel who do not work directly on the product, but whose services are necessary for the manufacturing process

Other manufacturing costs - depreciation of plant and equipment, prooperty tax, insurance, utilities, service department, OT, Idle time

Prime Cost - DM + DL

Conversion Cost - DL + O/H

Cost Behavior (Page 274 - 285) | Top |

Assumptions: Cost can be divided into either fixed or variable

Mixed Cost (Semi-variable Cost) - Has both fixed and variable component (Page 279)

Step cost: where changes in level of activity will result in significant cost changes

Step-variable cost - is nearly variable, but increase in small steps instead of continuously.

Step-fixed cost - Remains fixed over wide ranges of activity, but jumps to a different amount for activity level outside that range

Opportunity Cost - the potential benefit given up when the choice of one action precludes selection of a different action

Out of pocket Cost - require the expenditure of cash or other assets

Sunk Cost - Cost have been incurred in the past and cannot be altered by any current or future decisions. It should not be considered in decision making

Differential Cost - Difference in a cost item under two decision alternatives

Incremental Cost - cost is the amount by which the cost of one action exceeds that of another

Marginal Cost - the extra cost incurred in producing one additional unit of output

Average cost per unit

Cost Tracing (Page 53 - 54)     | Top |

Tracing of costs to departments is known as responsibility accounting

A Cost can be direct cost of one department or subunit in the organization but an indirect cost of other departments.

An important objective of cost management system is to trace as many costs as possible directly to the activities that cause them to be incurred to eliminate non-value-added costs.

Direct Cost - cost can be traced to a particular department (e.g. salary)

Indirect Cost - cost cannot be traced to a particular department (e.g. advertising)

Controllable and Uncontrollable costs (Page 54 - 57)

Some costs may be controllable in the long run but not in the short run. For example, Cost of the equipment leased

Costs may be controllable or uncontrollable by various managers.  For example, quantity of materials used - controllable by production managers, price of materials - controllable by purchasing managers.

Cost Allocation (Page 529 - 530) | Top |

Cost Driver - characteristic of an activity or even that causes costs to be incurred by the activity or event. Factors that change the level of cost incurred.

Consideration of Cost Driver (Page 48)

Cost Pool - collection of costs to be assigned to a set of cost objects

Cost Object - responsibility centers, products or services to which costs are assigned

Cost Accumulation - Collecting costs in some natural classification (e.g. wages paid, utilities)

Cost Allocation - the process of assigning costs in a cost pool to the appropriate cost objects

Allocation Base - A measure of activity, physical characteristic or economic characteristic that is associated with the responsibility centre which are the cost objects in an allocation process

Allocation influenced by

Cost Management System (CMS) (Page 195)

CMS is a management planning and control system.

A Cost management system measures the cost of significant activities, identifies non-value-added costs, and identifies activities that will improve organizational performance. It takes a proactive role in planning, managing and reducing costs.

Objectives

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