MANAGEMENT ACCOUNTING Introduction to Management Accounting Chapter - - PowerPoint PPT Presentation
MANAGEMENT ACCOUNTING Introduction to Management Accounting Chapter 1 Prepared and delivered by: Dhanushka Abeysekara Sithari Herath Learning Outcomes LO1: Demonstrate an understanding of management accounting systems. LO2: Apply a
Prepared and delivered by:
Dhanushka Abeysekara Sithari Herath
Financial Accounting (FA) Management Accounting (MA)
Users Mainly for external users Mainly for internal users Frequency Usually prepared for a year Usually prepared monthly or quarterly Regulations Rules, laws, concepts, standards apply No regulations Formats Standard formats are compulsory Only traditional formats Focus Mainly past information Past and forecasted information Audit External audit is compulsory for some entities Not normally audited
Management Accounting Cost Accounting MA FA Accounting
Example 1 For a period the rent was £500. Draw a graph to show the rent cost changes with the no
100 200 300 400 500 600 1 2 3 4 5 6
Cost £ No of units
Total Fixed Cost
Cost (£) 500 1 500 2 500 3 500 4 500 5 500
0.00 100.00 200.00 300.00 400.00 500.00 600.00 2 4 6 8
Cost £ No of units
Fixed Cost per Unit
units Total Fixed Cost (£) Fixed Cost/Unit (£) 1 500 500.00 2 500 250.00 3 500 166.67 4 500 125.00 5 500 100.00 6 500 83.33
Example 2 If the company wants to increase the production capacity beyond 5000 units, it has to increase the storage capacity as well. For this, it has to rent out another warehouse for £250. Draw a graph to show the rent cost changes with the no of units produced
100 200 300 400 500 600 700 800 2000 4000 6000 8000 10000 12000
Cost £ No of units
Total Fixed Cost
Cost (£) 500 500 500 1,000 500 3,500 500 4,000 500 5,000 500 5,001 750 5,500 750 6,000 750 7,000 750 10,000 750
Example 3 For a company the rent cost is £50. Draw a graph which shows the fixed cost per unit using a production of 1 to 5 units.
units Total Fixed Cost (£) Cost per unit (£) 1 50 50.00 2 50 25.00 3 50 16.67 4 50 12.50 5 50 10.00
0.00 10.00 20.00 30.00 40.00 50.00 60.00 1 2 3 4 5 6
Cost £ No of units
Fixed Cost per Unit
Example 4 To produce one unit of product X, it costs £5 for the materials. Draw a graph to show changes in total variable cost (material cost) with the activity level (no of units of X)
units Variable cost/unit (£) Total Variable Cost (£) 5 1 5 5 2 5 10 3 5 15 4 5 20 5 5 25
5 10 15 20 25 30 1 2 3 4 5 6
Cost £ No of units
Total Variable Cost
Example 5 Draw a graph to show how the variable cost per unit changes with the activity level. (For the same example above
units Variable cost/unit (£) 5 1 5 2 5 3 5 4 5 5 5
1 2 3 4 5 6 1 2 3 4 5 6
Cost £ No of units
Variable Cost per Unit
Example 6 In a company telephone charges comprises of £100 fixed cost as well as per unit charge
cost changes with the activity level.
No of Units 50 75 100 101 130 150 200 Units more than 100 1 30 50 100 Fixed Cost (£) 100 100 100 100 100 100 100 100 Variable Cost per Unit (£) 2 2 2 2 Total Variable cost (£) 2 60 100 200 Total Cost (£) (FC+TVC) 100 100 100 100 102 160 200 300
50 100 150 200 250 300 350 50 100 150 200 250
Cost £ No of units
Semi Variable Cost No of Units Total Cost (£) (FC+TVC) 100 50 100 75 100 100 100 101 102 130 160 150 200 200 300
Example 7 If the company wants to increase the production capacity beyond 5000 units, it has to increase the storage capacity as well. For this, it has to rent out another warehouse for £250. Draw a graph to show the rent cost changes with the no of units produced
No of Units Units more than 100 Fixed Cost (£) Variable Cost per Unit (£) Total Variable cost (£) Total Cost (£) (FC+TVC) 100 100 50 100 100 75 100 100 100 100 100 120 20 100 2 40 140 500 400 100 2 800 900 3,500 3,400 100 2 6,800 6,900 5,000 4,900 100 2 9,800 9,900 5,500 5,400 350 2 10,800 11,150 7,000 6,900 350 2 13,800 14,150 10,000 9,900 350 2 19,800 20,150
No of Units Total Cost (£) (FC+TVC) 100 50 100 75 100 100 100 120 140 500 900 3,500 6,900 5,000 9,900 5,500 11,150 7,000 14,150 10,000 20,150
5000 10000 15000 20000 25000 2000 4000 6000 8000 10000 12000
Cost £ No of units
Semi Variable Cost
Example 8 For a company January telephone bill was £600 for 100 units. In February it was £750 for 150 units. Calculate the fixed cost and variable cost per unit. Month Units Cost (£) Jan 100 600 Feb 150 750
Change in Units 50 Change in Cost (£) 150
Step 1: Calculate the change in units and change in cost Step 2: Calculate the Variable cost per unit (VC/Unit) VC/Unit = 𝐷ℎ𝑏𝑜𝑓 𝑗𝑜 𝐷𝑝𝑡𝑢
𝐷ℎ𝑏𝑜𝑓 𝑗𝑜 𝑉𝑜𝑗𝑢𝑡
VC/Unit = 150/50 £3
Step 3: Calculate the total variable cost at any activity level of your choice At activity level 100:
TVC = VC per Unit × Activity level or Number of Units 3 × 100 £300
Step 4: Calculate the total Fixed Cost using the same activity level At activity level 100:
TFC = Total Cost - Total Variable Cost 600 - 300 £300
Step 5: Double check the answer by calculating total cost of the other activity level Total cost at the activity level of 150
TC = TVC+TFC (3×150)+300 £750
Example 9 For a company January electricity bill was £900 for 40 units. In February it was £1,000 for 50 units. Calculate the fixed cost and variable cost per unit. Example 10 For a company January telephone bill was £1,200 for 200 units. In February it was £1,050 for 150 units. Calculate the fixed cost and variable cost per unit.
Month Units Cost (£) Jan 40 900 Feb 50 1000 VC Per Unit = (1000-900)/(50-40) £10 TVC @ 40 Units= 10×40 £400 TFC = 900-400 £500
Answer : Variable cost per unit = £3 Fixed Cost = £600
include the cost of obtaining the materials and receiving them within the
Eg: Raw materials; components; cleaning materials; machine spare parts; machine oil.
those costs incurred in the form of wages and salaries, together with related employment costs Eg: wages, Salaries, Commission, Bonuses etc.
are external costs such as rent, business rates, electricity, gas, postages, telephones and similar items.
These are costs can be directly identified with a unit of product or service produced
These are costs can not be directly identified with a unit of product or service produced
Material Labour Expenses Material Labour Expenses Cost of materials that can be clearly identified with a unit of product or service produced Cost of labour that can be clearly identified with a unit of product or service produced Other costs that can be clearly identified with a unit of product or service produced Cost of materials that can not be clearly identified with a unit of product or service produced Cost of labour that can not be clearly identified with a unit of product or service produced Other costs that can not be clearly identified with a unit of product or service produced
Cloth Cutting and sewing Logo designing
Machine oil Factory supervisor Factory security Factory rent Factory electricity Machine depreciation Direct material Direct labour Direct expenses Indirect material Indirect labour Indirect expenses
Materials, Labour, any other production related cost.
Rent, telephone bill, Postage and any other administration related cost.
Advertising, Sales promotion, Sales commission and any other selling and distribution related cost.
Costs related to research and development of new products, imroviments of existing products, or new processes
Example 11 A company has a raw material cost of £15 per unit, a machine workers cost of £5 per unit and a royalty payment on production of £2 per unit. Cost of other materials used in the factory is £4,000. Salary of the factory supervisor is £6,000. Other expenses such as factory rent, machine depreciation, electricity etc…amounts to £6,000. Other overheads such as administration, selling and distribution amounts to £2,000. Company produced 1,000 units and it is company policy to add a 25% profit mark-up on cost. Calculate the selling price per unit.
A company increases its activity within the relevant range. Tick the correct answer below to indicate the effect on costs. Total variable costs will: increase decrease remain the same Total fixed cost will: Increase decrease remain the same The variable cost per unit will: increase decrease remain the same The fixed cost per unit will: increase decrease remain the same
In a hotel, which of the following would be suitable cost units and cost centres?
Restaurant Guest night Meal served Fitness suite Bar Suitable as cost centre Suitable as cost unit
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In determining the cost of providing a cleaning service to a particular client, which
would be an indirect cost?
(a) The wages paid to the cleaner who is sent to the client’s premises Direct cost Indirect cost (b) The cost of carpet shampoo used by the cleaner (c) The salaries of Spotless Ltd’s accounts clerks (d) Rent of the premises where Spotless Ltd stores its cleaning materials and equipment (e) Travelling expenses paid to the cleaner to reach the client’s premises (f) Advertising expenses incurred in attracting more clients to Spotless Ltd’s business
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2 . floppy disks for general office computer
the factory