Welcome to: FNSACC507A Provide Management Accounting Information
Week 1 – Chapter 1 COST CONCEPTS FNSACC507A Provide Management Accounting Information
By the end of this lesson, you will be able to … 1. Explain the difference between management accounting and financial accounting and cost accounting 2. Identify and discuss basic cost concepts 3. Use the high-low method of cost estimation
PART FOCUS 1 Intro. to Management Accounting 2 Management Accounting + Cost concepts 3 Cost estimation using the High-Low Method
1. Management Accounting 1. What is MANAGEMENT ACCOUNTING about? Definition Purpose Tasks Output 2. How is MANAGEMENT ACCOUNTING different from: Financial Accounting Cost Accounting
Management Accounting DEFINITION The process of producing financial and operating information regarding the economic activity engaged in by an organisation. This information needs to be complete, relevant, timely and accurate.
Management Accounting PURPOSE This information is provided for decision makers internal to the organisation e.g. employees and managers. The management accounting process is driven by the information needs of these decision makers.
Management Accounting TASKS PROCESS and REPORT the CONVERT data information to information to end users STORE the COLLECT operational information and financial data
Management Accounting OUTPUT e.g. How much e.g. e.g. e.g. does What are our What are our How much a specific estimated material profit do we product or production and labour expect to make? activity quantities? requirements? cost?
Management Accounting How is it different from; 1. Financial Accounting? 2. Cost Accounting?
vs. FINANCIAL ACCOUNTING Management Accounting à INTERNAL focus Financial Accounting à EXTERNAL focus
vs. FINANCIAL ACCOUNTING Four (4) main differences: MANAGEMENT ACCOUNTING FINANCIAL ACCOUNTING 1 Focus is on providing info. to users Focus is on providing info. to users WITHIN the organisation e.g. Sales OUTSIDE the organisation Manager. e.g. shareholders & gov’t authorities. 2 Not required by law Required by law e.g. Statutory Accounts e.g. production forecast. to be submitted to ASIC (specific accounting & auditing standards control reporting formats & content). 3 Focus dictated by the info. needs of Focus is on the organisation as a whole the business and may be broad or e.g. ITR for ABC Ltd narrow e.g. on a particular product or cost centre of ABC Ltd. 4 More concerned about what is likely Past performance is the primary focus. to happen in the future.
vs. COST ACCOUNTING Cost accounting à NARROW focus Management accounting à BROAD focus MANAGEMENT ACCOUNTING includes cost accounting i.e. COST ACCOUNTING is a subset of the management accounting system. COST ACCOUNTING relates to the planning and control of activities across the organisation.
vs. COST ACCOUNTING Budgeting & forecasting MANAGEMENT ACCOUNTING Performance Cost reporting accounting
PLAN and CONTROL Continuous COMPARISON of FORMULATE corporate ACTUAL vs. BUDGET or GOALS STANDARD à VARIANCE + ACTION to be taken to reach those goals Provides basis on which to implement corrective action
vs. COST ACCOUNTING Some EXAMPLES of the different types of TASKS / OUTPUTS for each role … MANAGEMENT ACCOUNTANT COST ACCOUNTANT Resource acquisition & disposal Provide info. about the cost of a product analysis or service Revenue forecasting Prepare the costings associated with a specific activity, department or cost centre Project management Analyse the results of historical business operations Capital investment analysis
2.1 Cost Concepts 1. The relationship between ACTIVITY and COST 2. Cost classification Fixed costs vs. Variable costs Unit cost Service cost Product cost vs. Period cost Conversion cost 3. The manufacturing process Direct vs. Indirect costs Factory overhead 4. Types of inventories
The relationship between ACTIVITY and COST The measurement of activities is the key organising principle for studying management accounting information.
Organisational activities ACTIVITIES provide the link between spending on resources (people, equipment, materials etc.) and the products or services delivered to customers.
The relationship between ACTIVITY and COST Effective methods of cost control involve understanding what causes costs and what activities add value . A value added activity is one that, if eliminated, would reduce the product's service potential to the customer. A non-value added activity is an activity that presents opportunities for cost reduction without reducing the product's service potential to the customer.
The relationship between ACTIVITY and COST A COST can be defined as something of value (e.g. money) given up in exchange for something else (e.g. a good or service). Costs incurred necessitate the use of scarce resources. Therefore, the efficient operation of the organisation depends on management being fully and accurately informed about costs.
Cost Classification (FIXED vs. VARIABLE costs) FIXED COSTS in total do not vary (in the short run) with changing levels of activity. The cost per unit decreases as activity increases. This relationship is constant within the relevant range of activity. e.g. factory rent
Fixed Costs
Cost Classification (FIXED vs. VARIABLE costs) VARIABLE COSTS in total vary (in the short run) with changing levels of activity. Remain the same per unit over the relevant range. e.g. direct labour
Variable Costs
Cost Classification UNIT COST = the cost of manufacturing one unit of production. Example: n Costs incurred for the month amount to $10,000. n During the month 1,000 units are produced. n The unit cost of production for the month is $10.00 per unit.
Components of unit cost MANUFACTURING SERVICE ORGANISATION ORGANISATION Direct materials Other direct expenses (or costs) Direct labour Labour costs Factory overhead Overhead costs
Cost Classification SERVICE COST usually includes direct labour and overhead costs. The output of a service organisation (e.g. tax advice) has to be used up at the time it is made available, that is, it cannot be stored and sold later on like a manufactured good.
Cost Classification (PRODUCT vs. PERIOD costs) PRODUCT COST = the cost of converting raw materials into a finished product e.g. toy boxes. MANUFACTURING or PRODUCT costs include: (1) Direct materials e.g. cardboard (2) Direct labour (3) Factory overhead
Cost Classification (PRODUCT vs. PERIOD costs) PERIOD COSTS include all other costs associated with the business (i.e. expired costs). 1. Marketing/selling/distribution expenses 2. General and admin. expenses 3. Financial expenses
FLOW OF PRODUCT AND PERIOD COSTS (refer to your text p.44)
Cost Classification PRIME COST = the DIRECT cost associated with the manufacture of a product = DIRECT material + DIRECT labour
Cost Classification CONVERSION COST = the cost associated with the conversion of raw materials into finished goods = Direct labour + Factory overhead
The Manufacturing Process Is about converting raw materials into finished goods with the use of direct labour and factory overhead .
The Manufacturing Process
The Manufacturing Process MATERIALS WORK IN PROGRESS FINISHED GOODS LABOUR OVERHEADS
DIRECT versus INDIRECT costs FACTORY OVERHEAD: All indirect costs of running a factory INDIRECT COSTS e.g. indirect materials and labour; factory insurance; light and Costs that cannot be traced very power used by the factory easily to a particular product. All factory overhead. DIRECT COSTS Major items of cost that can be traced quite easily to a particular product Direct labour Direct materials
¡ Cost Classification Summary
What is factory overhead? Includes all factory costs other than direct materials and direct labour. Is also referred to as indirect manufacturing cost. Cannot be traced or is not worthwhile tracing (cost vs. benefit) to individual units of production. Examples: * Factory insurance * Factory supervisor’s salary * Factory light & power
What do we do with factory overhead? Although factory overhead costs cannot be traced (or are not worthwhile tracing) to individual units of production, the TOTAL FACTORY OVERHEAD COST incurred MUST BE ALLOCATED to individual units of production REGARDLESS. This means that each product has to be charged with an estimated amount of factory overhead which is expected to cover the actual TOTAL cost incurred. How do we do this? You’ll find out in week 14 …
Types of inventories Materials includes stocks of raw material and factory supplies e.g. lubricating oils for machinery. Work-in-progress are partly completed goods that will be completed in the future e.g. cardboard pieces cut out and ready to be glued. Finished goods are fully completed products ready for sale e.g. toy boxes.
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