chapter 2 management accounting: basic terms and concepts
TRANSCRIPT
Chapter 2
Management accounting: basic terms and concepts
Components of a management accounting systemCosting system - cost of products and
organisational unitsBudgeting system - planned revenues and
costsPerformance measurement - differences
between planned and actual performanceCost management system - managing the
causes of cost
Conventional vs contemporary approaches tomanagement accounting
Costing systems Conventional - focus on products and
organisational units, production volume assumed to drive costs
Contemporary - cost of activities, many causes of cost
Cont.
Conventional vs contemporary approaches tomanagement accounting
Budgeting systems Conventional - departmental budgets
aggregated to obtain organisation’s overall budget
Contemporary - activity-based budgeting, built around activities
Cont.
Conventional vs contemporary approaches to management accounting
Performance measurement Conventional - focus on controlling costs,
differences between actual and budget Contemporary - feedback on a range of critical
success factors; balanced scorecard, benchmarking and activity-based performance measures
Cont.
Conventional vs contemporary approaches tomanagement accounting
Cost management systems Conventional - information for controlling costs Contemporary - cost control and cost reduction;
search for ‘root’ causes
Emphasis on costs
Value chain upstream costs
• research and development, product design manufacturing/production costs downstream costs
• selling, distribution, customer support
Historic emphasis on costs production large proportion of cost upstream and downstream costs insignificant
Cont.
Emphasis on costs
Importance of cost information all organisations incur costs management decisions generally cause costs managers need to understand cost causes to
plan and control
Role of non-financial information decision makers also require qualitative
information for decisions
Classifying costs
Costs - resources given up to achieve a particular objective
Classification of costs variable costs - change in total, in direct
proportion to a change in the level of activity fixed costs - remain unchanged in total despite
changes in the level of activity cost driver - any activity or factor which causes
costs to be incurred
Cont.
Classifying costs
cost object - items which are assigned a separate measure of cost
direct costs - can be identified with, or traced to, a particular cost object in an economic manner
indirect costs - cannot be identified with or traced to a cost object in an economic manner
direct product costs - manufacturing costs that can be traced to products in an economic manner
Responsibility accounting
Holding individual managers responsible for results of their organisational units responsibility centres - areas of a business
where managers are held responsible for activities and results
controllable costs - costs a specific manager can control or significantly influence
uncontrollable costs - costs a specific manager cannot significantly influence
Costs in manufacturing businesses
Non manufacturing costs upstream costs
• research and development
• product design downstream costs
• marketing costs
• selling (or order-getting costs)
• distribution (or order-filling costs)
• customer support
Cont.
Costs in manufacturing businesses
Manufacturing costs direct material - cost of materials consumed in
the manufacturing process to produce a product, where the cost can be traced to each product in an economic manner
direct labour - costs of salaries, wages and labour on-costs for personnel who work directly on the manufactured product
manufacturing overhead - all other costs of manufacturing
Cont.
Costs in manufacturing businesses
Manufacturing overhead indirect materials and indirect labour costs of depreciation, insurance of factory,
utilities and manufacturing support departments costs of manufacturing support departments
• do not work directly on the manufacturing products but are essential to the manufacturing process
idle time and overtime premium
Cont.
Costs in manufacturing businesses
Combined manufacturing costs conversion costs - direct labour and
manufacturing overhead incurred to convert raw materials to finished product
prime costs - direct manufacturing costs traced to a product; direct materials and direct labour
Costs in service businesses
Service firms - produce services rather than goodsDifferences between service and manufacturing
businesses most service outputs are intangible service outputs are often heterogeneous services are often consumed as they are produced services are perishable and cannot be stored
Cont.
Costs in service businesses
Costs are classified in service businesses to provide information for managers’ decisions
Direct labour costs are significantDirect material costs are insignificantOverhead costs may refer to all indirect
costs, including production, upstream and downstream costs
Product costs in financial accounting reportsProduct costs - regarded as asset until soldCost of goods sold - matched against
revenue to determine gross marginPeriod costs - all costs which are not
product costs, expensed in the accounting period in which they are incurred
Selling costsAdministrative costs
Product costs for decision making
For longer-term decisions, product costs may include upstream, manufacturing and downstream costs
For short-term decisions, manufacturing and downstream costs may be considered
Cost structure - relative proportions of an organisation’s variable and fixed costs
Cost flows in amanufacturing business
Inventories raw materials - costs of all major materials
purchased for manufacturing work in process - products on which
manufacture has begun but is only partially complete at balance date
finished goods - manufactured goods that are complete and ready for sale
Cont.
Cost flows in amanufacturing business
Schedule of cost of goods manufactured cost of direct materials, direct labour and
manufacturing overhead applied to work in process during the period, and changes in work in progress inventory
Schedule of cost of goods sold cost of goods sold, and the changes in the
finished goods inventory
Costs and benefits of information
Management accountants need to assess the benefits of providing information against the cost of generating, communicating and using that information
Too much information may cause information overload
A recent survey identified monthly reports of less than 10 pages as ‘best practice’
Exhibit 2.1
Exhibit 2.5