ACCT312

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MANAGEMENT

ACCOUNTING 2

Welcome to ACCT312

MANAGEMENT ACCOUNTING 2

Dr. Davood Askarany

Office: Building 11H-14

Teaching hours:

Sundays and Tuesdays: 2.00pm-3.15pm

Room: 6B

Office hours:

10:00 – 12:00 Saturday and Sundays

Room: 11H-14

Textbook:

Textbook: Horngren, C, Datar, S, Foster, G, Rajan, M

and C Ittner.(2009). Cost Accounting: A Managerial

Emphasis. 13th edition, Pearson.

Content Outline

Introduction CH2

Cost measurement systems, variable and absorption costing CH9,

CVP analysis CH3

Variations in cost systems, allocation of service-department CH15

Management Control, forecasts, projections and budgets, cost

estimation CH10,

Master budget, variance analysis, flexible budget and variances CH7,

Overhead variances CH8

Management control and transfer pricing CH22

Capital budgeting and cost analysis, CH 21

EOQ Inventory Management, Just-in-Time CH20

Decision Making and Relevant Information, CH11

Expectations

• Prepare readings in advance

• Do practice exercises especially your assignments

• Work throughout semester

• Ask questions!

• Attend all lectures

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Additional Learning Resources

• Eldenburg, L. G., Brooks, A., Oliver, J., Vesty, G. & Wolcott, S. 2008,

Contemporary Management Accounting, John Wiley & Sons Limited,

Australia

• Hilton, R. W., Maher, M. W., & Selto, F. H., 2006, Cost Management

Strategies for Business Decisions, McGraw-Hill Irwin, New York

• Drury, C. 2004, Student’s Manual - Management and Cost Accounting (6th

ed.) Thompson Learning

• Barlow, J, F. 2001, Excel Models: For business and operations management.

Chichester, England: John Wiley & Sons Limited

• Cornes, D., 1996, Evolution Before Revolution, Management Accounting

(UK), April, pp.16-18

• Böer, G., 1994, Five Modern Management Accounting Myths, Management

Accounting (USA), January, pp.22-27

• Gantt, H.L., 1994, The Relation Between Production and Costs, Journal of

Cost Management, Spring, pp.4-11 7

Assessment:

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Type of Assessment Percentage

Assignments 20%

Mid-Term 20%

Final Exam 60%

Total 100%

ACCT312 Introduction to

cost terms and

purposes

Chapters

1 -3

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1. Definition of Accounting

the process of identifying, measuring and

communicating

economic information to permit informed

judgements and

decisions by users of the information.

2. Users of accounting information can be

divided into two categories:

(i) External parties outside the organization (financial

accounting).

(ii) Internal parties within the organization

(management accounting).

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3. Major differences between financial and

management accounting:

Statutory requirement for companies to produce

annual financial statements, whereas there is no legal

requirement for management accounting.

Financial accounting reports describe the whole of

the organisation, whereas management accounting

focuses on reporting information for different parts of

the business.

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3. Major differences between financial and

management accounting (continued):

Financial accounting reports must be prepared in

accordance with generally accepted accounting

principles (e.g. SSAPs) –statement of standard accounting practices.

Financial accounting reports historical information,

whereas management accounting places greater

emphasis on reporting estimated future costs and

revenues.

• Management accounting reports are produced at more

frequent intervals.

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Cost terms

• Cost Object: Anything for which a cost is required.

Often a product, but could be a service, activity, cost centre,

department etc.

• Direct cost: A cost that can be traced to a cost object in an

economically feasible (e.g. staple is traceable but not

economically feasible) manner.

• Indirect cost (Also known as Overheads) : a cost that cannot

be traced to a cost object in an economically feasible

manner.

The distinction between direct and indirect costs depends on

what is identified as the cost object. (e.g. for a department

depreciation may be direct cost but it would be indirect cost for a

product produced in that department)

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Cost terms (continued):

Note. A cost can only be described as direct or indirect in

relation to a given cost object – a direct cost for a

particular cost object may be an indirect cost to a different

cost object.

• Cost Assignment: Linking costs to cost objects.

Two methods:

1. Tracing

2. Allocating (using some arbitrary {but rational} base)

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Cost Terms (continued):

• Prime cost: Direct materials + direct labour.

• Conversion cost: Direct labour + manufacturing

overhead.

• Product cost: Cost assigned to a product.

• Period cost: Cost regarded as an expense in the current

accounting period.

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Reasons for Studying Costing

• Stock valuation & profit calculation

• Short-term decision making

• Long-term decision making

• Control

• Pricing

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Cost Terms (continued):

• A cost collection system normally accounts for costs in two

broad stages:

– 1. Accumulates costs by classifying them into certain

categories (e.g. labour, materials and overheads).

– 2. Assigns costs to cost objects.

Cost allocations = process of assigning costs to cost objects

that involve the use of surrogate, rather than direct

measures.

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© 2000 Colin Drury

Categories of Manufacturing Costs

• Traditional cost systems accumulate

product costs as follows:

Direct materials xxx

Direct labour xxx

Prime cost xxx

Manufacturing overhead xxx

Total manufacturing cost xxx

Non-manufacturing overheads xxx

Total cost xxx

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© 2000 Colin Drury

Classification by cost behaviour

• Important to predict costs and revenues at different

activity levels for many decisions.

• Variable costs vary in direct proportion with activity.

• Fixed costs remain constant over wide ranges of activity.

• Semi-fixed costs are fixed within specified activity levels,

but they eventually increase or decrease by some constant

amount at critical activity levels.

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© 2000 Colin Drury

Classification by cost behaviour

• Semi-variable costs include both a fixed and a variable

component (e.g. telephone charges).

Note that the classification of costs depends on the time

period involved. In the short term some costs are fixed, but

in the long term all costs are variable.

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Cost behaviour (Variable cost)

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Cost behaviour (fixed cost)

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© 2000 Colin Drury

Avoidable and unavoidable costs

• Avoidable costs are those costs that can be saved by not

adopting a given alternative, whereas unavoidable costs

cannot be saved.

• Avoidable/unavoidable costs are alternative terms

sometimes used to describe relevant/irrelevant costs.

Relevant and irrelevant costs and revenues

• Relevant costs and revenues are those future costs and

revenues that will be changed by a decision, whereas

irrelevant costs and revenues will not be changed by a

decision.

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© 2000 Colin Drury

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Concepts of Costs & Benefits for

Decision-making

Costs & Benefits

Future Past

economic costs & benefits costs & benefits

Uncommitted Committed

Future economic Future economic

costs & benefits costs & benefits

RELEVANT IRRELEVANT Costs & Benefits Costs & Benefits

(avoidable) (either unavoidable or totally avoided)

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Concepts of Costs & Benefits for

Decision-making

Relevant Costs & Benefits

“to do” “not to do”

Incremental Opportunity Costs & Benefits Costs & Benefits

Net incremental Net opportunity

Costs/Benefits Costs/Benefits

DIFFERENTIAL

COST OR BENEFIT

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TOTAL COSTS Manufacturing Non Manufacturing

Variable

Direct Costs

D. Materials

D. Labour

Sub-

contracts

Variable

Indirect Costs

Electricity

Indirect

materials

Variable Sales

and

Distribution

Commissions

Fuel

Variable

Admin

Telecommuni-

cations

Stationery

Variable

Costing

Fixed

Fixed Indirect

Costs

Rent

Depreciation

Supervisory

salaries

Security

Fixed Sales

and

Distribution

Rent

Depreciation

Salaries

Advertising

Fixed Admin

Rent

Depreciation

Salaries

Absorption Costing (Period Costs) 29

© 2000 Colin Drury

Sunk costs

• Sunk costs are the costs of resources already acquired

and are unaffected by the choice between the various

alternatives (e.g. depreciation).

• Sunk costs are irrelevant for decision-making.

Opportunity costs

• A cost that measures the opportunity that is lost or

sacrificed when the choice of one course of action

requires that an alternative course of action be given up.

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© 2000 Colin Drury

Example To produce product X requires that an order that yields

$1000 contribution to profits is rejected. The lost

contribution of $1000 represents the opportunity cost of

producing product X.

Marginal and incremental costs/revenues

• Incremental costs and revenues are the additional

costs/revenues from the production or sale of a group of

additional units.

• Marginal cost/revenue represents the additional

cost/revenue of one additional unit of output.

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© 2000 Colin Drury

End of introduction

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