Cost and Management Accounting
Learning Objectives for Cost and Management Accounting
Describe the purpose of management accounting in organisations, with regards to the role of the management accountant, the users of accounting information and the operating environment Identify the nature of the various costs that arise within the business entity and the implications of such costs for the business Distinguish between job costing, process costing and contract costing and determining the cost for jobs using various methods Differentiate between an absorption costing system and a marginal costing system Prepare profit statements based on marginal costing system and absorption costing systems. Apply standard costing methods within costing systems and demonstrate the reconciliation of budgeted and actual profit margins Explain the purpose of budgetary control Understand how activity based costing works in service and trading sector
Course Content
Major theme of course: How to create value through acquiring and using cost information to make better decisions and effectively manage value chain relationships
Introduction Cost concepts and cost-benefit analysis Cost flows and terminology Job order and Process Costing Absorption Costing CVP analysis Short term decision making and relevant cost analysis ABC Costing and Management Standard Costing Budgetary Control
Administrative Matters
Office Hours: Wednesday & Thursday from 4.00 p.m. to 5.00 p.m. No Discussion Hours Grading : Class Participation Quizzes ( Online / In class Surprise quizzes) Midterm examination ( Tentative date Dec.17th ) Final examination ( 2nd January 2012) 5% 20% 35% 40%
Session 1
Cost and Management Accounting An Introduction and Overview
Learning Objectives
Discuss key features of Cost and Management accounting Reflect on who uses cost information and why and how Identify / Discuss the Elements of Cost Become familiar with the Costing Methods, Costing Techniques Use of Cost accounting data for decision making purpose Finally to become Intelligent users of cost accounting information
The Nature of Cost Accounting
What is Cost accounting? Identifying Measuring Analyzing Interpreting Communicating information In pursuit an organizations goals. What is the difference between Cost accounting and financial accounting ?
Every entity keeps three separate sets of accounting records 1. Financial Accounting / Reporting records 2. Management accounting / Cost Accounting records 3. Taxation and other regulatory records
A Conceptual View of Accounting
The image cannot be display ed. Your computer may not hav e enough memory to open the image, or the image may hav e been corrupted. Restart y our computer, and then open the file again. If the red x still appears, y ou may hav e to delete the image and then insert it again. The image cannot be display ed. Your computer may not hav e enough memory to open the image, or the image may hav e been corrupted. Restart y our computer, and then open the file again. If the red x still appears, y ou may hav e to delete the image and then insert it again.
Suppliers
The image cannot be display ed. Your computer may not hav e enough memory to open the image, or the image may hav e been corrupted. Restart y our computer, and then open the file again. If the red x still appears, y ou may hav e to delete the image and then insert it again.
Customers
Acquire Resources
Process resources
Deliver Product
GAAP
The image cannot be display ed. Your computer may not hav e enough memory to open the image, or the image may hav e been corrupted. Restart y our computer, and then open the file again. If the red x still appears, y ou may hav e to delete the image and then insert it again.
Financial & nonfinancial data Estimate, validate, predict
Decision useful Information
Plan
Control
Auditors
Financial Statements
Financial Accounting
Management Accounting Managers
Shareholders, Lenders, Government
Cost Accounting and Financial Accounting - Comparison
Income Statement for the period .
Sales Materials Wages Other Expenses Profit (Balancing Figure)
150,000 (75,000) (20,000) (25,000) 30,000
Product Z 23,000 5,000 2,000 30,000 26,000 (4,000)
Statement of Cost and Profit for the period.. Total Product X Product Y Material Wages Other Expenses Total Cost (A) Sales (B) Profit / (Loss) (B A) 75,000 20,000 25,000 120,000 150,000 30,000 40,000 10,000 20,000 70,000 96,000 26,000 12,000 5,000 3,000 20,000 28,000 8,000
Basic Cost Concepts
According to Oxford Dictionary cost means The Price paid for something Cost is the amount of expenditure (actual or notional) incurred or attributable to a given thing. ( CIMA, London) Cost is a measurement, in monetary terms, of the amount of resources used for the purpose of production of goods or rendering of services. (ICWAI)
Basic Cost Concepts
Cost
Expired Cost Expense Shown in Income statement
Unexpired Cost Asset Shown in Balance Sheet
Basic Cost Concepts
Production cost
Cost of one unit of product or service
Components of production cost/product cost
inventoriable Direct materials Direct labor Conversion cost Mfg. Overhead Prime cost
- these costs are
Selling ,distribution and administrative expenses are period costs expensed in the period these costs are incurred Flow of costs -- We will discuss this in greater detail later
13
Two Kinds of Income Statements
Absorption costing or GAAP income statement - useful for external reporting - basis for product costing - long run measure of resource consumption Contribution margin or variable costing income statement - useful for decision making - short run measure of resource consumption CM statement with Relevant Costing information - Footnotes differential cost information to the CM statement - useful for decision making
14
Absorption Costing Income Statement
Nav Bharat Electronics, Inc. For the year ended 12/31/2009 Revenues Cost of goods sold Gross margin Selling, general and administrative expenses Operating income for the year Notes:
1. Cost of goods sold (COGS) refers to product costs includes DM, DL and MOH 2. Selling, general and administrative (SG&A) expenses are period costs - not inventoriable, i.e., must be expensed in the same period in which they are incurred
$100 $40 $60 $50 $10
15
Contribution Margin / Variable Costing Income Statement
Nav Bharat Electronics, Inc. For the year ended 12/31/2009 Revenues (10 million units @ $10/- per unit) Variable manufacturing costs ( 10 million units @ unit variable manufacturing cost $2/-) Variable selling and admin. costs ( 10 million units @ unit variable manufacturing cost $1/-) Total variable costs Contribution margin Fixed manufacturing costs Fixed selling, general and admin. Costs Total fixed costs Operating income for the year $40 20 $60 $10
16
$100 $20 10 $30 $70
Managerial Accounting and Value Creation
What is value? How can Managerial Accounting help in creating value? Managerial Accounting has an informational role in designing and implementing value creating strategies Some examples of Managerial Accountings role in promoting value creation Strategic Management of value drivers Getting the right cost value driver information for resource allocation Making good short term and long term resource allocation decisions through cost-benefit analysis Creating effective management control systems Using financial and non-financial performance measurement effectively
Key Informational Role of Managerial Accounting
Strategic Plans
Managerial
Continual
Improvement Accounting Information
Analytical Decisions
Control & Monitoring
Industry Value Chain
FIRM
Suppliers R&D ---- EngineeringProductionSales Customers
Effective Strategy formulation and implementation exploits the value chain Information acquired in strategy formulation and implementation includes value driver information and managerial accounting inputs on resource consumption Cost-Benefit Analysis is at the heart of all decision making
A Value Chain Perspective Of Intra-firm Business Functions PRE-MANUFACTURING
Product Conception Research and Development
Product/ Process Design
Prototype Test & Design Changes Operations &
Manufacturing
Customer
Customer Service
Distribution & Sales
Marketing
POST-MANUFACTURING
M A N U F A C T U R I N G How does a firm optimize its Internal activities and resources?
20
Practical Approaches for Value Creation
Managing Income statement value drivers Revenue drivers Cost drivers Creating strategies to increase revenues and decrease costs Managing Balance sheet value drivers Manage capital employed effectively
Different costs for different purposes!
Examples of Cost Driver Analysis in Value Chain Management
Understanding value drivers helps us get good financial information for decision making
How do products, services and customers consume resources? What are the links between process and resource consumption? Given the cost and revenue estimates for the products, how do they compare in profitability? How should scarce capacity be allocated among the products to maximize value?
Customer profitability management Supplier cost reduction through score-card performance measurement and cost analysis Cost reduction through process improvement Designing for efficient manufacturing
22
