management accounting

Who are the main users of accounting information?

Managers - require info that will assist them in decision making and control activities.

shareholders - require info on the value of their investment and income derived.

employees - require info on wages and job security

creditors/suppliers - require info on the organisations ability to pay

and government agencies - require info on sales, profits and taxes

How are accounting users classified?

Internal users (managers and employees) and external users (shareholders, creditors, and government agencies).

What is management accounting?

The provision of information to people within an organisation to help them make better decisions and improve efficiency and effectiveness.

What is financial accounting?

The provision of information to external parties about the overall performance and position of the business.

Is management accounting mandatory?

No, it is optional and information is produced only if the benefits exceed the costs. Financial accounting is legally required.

What are the key differences between management accounting and financial accounting?

	Financial	Management
Legal	Statutory requirement	Optional
Business	Whole business	Parts of business
Rules	GAAP, Companies Act	Best pratice
Time	Historical	Future focused
Frequency	Annually	As required

How does the business environment affect management accounting?

The business environment affects management accounting by changing the type of information managers need and the role management accountants play.

What factors characterise the changing business environment?

• global competition,

• deregulation & privatisation,

• growth of service sector,

• shorter product life cycles,

• advances in manufacturing technology,

• advances in info tech,

• customer orientation,

• environmental issues.

Group Deadlines Stress People, Making Insanity Common Everywhere

Why is ethical behaviour important in management accounting?

Unethical behaviour can harm stakeholders and threaten the long-term sustainability of an organisation.

Essential of ethics code

• Integrity (honest and truthful, avoid misleading statements)

• Objectivity (impartial and unbiased, avoid conflicts of interest)

• Professional competence (maintain knowledge & skill)

• Confidentiality (do not disclose information without permission)

• Professional behaviour (avoid discrediting the profession)

What are the core ethical principles for management accountants?

Integrity, objectivity, professional competence, confidentiality, and professional behaviour.

What factors drive customer satisfaction?

Cost efficiency - accurate cost information for products/services

quality - focuses on functions that deliver quality products

time - delivery times, time to bring new products to market

innovation and continuous improvement - new products, adaptable to customer requirements

What are the three functions of management accounting?

Scorekeeping - Captures and records financial information
(costs, revenues), and allocates costs between
products sold and items in inventory

problem solving - Provides relevant information to help managers
make better decisions
attention directing - provides managers with information for
planning, control, performance measurement
and continuous improvemen

mark-up

represents profit as a percentage of cost

cost price is 100%

margin

represents profit as a percentage of selling

selling price is 100%

What is a cost object?

Any activity for which a separate measurement of cost is desired, such as a product, service, department, or customer.

What are the two stages of cost collection?

Accumulating costs by category (type of expense, cost behaviour) and assigning those costs to cost objects.

What are direct costs?

Costs that can be specifically and exclusively traced to a cost object.

Give examples of direct costs.

Direct materials, direct labour, and direct expenses.

What are indirect costs?

Costs that cannot be traced directly to a cost object and therefore must be allocated.

Give examples of indirect costs.

• materials used to repair or test machinery

• staff employed in maintenance, warehouse staff, supervisors

• heating, lighting, factory rent, machine insurance
  

What are product costs?

Costs attached to goods produced or purchased for resale and included in inventory until sold.

• Costs associated with production of a product or service

• Include all manufacturing costs - direct & indirectly

• Initially recorded as part of the value of inventory

• Only treated as expenses (cost of sales) when items sold

What are period costs?

Costs expensed in the period incurred and not included in inventory valuation.

• Don’t relate to production of a product or service

• Treated as expenses in the period in which are incurred

• Never included in the value of inventory

How are costs classified in manufacturing organisations?

Manufacturing costs are product costs; non-manufacturing costs are period costs.

What is a variable cost?

A cost that varies directly with activity level; total variable cost changes proportionally while unit cost remains constant.

What is a fixed cost?

A cost that remains constant even when the activity level
changes, while fixed cost per unit decreases as activity increases.

cost behaviour summary

	Total Cost	Cost per Unit
Variable	Total cost changes as activity level changes	Cost per unit remains the same even when the activity level changes
Fixed	Total cost remains the same even when the activity level changes	Cost per unit goes down as activity level goes up
Stepped/Semi-fixed	Total cost remains the same but only for a set time period or level of activity	Cost per unit goes down as activity level goes up (within each time period or level of activity)
Semi-variable	Includes a fixed element and a variable element	Includes a fixed element and a variable element

What is prime cost?

The total of direct materials plus direct labour.

What are manufacturing overheads?

All manufacturing costs other than direct materials and direct labour.

What is conversion cost?

Direct labour plus manufacturing overheads.

Why are unit fixed costs misleading for decision-making?

Because unit fixed costs change with activity level; decisions should focus on total fixed costs.

What is the purpose of a cost accounting system?

A cost accounting system generates information to help managers:

• Determine a value for inventory

• Measure profit

• Make better decisions

• Plan, control and measure performance

What is an integrated cost accounting system?

A system using one set of accounting records for both management and financial accounting.

What is an interlocking cost accounting system?

A system with separate financial and cost records that must reconcile using control accounts.

issues linked to Labour costs

Issues Linked to Labour Costs

• Changing patterns of employment – fewer full-time staff, fewer
  permanent staff, more part-time / contract staff

• Varying remuneration methods across organisations

What is a time-based wage system?

Wages are calculated as hours worked multiplied by rate per hour.

Advantages

• Easy to understand, administer, and negotiate

• Higher rates are offered to attract higher grade staff
  

Disadvantages

• Staff earn wage regardless of output - no incentive to increase output

• Supervision is necessary
  

Most appropriate for businesses where:

• Quality / safety are more important than volume, e.g. health, education

• ‘Rates per unit’ are not appropriate, e.g. clerical work, retail

• Volume is not under employee’s control, e.g. transport

• Different grades of staff are employed, e.g. accountancy office, factory

What is an output-based (piecework) system?

Wages are based on units produced multiplied by a rate per unit.

Advantages

• Improves worker morale and increases productivity

• Attracts efficient workers - opportunity to earn high wages
  

Disadvantages

• Complex & expensive to administer

• Difficulties in establishing performance levels & rates

• Quality checks are necessary
  

Factors for Success:

• Clear ‘attainable’ objectives / Seen as fair by both employees & employers

• Rules easily understood / Not open to misinterpretation

• Clear link to effort / Paid promptly / Only those making extra effort rewarded

• Allowances made for factors outside employee’s control, e.g. machine
  breakdowns, material shortages

bonus schemes

Bonuses may be paid to reward performance (Despite higher wage
costs, the overall ‘cost per unit’ falls due to increased productivity)

What is an overtime premium?

The additional rate paid above the basic hourly rate for overtime hours worked.

How is overtime cost allocated?

Job-specific overtime is charged to Work in Progress; general overtime is charged to production overheads.

What is the overhead absorption rate (OAR)?

Budgeted production overheads divided by budgeted labour or machine hours.

What is under-absorption of overheads?

When absorbed overheads are less than actual overheads, the difference is charged to profit or loss.

What is over-absorption of overheads?

When absorbed overheads exceed actual overheads, the excess is credited to profit or loss.

cost behaviour

describes how a particular cost can change relative to changes in activity or volume