costs and budgets session 1

differences between management accounting and financial accounting

purpose:

mgmt acc. helps managers make decisions to fulfil an organisation’s goal

fin acc. communicates financial position to stakeholders (eg. investors, banks, regulartors, etc)

primary users:

mgmt acc. used by managers of the organisation

fin. acc used by external users

rules of measurement and reporting:

mgmt acc. dont have to follow GAAP but are based on cost-benefit analysis (comparing total expected costs to total expected benefits)

fin. acc must be prepared in accordance with GAAP and must be certified by external, independent auditors

time span and type of reports:

mgmt acc. varies from hourly information to 15-20 years with financial and nonfinancial reports on products, departments, etc

fin acc. depends on annual and quarterly financial reports primarily on the company as a whole

behavioral implications

mgmt acc. designed to influence the behavior of managers and other employees

fin acc. reports economic events but also influences behavior because manager’s compensation is often based on reported financial results

value vs price vs cost

value: perceived worth by customer

price: how much you charge a customer

cost: expenses related to the product or service

what is a cost object?

anything for which a company wants to track and measure the cost of something

What are the different costing methods and how do they differ?

job order: tracks expenses based on/for custom batches

process: tracks expenses for identical/mass made products

fixed, variable and mixed costs

fixed: remain unchanged despite level of activity

variable: changes in total, in direct proportion to a change in level of activity

mixed costs: may have some fixed parts, others variable

direct vs indirect costs

direct: easily attached to ‘cost object’ (salaries can be direct, so long as its for workers ONLY working on that product)

indirect: cannot be traced directly to object (eg. shipping, advertising, salaries of managers)

different types of costs

total costs and partial costs

real: calculated AFTER the fact

projected: based on forecasts or standards