Management Accounting

What is the purpose of Management Accounting?

1) It provides future oriented information to aid managers in making organizational decisions

2) Interred to give information for 5 purposes

• Formulating overall strategies

• Resource allocation

• Cost planning and control

• Performance measurement

• Meeting regulatory/legal obligations

3) Influences planning, control and decision making

Cost Object

Anything for which a separate measurement of costs is desired

Job Costing

Costing system where costs are assigned to a distinct unit of a product or batch, allowing for accurate tracking of expenses associated with specific jobs or projects.

Process Costing

Costing system where the cost object is masses of identical or similar units.

Cost is obtained by using broad averages to assign costs to each unit produced, making it suitable for industries like manufacturing where products are homogenized.

Direct Costs vs. Indirect Costs

Direct costs can be traced directly to a cost object( raw materials for a product)

Indirect costs cannot be traced directly and are allocated (utilities for a factory)

Variable Costs vs. Fixed Costs

Variable costs are expenses that change in proportion to production level or sales volume(raw materials, direct labor)

Fixed costs remain constant regardless of business product or sales volume(rent, salaries, insurance)

What is relevance costing? What classifies as a relevant cost?

Classifies which costs are relevant, and is either a future cost or a cost that makes a difference in a decision

Types of Relevant Costs:

• Variable Costs

• Avoidable Fixed Costs(Futuristic)

• Opportunity Cost

Example of Process Costing

• Oil Refining (manufacturing sector)

• Postal Delivery (service sector)

• Grain Dealing (merchandising sector)

6 Step of Job Costing

1) Identify the Job

2) Identify Direct Costs

3) Identify Indirect Cost Pools

4) Select Cost-Allocation Base

5) Develop Allocation Rate

6) Allocate Costs to the Job

Actual Costing

Costing method used to assign costs to a cost object, such as a product or service, based on the actual costs incurred

Provides more accuracy, but requires more time and complexity

Direct Labour Cost Rate

The cost per hour of labor that is directly involved in completing a job or producing a product

Direct Labour Cost Rate = Total Direct Labour Cost ÷ Total Labour Hours Worked

Normal Costing

Costing method that traces direct costs to a cost object by using the actual direct-cost rate

Helps estimate the total cost of a job quicker by using estimated overhead

Main difference between actual costing and normal costing?

Actual costing uses actual indirect-cost rates, while normal costing uses budgeted indirect-cost rates.

In normal costing, how are direct costs calculated?

Actual direct-cost rate x Actual Quantity

What is an allocation base?

A factor used to distribute indirect costs to different jobs or activities in job costing

Example of Manufacturing Overhead

• Factory rent or depreciation on machinery

• Salaries of production supervisors

• Utility bills for the factory

• Insurance on factory equipment

Operating Income Equation

Sales - Variable Costs - Fixed Costs

What is the breakeven point?

The level of sales at which total revenue equals total costs, meaning no profit and no loss

How is the breakeven point in units calculated?

Fixed Costs ÷ Contribution Margin per Unit

What is the contribution margin per unit?

Selling Price per Unit – Variable Cost per Unit

How is the breakeven point in sales revenue calculated?

Fixed Costs ÷ Contribution Margin Ratio

What is the contribution margin ratio?

Contribution Margin per Unit ÷ Selling Price per Unit