1 - Management Accounting
Skill Set Review
Apply costing methods to help with planning, control and decision-making
Throughput, Marginal, and Absorption Costing
Learning Objective
Use absorption costing, marginal costing, and throughput accounting to determine inventory values and net profits.
Introduction
Costs in manufacturing can affect inventory valuation and profit reporting.
General principles: production vs non-production costs
Non-production costs include sales/marketing, excluded from inventory costs.
Production costs:
Direct costs (e.g., materials)
Indirect costs (maintenance, overheads)
Fixed Overheads: Don't change with production volume (e.g., salaries)
Variable Overheads: Change with production volume (e.g., hourly utilities)
Costing Methods Characteristics
Absorption Costing
All production costs (including fixed overheads) are product costs.
Unsold inventory measured at total production cost.
Marginal Costing
Only variable production costs are assigned to products.
Fixed overheads treated as period costs.
Throughput Accounting
Treats fixed production costs (except direct materials) as total overhead costs.
Comparing Approaches
Demonstrate how differing costing methods may lead to varied profit estimation.
For example, two methods show different profits for the same production scenario, based on inventory and cost classifications.
Direct and Indirect Costs
Cost Classifications
Direct Costs: Easily attributed to a cost object (e.g., materials for desks).
Indirect Costs: Shared across multiple cost objects, requiring allocation (e.g., utilities).
Cost Objects: Anything for which cost is measured, varying from product lines to departments.
Cost Determination Techniques
Absorption vs Marginal Costing
Absorption Costing:
All production costs absorbed into inventory costs.
Marginal Costing:
Only variable costs allocated, making it more useful for short-term decision-making.
Profit Statement Examples
Abstract profit calculations showing each month’s profit via absorption vs marginal costing method, demonstrating numerical differences between the two techniques.
Issues with Costing Methods
Management Scenarios
Glenn Kitchens' costing estimation for new products via absorption vs marginal techniques.
Illustrate the necessity for informed decision-making based on profit contributions vs losses.
As showing sales volume vs production capacity influences profit via inventory allocation settings.
Variance and Cost Trend Analysis
Standard Costing
Standard costing:
Control Mechanism: Helps manage and report variances from expected cost standards.
Use in various operational scenarios, highlighting discrepancies in planned vs actual costs.
Types of Variance
Price Variance
Commercial prices disconcordance.
Demand changes affecting sales profit and stock turns.
Advanced Variance Analysis
Additional Cost Types
Sales Mix and Quantity Variances:
Differentiating product sales and understood profit ratios.
Further breakdown of sales leading to personal department variances.
Further Investigates
Manage variance types mentioning production errors, quality processes, and additional analyses on costs.
Activity-Based Costing (ABC)
Overview
ABC categorizes indirect costs by activities, allowing more specific allocation based on activities rather than volume alone.
Cost Driver Determinants: Explained and applied for effective measurements in complex production.
Applications of ABC
ABC benefits explain clearer insights into production costs, ensuring profitability goals are clearly delineated.
Costs of Quality and Environmental Costs
Quality Management
Breakdown given showing the types of internal/external conformance costs to ensure minimizing defects and managing waste effectively.
Environmental Impact Considerations
Emphasis on the significance of sustainability and environmental effects of production processes and decision analyses affecting cost perceptions.
Incorporate stakeholders into the analysis of quality metrics, ensuring teams focus on meeting both production goals and environmental implications.