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MAA 703 Management Accounting
2Lecture 1:
Topic 1: Introduction to management accounting: Information
for contemporary managersRef: LS chapters 1 & 2
Topic 2: Cost behaviourRef: LS chapter 3
3Introduction
Managers are people who are paid to make decisions
Management accountants provide relevant and reliable information to managers so that they will make the right decisions
The study of management accounting yields insights into both the manager’s role and the accountant’s role in an organization.
4
3 Major Purposes of Accounting Systems
1 Internal routine reporting2 Internal non-routine reporting3 External reporting
5Internal Routine Reporting
This purpose covers information provided for decisions that occur with some regularity:
Daily reports Weekly reports Performance reports
This information is needed for pricing and other short-run decisions.
6Internal Non-routine Reporting
This purpose covers information for decisions that occur irregularly or that may be without precedent, for example:
Outsourcing of components or services Implementation of a special cost control
system (a cost-benefit analysis) Accept or reject a special ‘once-off’ order
from a customer
7External Reporting
This purpose covers information provided to investors, government authorities, and other outside parties on the results of the organization’s operations..
External reporting focuses on an entity’s financial performance and position. It must comply with rules created by external bodies.
8
Managerial Accounting...
– measures and reports financial and non-financial information that helps managers make decisions that will achieve the organization’s goals.
9Financial Accounting...
focuses on reporting to external parties.
It measures and records business transactions. It provides financial statements based on
generally accepted accounting principles. It is subject to the requirements of accounting
standards, the Corporations Act 2001 and (for listed companies) the ASX Listing Rules.
10Cost Accounting...
provides information for both managerial accounting and financial accounting purposes.
It measures and reports financial and non-financial data that relates to the cost of acquiring or consuming resources by an organization.
11Cost Management...
describes the activities of managers in short- run and long-run planning and controlling of costs.
It includes the continuous reduction of costs. It is a key part of general management
strategies and their implementation.
12What is Planning?
It is deciding on organization goals, predicting results under various alternative ways of achieving those goals, and then deciding how to attain the designated goals.
13What is Control?
Basically control means comparing actual performance with planned performance and then taking action to correct any unfavourable trends and/or adjust future planning processes.
14What are Budgets?
They are quantitative expressions of a proposed plan of action by management for a future time period and an aid to the coordination and implementation of the plan.
Budgets are financial roadmaps that tell us where we are going and how we intend to get there.
Budgets are covered in Lecture 9
15What is a Performance Report?
This is a report that compares actual results with budgeted or planned amounts.
The performance report of the Seattle Specialty shop for the month of July shows the following:
16Performance Report
Seattle Specialty Shop, July 2000 Seattle Specialty Shop, July 2000 BudgetBudget ActualActual VarianceVariance Revenues Revenues $57,000$57,000 $60,000$60,000$3,000 F Cost of goods sold$3,000 F Cost of goods sold 40,000 40,000 43,40043,400 3,400 U 3,400 U Wages Wages 6,700 6,700 7,000 7,000 300 300 U GeneralU General 1,300 1,300 900 900 400 400 F Fixed costsF Fixed costs
5,000 5,000 5,000 5,000 ------- ------- Operating Operating incomeincome $ 4,000$ 4,000 $ 3,700$ 3,700 $ 300 U$ 300 U
17Performance Report
The performance report indicates that although actual revenues exceeded the budgeted amount by $3,000, operating income was $300 less than budgeted.
The report could spur investigation and further decisions.
Did the purchasing department pay more than expected for the merchandise?
18Performance Report
Yes, actual cost of goods sold was 72% of revenues instead of the budgeted 70%.
Budget % Actual % Revenues
$57,000 100 $60,000 100 Cost of goods sold 40,000 70 43,400 72 Gross profit $17,000 30 $16,600 28
19
3 Key Roles of Management Accountants
Problem-solving, scorekeeping, and attention-directing
20Problem Solving...
– involves comparative analysis for decision making.
This role requires the management accountant to consider several alternatives and then decide which one is the best?
21Scorekeeping...
– involves accumulating data and reporting reliable results to all levels of management.
This role requires the management accountant to explain how well the business is performing.
22Attention Directing...
– involves helping managers properly focus their attention.
This role involves identifying opportunities and problems and then ranking them according to their importance.
Attention directing should focus on all opportunities to add value, and not just on cost-reduction opportunities.
23Management Accountants...
– Fulfil each of these three roles in relation to both planning and control decisions.
The problem-solving role is critical for planning decisions.
The scorekeeping and attention-directing roles are most important for control decisions.
24Value Chain
The term “value chain” refers to the sequence of business functions in which usefulness is added to the products or services of an organization.
The term “value” is used because as the usefulness of the product or service is increased, so is its value to the customer.
25Value Chain
Management accountants provide decision support for managers in the following six business functions:
26Value Chain
Distribution
Management Accounting
Service
Marketing
Production
Design
R & D
27Value Chain
1 Research and development (R&D) – the process that is conducted to generate and experiment with ideas related to new products, services, or processes.
2 Design – the detailed planning and engineering of products, services, or processes.
3 Production – the acquisition, coordination, and assembly of resources to produce a product or deliver a service.
28Value Chain
4 Marketing – the manner by which companies promote and sell their products or services to customers or prospective customers.
5 Distribution – the delivery of products or services to the customer.
6 Customer service – the after-sales support activities provided to customers.
29
The R & D and Design functions are sometimes referred to as upstream activities
The Marketing, Distribution and Service functions are sometimes referred to as downstream activities
30
Four key themes that are important to managers
attaining success in their planning and control decisions
31Key Themes in Management Accounting
Customer FocusCustomer Focus Success FactorsTime, Quality,
Cost, Innovation
Success FactorsTime, Quality,
Cost, Innovation
ContinuousImprovement
ContinuousImprovement
Value-Chain andSupply-Chain
Analysis
Value-Chain andSupply-Chain
Analysis
32Customer Focus
The challenge facing managers is to continue investing sufficient (but not excessive) resources in customer satisfaction such that profitable customers are attracted and retained.
The key question: “How can I add value for the customer?”
33Success Factors...
– are operational factors that directly affect the economic viability of the organization.
The key question: What are the things that we need to manage well in order to prosper and grow?
Cost – organizations are under continuous pressure to reduce costs.
Quality – customers are expecting higher levels of quality.
34Key Success Factors
Time – organizations are under pressure to complete activities faster and to meet promised delivery dates more reliably.
Innovation – there is now heightened recognition that a continuing flow of innovative products or services is a prerequisite to the ongoing success of most organizations.
35
Continuous Improvement
Continuous improvement by competitors creates a never-ending search for higher levels of performance within many organizations.
36
Three guidelines that assist management accountants to
increase their value to managers
37
Cost-Benefit Approach
A cost-benefit approach should be used in order to spend resources if they promote decision making that better attains organization goals in relation to the costs of those resources.
38Behavioural and Technical Considerations
A managerial accounting system should have two simultaneous missions for providing information:
1 To help managers make wise economic decisions
2 To help managers and other employees to aim for and achieve the goals of the organization
39
Different Costs for Different Purposes
A cost concept used for the external reporting purpose need not be the appropriate concept for the purpose of internal routine reporting to managers.
40
Cost concepts and terms
Different cost concepts and terms are often used in accounting reports.
Managers who appreciate these concepts and terms are able to...
– best use the information provided, and– avoid misuse of that information.
41Costs and Cost Terminology
Cost is a resource sacrificed or forgone to achieve a specific objective.
It is usually measured as the monetary amount that must be paid to acquire goods and services.
An actual cost is the amount that was paid (an historical cost) as distinguished from a budgeted cost.
An opportunity cost is the value of what is given up when one alternative is chosen instead of another
42Costs and Cost Terminology
A cost object (or objective) is anything for which a separate measurement of costs is desired.
43Costs and Cost Terminology
There are two basic stages of accounting for costs:
1 Cost accumulation2 Cost assignment to various cost objects
44Costs and Cost Terminology
Cost accumulation is the collection of cost data in some organized way by means of an accounting system.
Cost assignment is a general term that encompasses both...
– tracing direct costs to a cost object, and– allocating indirect costs to a cost object.
45Direct Costs
Direct costs of a cost object are those that are related to a given cost object (product, department, etc.) and that can be traced to it in an economically feasible way.
46Indirect Costs...
– are related to the particular cost object but cannot be traced to it in an economically feasible way.
– indirect manufacturing costs are grouped under the heading of Manufacturing Overhead
47Indirect Costs
Cost allocation describes the assigning of indirect costs to the particular cost object.
Pendal Ltd. has two production departments, Assembly and Finishing, and two service departments, Maintenance and Personnel.
48Direct and Indirect Costs
Direct Costs:
Maintenance Department $30,000
Personnel Department $24,600
Assembly Department $70,000
Finishing Department $50,000 Assume that Maintenance Department costs are
allocated equally among the production departments. How much is allocated to each department?
49Direct and Indirect Costs
Allocated $15,000 $15,000
Maintenance$30,000
AssemblyDirect Costs
$70,000
FinishingDirect Costs
$50,000
50Direct and Indirect Costs
Several factors affect the classification of a cost as direct or indirect:
– The materiality of the cost in question– Available information-gathering technology– Design of operations– Contractual arrangements The direct/indirect classification can depend
on the choice of the cost object.
51Cost Behaviour Patterns
Variable costs change in total in proportion to changes in the related level of total activity or volume.
Fixed costs do not change in total for a given time period despite wide changes in the related level of total activity or volume.
52Cost Behaviour Patterns
Assume that Metairie Bicycles buys a handlebar at $52 for each of its bicycles.
Total handlebar cost is an example of a cost that changes in total in proportion to changes in the number of bicycles assembled (variable cost).
What is the total handlebar cost when 1,000 bicycles are assembled?
53Cost Behaviour Patterns
1,000 units x $52 = $52,000 What is the total handlebar cost when 3,500
bicycles are assembled? 3,500 units x $52 = $182,000
54Cost Behaviour PatternsVariable Costs
Total costs ($000) $182
$52 0 1,000 3,500 Units
55Cost Behaviour Patterns
Assume that Metairie Bicycles incurred $94,500 in a given year for the leasing of its plant.
This is an example of a fixed cost with respect to the number of bicycles assembled.
This costs remains unchanged in total over a designated range of the number of bicycles assembled during a given time span.
56Cost Behaviour Patterns
What is the leasing (fixed) cost per bicycle when Metairie assembles 1,000 bicycles?
$94,500 ÷ 1,000 = $94.50 What is the leasing (fixed) cost per bicycle
when Metairie assembles 3,500 bicycles? $94,500 ÷ 3,500 = $27 Fixed cost per unit of output declines
as total output increases
57Cost Drivers
A cost driver is a factor, such as the level of activity or volume, that causally affects costs (over a given time span).
The cost driver of variable costs is the level of activity or volume whose change causes the (variable) costs to change proportionately.
The number of bicycles assembled is a cost driver of the cost of handlebars.
58Relevant Range...
– is the range of activity or volume over which a specific relationship between the level of activity or volume and the cost in question is valid.
Assume that fixed (leasing) costs are $94,500 for a year and that they remain the same for a certain volume range (1,000 to 5,000 bicycles).
1,000 to 5,000 bicycles is the relevant range.
59Relevant Range
If annual demand for Metairie’s bicycles increases, and the company needs to assemble more than 5,000 bicycles, it would need to lease additional space which would increase its fixed costs.
60Relevant Range
Total fixed costs ($000) Relevant Range $ 94.5 0 1,000 5,000 Volume
61Costs in manufacturing businesses Non manufacturing costs (“period costs”)
– upstream costs– downstream costs
Manufacturing costs (“product costs”)– direct material – direct labour – manufacturing overhead
62Classifications of Costs
DirectMaterials
DirectMaterials
DirectLabourDirectLabour
ManufacturingOverhead
ManufacturingOverhead
PrimeCost
ConversionCost
Manufacturing costs are oftencombined as follows:
63Nonmanufacturing Costs
Marketing and selling costs . . .– Costs necessary to get the order and deliver the
product.
Administrative costs . . .– All executive, organisational, and clerical costs.
64Product Costs Versus Period Costs
Product costs include direct materials, direct
labor, and manufacturing overhead.
Period costs are not included in product
costs. They are expensed on the income
statement.Inventory Cost of Good Sold
BalanceSheet
IncomeStatement
Sale
Expense
IncomeStatement
65
Merchandiser Current Assets
– Cash– Receivables– Prepaid Expenses– Merchandise
Inventory
Manufacturer Current Assets
Cash Receivables Prepaid Expenses Inventories
Raw Materials
Work in Process
Finished Goods
Balance Sheet
66
Merchandiser Current Assets
– Cash– Receivables– Prepaid Expenses– Merchandise
Inventory
Manufacturer Current Assets
Cash Receivables Prepaid Expenses Inventories
Raw Materials
Work in Process
Finished Goods
Balance Sheet
Materials waiting to be processed.
Partially complete products – some
material, labour, or overhead has been
added. Completed products
awaiting sale.
67The Income Statement
Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold: Beg. merchandise inventory 14,200$ + Purchases 234,150 Goods available for sale 248,350$ - Ending merchandise inventory (12,100) = Cost of goods sold 236,250$
68Manufacturing Cost Flows
Raw MaterialsMaterial Purchases
Balance Sheet Costs Inventories
Income StatementExpenses
69Manufacturing Cost Flows
ManufacturingOverhead
Work in Process
Material Purchases
Direct Labour
Balance Sheet Costs Inventories
Income StatementExpenses
Raw Materials
70Manufacturing Cost Flows
ManufacturingOverhead
Work in Process
FinishedGoods
Cost of GoodsSold
Material Purchases
Direct Labour
Balance Sheet Costs Inventories
Income StatementExpenses
Raw Materials
71Manufacturing Cost Flows
ManufacturingOverhead
Work in Process
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
Material Purchases
Direct Labour
Balance Sheet Costs Inventories
Income StatementExpenses
Selling andAdministrative
Period Costs
Raw Materials
72Inventory Flows
Beginningbalance
$$
Beginningbalance
$$
Available$$$$$
Available$$$$$
Endingbalance
$$
Endingbalance
$$
Additions$$$
Additions$$$+ =
Withdrawals$$$
Withdrawals$$$
_
=
73Product Costs - A Closer Look
Beginning inventory is the inventory
carried over from the prior period.
Beginning inventory is the inventory
carried over from the prior period.
Manufacturing WorkRaw Materials Costs In Process
Beginning raw materials inventory
74
Manufacturing WorkRaw Materials Costs In Process
Beginning raw Direct materials materials inventory
+ Raw materials purchased
= Raw materials
available for use in production
– Ending raw materials inventory
= Raw materials used
in production
As items are removed from raw materials inventory and placed into
the production process, they arecalled direct materials.
As items are removed from raw materials inventory and placed into
the production process, they arecalled direct materials.
Product Costs - A Closer Look
75
Manufacturing WorkRaw Materials Costs In Process
Beginning raw Direct materials materials inventory + Direct labor
+ Raw materials + Mfg. overhead purchased = Total manufacturing
= Raw materials costs
available for use in production
– Ending raw materials inventory
= Raw materials used
in production
Conversion costs are costs
incurred to convert the
direct material into a finished
product.
Conversion costs are costs
incurred to convert the
direct material into a finished
product.
Product Costs - A Closer Look
76
Manufacturing WorkRaw Materials Costs In Process
Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the in production period
– Ending raw materials – Ending work in inventory process inventory
= Raw materials used = Cost of goods
in production manufactured.
All manufacturing costs incurred during the period are added to the
beginning balance of work in process.
All manufacturing costs incurred during the period are added to the
beginning balance of work in process.
Product Costs - A Closer Look
77
Manufacturing WorkRaw Materials Costs In Process
Beginning raw Direct materials Beginning work in materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the in production period
– Ending raw materials – Ending work in inventory process inventory
= Raw materials used = Cost of goods
in production manufactured.
Product Costs - A Closer Look
Costs associated with the goods that are completed during the period are
transferred to finished goods inventory.
Costs associated with the goods that are completed during the period are
transferred to finished goods inventory.
78Product Costs - A Closer Look
79Resource Flows
Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used?
» a. $276,000
» b. $272,000
» c. $280,000
» d. $ 2,000
80
Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used?
» a. $276,000» b. $272,000» c. $280,000» d. $ 2,000
Resource Flows
81Resource Flows
Direct materials used in production totaled $280,000. Direct Labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month?
» a. $555,000» b. $835,000» c. $655,000» d. Cannot be determined.
82
Direct materials used in production totaled $280,000. Direct Labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month?
» a. $555,000» b. $835,000» c. $655,000» d. Cannot be determined.
Resource Flows
83Resource Flows Beginning work in process was $125,000.
Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month?
» a. $1,160,000» b. $ 910,000» c. $ 760,000» d. Cannot be determined.
84
Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month?
» a. $1,160,000» b. $ 910,000» c. $ 760,000» d. Cannot be determined.
Resource Flows
85Costs in service businesses
Costs are classified in service businesses to provide information for managers’ decisions
Direct labour costs are significant Direct material costs are insignificant Overhead costs may refer to all indirect
costs, including production, upstream and downstream costs
86
For longer-term decisions, product costs may include upstream, manufacturing and downstream costs
For short-term decisions, manufacturing and downstream costs may be considered
Cost structure – the relative proportions of an organisation’s variable and fixed costs
Product costs for decision making
87
End of Lecture 1
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