week 1 management accounting
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- Created by: jmf00632
- Created on: 11-02-20 11:18
what is management accounting?
• provided for decision making, plannig, control and evaluation
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sunk costs?
do not consider these costs into decision making
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controllable costs
– costs that yu can influence e.g. borrowing some of the book from the library rather than purchasing them. Assume you will incu this cost if you continue your degree.
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salary is......
an alternative cost
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what are the 2 main branches of accounting?
financial accounting and management accounting
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financial accounting (my own definition)
financial accounting an maangemnt accounting. fiancail account records financial transactions and they are given to stakeholders. the financial staments it contains historical info (past transactions).
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management accounting (my own definition)
provides information for the future. controlling, plannig, decision making and performance evaluation. – the manager is not interested in hr east – they are interested in the future – e.g. ho will cost change? how will it effect my profit?
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financial accounting (from power-point)
A method of recording economic activity and reporting the results and financial position of a business. Provides historical information.
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managment accounting (from powerpoint)
Concerned mainly with data analysis to provide information for rational economic managerial decision making. Primarily concerned with the future
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we are going to learn in this module....
- the theory of costs that are relevant to what decisions we need to make and ho we know when we are going to break even
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financial accounting
Reporting information primarily for external use, Reporting by Companies is required by law, Historic orientation, Conforms to statute and accounting standards, Highly aggregated & whole organisation, Financial information
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management accounting
Information for internal use, No statutory requirement, Future orientation, no need to conform, specific, financial and non-financial info
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the key difference between financial and management
companies have to provide their accounts every year by law. financial accounting is the past and management accounting is the future.
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and..
financial tatement – money only (only financial) where as maangment accounting records financial AND NON- FINANCIAL INFO E.G. emloyess need training
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management accounting is concerned with these 4 main things.....
planning, control, decision making and evaluation
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control
taking corrective action when the actual result devirate from your plans e.g. you want to produce 100 units but you have only produced 80 units – this is all about the control process
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decision making
the decisions the managers have to make - do we go internationally or jut concentrate on our domestic market?
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evaluation
data gathering, data storing, data processing and communicating information to management
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The decision-making, planning and control process (5)
1. Identify objectives 2. search for alternative courses of action,3. select appropriate courses of action 4. implement the decisions, 5. compare actual and planned outcomes 6. respond to divergencies from plan
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examples and definitions of this process 1. identify objectives
what is the objective of the business e.g. maximise profit
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2. search for alternative course of action -
. then you look to see how you can achieve that objective – e.g. existing products in a new market
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3. select appropriate course of action
. select the most appropriate course of action – e.g. a lecture costs a lot so the best plan of action would be to not miss it
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4. control processes
compare the plans with the outcomes – then take corrective action
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the functions of management accounting are......
1.Allocate costs between products sold, and fully and partly completed products that are unsold.2.Provide relevant information to help managers make better decisions 3.Provide info for planning, control and perf measurement and continuous improvment
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number 1 - Allocate costs between products sold, and fully and partly completed products that are unsold.
e.g. what types f costs should we be allocating to products? how do we classify it? which costs are product costs and non-product costs? how do we price a cost? make it or buy it? what product should be discontinued or continued?
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number 2 - Provide relevant information to help managers make better decisions
profitability analysis, product pricing, make or buy (outsourcing), product mix and discontinuation
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number 3- Provide information for planning, control and performance measurement and continuous improvement
long-term and short-term planning (budgeting) periodic performance reports for feedback control performance reports also widely used to evaluate managerial performance note that costs should be assembled in different ways to meet the above three requ
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qualitis of information for decision making
• Relevant, complete and transparent • Trusted by users, appropriately communicated and on time • Accurate as far as practicable and its volume manageable – e.g. a new phone contract the contract is 25 pages – you just have to trust the phone company
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qualities of info for decision making (2)
• Cost of acquiring information < Benefits generated from the information (Cost Effective) • Note that both financial and non-financial information are used in management accounting. – e.g. report employees skills
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financial accounting in the 19th centenary
Detailed information was required for costing and decision-making primarily in a manufacturing environment
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statements produced out of financial accounting were:
Out of date by the time they become available Looks at the past Involves the whole organisation rather than specific departments, centres or products.
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cost accounting
This is a part of “management accounting which establishes costs of operations, processes, departments or products, and carries out analysis of variances, profitability and social use of funds.” – so establishes issues
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definition of cost
It depends on the context of use – So we cannot define it – however it can be defined as a disbursement of money coming out of the business
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Ascertainment of cost
of each product, process, job, or service rendered.- can be used to establish the cost of service or product
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what can this be used for?
This could be used to establish the selling price and profitability of each product, process, job, or service rendered.
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another use (2)
• This could be used to establish the selling price and profitability of each product, process, job, or service rendered.
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another use (3)
• It can also provide other information to management for planning, control and other decision-making
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cost clasification
Costs can be classified (collected into logical groups) in many ways. The particular classification selected will depend upon the purpose for which the resulting analysed data will be used:
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purpose: financial accounts
classification: By function – cost of sales, distribution cots, administrative expenses
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purpose: cost control
classification: classification: By element materials, labour, other expense
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purpose: cost acounts
by relationship to cost units- direct, indirect
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purpose: budgeting, decision making
classification - by behaviour – fixed, variable or relevant/ irrelevant
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a cost object
is any activity for which a separate measurement of cost is desired, e.g., cost of a service, operating a department, etc
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The costs assigned to a cost object can be divided into......
direct and indirect costs
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direct costs
Can be traced in full to a product. They are specifically and exclusively identified with a cost object.
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direct costs - example
e.g. for a table the direct cot would be the materal e.g. 1m would be 10 ounds and if you used 2 then £20
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indirect cost (overhead)
Cannot be related in whole to any individual product or cost object, i.e., they cannot be identified specifically and exclusively with the cost object.- they cannot be traced in full
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JESS
IT IS VERY IMPORTANT THAT YOU UNDERSTAND DIRECT AND INDIRECT COSTS
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Definition- direct material
• Are all costs relating to materials that become part of the product, unless used in negligible amount and/or having negligible cost.
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examples of direct material
• Raw materials e.g., rubber for tyres - DIRECT COST • Component parts specifically purchased for a particular job or product, e.g., tyres for cars – DIRCT COST – SPECIALLY PURCHASED FOR THE COST OBJECTIV-Primary packing materials like cartons/ BOX
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Definition - direct labour
• This is the cost of labour involved in “direct production work”.-
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direct labour - examples
• This can include wages of non-productive personnel, who are specifically required for the job and whose wages are specifically identified for e.g., inspectors, testers, etc... – when you see direct labour think house inspector
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definition - direct expenses
• Are any expenses which are incurred specifically for a product, other than direct material cost and direct wages.
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direct expenses - examples
– The hire of specific tools for a particular job, etc..
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definition - indirect materials
Cannot be fully traced in a cost object
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indirect materials - example
e.g., materials used in negligible amount in manufacturing a product.
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definition - indirect wages
Not charged directly to a cost object, such as wages of non-productive personnel,
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indirect wages - example
e.g., foremen, supervisors, etc…in producing a product
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definition - indirect expenses
Not charged directly to a cost object
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example - indirect expenses
e.g., rent, rates and insurance of factory, depreciation of plant, etc...
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• Indirect costs (i.e. overheads)are assigned to cost objects on the basis of...
cost allocation
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cost allocation - definition
process of assigning costs to cost objects that involve the use of surrogate, rather than direct measures.
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direct costs is also...
prime costs
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The sum of direct labour and manufacturing / production overhead costs are known as.....
conversion costs
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conversion costs represent.....
the cost of converting raw materials into finished products
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rent is....
an indirect costs – just because it annot be traced in full does not mean we ignore it
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The sum of direct labour and manufacturing / production overhead costs are known as.....
conversion costs
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costs that the manager/ management accountant should take into account in decision making...
production overheads
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non-production costs that the manager should take consider into their decision making
– Administration costs – Selling and Distribution costs – Finance Costs
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where do we put and not put non-production costs?
– THESE ARE ALL non PRODUCTION COSTS BUT WE DO NOT INLUDE THESE INTO THE COST VALUE – included in the INVENTORY EVALUATION
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product costs
are costs that are identified with goods purchased or produced for sale to customers. They are included in inventory valuation if goods remain unsold.
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example of product costs
E.g. Direct Material, Direct Labour / Manufacturing Overhead.
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period costs
are those costs that are not included for inventory valuation and are treated as expenses in the period in which they are incurred.
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period costs - examples
E.g. Rent, Business Rates, Marketing, Selling and Administrative Costs. –WRTTEN OFF FROM THE FINANCIAL STATEMNT
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manufacturing cost is a.....
product cost
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if the product is sold it is recorded as a......
recorded as an expense – in the profit and loss account in the current accounting period
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if the product is un-sold it is recorded as a...
recorded as an asset- (inventory) in the balance sheet and becomes an expense in the profit and loss account when the product is sold
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non-manufacturing cost is a...
period cost
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period cost is reocrded as a..
expense in the profit and loss account in the current accounting period and is written off in the period that it occured
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relevant cost and revenue
are those future costs and revenues that will be changed by a decision, whereas irrelevant costs and revenues will not be changed by a decision
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sunk cost
a cost that cannot be changed by any decision made in the future e.g. uni will not refund you your fees if you drop out (irrelevant)
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controllable cost
costs that you can influence (relevant) e.g. you can save money on books by getting them from the library
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product cost
only occurred if product are occurred or produced – costs incurred to create a product
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period cost
concerned with the passage of time – inventory or fixed asset
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opportunity cost
the loss of other alternatives when one alternative is chosen.
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sunk cost
a cost that will occur anyway
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avoidable cost
those costs that can be saved by not adopting a given alternative, whereas unavoidable costs cannot be saved.
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Avoidable/unavoidable costs are alternative terms sometimes used to describe......
relevant/ irrelevant costs
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sunk costs are the cost... (again i know)
of resources already acquired and are unaffected by the choice between the various alternatives. Sunk costs are irrelevant for decision-making.
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an opportunity cost (again i know)
is the cost of the next best alternative foregone
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incremental or differential costs....
are the difference between the costs of each alternative action that is being considered
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controllable cost (again i know)
costs that are influenced by the decisions or actions of a decision maker/manager e.g. shut down costs, retrenchment wages, etc...
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uncontrollable cost
costs that are not influenced by the decisions or actions of a manager such as the price increase of raw materials.
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cost centres
are collecting places for costs before they are further analysed into cost units. Examples include, a machine, a department or a project.
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revenue centres
are areas where managers should normally have control over and are based on how revenues are raised. Managers are usually accountable for these revenues.
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profit centres
are areas where managers will be accountable for both costs and revenues.
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investment centre
a profit centre with additional responsibilities for capital investment. The manager will wish to maximise return on investment
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responsibility centre
organisational unit or a segment of a business, whose performance a manager is held accountable. This may include both an investment centre and associated financing
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Other cards in this set
Card 2
Front
sunk costs?
Back
do not consider these costs into decision making
Card 3
Front
controllable costs
Back
Card 4
Front
salary is......
Back
Card 5
Front
what are the 2 main branches of accounting?
Back
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