Management Accounting Week One - Review Management Accounting

Management Information Managers need information for Strategy, Planning and Control Accountants provide this information by taking data and transforming it into useful information Mostly Management Accountants investigate costs

Basic Costs Basic Costs are the components of the COST OBJECT COST OBJECTS are the products or services that are produced by the firm Basic costs are related to the Direct (Variable) or Indirect (Fixed Costs)

Direct Costs Direct Costs are the materials and labour that go to make the COST OBJECT Direct costs are usually measured in Units 1 nail 1 hour of labour A COST OBJECT will have many different units when it is complete

Example – A Chair One Chair requires: Each Unit will have a cost 5 units of wood 3 units of nails 2 units of glue 2 Hours of Labour Each Unit will have a cost Wood Costs $10 per unit Nails cost $2 per unit Glue costs $1 per unit

Example ctd So if we know how many units are required and the price of the units we can know how much our COST OBJECT is in $ The Chair requires Wood (3 x 10 = 30), Nails (3 x 2 = 6) and Glue (2 x 1 = 2) Therefore our DIRECT (Variable) costs are $38

Indirect (Fixed) Costs But there are other cost of production These are often called the Overheads, the costs which exist in production whether or not you make any COST OBJECTS Factories use heat, light and other things as well as cost rent and taxes These costs must be ALLOCATED to the COST OBJECT

Example The Factory making Chairs has the following Overheads Rent $10,000 per year Heat $2000 per year Light $1000 per year It makes 10000 chairs (THE COST OBJECT) per year

Example Ctd If we know how much our overheads are and how many COST OBJECTS we are making then we can ALLOCATE the overheads to the chairs Total Overheads = (10000+2000+1000) 13000 Total number of COST OBJECTS = 10000 Allocate (13000/10000) $1.3 per COST OBJECT

Total Cost Total Cost is Direct Costs + Indirect Costs The Chair therefore costs (38+1.3) $39.3

Revenue To find revenue need to know SELLING PRICE SELLING PRICE will be the Total Costs of production with SALES MARGIN added to it SALES MARGINS are often a percentage of the TOTAL COSTS

Example Our Chair (COST OBJECT) costs $39.3 to produce The Company wishes to make a MARGIN of 50% To find SELLING PRICE we have to know what the TOTAL COSTS plus MARGIN is For the chair it is (39.3 x 50%) + (39.3) = $58.95

Cost Behaviour Fixed (Indirect) Costs remain even Variable (Direct) Costs increase as production increases

Job Costing Job Costing is a way of representing these cost formally Job Costing consist of information about the Materials (Bill of Materials), Labour (Time Ticket and Overheads (Allocated on the job sheet) Each Job sheet has lots of information but it is used to arrive at a summary of the unit cost

Job Costing Have a look at the job costing in the text book, ask if there is anything you do not understand

Activity Based Costing (ABC) Activity Based Costing is a different costing method It still looks to work out the cost of the COST OBJECT It uses the concept of ACTIVITY as a basis of allocation of overheads Remind yourselves of what an ABC costing looks like from your text books

ABC Benefits and Limitations ABC provides much more information on where costs occur in the production process ABC is very good at pinpointing high cost areas and allows a redesign of the process to become more efficient BUT ABC IS VERY EXPENSIVE TO IMPLEMENT ABC CAUSES OVERHEADS TO SHIFT FROM HIGH VOLUME TO LOW VOLUME COST OBJECTS ABC MAY BE AS INACCURATE AS TRADITIONAL COSTINGS