23.1PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. ACCOUNTING Financial and Organisational Decision Making Chapter 23 Cost concepts for management decisions Slides written by Sandra Porritt designed byTony Van Eekelen

Chapter 23: Cost concepts for management decisions 23.2PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Learning Objectives In this chapter you will be introduced to: –the need for different cost classifications according to their decision-making context –outlay costs and opportunity costs –costs as direct or indirect with regard to various identified cost objectives

Chapter 23: Cost concepts for management decisions 23.3PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Learning Objectives –the behaviour of variable costs and fixed costs –controllable and non- controllable costs –the concept of costs being engineered, discretionary or committed

Chapter 23: Cost concepts for management decisions 23.4PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. –the benefits obtainable from derivingthe cost of value adding and non-valuing adding activities –opportunity, incremental, differential and sunk costs Learning Objectives

Chapter 23: Cost concepts for management decisions 23.5PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Introduction ways of classifying and analysing costs for different management purposes cost classification - variable and fixed costs costs, incremental, differential and sunk costs to name some costing methods and there use for setting prices

Chapter 23: Cost concepts for management decisions 23.6PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Management purposes: Planning Decision making Control

Chapter 23: Cost concepts for management decisions 23.7PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Planning management accountants prepare plans in the form of operating budgets and capital expenditure budgets the anticipated outcome of following these plans are presented in :- budgeted profit and loss statements, balance sheet and cash flow the anticipated picture is all collected together in the master budget

Chapter 23: Cost concepts for management decisions 23.8PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Decision making managers need adequate information to make decisions management accountability - need for decisions to be rationalised and supported

Chapter 23: Cost concepts for management decisions 23.9PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Control to ensure that events are conforming to plan management accounting system used to monitor activities when there is a deviation from plan take action to revert to plan or changed circumstances means plan revision control of costs needs a detailed cost accounting system

Chapter 23: Cost concepts for management decisions 23.10PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Evaluation feedback on results for decisions about any changes used to determine managers strengths and weaknesses

Chapter 23: Cost concepts for management decisions 23.11PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Cost classifications for different management purposes direct and indirect costs variable and fixed costs controllable and non-controllable costs engineered, discretionary and committed costs value adding and non value-adding incremental, differential and sunk costs

Chapter 23: Cost concepts for management decisions 23.12PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Outlay and opportunity costs outlay costs - actual financial expenditure to obtain goods and services opportunity costs - are measures of the loss of benefits from a foregone alternative

Chapter 23: Cost concepts for management decisions 23.13PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Direct and indirect costs direct costs - costs that can be traced to an activity or project indirect costs - relates to what is the cost object for example in the making of a product the manager’s salary is indirect but when the object is the entire department then it becomes direct

Chapter 23: Cost concepts for management decisions 23.14PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Variable and fixed costs how costs are are expected to change in response to changes in other variables

Chapter 23: Cost concepts for management decisions 23.15PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Fixed costs costs that do not change with the level of activity - the cost of a leased building

Chapter 23: Cost concepts for management decisions 23.16PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Variable costs costs which vary according to the level of activity –examples are direct materials and direct labour

Chapter 23: Cost concepts for management decisions 23.17PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Semi-variable costs many costs are neither fully fixed nor fully variable they contain elements of both –for example the cost of equipment repairs fixed - is the cost of maintenance staff variable is the increased cost of repairs caused by increased usage they are not strictly variable - they are not zero when activity is zero

Chapter 23: Cost concepts for management decisions 23.18PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Controllable and non- controllable costs The costs are directly controlled or outside the scope of authority

Chapter 23: Cost concepts for management decisions 23.19PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Engineered, discretionary and committed costs engineered costs - direct relationship to activity level committed costs - predetermined and inflexible discretionary costs - resources that are not consumed in direct proportion to operations

Chapter 23: Cost concepts for management decisions 23.20PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Value-adding and non-value-adding costs the activity is said to add value to the product if it causes the product to become more valuable to the customer non-value adding costs should be eliminated

Chapter 23: Cost concepts for management decisions 23.21PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Incremental, differential and sunk costs incremental - additional costs that will be incurred as a result of the decision differential - costs that will differ between decision alternatives sunk - cost incurred in the past that will not change

Chapter 23: Cost concepts for management decisions 23.22PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Qualitative and behavioural factors in management decisions decisions are made by people who have prejudices are bias and have likes and dislikes other motivations and hidden agendas

Chapter 23: Cost concepts for management decisions 23.23PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Ethical issues influences on decisions bias can influence the inclusion of some facts

Chapter 23: Cost concepts for management decisions 23.24PPS t/a Carnegie et al; Accounting: Financial and Organisational Decision Making © 1999 McGraw-Hill Book Co. Aust. Summary accounting information is required for planning, decision making and control cost classification make costs traceable to cost objects