1. Management Accounting
Week One - Review
Management Accounting

2. 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

3. 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)

4. 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

5. 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

6. 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

7. 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

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

9. 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 = ( ) 13000
Total number of COST OBJECTS = 10000
Allocate (13000/10000) $1.3 per COST OBJECT

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

11. 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

12. 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

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

14. 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

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

16. 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

17. 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