CMA

EPGP platform batch 12

Pankaj Baag
Faculty Block 01, Room No 21

Mob: 8943716269
Ph (O): 0495-2809121
Ext. 121
Email: [email protected]

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Only 2 quizzes – 4th and 6th Class

All classes carries marks, all assignments carries marks

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 Management Accounting

Basic Cost Concepts, elements of cost, cost statement

1-3
• Accounting systems process economic events and transactions into
information helpful to managers.
• This data is collected, categorized, summarized, and analyzed.
• Accounting systems provide information found in the financial
statements as well as in internal performance reports.
• Managers use this information to administer the activities of their area
of responsibility.
• Information needs may vary depending on managerial needs.

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• Different needs of different users within a company– wrt --sales data –
different aspects
• Sales managers are interested in sales data by region or sales person;
• Distribution managers may be interested in orders by geographic
location or requested due dates;
• Manufacturing managers may be interested in quantities of products
ordered so production scheduling can occur.

• Accounting systems accumulates financial and managerial accounting

data in the cost accounting system

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• Management accounting has a different focus than financial
accounting.
• The management accountant reports financial and nonfinancial
information that helps managers make decisions that will help the
company achieve its goals or implement its strategy.
• It is forward-looking.
• Important word here is the “decision-making” focus of management
accounting
• Management accounting reports information in a manner that will help
managers do their jobs better.
• They are not restricted by Accounting Principles or AS
• Important Element of management accounting—the cost-benefit ratio.
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7
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 Managerial versus Financial Accounting
the perspective of cost accounting and how it differs from that of financial accounting

Accounting
Accounting System
System
(accumulates
(accumulates financial
financial and
and
managerial
managerial accounting
accounting data
data in
in the
the cost
cost
accounting
accounting system)
system)

Managerial
Managerial Accounting
Accounting Financial
Financial Accounting
Accounting
Information
Information for
for decision
decision Published
Published financial
financial
making,
making, planning,
planning, and
and statements
statements and and other
other
controlling
controlling an
an financial
financial reports.
reports.
organization’s
organization’s
operations.
operations.
Internal External
Users Users 9
Basis Financial Accounting Management Accounting
Period After a stated Period At frequent intervals, as and when required by the management

Objectives It gives the periodical report to owners, creditors and government It assist the internal management

Time Historical data based Historical, current and future data based

Unit of expression Monetary unit Any unit – monetary or statistical

Nature and sources of data It is concerned with actual historical data, internal sources It is concerned with future plans and policies based on projected
data and past, historical data, internal and external sources

Subject matter and specificity It deals with the business as a whole and on aggregate basis It gives only a limited coverage but with a detailed analysis

Flexibility, description and reality Here standards are fixed by external parties, have money Here standards are fixed by management itself, have event
consequences and are objective consequences and are subjective

Legal compulsion Statutory for every business that is it is obligatory Adopted on voluntary basis that is it is optional

Precision Pie to pie accuracy May be guess work

Purpose It gives an overview of entire business activity Analytical details of such decisions as called for decisions

Unit of account Recognizes whole business Results of units, divisions

Publication and audit Essential Not required
Accounting principles and sources It has principles and conventions, sources are like Indian No such principles, flexible and tailored to meet specific needs
Accounting Standards, GAAP, IFRS
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Basis Cost Accounting Management Accounting

object To determine the cost of a Provide information to

product management

Deals With cost data With both cost and revenue

data

Scope limited Much wider

Nature Past and present facts Projection of future plans

Principles Procedures exist No procedures

Type of data Quantitative aspects Both qualitative and
quantitative aspects

Parties Useful for both internal and Internal for management

external

Value addition to decision Low High

making
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STRATEGY AND MANAGEMENT ACCOUNTING

Deciding between the two broad strategies of cost leadership or product differentiation is a critical
part of what managers do.
Management accountants work closely with managers in various departments to formulate strategies
by providing information about the sources of competitive advantage,
such as (1) their company’s cost, productivity or efficiency advantage relative to competitors or
(2) the premium prices a company can charge relative to the costs of adding features that make its
products or services distinctive.

 Strategy specifies how an organization matches its own capabilities

with the opportunities in the marketplace. There are two broad
strategies:
cost leadership or product differentiation

 Strategic cost management—describes cost management that

specifically focuses on strategic issues.
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Management accounting helps answer important questions such as:

 Who are our most important customers, and how can we be competitive and
deliver value to them?

 What substitute products exist in the marketplace, and how do they differ
from our own?

 What is our most critical capability?

 Willadequate cash be available to fund the strategy or will additional funds

need to be raised?

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 Managerial Accounting
Managerial accounting is the process of
 Identifying
 Measuring
 Analyzing
 Interpreting
 Communicating ------- information

in pursuit of an organization’s goals/strategy

Managerial accounting is an integral part of the management process.

Successful management accounting systems capture and report information that helps managers make decisions to fulfill
organizational goals in an effective and efficient manner. Management accounting also provides information critical to the
planning and control and decisions of managers.
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How Managerial Accounting Adds Value to
the Organization : objectives
•• Providing
Providing information
information for
for decision
decision making
making andand
planning.
planning.
•• Assisting
Assisting managers
managers in
in directing
directing and
and controlling
controlling
activities.
activities.
•• Motivating
Motivating managers
managers and
and other
other employees
employees towards
towards
organization’s
organization’s goals.
goals.
•• Measuring
Measuring performance
performance ofof subunits,
subunits, activities,
activities,
managers,
managers, andand other
other employees.
employees.
•• Assessing
Assessing the
the organization’s
organization’s competitive
competitive position.
position.

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1-15
MANAGEMENT ACCOUNTING AND VALUE

Customers demand much more than just a fair price – they expect quality products delivered in a
timely manner.
That experience is the VALUE derived from purchasing a particular product or service.

McDonald &
Wilson (2002

 Creating value is an important part of planning and

implementing strategy.

 Value is the usefulness a customer gains from a company’s

product or service.

 The entire customer experience determines the value a

customer derives from a product.

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Customer Value Propositions
Customer
Understand and respond to
Intimacy
individual customer needs.
Strategy

Operational Deliver products and services

Excellence faster, more conveniently,
Strategy and at lower prices.

Product
Leadership Offer higher quality products.
Strategy
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 The Value chain is the sequence of business functions in which a
product is made progressively more useful to customers.

 The Value chain consists of:

1. Research & development (generating and experimenting with ideas related to
new products, services or processes)
2. Design of Products and Processes(detailed planning, engineering and testing
of products and processes)
3. Production (procuring, transporting and storing, coordinating and assembling
resources to produce a product or deliver a service)
4. Marketing (promoting and selling products or services)
5. Distribution (processing orders and shipping products or services to customers)
6. Customer service (providing after-sales service to customers)

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THE VALUE CHAIN ILLUSTRATED Here we have a pictorial view of the value chain.

In addition to each of our functions previously discussed, you see “administration” as an additional
function.

This includes accounting, human resources, information technology and supports the six primary
business functions.

Management accounting provides information to inform each of these functions in the value
chain.
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SUPPLY-CHAIN ANALYSIS

 Production and Distribution are the parts of the value chain

associated with producing and delivering a product or service.

 These two functions together are known as the Supply-Chain

 The supply chain describes the flow of goods, services and

information from the initial sources of materials, services, and
information to their delivery regardless of whether the activities
occur in one organization or in multiple organizations.

 To increase efficiency in these areas, in other words to increase

performance and reduce costs, suppliers may be asked to deliver
small quantities of materials frequently instead of one larger
shipment.
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Strategic Cost Management and the Value
Chain
The value chain and supply chain
should be used by the company to
deliver improving levels of
Product performance for the customer.
Product
Design
Design
Production
Production
Research
Research
and
and
Development
Development Marketing
Marketing
Securing
Securing raw
raw
materials
materials and
and Distribution
Distribution
other
other resources
resources
Customer
Customer
Start Service
Service
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KEY SUCCESS FACTORS
 Customers want companies to use the value chain and supply chain
to deliver ever-improving levels of performance when it comes to
several (or even all) of the following:
 Cost and efficiency--understanding the activities that cause costs to arise
and managing them allows managers to react to the continuous pressure to
reduce costs
 Quality--customers expect high levels of quality
 Time--two important dimensions of time are new-product development and
customer-response time
 Innovation--a constant flow of innovative products or services is the basis
for the ongoing success of a company.
 Sustainability--the development and implementation of strategies to
achieve long-term financial, social and environmental goals.

 Theseare the Dimensions of performance that customers expect, and that

are key to the success of a company 1-22
A FIVE-STEP DECISION MAKING PROCESS IN PLANNING AND CONTROL

1. Identify the problem and uncertainties.

2. Obtain information.
3. Make predictions about the future.
4. Make decisions by choosing between alternatives.
5. Implement the decision, evaluate performance, and learn.

The first four of these steps fall under Planning;

step five is the Control.

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PLANNING AND CONTROL SYSTEMS

 Planning selects goals and strategies, predicts results, decides how to

attain goals, and communicates this to the organization.

 Budget—the most important planning tool-is the quantitative expression of a

plan of activity by management and is an aid to coordinating what needs to
be done to execute that plan.

 Control takes actions that implement the planning decision,

evaluates performance, and provides feedback and learning to the
organization.
The most important planning tool when .implementing strategy is the budget. 1-24
MANAGEMENT ACCOUNTING GUIDELINES

Three guidelines help management accountants provide the most value to the
strategic and operational decision- making of their companies:

 Cost–benefit approach: benefits of an action/purchase generally must exceed

costs as a basic decision rule.

 Behavioral and technical considerations: people are involved in decisions, not

just dollars and cents.

 Different Costs for Different Purposes: Managers use alternative ways to

compute costs in different decision-making situations.

 In determining the cost, the first question that should be asked is “What is
the purpose of this cost number?”
 Performance evaluation, external reporting, and internal decision making are
three different purposes that might require a different view of cost.
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 PROFESSIONAL ETHICS

 The four standards of ethical conduct for management accountants as

advanced by the Institute of Management Accountants are:
 Competence
 Confidentiality
 Integrity
 Objectivity

 Ethics are the foundation of a well-functioning economy.

 Accountants have special ethical obligations given that they are responsible
for the integrity of the financial information provided to internal and
external parties.

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Value non value

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Identify two potential non-value-added costs for each of the
following service providers: airlines, banks, and hotels

Falcon Enterprises, which manufactures lawn mowers, recently introduced an activity-

based management program.
Required: Identify the following items as value-added activities, non-value-added
activities, or both.
1. Attaching the engine to the mower's body.
2. Installing a new air-conditioning system in the executive offices.
3. Replacing a defective wheel with a new wheel.
4. Designing and printing an owner's instruction manual for a new model.
5. Moving completed mowers to the finished-goods warehouse.
6. Attaching the handle to the mower's body. The process took longer than normal
because of a worker slowdown caused by disgruntled employees.
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• 1. Microsoft: Developing computer coding for a new spreadsheet package.
• 2. General Mills: Painting the office of a maintenance supervisor at a plant that produces
cereal.
• 3. Mayo Clinic: Examining a new patient.
• 4. American Airlines: The 90 minutes that a Boeing 757 sits idle on the ground between
flights.
• 5. Office Depot: Moving cases of paper from one location to another in the same
warehouse.
• 6. Rolex: Attaching a watch band to the watch's face.
• 7. Indian Postal Service: Reprocessing mail that had been sorted incorrectly on a
malfunctioning sorting machine.
• 8. IndiaBulls Investments: Correcting errors made by company personnel in customer
accounts.
• 9. Marriott: Upgrading the quality of bedding used at hotels in very competitive
marketplaces.

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Airlines:
• Vouchers for future flights that are given to passengers as a result of poor customer service.
• The cost of tracing, returning, repairing, or replacing lost or mishandled luggage.
• Additional compensation paid to flight crews attributable to cancellations or delays from problems that should have been
prevented by routine maintenance.
Banks:
• The cost of correcting bank errors in customer accounts.
• The cost of performing manual banking procedures necessitated by computer system downtime.
• Losses caused by employee embezzlement and petty thefts.
• Defaulted loans made to borrowers who should have been classified as poor risks by existing credit-granting procedures.
Hotels:
• Broken dishes and glassware, loss of or damage to linens and towels.
• The cost of replacing lost room keys/entry cards.
• The cost of overstaffing the front desk during nonpeak hours.
• Excess food costs, including preparation.

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Management accounting Managers use management accounting
________. information to ________.

A) focuses on estimating future A) help external users such as investors,

revenues, costs, and other banks, regulators, and suppliers
measures to forecast activities and B) communicate, develop, and
their results implement strategies
C) communicate a firm's financial
B) provides information about the
position to investors, banks, regulators,
company as a whole
and other outside parties
C) reports information that has D) ensure that financial statements are
occurred in the past that is consistent with the SEBI rules
verifiable and reliable
D) provides information that is
generally available only on a
quarterly or annual basis 31
An Introduction to Cost Terms, classification and Purposes
What Do We Mean By a Cost?
At the most basic level, a cost may be defined as the sacrifice made, usually measured by
the resources given up, to achieve a particular purpose.

A cost
is the measure of
resources given
up to achieve a
particular purpose.
• Cost : Use of resources for some purpose
•Cost is a measurement, in monetary terms, of the amount of resources used for the purpose of
production of goods and services (CAS I )
Example : Cost of making appliances includes costs of material, cost of labours etc.
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 Basic Cost Terminology
• Cost—a sacrificed or forgone resource to achieve a specific objective.
• Actual cost—a cost that has occurred.
• Budgeted cost—a predicted cost.
• Cost object—anything for which a cost measurement is desired.

Managers use cost information in two main ways: when MAKING decisions and when IMPLEMENTING decisions

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Cost Object Examples at BMW

Cost Object Illustration

Product A BMW X6 sports activity vehicle
Telephone hotline providing information and assistance to BMW dealers
Service

R&D project on DVD system enhancement in BMW cars

Project

Herb Chambers Motors, a dealer that purchases a broad range of BMW vehicles
Customer

Setting up machines for production or maintaining production equipment

Activity

Department Environmental, Health and Safety department

When we are thinking of the cost of something, it is a particular something: a car, a piano, a new outfit.
That THING about which we want to know the cost is called a cost object.
we have here some examples of different things about which we may want to know the costs.

Cost object—anything for which a cost measurement is desired.

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2-
• Cost accumulation—the collection of cost data in an organized way by
means of an accounting system.
• Cost assignment—a general term that encompasses the gathering of
accumulated costs to a cost object in two ways:

– Tracing accumulated costs with a direct relationship to the cost object and
– Allocating accumulated costs with an indirect relationship to a cost object.

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2-
 Direct and Indirect Costs
One way that we differentiate between different kinds of costs is to identify them as direct or indirect.

• Direct costs can be conveniently and economically traced (tracked) to a cost object.
• Indirect costs cannot be conveniently or economically traced (tracked) to a cost object.
• Instead of being traced, these costs are allocated to a cost object in a rational and
systematic manner.

The salary of a plant administrator at BMW, as an example, is an indirect cost of a particular automobile
because unlike the steel or tires used, it is virtually impossible to trace plant administration to a particular car
line.
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Cost assignment to a cost object (bmw example)

Going back to our X6 BMW example, we see here an illustration of how costs for that line would be collected to the cost
object.

If the BMW X6 is our cost object, the direct costs can be traced but the indirect costs must be allocated.

Added together, we’ll obtain total costs for the cost object.

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Cost Examples
To gain a better understanding of the types of items that fit into each type of cost (direct or indirect),

• Direct Costs One way to think about this is that association between the
• Parts (steel or tires for a car, as an direct costs and the specific request for those items in the
production process.
example)
• Assembly line wages
We need 4 tires and x lbs of steel for each car, but we don’t
requisition some number of hours of administration time or
• Indirect Costs (also called Overheads) rent for each car or for the line.
• Electricity
• Rent
• Property taxes Managers are generally more confident about the accuracy of the
• Plant administration expenses direct costs of cost objects.

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Factors Affecting Direct/Indirect Cost Classification
• The materiality of the cost in question-- (the smaller the cost, the less likely it
will be efficient to trace the cost)
• The available information-gathering technology-- (technology allows us to treat
more and more costs as direct)
• Design of operations--(if parts of a facility are dedicated to a particular cost
object, we are generally able to classify more costs as direct)

• NOTE: a specific cost may be both a direct cost of one cost object and an indirect
cost of another cost object.

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Cost Behavior
Cost behavior defines how costs change.
That will be in total, with a change of activity (variable costs) or per unit, with a change of activity (fixed costs).

• Variable costs—change in total in proportion to changes in the related level of activity or

volume of output produced.
• Variable costs are constant on a per-unit basis.
• If a product takes 5 pounds of materials each, it stays the same per unit regardless if one, ten,
or a thousand units are produced.

• Fixed costs—remain unchanged in total, for a given time period, despite changes in the
related level of activity or volume of output produced.
• Fixed costs change inversely with the level of production.
• As more units are produced, the same fixed cost is spread over more and more units, reducing
the cost per unit.

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Cost Behavior Summarized
In this chart, we have a summary of the way our costs
change in total or per unit.

Total Dollars Cost per Unit Variable cost TOTAL

DOLLARS change in
proportion with
Total Dollars Cost Per Unit output but remain
Change in unchanged PER UNIT
Changewith
proportion in Unchanged in
Variable Costs proportion
output with relation to
Variable Costs More output
output
= More cost output
More output = More cost

Change
Change Fixed cost TOTAL
inversely
inversely with
with DOLLARS remain
Fixed Costs Unchanged in
output
output
unchanged in relation
relation to output
Unchanged in to output but change
Fixed Costs More
More output
output == lower
lower INVERSELY per unit
relation to output cost
cost per unit
per
unit
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 Graphs of variable and fixed costs
In these charts, we see
the graphs for variable
and fixed costs using
the number of
steering wheels for
the BMW X6.

Fixed Costs are presented in Panel B where we

have a line across at the $2,000,000 mark.
Panel A shows a graph of the total
variable cost of steering wheels. The Annual total fixed supervision costs for the
X6 are that amount and will be that amount
The cost begins at zero because if we whether we assemble zero, 20,000, 40,000 or
make no X6s, we’ll incur no cost for 60,000 cars
the steering wheels.
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The cost of your HBO cable bill can be divided by the number of HBO movies watched to
arrive at the average cost per HBO movie.
The more HBO movies that you watch, the average cost per HBO movie decreases.

Fixed Cost Per Unit Example

The average cost per HBO movie decreases as more HBO
movies are watched.

Monthly HBO Bill per Movie

Watched
Number of HBO Movies
Watched 2-44
Types of Fixed Costs

Committed Discretionary
Long-term, cannot be May be altered in the short-term
significantly reduced in the short by current managerial decisions
term.

Examples Examples
Depreciation on Buildings and Advertising and Research and
Equipment and Real Estate Taxes Development
Other Cost Concepts
• Cost driver—a variable, such as the level of activity or volume, that causally affects costs over
a given time span.

• Relevant range—the band or range of normal activity level (or volume) in which there is a
specific relationship between the level of activity (or volume) and the cost in question.
• For example, fixed costs are considered fixed only within the relevant range.
• The idea of the relevant range is that at some point of increased production or assembly, fixed costs will
likely increase.
• For example, if you run out of capacity and need to enlarge the facility, there will be additional costs
involved.

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Fixed Costs and the Relevant Range
For example, assume office space is available at a rental rate of
$30,000 per year in increments of 1,000 square feet.

Fixed costs would increase in a step

fashion at a rate of $30,000 for each
additional 1,000 square feet.
Fixed Costs and the Relevant Range

90
Rent Cost in Thousands

The
The relevant
relevant range
range ofof
Relevant activity
activity for
for aa fixed
fixed cost
cost is
is
60
of Dollars

the
the range
range of of activity
activity over
over
Range which
which the
the graph
graph of of the
the cost
cost
is
is flat.
flat.
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0
0 1,000 2,000 3,000
Rented Area (Square Feet)
 Mixed Costs
(also called semivariable costs)
A
A mixed
mixed cost
cost contains
contains both
both variable
variable and
and fixed
fixed elements.
elements. Consider
Consider the
the
example
example of
of utility
utility cost.
cost.
Y
Total Utility Cost

os t
ed c
t al mix
To
Variable
Cost per KW
X Fixed Monthly
Activity (Kilowatt Hours)
Utility Charge
CP-1
Which of the following costs would be variable with respect to the
number of cones sold at a Baskins & Robbins shop?
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream
D. The cost of napkins for customers
CP-2
What is the total fixed cost of the shipping department of Elaine Co. if it has the following
information for 2014?
• Salaries $800,000 --75 percent of employees on guaranteed contracts
• Packaging $400,000 depending on size of item(s) shipped
• Postage $500,000 depending on weight of item(s) shipped
• Rent of warehouse space $250,000 annual lease

a. $850,000.
b. $900,000.
c. $1,050,000.
d. $1,950,000.
 CP-3
Rosland Graphics successfully bid on a job printing standard notebook covers during the
year using last year’s price of $0.27 per cover. This amount was calculated from prior year
costs, noting that no changes in any costs had occurred from the past year to the current
year. At the end of the year, the company manager was shocked to discover that the
company had suffered a loss. “How could this be?” she exclaimed. “We had no increases in
cost and our price was the same as last year. Last year we had a healthy income.” What
could explain the company’s loss in income this current year?

a. Their costs were all variable costs and the amount produced and sold increased.
b. Their costs were mostly fixed costs and the amount produced this year was less than last
year
c. They used a different cost object this year than the previous year.
d. Their costs last year were actual costs but they used budgeted costs to make their bids.
 Understand the importance of identifying an organization’s cost drivers

One of the most important cost classifications involves the way a cost changes in relation to
changes in the activity of the organization.

Activity refers to a measure of the organization’s output of products or services.

The activities that cause costs to be incurred are also called cost drivers.

Cost Driver : Any factor that causes a change in the cost of an activity.

Management of cost driver is essential.

2-53
The Activity Base (Cost Driver)
Units Machine
produced hours

A measure of what causes

the incurrence of a cost

Miles driven Labor hours

Activities that cause costs to be incurred
are called COST DRIVERS:

2-55
 Multiple Classifications of Costs

• Costs may be classified as:

• Direct/Indirect, and
• Variable/Fixed

• These multiple classifications give rise to important cost combinations:

• Direct and variable
• Direct and fixed
• Indirect and variable
• Indirect and fixed

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Examples of the Multiple
Classifications of Costs

Once again using the BMW

X6 as an example, we see
here examples of the various
combinations that can occur
for direct/indirect and
variable/fixed costs.

57
 A Cost Caveat
• Unit costs should be used cautiously. Because unit costs change with a
different level of output or volume, it may be more prudent to base
decisions on a total cost basis.
• Unit costs that include fixed costs should always reference a given level of
output or activity.
• Unit costs are also called average costs.
• Managers should think in terms of total costs rather than unit costs for many
decisions.

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