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Lecture 1 - Introduction To Cost and Management Accounting

This document provides an introduction to cost and management accounting, defining it as a process that identifies, measures, and communicates economic information to support informed decision making. It discusses the basic terminology in cost accounting, the differences between management and financial accounting, and the role of management accounting in providing relevant cost information to support planning, control, and performance evaluation. Key considerations in designing management accounting systems include balancing the costs and benefits of information production and effectively communicating financial data to support agile decision making.

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0% found this document useful (0 votes)
54 views38 pages

Lecture 1 - Introduction To Cost and Management Accounting

This document provides an introduction to cost and management accounting, defining it as a process that identifies, measures, and communicates economic information to support informed decision making. It discusses the basic terminology in cost accounting, the differences between management and financial accounting, and the role of management accounting in providing relevant cost information to support planning, control, and performance evaluation. Key considerations in designing management accounting systems include balancing the costs and benefits of information production and effectively communicating financial data to support agile decision making.

Uploaded by

prakriti.chd95
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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You are on page 1/ 38

AYN 414 Cost & Management Accounting

Lecture 1

Introduction to Cost and Management Accounting: Information for


value creation, cost terms and cost behaviour

1
Lecture overview
• Introduction to the unit
• Introduction to cost accounting as a technical and social practice
• Introduction to basic costing terminology

2
What is accounting?

• Accounting is defined as

• “the process of identifying, measuring and communicating economic information to permit


informed judgments and decisions by users of information” - American Accounting
Association (1966)

• “…a technical, social and moral practice concerned with the sustainable utilisation of
resources and proper accountability to stakeholders to enable the flourishing of
organisations, people and nature” (Carnegie et al., 2021, p. 69)

• Accounting provides both financial and non-financial information


Who are the users of accounting information?
• Users of accounting information can be divided into two groups:
• External users
• parties outside the organization, such as owners, potential investors, creditors,
government and so on
• Internal users
• parties within the organization - managers, employees

• The objective of accounting is to provide sufficient information to meet


the needs of both internal and external users.

4
Classification of accounting
• Based on the above classification of users of accounting information,
accounting can be divided into two branches:
• Financial accounting
• Management accounting

5
Management accounting vs Financial accounting

Langfield-Smith et al. (2018). Management Accounting: Information for Creating and Managing Value, p. 10.
What is management accounting? (1/3)
• The processes and techniques that focus on the effective and efficient use of
organisational resources to support managers in their task of enhancing both
customer value and shareholder value.
• Customer value
• The value that a customer places on particular features of a product or service
• Shareholder value
• The value that shareholders or owners place on a business – capital appreciation buying
selling value+ dividend
• Trade-offs between actions that increase customer value and actions that
increase shareholder value
What is management accounting? (2/3)

• CIMA (part of cpa now) Terminology defines management accounting


as

• “the application of the principles of accounting and financial management to


create, protect, preserve and increase value for the stakeholders of for profit
and not for profit enterprises of for-profit and not-for-profit enterprises in the
public and private sectors”.
What is management accounting? (3/3)
• Resources
• Financial and non-financial (e.g. employees, networks)
• Organisational capabilities and competencies
• Effective use of resources
• The successful achievement of an objective
• Efficient use of resources- more value adding activities
• The least possible consumption of resources to achieve an objective
Cost accounting
Financial accounting Management accounting
prepares reports most prepares reports most
frequently used by frequently used by
decision makers external decision makers internal
to the organisation to the organisation

Cost accounting is a “method for measuring


the cost of a project, process, or thing”
(object)
It includes both financial and non-financial
information and is used for both financial
and management accounting.
10
Cost Accounting
• Cost Accounting is a sub-division of management
accounting.
• It is concerned with cost accumulation for inventory
valuation to meet the requirements of external reporting
and internal profit measurement. (helps in making income
statement)
• In particular it is concerned with establishing costs of:
• Operations,
• Processes,
• Activities,
• Products.

11
Recent changes in business environment
(affecting costs)
• Organizations have faced dramatic changes in their business environment:
• Declining product life-cycles
• E.g., Apple, Samsung, and Microsoft launch new phones, tablets and computers
every other year with a lifecycle of around 2 years.
• Financial Crises
• Protective government policies
• Trump (border tax), Brexit. (e.g. Tax laws,customs,foreign policies)
• Such changes have contributed to the importance of cost and management
accounting.

12
Corporate adaptation to the changing business
environment
• To successfully operate in today’s
competitive environment companies are:
• Making customer satisfaction an overriding priority.
• Adopting new management approaches.
• Changing their manufacturing systems (E.g., Robotics).
• Increasingly using information technologies in their business activities (E.g.,
use of artificial intelligence).

13
Cost accounting and other calculative practices shape society
eg nike scandal)

• “The reach of accounting can extend …far beyond organisational boundaries” (Jeakle,
forthcoming, p. 10).
• Cost saving plays an important role in creating the do it yourself phenomena
(ibid),ikea-do it yourself (reducing labourcost).
• “[Cost] accounting [calculations] … contribute to the creation of a sweatshop
environment by helping to maintain high levels of work intensity on the shop floor”
(Neu et al., 2014, p. 343).
• “Pressures to reduce cost tend to … not only reduce cost and put pressure on wages
but also reinforce verbal and physical abuse and pressure” (Mouritsen, 2014, p. 347).
Make sure to take viable decisions and see who is it impacting

14
Role of management accounting in this changing
environment

• Management accounting information can be used in:


• Achieving cost efficiency;
• Accurate determination of product costs and prices;
• Effective cost management;
• Product comparisons decisions.

• In this process one of the key success factors is to improve


management accounting information.

15
The functions of management accounting in this
environment
• To allocate costs between cost of goods sold and stock for profit
measurement purposes

• To provide relevant information to help managers make better


decisions

• To provide relevant information for planning, control and


performance measurement

16
(1) Cost allocation for inventory valuation and profit
calculation
• Matching principle requires to match costs with revenues to calculate
profit;
• To determine cost of goods sold we need to know the cost of unsold
finished goods or partly completed stock (work in progress);
• Therefore, it is necessary to trace costs to each individual job or
product to allocate costs between cost of goods sold and inventories.

17
(2) Provision of relevant information for better decisions

• Provide relevant information to help managers in making better


decisions
• Profitability analysis
• Product pricing
• Make or buy (Outsourcing)
• Product mix and discontinuation

18
(3) Provision of relevant info for planning, control and
evaluation
• Provide information for planning, control
and performance measurement
• 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 requirements.

19
Some important considerations in the design of management
accounting and control systems
note : How u interpret or look matters
Decision making: the cost vs benefit of
producing management accounting
information

• Some accountants provide too much


information; incomplete, raw, misleading,
excessive.
• Others do a poor job of visualizing financial
data.
• Good management accounting information
should reveal data patterns, themes and
changes at a quick glance for agile decision
making. In other words, management
accounting is about storytelling.
This Photo by Unknown Author is licensed under CC BY-NC-ND
Costing terminology
• ‘Costing’:
• understanding and identifying the costs of particular
activities and decisions
• a key part of management accounting

• A definition of ‘cost’:
• the amount of resource, usually measured in monetary
terms, sacrificed to achieve a particular objective.

21
Cost object
• A cost object is any activity for which a separate measurement of cost
is required
• Examples:
• cost of making a product
• cost providing a service.

22
Three different types of cost classification

• Three different cost classifications


• Direct and Indirect costs
• Variable and Fixed costs
• Product and Period costs
• These are just three different ways of looking at costs.
• Any particular item could have more than one of these classifications
attached to it.

23
These are just different ways of looking at total costs

24
Direct v indirect costs
• Direct costs can be specifically and exclusively identified with a given
cost object
• examples: direct materials, direct labour.
• Indirect costs cannot be specifically and exclusively identified with a
given cost object
• examples: rent of factory, administration costs.
• Indirect costs (also called as overheads) are assigned to cost objects
on the basis of cost allocations.

25
Cost structure
Direct materials x
Direct labour x
Other direct costs x
Prime cost X
Indirect materials x
Indirect labour x
Other indirect costs x
Manufacturing overheads X
Manufacturing cost X
Other overheads x
(non-manufacturing costs)
Total cost X

26
Product v Period costs (1)
• Financial reporting standards require that inventory valuations are
made based on only manufacturing costs.
• Therefore, in manufacturing organisations accounting system
distinguishes between two types of costs:
• manufacturing costs, known as product costs
• non-manufacturing costs, known as period costs

27
Product v Period costs (2)
• Product costs are those costs that are attached to the products
intended for sale and included in the stock (inventory) valuation.
• examples: direct or indirect materials
• Period costs are those costs which are treated as expenses of the
period and are not carried forward as part of the inventory
• examples: telephone or storage expenses

28
Treatment of Period v Product Costs

29
Example:
Product v Period cost
• Product costs = $100,000
• Period costs = $80,000
• 50% of the output for the period is sold and there are no opening
inventories.
Production cost (product costs) 100,000
Less closing stock (50%) 50,000
Cost of goods sold (50%) 50,000
Period costs (100%) 80,000
Total period cost 130,000
30
Cost behaviour
• Costs and revenues vary with different levels of activity.
• It is important to predict costs and revenues at different activity levels
for many decisions and for planning and control purposes.
• Therefore, accountants usefully classify costs into fixed and variable
costs.

31
Variable v fixed costs
• A variable cost is one which varies directly with changes in the level of
activity.
• vary in proportion to volume of activity (direct materials) directly proportional
• A fixed cost is one which is not affected by changes in the level of activity,
over a defined period of time.
• remain constant irrespective of volume of activity, (rent)
• Semi-variable cost = fixed costs + variable costs (mixed cost) eg commission
to manager (fix salary+ bonus on basis of sale)
• Step cost = fixed cost increases by steps (semi fixed cost)

32
Graphical illustration of variable and fixed
costs
• Total variable costs are linear, but unit variable cost is constant

33
Total fixed cost and unit fixed cost
• Total fixed costs are constant for all levels of activity.
• Unit fixed costs decrease proportionately with the level of activity.

34
Semi-fixed and semi-variable costs
• Semi-fixed costs are fixed within specified activity levels, but they
eventually increase or decrease by some constant amount at critical
activity levels.
• additional labour or salary of another manager
• Semi-variable costs include both a fixed and a variable component
• cost of maintenance (maintenance is planned, but it also relates to the
volume of activity)
• Note: in the long-term, all costs are variable

35
Semi-fixed costs
• Semi-fixed costs are fixed within specified activity level, but may change with
a constant amount at critical activity levels.

36
Semi-variable costs
• Part of semi-variable costs change depending on the level of activity, but a
part of this cost is fixed (sales representative’s salary plus a commission)

37
References
• Jeakle, I (2017) The popular pursuit of DIY: Exploring the role of calculative technologies in an actor network,
Management Accounting Research. 35, pp. 99 – 109.
• Mouritsen, J. (2014). "Discussion of “Accounting and Sweatshops: Enabling Coordination and Control in Low-
Price Apparel Production Chains”. Contemporary Accounting Research 31(2): 347-353.
• Neu, D., et al. (2014). "Accounting and Sweatshops: Enabling Coordination and Control in Low-Price Apparel
Production Chains." Contemporary Accounting Research 31(2): 322-346.

38

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