Lecture 1 - Introduction To Cost and Management Accounting
Lecture 1 - Introduction To Cost and Management Accounting
Lecture 1
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Lecture overview
• Introduction to the unit
• Introduction to cost accounting as a technical and social practice
• Introduction to basic costing terminology
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What is accounting?
• Accounting is defined as
• “…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)
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Classification of accounting
• Based on the above classification of users of accounting information,
accounting can be divided into two branches:
• Financial accounting
• Management accounting
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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)
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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.
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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).
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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
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Role of management accounting in this changing
environment
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The functions of management accounting in this
environment
• To allocate costs between cost of goods sold and stock for profit
measurement purposes
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(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.
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(2) Provision of relevant information for better decisions
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(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.
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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
• A definition of ‘cost’:
• the amount of resource, usually measured in monetary
terms, sacrificed to achieve a particular objective.
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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.
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Three different types of cost classification
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These are just different ways of looking at total costs
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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.
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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
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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
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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
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Treatment of Period v Product Costs
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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
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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.
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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)
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Graphical illustration of variable and fixed
costs
• Total variable costs are linear, but unit variable cost is constant
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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.
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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
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Semi-fixed costs
• Semi-fixed costs are fixed within specified activity level, but may change with
a constant amount at critical activity levels.
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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)
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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.
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