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Cost and Management Accounting Accounting

This document provides an overview of a course on cost and management accounting. It discusses key objectives like describing the purpose of management accounting and differentiating between costing methods. The course content is outlined, covering topics like cost concepts, job order costing, absorption costing, budgetary control, and activity-based costing. Administrative details are provided on office hours, grading, and exam dates. The first session introduces cost and management accounting, distinguishing it from financial accounting. It also discusses basic cost concepts and how managerial accounting can help create value through the value chain.

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vyajivv
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50 views

Cost and Management Accounting Accounting

This document provides an overview of a course on cost and management accounting. It discusses key objectives like describing the purpose of management accounting and differentiating between costing methods. The course content is outlined, covering topics like cost concepts, job order costing, absorption costing, budgetary control, and activity-based costing. Administrative details are provided on office hours, grading, and exam dates. The first session introduces cost and management accounting, distinguishing it from financial accounting. It also discusses basic cost concepts and how managerial accounting can help create value through the value chain.

Uploaded by

vyajivv
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PDF, TXT or read online on Scribd
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Cost and Management Accounting

Learning Objectives for Cost and Management Accounting


Describe the purpose of management accounting in organisations, with regards to the role of the management accountant, the users of accounting information and the operating environment Identify the nature of the various costs that arise within the business entity and the implications of such costs for the business Distinguish between job costing, process costing and contract costing and determining the cost for jobs using various methods Differentiate between an absorption costing system and a marginal costing system Prepare profit statements based on marginal costing system and absorption costing systems. Apply standard costing methods within costing systems and demonstrate the reconciliation of budgeted and actual profit margins Explain the purpose of budgetary control Understand how activity based costing works in service and trading sector

Course Content
Major theme of course: How to create value through acquiring and using cost information to make better decisions and effectively manage value chain relationships
Introduction Cost concepts and cost-benefit analysis Cost flows and terminology Job order and Process Costing Absorption Costing CVP analysis Short term decision making and relevant cost analysis ABC Costing and Management Standard Costing Budgetary Control

Administrative Matters
Office Hours: Wednesday & Thursday from 4.00 p.m. to 5.00 p.m. No Discussion Hours Grading : Class Participation Quizzes ( Online / In class Surprise quizzes) Midterm examination ( Tentative date Dec.17th ) Final examination ( 2nd January 2012) 5% 20% 35% 40%

Session 1
Cost and Management Accounting An Introduction and Overview

Learning Objectives
Discuss key features of Cost and Management accounting Reflect on who uses cost information and why and how Identify / Discuss the Elements of Cost Become familiar with the Costing Methods, Costing Techniques Use of Cost accounting data for decision making purpose Finally to become Intelligent users of cost accounting information

The Nature of Cost Accounting


What is Cost accounting? Identifying Measuring Analyzing Interpreting Communicating information In pursuit an organizations goals. What is the difference between Cost accounting and financial accounting ?

Every entity keeps three separate sets of accounting records 1. Financial Accounting / Reporting records 2. Management accounting / Cost Accounting records 3. Taxation and other regulatory records

A Conceptual View of Accounting


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Suppliers
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Customers

Acquire Resources

Process resources

Deliver Product

GAAP
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Financial & nonfinancial data Estimate, validate, predict


Decision useful Information

Plan

Control

Auditors

Financial Statements
Financial Accounting

Management Accounting Managers

Shareholders, Lenders, Government

Cost Accounting and Financial Accounting - Comparison


Income Statement for the period .

Sales Materials Wages Other Expenses Profit (Balancing Figure)

150,000 (75,000) (20,000) (25,000) 30,000


Product Z 23,000 5,000 2,000 30,000 26,000 (4,000)

Statement of Cost and Profit for the period.. Total Product X Product Y Material Wages Other Expenses Total Cost (A) Sales (B) Profit / (Loss) (B A) 75,000 20,000 25,000 120,000 150,000 30,000 40,000 10,000 20,000 70,000 96,000 26,000 12,000 5,000 3,000 20,000 28,000 8,000

Basic Cost Concepts


According to Oxford Dictionary cost means The Price paid for something Cost is the amount of expenditure (actual or notional) incurred or attributable to a given thing. ( CIMA, London) Cost is a measurement, in monetary terms, of the amount of resources used for the purpose of production of goods or rendering of services. (ICWAI)

Basic Cost Concepts

Cost

Expired Cost Expense Shown in Income statement

Unexpired Cost Asset Shown in Balance Sheet

Basic Cost Concepts

Production cost
Cost of one unit of product or service

Components of production cost/product cost


inventoriable Direct materials Direct labor Conversion cost Mfg. Overhead Prime cost

- these costs are

Selling ,distribution and administrative expenses are period costs expensed in the period these costs are incurred Flow of costs -- We will discuss this in greater detail later

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Two Kinds of Income Statements


Absorption costing or GAAP income statement - useful for external reporting - basis for product costing - long run measure of resource consumption Contribution margin or variable costing income statement - useful for decision making - short run measure of resource consumption CM statement with Relevant Costing information - Footnotes differential cost information to the CM statement - useful for decision making

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Absorption Costing Income Statement


Nav Bharat Electronics, Inc. For the year ended 12/31/2009 Revenues Cost of goods sold Gross margin Selling, general and administrative expenses Operating income for the year Notes:
1. Cost of goods sold (COGS) refers to product costs includes DM, DL and MOH 2. Selling, general and administrative (SG&A) expenses are period costs - not inventoriable, i.e., must be expensed in the same period in which they are incurred

$100 $40 $60 $50 $10

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Contribution Margin / Variable Costing Income Statement


Nav Bharat Electronics, Inc. For the year ended 12/31/2009 Revenues (10 million units @ $10/- per unit) Variable manufacturing costs ( 10 million units @ unit variable manufacturing cost $2/-) Variable selling and admin. costs ( 10 million units @ unit variable manufacturing cost $1/-) Total variable costs Contribution margin Fixed manufacturing costs Fixed selling, general and admin. Costs Total fixed costs Operating income for the year $40 20 $60 $10
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$100 $20 10 $30 $70

Managerial Accounting and Value Creation


What is value? How can Managerial Accounting help in creating value? Managerial Accounting has an informational role in designing and implementing value creating strategies Some examples of Managerial Accountings role in promoting value creation Strategic Management of value drivers Getting the right cost value driver information for resource allocation Making good short term and long term resource allocation decisions through cost-benefit analysis Creating effective management control systems Using financial and non-financial performance measurement effectively

Key Informational Role of Managerial Accounting


Strategic Plans

Managerial

Continual
Improvement Accounting Information

Analytical Decisions

Control & Monitoring

Industry Value Chain


FIRM
Suppliers R&D ---- EngineeringProductionSales Customers

Effective Strategy formulation and implementation exploits the value chain Information acquired in strategy formulation and implementation includes value driver information and managerial accounting inputs on resource consumption Cost-Benefit Analysis is at the heart of all decision making

A Value Chain Perspective Of Intra-firm Business Functions PRE-MANUFACTURING


Product Conception Research and Development
Product/ Process Design

Prototype Test & Design Changes Operations &


Manufacturing

Customer

Customer Service

Distribution & Sales

Marketing

POST-MANUFACTURING

M A N U F A C T U R I N G How does a firm optimize its Internal activities and resources?


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Practical Approaches for Value Creation


Managing Income statement value drivers Revenue drivers Cost drivers Creating strategies to increase revenues and decrease costs Managing Balance sheet value drivers Manage capital employed effectively

Different costs for different purposes!

Examples of Cost Driver Analysis in Value Chain Management


Understanding value drivers helps us get good financial information for decision making
How do products, services and customers consume resources? What are the links between process and resource consumption? Given the cost and revenue estimates for the products, how do they compare in profitability? How should scarce capacity be allocated among the products to maximize value?

Customer profitability management Supplier cost reduction through score-card performance measurement and cost analysis Cost reduction through process improvement Designing for efficient manufacturing

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