Managing Cost and Finance

Managing information

The purpose of management information –

 Plan the future of the organization. (Example future cash flows & whether borrowing will need
to be arranged or more employees need to be recruited
 Control the progress of the organization. (Example whether budgets set in the planning stage will
be met)
 Decision Making

The purpose of managing information for your business is to have insight, understanding, proactive
thinking for any decision making & also most important knowledge which creates wisdom.

The Features of useful management information

A - Accurate so managers can use confidently

C -Complete missing information can be fatal for a business

C -Cost-beneficial there is little point having information which costs more to provide than
any benefit.

U - User Targeted information should be what users need

R -Relevant too much information causes information overload & might mean that
important matters.

A -Authoritative what is the information sources and reliability

T -Timely information should be received quickly to be of use to the decision maker

E -Easy to use information should be well set out and described

Sources & categories of Management Information

 Internal information
 External information

Internal Data is private data derived & collected inside a business. Sources of internal data:
  Sales – internal data in the sales department includes revenue, profits, and bottom line. The data
a business gathers from the sales department is used in determining how much profit and
revenue the business is making.
 Finance – Internal data in the Finance department includes production reports, cash flow and
budget variance analysis. The cash flow summarizes cash generated and used over a specific
period; the production report shows the cost incurred during production.
 Marketing - Data supplied by the marketing department includes website traffic stats, phone
reports and promo codes.
 Human Resources – The HR department in an organization supplies data concerning
demographic, recruitment, compensation, and talent management.

External Data Sources

 Government publications such as monetary and fiscal policies.

 Press releases such as newspapers, technical magazines, journals which provide information
about share price.
 Banks can provide information on potential customers and on national markets.
 Financial statements of other businesses provide useful information to the company.

COST CLASSIFICATION

Cost can be classified in different ways:

 By their behavior – Do they increase as an organization gets busier or do they tend to stay the
same?
 By their location – Where in the organization are they incurred.
 By their function – for example cost related to research and development, marketing, training,
manufacturing.
 By the person responsible for their control. All costs need to be controlled and there should be a
clearly identified person who is responsible for controlling each cost.
 By their traceability – are they direct or indirect? Direct costs are closely related & traceable to
each item produced.

Variable, fixed, semi-variable and stepped fixed cost.

 Variable Cost – example the cost of material used to produce production costs will double
also.
 Fixed Cost – No matter how many units are made, the rent is fixed.
 Semi variable cost – Have a fixed element and a variable element, telephone bill (fixed cost
for line rental) variable cost for each minute of telephone calls.
 Stepped fixed costs – constant over a range of activity then a sudden increase, then constant
again. Example One supervisor for 6 workers ,two for 12.

HI -Lo/Range method.
  The fixed part of a semi variable cost = F
 The variable part of the semi variable = V
 At a high production level P2: Total Semi-Variable = F + VP2
 At a low production level P1: Total Semi - Variable = F + VP1

Subtracting = P2 – P1 = VP2 – VP1

So the increase in units (P2-P1) has caused the increase in total variable costs.

Cost Accounting Systems and Cost Accounting

There are two sets of accounting information:

 Financial reporting information – the amounts paid for purchase and wages. These are the
amounts that appear in the financial statements.
 Cost and management accounting information – materials and wages go into each item
produced.

DIFFERENCES

COST & MANAGEMENT ACCOUNTING EXTERNAL FINANCIAL REPORTING

Usually produced monthly Produced annually
Reports both historical information & future Reports historical information only (Cash flow,
information income statements)
Can be any format management finds useful Format is strictly controlled by law & accounting
reporting standards
Does not have to be audited Usually audited
Produced for management Produced for shareholders

The same transactions often have to be dealt with in two different ways: once for the accounting
information& then again for the cost accounting information, there are two approaches to these
requirements:

 An integrated accounting system. Information is recorded once for the two separate purposes;
this can save time and effort at the recording stage but might increase effort at the presentation
stage.
 An interlocking accounting system: here separate ledger systems are maintained for the financial
information and the costing information. This increases the recording effort but can be more
efficient late when presenting information.

Direct materials are those which can be specifically traced to a unit of production,

Indirect materials cannot be specifically traced to a unit of production.

Direct labor is labor that can be directly identified with a unit of production, a mechanic repairing a car
would be an example of direct labor,

Indirect labor cannot be identified with specific units of production. A supervisor’s time is spread
amongst all workers.

Keys ratios to learn:

 Labor turnover = No. of deporting employees requiring replacement

Average No. of employees

 Labor efficiency= Standard hours of output

Actual hours worked.

 Labor capacity= Actual hours worked

Total budgeted hrs.

 Labor production volume= Standard hrs. of output

Total budgeted hrs

Absorption Costing

 Handling problem with indirect cost (Overheads) with Cost Units,

 The focus is production. Overhead cost that are not incurred at the time of production do not
find their wat into inventory,
 It is useful to think of production cost as being those that end up as part of the inventory
(valuation)while other (non-production) costs are incurred outside and normally after the
product leaves inventory.

Allocation, Apportionment and Re-apportionment

Cost units are produced in production center

Allocating factory overheads per product lines

  Step 1: Identify total factory overheads to be absorbed.
 Step 2: Take the total quantity recorded for the absorption base.
 The absorption base should be highly correlated with incurrence of overhead.
 Most common absorption bases selected: direct labor hrs., machine hrs. units of
output.

 Step 3: Compute overhead absorption rate (OAR) as Step1/ Step 2($/unit of absorption base)
 Step 4: Obtain unit overhead cost per unit product line, by multiplying the OAR with the
absorption base quantity.
 Step 5: For each product, multiply step 4 by total output to determine factory overhead to
absorb in the production cost.

Marginal Costing

A marginal approach to costing focuses on the variable (marginal) costs. This allows the company to be
able to quantify the amount by which its cost rise, if it produces/sells an additional unit of output.

 Is an alternative costing method with variable costs only being charges as a cost of sale( excludes
factory overheads from manufacturing cost)
 Results in reporting lower ending inventories & lower operating profits(as fixed factory
overheads are fully expensed as incurred instead of being absorbed in inventory cost)
 Recognizes that fixed cost become irrelevant for a short term production decision making based
on product profitability (sunk costs)
 Avoids arbitrary bases for fixed overhead absorptioninto the production cost

Contribution

Contribution is defined as the difference between sales revenue and the marginal cost of sales.

Contribution = Sales -variable cost (both production and non-production)

Absorption Costing

This method argues that focusing on marginal costs is potentially misleading in the longer run because
fixed production costs have also to be covered. Accounting conventions require that fixed production
costs be reflected in each unit produced.

 Handling problem with indirect costs(Overhead) with cost units.

 The focus is production, overhead costs that are not uncured at the time of production do not
find there way into inventory.
 It is t