MANAGEMENT ACCOUNTING

LECTURE 1: INTRODUCTION TO COST TERMS AND PURPOSES

1. Accounting consists of 3 basic activities

 Identifies – Identify economic events ( transactions)
 Records – Record, classify, and summarize
 Communicates – Prepare accounting reports; Analyze and interpret for users

2. Accounting discripline overview

 Managerial accounting — measures, analyzes, and reports financial and nonfinancial information
to help managers make decisions to fulfill organizational goals. Managerial accounting need not be
GAAP compliant.
 Financial accounting — focus on reporting to external users including investors, creditors, and
governmental agencies. Financial statements must be based on GAAP.

3. Major differences between financial and managerial accounting.

4. Strategy and management accounting

 Strategy: specifies how an organization matches its own capabilities with the opportunities in the
marketplace to accomplish its objectives.
 Strategic cost management: focuses specifically on the cost dimension within a firm’s overall
strategy.

5. Management Accouting and Value

 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.
 Value chain is the sequence of business functions in which customer usefulness is added to
products or services.

6. Planning and control system:

 Planning selects goals, predicts results, decides how to attain goals, and communicates this to the
organization.
Budget—the most important planning tool
 Control takes actions that implement the planning decision, decides how to evaluate performance,
and provides feedback to the organization.
7. 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.

8. Professional ethics
4 standards of ethical conduct for management accountants:
 Competence
 Confidentiality
 Integrity
 Objectivity

9. Basic Cost Terminology

 Cost accumulation: acollection of cost data in an organized manner

 Cost assignment: a general term that includes gathering accumulated costs to a cost object. This
includes:
 Tracing accumulated costs with a direct relationship to the cost object
 Allocating accumulated costs with an indirect relationship to a cost object

10. Direct and Indirect cost

 Direct costs can be conveniently and economically traced (tracked) to a cost object. Example: a T-
shirt: DC: cotton, salary of direct workers.
 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. Example:
rental of factory, depreciation of factory, utility expenses, electicity, property taxes.

11. Costs behavior

 Variable costs — changes in total in proportion to changes in the related level of activity or volume
 Fixed costs — remain unchanged in total regardless of changes in the related level of activity or
volume
 Costs are fixed or variable only with respect to a specific activity or a given time period.

12. Other cost concepts

 Cost driver—a variable that causally affects costs over a given time span
  Relevant range—the band of normal activity level (or volume) in which there is a specific
relationship between the level of activity (or volume) and a given cost
 For example, fixed costs are considered fixed only within the relevant range.

13. Different types of firms

 Manufacturing-sector companies purchase materials and components and convert them into
finished products.
 Merchandising-sector companies purchase and then sell tangible products without changing their
basic form.
 Service-sector companies provide services (intangible products).

14. Types of manufacturing inventories:

 Direct materials: resources in-stock and available for use
 Work-in-process (or progress): products started but not yet completed, often abbreviated as WIP
 Finished goods: products completed and ready for sale

15. Types of product costs

 Direct materials—acquisition costs of all materials that will become part of the cost object.
 Direct labor—compensation of all manufacturing labor that can be traced to the cost object.
 Indirect manufacturing—factory costs that are not traceable to the product in an economically
feasible way. Examples include lubricants, indirect manufacturing labor, utilities, and supplies.

16. FORMULA

 Total manufacturing cost = Direct material cost + Direct labor cost + Manufacturing overhead
cost (VC+FC)
 Manufacturing cost per unit = Total manufacturing cost / the number of units
 Semi-variable cost/ semi-fixed cost = mixed cost
 COGS: Direct material + Direct manufacturing labor + Variable manufacturing overhead +
Fixed manufacturing overhead.
 COGM: Direct material used + Direct manufacturing labor cost + Indirect manufacturing labor
cost + Other plant expenses.
 LECTURE 2: JOB COSTING

1. Basic costing terminology logically extended

 Cost pool: any logical grouping of related cost objects
 Cost-allocation base: a cost driver is used as a basis upon which to build a systematic method
of distributing indirect costs.
 For example, let’s say that direct labor hours cause indirect costs to change.
Accordingly, direct labor hours will be used to distribute or allocate costs among objects based
on their usage of that cost driver.

2. Costing systems:
 Job-costing—system accounting for distinct cost objects called jobs. Each job may be different from
the next, and consumes different resources. Example: Wedding announcements, aircraft, advertising
 Process-costing—system accounting for mass production of identical or similar products. Example:
Oil refining, orange juice, soda pop

3. Costing approaches
 Actual costing—allocates: Indirect costs based on the actualindirect-cost rates times the
actual activity consumption.
 Normal Costing—allocates: Indirect costs based on the budgetedindirect-cost rates times the
actual activity consumption.
 Both methods allocate direct costs to a cost object the same way: by using actual direct-cost
rates times actual consumption.

4. Seven-step job costing

1. Identify the job that is the chosen cost object.
2. Identify the direct costs of the job.
3. Select the cost-allocation base(s) to use for allocating indirect costs to the job.
4. Match indirect costs to their respective cost-allocation base(s).
5. Calculate an overhead allocation rate:

6. Allocate overhead costs to the job: Budgeted Allocation Rate x Actual Base Activity For the Job
7. Compute total job costs by adding all direct and indirect costs together.

5. Imbalance situation exists between the two overhead accounts

 If Overhead Control > Overhead Allocated, this is called Under-allocated Overhead
 If Overhead Control < Overhead Allocated, this is called Over-allocated Overhead

6. Actual costing, normal costing, accounting for manufacturing overhead.

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 LECTURE 3: PROCESS COSTING

1. Job costing & Process costing

 Job-Costing Systems: Distinct, identifiableunits of a productor service. Examples: Custom-
mademachines, houses
 Process-CostingSystems: Masses of identicalor similar units of aproduct or service. Examples:
Food, chemical processing

2. Process costing
 Process costing is a system where the unit cost of a product or ser vice is obtained by
assigning total costs to many identical or similar units.
 Each unit receives the same or similar amounts of direct materials costs, direct labor costs,
and manufacturing overhead.
 Unit costs are computed by dividing total costs incurred by the number of units of output
from the production process.
 Process-costing assumptions:
o Direct materials are added at the beginning of the production process, or at the
start of work in a subsequent department dow n the assembly line.
o Conversion costs are added equally along the production process.
 Five-step process-costing allocation
1. Summarize the flow of physical units of output.
2. Compute output in terms of equivalent units.
3. Summarize total costs to account for .
4. Compute cost per equivalent unit.
5. Assign total costs to units completed and to units in ending work-in-process.

3. Equivalent units
 A derived amount of output units that:
1. Takes the quantity of each input in units completed and in unfinished units of work in
process and
2. Converts the quantity of input into the amount of completed output units that could be
produced with that quantity of input
 Are calculated separately for each input (direct materials a nd conversion cost)
 When calculating equivalent units in step 2, focus on quantities and disregard dollar amounts until af
ter the equivalent units are computed

4. O. WIP
Example:
5. 2 Inventory methods

Weighted average
FIFO
SUMMARIZE

LECTURE 4: ACTIVITY-BASED COSTING

7. Broad averaging
 Historically, firms produced a limited variety of goods while their indirect costs were
relatively small.
 Allocating overhead costs was simple: use broad averages to allocate costs uniformly
regardless of how they are actually incurred.
 The end-result: overcosting and undercosting

8. Overcosting and undercosting

 Overcosting—a product consumes a low level of resources but is allocated high costs per
unit.
 Undercosting—a product consumes a high level of resources but is allocated low costs per
unit.

9. Cross-subsidization
 The results of overcosting one product and undercosting another.
 The overcosted product absorbs too much cost, making it seem less profitable than it really
is.
 The undercosted product is left with too little cost, making it seem more profitable than it
really is.

10. Rationale for selecting a more refined costing system

 Increase in product diversity
  Increase in indirect costs
 Advances in information technology
 Competition in foreign markets

11. Cost hierarchies

ABC uses a four-level cost structure to determine how far down the production cycle costs should be
pushed:
 Unit-level (output-level)
 Batch-level
 Product-sustaining-level
 Facility-sustaining-level

12. Abc vs. Simple costing schemes

 ABC is generally perceived to produce superior costing figures due to the use of multiple
drivers across multiple levels.
 ABC is only as good as the drivers selected, and their actual relationship to costs. Poorly
chosen drivers will produce inaccurate costs, even with ABC.

13. Activity-based management

A method of management that uses ABC as an integral part in critical decision-making situations,
including:
 Pricing and product-mix decisions
 Cost reduction and process improvement decisions
 Design decisions
 Planning and managing activities

14. Signals that suggest that abc implementation could help a firm
 Significant overhead costs allocated using one or two cost pools
 Most or all overhead is considered unit-level
 Products that consume different amounts of resources
 Products that a firm should successfully make and sell consistently show small profits
 Operations staff disagreeing with accounting over manufacturing and marketing costs

EXERCISE

Automotive Products (AP) designs and produces automotive parts. In 2017, actual variable manufacturing
overhead is $308,600. AP’s simple costing system allocates variable manufacturing overhead to its three
customers based on machine-hours and prices its contracts based on full costs. One of its customers has
regularly complained of being charged noncompetitive prices, so AP’s controller Devon Smith realizes that it
is time to examine the consumption of overhead resources more closely. He knows that there are three main
departments that consume overhead resources: design, production, and engineering. Interviews with the
department personnel and examination of time records yield the following detailed information:
1. Compute the manufacturing overhead allocated to each customer in 2017 using the simple costing
system that uses machine-hours as the allocation base
2. Compute the manufacturing overhead allocated to each customer in 2017 using department-based
manufacturing overhead rates
3. Comment on your answers in requirements 1 and 2. Which customer do you think was complaining
about being overcharged in the simple system? If the new department-based rates are used to price
contracts, which customer(s) will be unhappy? How would you respond to these concerns?