Accounting
process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.
Why managers use accounting information
assists with decision making and control activities.
Why shareholders use accounting information
knowledge on investment value and income earned.
Why employees use accounting information
knowledge on firm ability to meet wage demands.
Why creditors/suppliers use accounting information
knowledge on firm ability to meet financial obligations
Why government agencies use financial information
details on sales activity, profits, investments, stocks, dividends, proportion of profits absorbed by taxation. this is used to determine polices to manage economy.
Model of decision making process (7 steps)
1 - clarify problem
2 - specify decision criteria
3 - identify alternative courses of action
4 - collect information about cost and benefits
5 - compare alternative cost and benefits
6 - select course of action
7 - evaluate decision effectiveness
Tactical decisions
short-term and don’t require significant changes in capacity related resources.
Long-term decisions
more strategic in nature and involve changes in capacity related resources.
Impacts of changing business environment on management accounting (5)
- global competition
- changing product life cycles
- advances in technology (manufacturing and information)
- environmental and sustainability issues
- greater pressure for higher standards of ethical behaviour
Competitive advantage in today’s environment (4)
- cost efficiency
- quality control
- time management
- innovation and continuous improvement
Functions of management accounting (3)
1 - allocate costs between goods sold and fully/party goods unsold.
2 - provide relevant information on profitability analysis, product pricing, make or buy product mix and discontinuation.
3 - provide information for planning, control and performance measurement and continuous improvement. (periodic performance reports)
Cost object
any activity for which a seperate measurement of cost is required.
Cost collection system (2)
1 - accumulated costs by classifying them
2 - assigns costs to cost objects
Direct costs
Indirect costs
Direct - specifically and exclusively identified with a given cost object
Indirect - cannot be specifically and exclusively identified with a given cost object
Cost allocation
process of assigning costs to cost objects that involve the use of surrogate rather than direct measures.
Product costs
Period costs
Product costs - those attached to the products and included in the stock.
Period costs - not attached to the product and included in the inventory valuation.
Variable costs
vary in direct proportion with activity.
Fixed costs
remain constant over wide ranges of activity.
Semi fixed costs
fixed with activity levels but increase or decrease by some constant amount at critical activity levels.
Semi variable costs (mixed costs)
include both a fixed and variable component.
Relevant revenues/costs
Irrelevant revenues/costs
future costs and revenues that will be changed by a decision.
irrelevant costs/revenues which will not be changed by a decision.
Opportunity costs
a cost that measures the opportunity that is lost/sacrificed when the choice of one course of action requires that an alternative course of action be given up.
Unavoidable/avoidable costs
costs that can be saved by not adopting a given alternative, whereas unavoidable costs cannot be saved.
Incremental revenue/costs
additional costs/revenues from production or sale of a group of additional units.
Marginal revenues/costs
Additional costs/revenues of one additional unit of output.
Cost and management information system requirements (3)
1 - inventory valuation for internal and external profit measurement
2 - provide relevant information to help managers make decisions
3 - provide information for planning, control and performance measurement
Cost assignment
The allocations of costs to the activities or objects that triggered the incurrence of the cost.
Allocation bases that are not significant determinants of costs are...
Arbitrary allocations
*traditional costing systems use this
Overhead application
The assignment of factory overhead costs to the unit based on a predetermined overhead rating.
Allocation basis:
Things to consider (5)
Basis upon which an entity allocates its overhead costs.
- direct labour hours
- machine hours used
- direct labour cost
- kilowatt hours consumed
- square footage occupied
Overhead rates
A blanket overhead is only justified if all products consume departmental overheads in similar proportions. If not, seperate departmental costs should be established.
Two stage allocation process
1 - assign overheads initially to cost centres
2 - allocate cost centre overheads to cost objects
4 steps required for the 2 stage allocation process
1 - assigning manufacturing overheads to production & service cost centres
2 - reallocating costs assigned to service cost centres to production cost centres
3 - computing seperate overhead rates for each production cost centre
4 - assigning cost centre overheads to products or other chosen cost objects
Why we use budgeted overhead rates?
- delay in product costs if actual annual rates are used
- fluctuating overhead rates that will occur if actual monthly rates are used
Accounting for manufacturing overhead
close under applied/ over applied overhead to cogs
OR
allocate to cogs, work in process inventory and finished goods inventory
Support departments
Help production departments provide products/services.
Allocation methods
- direct costs
- specified order of closing
- repeated distribution
Direct method
Allocate support costs only to operating departments.
Sequential (step down) allocation
Allocates support department costs to other support departments and to operating.
Reciprocal (matrix) allocation
Allocates support department costs to operating departments by fully recognising the mutual services provided among all support departments.
Which allocation method is best?
- each provides different outcomes
- cost vs benefit decision
- where reciprocal relationships strong use reciprocal
What does job costing involve? (2)
- manufacturing costs traced to individual jobs
- products produced are significantly different and may be produced in distinct jobs/batches
Pricing the issue of raw materials (3)
- cost flows process
- recorded in control account at cost
- issued to production department
Costing issues
continuous purchasing means not all inventory will have the same historical cost.
Types of accounting systems (2)
- integrated cost accounting system
- interlocking accounting system
Integrated cost accounting system
An accounting system in which the cost and financial accounts are combined in one set of accounts.
Interlocking accounting system
An accounting system in which the cost and financial accounts are maintained independently.
Control account
An account in the general ledger for which a corresponding subsidiary ledger has been created.
Unit cost formula =
total cost/number of units
Job order production - step 1
Prepare source documents
- the job order sheet
- materials requisition form
- time sheet
Materials requisition form
Cost of direct materials is assigned to a job by the use of a source document.
Includes:
- type, quantity and unit price direct materials
- number of job
Just-in-time production features (7)
- materials purchased as needed
- simplified production processes
- purchases are in small lots
- quick and inexpensive setups
- high quality levels for raw materials, components and finished products
- preventative maintenance
- flexible work terms
Just-in-time purchasing (4)
- reduced number of suppliers
- long-term contracts with suppliers
- quality targets in supplier contracts
- use of e-commerce applications
Cost and benefits of JIT
costs:
- substantial investment to change production facilities
- increased risk of inventory storage
- adverse impacts on small suppliers
benefits:
- saving in inventory costs
- eliminates non-value added activities
Backflush costing
Costing system that delays recording some or all of the journal entries relating to the cycle from purchase of direct materials to the sale of finished goods.
Contract costing
Applied to relatively large cost units which takes a long time to complete.
- no profit taken if contract early stage
- prudence concept applied
In contract costing, if the contract is near completion...
a proportion of profit should be recognised based on:
(Cash received to date/ Contract price) x Estimated Price
Process costing
A system where the unit cost of a product or service is on tainted by assigning total costs to many identical or similar units of output.
Job costing
Individual jobs use different quantities of resources so it would be incorrect to cost each job at some average production cost.
Process costing cost categories
*seperate according to when costs are introduced
1 - direct materials are added at the beginning of the production process or at the start of work.
2 - conversion costs are generally added equally along the production process.
Process costing three ways
1 - no beginning or ending work in process inventories
2 - no beginning work in process inventory and some ending work in process inventory
3 - both beginning and ending work in process inventories are present
Equivalent units
A derived amount of output units that:
1 - takes quantity of each input in units completed end in unfinished units WOP
2 - converts the quantity of input into the amount of completed output units that could be produced with that quantity of input
Weighted average process costing method
Calculates cost per equivalent unit of all work done to date. Then assign this cost to equivalent units completed and transferred out of the process and to equivalent units in ending work in process inventory.
First in first out method
Assigns the cost of the previous accounting periods equivalent units in beginning work in process inventory to the first units completed and transferred out of the process.
Transferred in costs
Costs incurred in previous departments that are carried forward as the products cost when it moves to a subsequent process in the production cycle.
Normal vs Abnormal losses
Normal losses - cannot be avoided, cost is absorbed by good production
Abnormal losses - can be avoided, cost is recorded separately and treated as a period cost
Types of costing systems
- direct costing systems
- traditional costing systems
- ABC systems
Generating relevant cost information
1 - cost of many joint resources fluctuate according to demand, costs of support functions difficult to trace to cost objects
2 - an attention directing system is required to identify potentially unprofitable products
3 - many product related decisions are not independent
Comparison of traditional vs ABC
- both use 2 stage allocation process
- ABC only cause and effect drivers, traditional rely on arbitrary allocation bases
- ABC tends to seperate cost driver rates for support departments, whereas traditional merges support and production
Problems with traditional product costing systems (4)
- calculation of manufacturing overhead rate using a volume based cost driver
- non-manufacturing costs are not assigned to products
- failure to adapt to the changing business environment
- cause of changes in cost structures
In a product costing system - inaccurate product costs are likely when... (4)
- proportion of direct labour decreases
- proportion of related and unrelated manufacturing overhead costs increases
- non-manufacturing costs that are product related become substantial
- product diversity increases
When are traditional systems appropriate? (5)
- direct costs dominant
- indirect costs small
- information costs high
- lack of global competition
- limited range of products
Activity driver
Cost driver used to estimate cost of an activity consumed by cost object.
Cost driver
Factor/activity in that causes a cost to be incurred.
Resource driver
Cost driver used to estimate cost of resources consumed by an activity.
Root cause cost driver
Underlying factors that cause activities to be performed and their costs to be incurred.
Classification of activities
Unit level - performed each time unit of product is produced
Batch related - performed each time batch of goods is produced
Product/service sustaining - performed to enable individual product production
Facility sustaining - performed to support organisation as a whole
Time driven activity based costing (TDABC)
A management methodology that provides detailed info about the cost to serve and profitability for all products, services and customers.
Cost of resources supplied =
cost of resources used + cost of unused capacity
Implications of spare capacity
- ABC estimates the cost of resources used to perform activities to produce and sell products.
- committed resources are those supplied in advance of being used in production.
- when budgeted costs are used to estimate activity costs, the committed costs supplied will not always equal resources used.
It must be selected the correct denominator activity level ...
This is the level of capacity supplied.
Costing view
Considers how ABC can be used to estimate the cost of cost objects.
Activity management view
Assists management by identifying and analysing the characteristics of business activities.
Limitations of ABC (4)
- facility level costs
- use of average costs in decision making
- complexity
- resistance to change by employees
Joint costs
the costs of a production process that yields multiple products simultaneously.
Split-off point
the juncture in a joint production process where two or more products become separately identifiable.
