- •Lecture Notes b.Devlin
- •Introduction
- •Management accounting
- •1 Financial accounting.
- •2 Management accounting
- •To provide information about product costing to be used in financial
- •To provide information for planning, controlling and organising.
- •To ascertain the cost of a product. This information is used to value stock which is required for external reporting .
- •To assist management in the decision-making process.
- •Marginal costing
- •Decision making
- •In the short-run all fixed costs remain unchanged and therefore treated as irrelevant.
- •Variable overhead
- •2 Shut-down decisions
- •3 Make or Buy
- •Variable overheads £2
- •Variable cost of production £7
- •Variable overhead £2
- •4 Limiting factor decisions
- •5 Profit Planning or cost profit volume analysis
- •Cost volume profit analysis
- •It is possible to ascertain these by using a break-even chart or by using formulae.
- •Budgeting
- •1. Sales Budget 19x0
- •Production budget 19x0
- •3. Materials Usage Budget 19x0 (Component usage)
- •4. The Material Purchase Budget 19x0
- •Cash summary December 19x0
- •Depreciation never appears in a cash budget as it is a non-cash expense.
- •In respect to credit transactions time lags have to be built into the cash budget
- •It is useful to have a memo column to record items which will appear in the balance sheet if required. Budgeted Profit and Loss Account for six months ending 30 June 19x1
- •Budgeted Balance Sheet as at 30 June 19x1
- •Investment appraisal methods
- •1 Payback
- •2 Accounting rate of return
- •Investment appraisal compares the cash outflows with the cash returns from the project and these cash flows take place over a lengthy period of time.
- •3 Net Present Value
- •6 Profitability Index
- •The costing
- •Overheads
- •Indirect materials used in Dept. B £35,000
- •Insurance of machinery £5,000
- •In the absorption stage an overhead recovery (absorption) rate (oar) is calculated. The formula used is:
- •30,000 Machine hrs.
- •35,000 Labour hrs.
- •In recent years there has been criticism of the traditional system of costing for overheads ( Kaplan & Cooper ). Traditional cost systems were designed when:
- •Information processing costs were high;
- •Inspection cost:
- •Standard costing
- •Variances represent the differences between standard costs and actual costs. The standard cost is what the cost is estimated to be and this is compared to what the cost is actually.
- •Variable Overhead Variance
- •Variable overhead efficiency variance
- •Responsibility accounting
- •It is a ‘ system of accounting that segregates revenues and costs into areas of personal responsibility in order to assess the performance attained by persons to whom authority has been assigned’.
- •Net Residual Income
Indirect materials used in Dept. B £35,000
Rent & Rates £30,000
Light & Heat £15,000
Insurance of machinery £5,000
-----------
£125,000
-----------
Overhead |
Basis |
Dept. A |
Dept. B |
Total |
Salaries |
Allocate |
£40,000 |
|
£40,000 |
Ind. materials |
Allocate |
|
£35,000 |
£35,000 |
Rent & Rates |
Floor area |
£20,000 |
£10,000 |
£30,000 |
Light & Heat |
Floor area |
£10,000 |
£5,000 |
£15,000 |
Insurance |
Value of Mach. |
£1,000 |
£4,000 |
£5,000 |
|
|
---------- |
---------- |
----------- |
|
|
£71,000 |
£54,000 |
£125,000 |
|
|
---------- |
---------- |
----------- |
In apportioning costs a suitable basis is used eg. floor area is used to divide the rent of the factory between the two cost centres. The following bases of apportionment is useful in dealing with certain overhead cost items.
Overhead cost item |
Basis |
Rent & Rates, Light & Heating |
Floor area of cost centre |
Depreciation, insurance of machinery |
Original cost or book value |
Power costs |
Horse power of machinery |
Canteen expenses |
Number of employees in cost centre |
Maintenance costs for premises |
Floor area |
Once overheads are allocated and apportioned among a number of cost centre if there are any overheads located in non-production cost centres these have to be removed and re-apportioned to the production departments.
Example:
A company has the following distribution of overheads in two production departments A and B and two service departments, a stores and a maintenance department. Requisitions from the stores by Depts. A and B are £1,000 and £500 respectively. The maintenance personnel spend three-quarters of their time in Dept. A and the remainder in Dept. B.
Overhead |
Dept. A |
Dept. B |
Stores |
Canteen |
|
£ |
£ |
£ |
£ |
Allocated & Apportioned |
10,000 |
5,000 |
3,000 |
4,000 |
Reapportion Stores costs |
2,000 |
1000 |
--- |
|
Reapportion Maintenance costs |
3,000 |
1,000 |
|
--- |
|
--------- |
-------- |
-------- |
------- |
|
15,000 |
7,000 |
0 |
0 |
|
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------- |
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