- •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
In the absorption stage an overhead recovery (absorption) rate (oar) is calculated. The formula used is:
Budgeted Production Overheads
OAR = --------------------------------------------
Suitable basis
A number of bases can be used to compute an overhead rate eg. labour cost percentage, material cost percentage, prime cost percentage and cost units.
Generally, businesses use an activity rate to recover overheads. This rate is usually labour hours or if appropriate machine hours. Since many of the overheads arise as a consequence of the employment of labour or the use of mechanisation it appears reasonable to employ one or other of these bases.
Example:
Lets assume Dept. A is a mechanised operation and has 30,000 machine hours whereas Dept. B has only 4,000 machine hours. Labour hours in Dept. A is 5,000 and is 35,000 labour hours. Overheads in Dept. A is £15,000 and £7,000 in Dept.B.
Dept. A £15,000
OAR = ------------ = £0.50 per machine hr.
30,000 Machine hrs.
Dept. B £7,000
OAR = ------------- = £0.20 per labour hr.
35,000 Labour hrs.
Example: The company makes two products X and Y. The following information is available:
Product X Product Y
£ £
Direct materials 10 12
Direct labour 12 14
(Wage rate £2 per hr.)
Machine hours in
Dept. A 4 6
Required: Calculate the production cost of the two products.
Product X Product Y
£ £
Prime cost 22.00 26.00
+ Production overheads
Dept. A (4 hrs. x 0.50) 2.00 (6 hrs. x 0.50) 3.00
Dept. B (6 hrs. x 0.20) 1.20 (7 hrs. x 0.20) 1.40
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23.20 30.40
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Lesson 6 Activity Based Costing