- •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
Inspection cost:
Cost per inspection Inspection cost
------------------- = £180,000 = £1,500 per
No. of inspections
The final stage of the process is to use the cost driver rates to assign overhead cost to products.
|
X |
Y |
|
£ |
£ |
Direct labour |
15.00 |
5.00 |
Direct materials |
25.00 |
20.00 |
Production overhead (1) |
20.00 |
40.00 |
Set-up costs (2) |
0.80 |
20.00 |
Inspection (3) |
2.40 |
24.00 |
|
------ |
------- |
|
63.20 |
109.00 |
|
------- |
------- |
X =£20 x 1 machine hr. =£20; Y = £20 x 2 machine hours = £40
X = (£5,000 x 4 set-ups)/2,500 units = 80p; Y = (£5,000 x 20 set-ups)/5,000 units = £20
X = (£1,500 x 40 inspections)/ 25,000 units = £2.40; Y = (£1,500 x 80 inspections)/ 5,000 units = £24
The comparison of the two approaches is given:
|
Product X |
Product Y |
Absorption costing |
£77.50 |
£37.50 |
ABC |
63.20 |
£109.00 |
Advantages of ABC
It recognises the reality in advanced manufacturing environments that overheads are not related to direct labour since the proportion of direct labour costs is small in the total costs of a product. Instead activities cause overheads.
Traditional costing systems tend to understate the overhead cost of a low volume complex product and overstate the overhead cost of a high volume product. ABC tends to allocate overheads to products which consume activities which in turn cause the overheads to arise.
Since ABC produces more accurate product costs, decisions taken by management are better informed eg. pricing decisions.
More accurate product profitability analysis can be produced.
It creates an awareness of the various activities that take place in an organisation and focuses on non-value added activities to ascertain whether they are needed or not.
Standard costing
Lesson 7 Standard Costing
Standard costing is a management control system which is to be found in manufacturing industry in particular. Just like budgetary control, standard costing is also part of the control system. Both use variance analysis. Standard costing is a unitary concept ie. it uses standard material cost or standard labour cost. Budgeting, on the other hand uses these unit standard costs to compile total costs eg. material costs or labour costs.