- •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
2 Shut-down decisions
Often management wish to analyse the performance of their products, branches, divisions.
Consider the following example.
Example:
Product |
A |
B |
C |
Total |
|
£ |
£ |
£ |
£ |
Sales |
20,000 |
50,000 |
25,000 |
95,000 |
Less |
|
|
|
|
Direct materials |
1,000 |
15,000 |
10,000 |
26,000 |
Direct labour |
3,000 |
16,000 |
14,000 |
33,000 |
Fixed overheads |
2,000 |
7,000 |
9,000 |
18,000 |
|
-------- |
-------- |
-------- |
-------- |
|
6,000 |
38,000 |
33,000 |
77,000 |
|
-------- |
-------- |
-------- |
-------- |
Profit/(Loss) |
14,000 |
12,000 |
(8,000) |
18,000 |
With product C making a loss management might consider discontinuing this product. However, using marginal costing principles, with fixed costs treated as irrelevant for short-run decision-making the income statement can be reformatted.
Prtoduct |
A |
B |
C |
Total |
|
£ |
£ |
£ |
£ |
Sales |
20,000 |
50,000 |
25,000 |
95,000 |
Less |
|
|
|
|
Variable costs |
4,000 |
31,000 |
24,000 |
59,000 |
|
-------- |
-------- |
-------- |
-------- |
Contribution |
16,000 |
29,000 |
1,000 |
36,000 |
Fixed costs |
|
|
|
18,000 |
|
|
|
|
-------- |
Net profit |
|
|
|
18,000 |
|
|
|
|
-------- |
Since product C makes a contribution it may be inadvisable to close it down. If Product C is closed down the company will lose £1,000 contribution and the overall effect would be to reduce profits to £17,000.
3 Make or Buy
Sometimes management may have to consider whether it is best to manufacture products or components or to sub-contract them out and purchase them externally.
Example:
A company makes product P. A component Q used in the manufacture of P can be purchased from a supplier for £8. The costs to make the component are as follows:
Direct materials £2
Direct wages £3