- •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
Variable overheads £2
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Variable cost of production £7
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Assume spare capacity and the fixed costs remain unchanged.
Obviously it is cheaper to make than to buy.
However, if the firm is working at full capacity and to make component Q involves moving some of the capacity from product P then the decision is a little more involved.
The following data applies to product P.
Selling price £16
Direct materials £6
Direct labour £4
Variable overhead £2
------
Contribution £4
------
The production rate for product P is 5 units per hour and for component Q is 10.
The effective cost of making a unit of component Q is:
Marginal cost of production £7
Plus Opportunity cost of £2
-----
The effective cost is £9
-----
By switching capacity from product P to component Q there is £2 contribution lost. This is an opportunity cost ie. it is the benefit foregone by choosing one course of action over the other.
4 Limiting factor decisions
Often a company finds that there is a limiting factor or constraint which inhibits its capacity to meet the desired production level. The limiting factor may be any resource eg. materials, labour or machine hours. Management has to decide what is the best way to allocate the scarce resource among the product range in the most effective way so that profits are maximised.
Example:
Product |
X |
Y |
Z |
Desired production (units) |
1,000 |
2,000 |
500 |
|
£ |
£ |
£ |
Selling price per unit |
35 |
25 |
15 |
Variable cost per unit |
15 |
10 |
5 |
|
----- |
----- |
----- |
Contribution per unit |
20 |
15 |
10 |
A special machine is used to manufacture the three products and there are only 15,000 machine hours available.
Product X uses 20 machine hours per unit.
Product Y uses 5 machine hours per unit.
Product Z uses 2 machine hours per unit.
|
X |
Y |
Z |
Contribution per unit |
20 |
15 |
10 |
No. of machine hrs. |
20 |
5 |
2 |
Contribution per machine hr. |
1 |
3 |
5 |
Ranking |
(3) |
(2) |
(1) |
Desired production level
Product Z |
500 units x 2 hrs. |
1,000 hrs |
|
|
Product Y |
2,000 x 5 hrs |
10,000 hrs |
|
|
Product X |
200 x 20 |
4,000 hrs |
|
|
Product Z earns 500 units x £10 = £5,000 contribution
Product Y earns 2,000 units x £15 = £30,000 contribution
Product X earns 200 units x£20 = £4,000 contribution
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£39,000 contribution
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