Week One - Review

1. Week One - Review Management Accounting

2. Management Information • Managers need information for Strategy, Planning and Control • Accountants provide this information by taking data and transforming it into useful information • Mostly Management Accountants investigate costs

3. Basic Costs • Basic Costs are the components of the COST OBJECT • COST OBJECTS are the products or services that are produced by the firm • Basic costs are related to the Direct (Variable) or Indirect (Fixed Costs)

4. Direct Costs • Direct Costs are the materials and labour that go to make the COST OBJECT • Direct costs are usually measured in Units • 1 nail • 1 hour of labour • A COST OBJECT will have many different units when it is complete

5. Example – A Chair • One Chair requires: • 5 units of wood • 3 units of nails • 2 units of glue • 2 Hours of Labour • Each Unit will have a cost • Wood Costs $10 per unit • Nails cost $2 per unit • Glue costs $1 per unit

6. Example ctd • So if we know how many units are required and the price of the units we can know how much our COST OBJECT is in $ • The Chair requires Wood (3 x 10 = 30), Nails (3 x 2 = 6) and Glue (2 x 1 = 2) • Therefore our DIRECT (Variable) costs are $38

7. Indirect (Fixed) Costs • But there are other cost of production • These are often called the Overheads, the costs which exist in production whether or not you make any COST OBJECTS • Factories use heat, light and other things as well as cost rent and taxes • These costs must be ALLOCATED to the COST OBJECT

8. Example • The Factory making Chairs has the following Overheads • Rent $10,000 per year • Heat $2000 per year • Light $1000 per year • It makes 10000 chairs (THE COST OBJECT) per year

9. Example Ctd • If we know how much our overheads are and how many COST OBJECTS we are making then we can ALLOCATE the overheads to the chairs • Total Overheads = (10000+2000+1000) 13000 • Total number of COST OBJECTS = 10000 • Allocate (13000/10000) $1.3 per COST OBJECT

10. Total Cost • Total Cost is Direct Costs + Indirect Costs • The Chair therefore costs (38+1.3) $39.3

11. Revenue • To find revenue need to know SELLING PRICE • SELLING PRICE will be the Total Costs of production with SALES MARGIN added to it • SALES MARGINS are often a percentage of the TOTAL COSTS

12. Example • Our Chair (COST OBJECT) costs $39.3 to produce • The Company wishes to make a MARGIN of 50% • To find SELLING PRICE we have to know what the TOTAL COSTS plus MARGIN is • For the chair it is (39.3 x 50%) + (39.3) • = $58.95

13. Cost Behaviour • Fixed (Indirect) Costs remain even • Variable (Direct) Costs increase as production increases

14. Job Costing • Job Costing is a way of representing these cost formally • Job Costing consist of information about the Materials (Bill of Materials), Labour (Time Ticket and Overheads (Allocated on the job sheet) • Each Job sheet has lots of information but it is used to arrive at a summary of the unit cost

15. Job Costing • Have a look at the job costing in the text book, ask if there is anything you do not understand

16. Activity Based Costing (ABC) • Activity Based Costing is a different costing method • It still looks to work out the cost of the COST OBJECT • It uses the concept of ACTIVITY as a basis of allocation of overheads • Remind yourselves of what an ABC costing looks like from your text books

17. ABC Benefits and Limitations • ABC provides much more information on where costs occur in the production process • ABC is very good at pinpointing high cost areas and allows a redesign of the process to become more efficient • BUT • ABC IS VERY EXPENSIVE TO IMPLEMENT • ABC CAUSES OVERHEADS TO SHIFT FROM HIGH VOLUME TO LOW VOLUME COST OBJECTS • ABC MAY BE AS INACCURATE AS TRADITIONAL COSTINGS