CIMA C1Fundamentals of Management Accounting

Introduction to Cost Accounting

CIMA C1Fundamentals of Management Accounting

Class Slides – Ian Wilson

1. Define management/Cost Accounting2. Explain the importance of Cost Control &

Planning in an organisation3. Describe how information can be used to

measure performance in a company4. Explain the differences between financial

information requirements for Companies, public bodies & society.

Learning Aims (CIMA)

1. Explain the concept of Direct & Indirect Cost

2. Explain why the concept of cost is meaningful & essential to business

3. Explain how different types of costs behave in relation to changes in the Level of Activity

4. Distinguish between Fixed, Variable & Semi-Variable Costs

5. Explain Step Costs6. Calculate the Fixed & Variable elements of

Semi-Variable costs

Learning aims continued

Management & Cost Accounting: A Management Information System which

provides analysis of past, present & future cost data for management action

Management/Cost Accountant: Provide key financial data for planning,

controlling & decision making in the organisation

What is Management/Cost Accounting?

Key Emphasis in 4 areas of use:1. Stock Valuations, what is the value/cost of

inventory?2. Planning, future forecasts3. Control, actual against planned

performance4. Decision Making, the ‘right’ outcome in

terms of cost/profit for the business

Cost Systems

Financial

The ‘Financial’ Accountant

Management

The ‘Management’ Accountant

Mostly Historic, Financial Data Past, Present & Future

External Audience: Lenders, Stakeholders in plc’s

Internal measure of Performance, qualitative & financial

Content Regulated by Standards & Legislation

Flexible content, Layout & Analysis

Annual for Shareholders Over any time period, weekly-monthly-annual, as and when required

Financial v’s Management?

2 Branches of Profession:

Financial v’s Management?

Information & data that is collected & analysed by a Management Accountant will be used to assist the business in the following areas:

1. Planning : ‘Failing to plan, is planning to fail!’

2. Decision Making : making the ‘Right’ choice at the ‘Right’ time for the ‘Right’ reasons

3. Control : Making sure Actual results fall in line with those planned – corrections if necessary

Management Activities

Strategic Long Term

TacticalMedium Term

OperationalShort Term

Levels of Management

Directors & Senior Managers – 1/3/5 yrs +

Middle Managers – up to 1 Year

Junior Managers/Team Leaders Day to Day focus

Board

Production

Machining Assembly

Admin

I.T.

Company Structures & Cost

Having seen the ‘family tree’ of how a company may be structured, various departments may be responsible for differing levels of business processes:

Cost Centre: responsible for ‘COST’ control ONLY

Revenue Centre: responsible for ‘REVENUE’ ONLY

Profit Centre: Accountable for REVENUE & COSTS

Company Structures

Investment Centre: responsible for: Costs Revenue…….& Investment in the ‘Investment’ Centre, ie

Capital equipment etc. As such, the ‘Manager’ is responsible for

obtaining the ‘Return on the Investment’ (ROI), or the ‘Return on Capital Employed’ (ROCE)

Company Structures

You will need to learn this key measure:

ROCE = Profit before Interest & Tax x 100%

Capital Employed

Now try Exercise 1 page 18

ROCE

Look at your class notes (page 4) You need to be able to recognise &

describe:1. Cost Units2. Cost Centres (already studied) 3. Cost Objects4. Cost Classification – see the next area of

study on the following slides:

Cost Units & Cost Centres

What are theses 2 aspects about? Cost Units: A unit of product or service for which costs

can be obtained Usually measured in the ‘currency’ in which

the product/service is sold in: Litre of Petrol Tin of Paint Loaf of Bread

Cost Units & Objects

Cost Objects: Often spoken about in ABC Costing Cost Objects may be a unit of product but

could equally be a customer or supplier You will re-visit this with P1 later in your

CIMA studies

Cost Units & Objects

Costs fall into 3 broad categories:1. Materials2. Labour3. Expenses(called ‘Overheads’)

Materials & Labour speak for themselves, Expenses are varied, typically Rent/Rates/Heating/Lighting/Depreciation and so on…

Cost Classification

Direct Costs: those that are directly involved in the making of the product. The sum of the direct costs is called ‘Prime Cost’.

Indirect costs: incurred for other reasons and cannot be allocated DIRECTLY to the product

Consider: A Factory Operative A Shift Supervisor leading a team of

operatives

Direct & Indirect Costs

Costs: Which is Direct & Indirect?.

Direct & Indirect Costs

Production: costs that relate to manufacturing the product. They are included in income statement as ‘cost of sales’ and are included in stock valuation.

Non-Production: incurred as business costs but NOT relating to production/manufacturing:

a. Distributionb. Sales/Marketingc. Administration

Production & Non-Production Costs

I often draw out a structure for costs.

Make sure you note this down.

Cost Classification

Practice your skills with True or False

We have 5 questions to deal with, I will read these out

True or false, which do you think is the correct one based on the narrative given:

Exercise 1

Different thoughts on costs when Decision Making, Planning & Controlling:

1. Relevant Costs2. Avoidable Costs3. Opportunity Costs4. Sunk Costs5. Controllable Costs6. Uncontrollable Costs We can consider each in turn:

Cost Behaviour

Relevant Costs: Future ‘cash flows’ arising as a direct

consequence of a decision. They are: Future Costs Cash Flows Incremental Costs

Cost Behaviour

Avoidable Costs: Costs which would not be incurred if the

activity to which they relate did not exist Important to know if you wish to discontinue

a product/operation

Cost Behaviour

Opportunity Costs: The value of the benefit sacrificed when one

course of action is chosen in preference to an alternative.

Sunk Costs: This is a past cost which is not directly

relevant in decision making Controllable Costs: That which can be influenced by

management decisions & actions

Cost Behaviour

Uncontrollable Costs: This cost cannot be affected by

management within a given time span

Can you think of examples of controllable & uncontrollable costs?

Cost Behaviour

Decision making in the future will depend on the accountant’s ability to predict how costs will behave in a variety of scenarios.

Your syllabus will require you to deal with 4 types of Cost:

1. Fixed 2. Step3. Variable4. Semi-Variable

Cost Behaviour

Cost Behaviour is the way in which a cost changes as activity levels change

Level of Activity refers to the amount or volume of work done

It may seem easy to agree that costs increase as the level of activity increases.

Study pages 7 to 9 in your notes.

Cost Behaviour

Make sure you learn the 4 diagrams connected with each cost.

1. Fixed Cost2. Step Cost3. Variable Cost4. Semi-Variable Cost

Consider examples of each

Cost Behaviour diagrams

They tend to remain constant over time: Examples?

Fixed Costs: Graph

Fixed Costspend

Look at the graph shapes:

Fixed Cost, Total & per Unit

Costs step up as activity increases: Examples?

Step Costs: Graph

Fixed Cost reaches a point at which resources are increased

Cost increase in proportion to activity changes: Examples?

Variable Costs: Graph

Part Fixed & part Variable cost elements which are partly affected by a change in activity.

Semi-variable costs have both a fixed & variable element.

Consider the earlier definitions of ‘Fixed’ & ‘Variable’

A graph helps to follow what is going on:

Semi-Variable Costs

Semi-Variable Costs

Examples: Electric Bill Gas Bill Sales Reps Salary Water Bill

Semi-Variable Costs

Bring ALL the elements together:

Total Costs

So, we know that Semi-Variable costs have 2 parts:

Fixed & Variable However, in your exam you may be given

data, based on historical spends, for Semi-Variable Costs. How do we know or find out what part is Fixed & what is variable?

You may need this ‘split’ so you can forecast forward how much costs will be, given a level of activity

Semi-Variable Costs

The fixed & variable elements can be predicted by this method.

Look at Exercise 2 in your notes on page 26

I will demonstrate this for you You need to learn this It is VITAL!

High/Low Method

Subtract ‘Low’ values from ‘High’ values given(you need at least 2 values), keeping the Cost as the numerator(on top) & the Volume as the denominator(below).

This answer is the VARIABLE COST per UNIT. Substitute your variable cost per unit into

any of the historical data sets given. No of Units X Variable Cost per unit will

equal the TOTAL VARIABLE COST

High/Low Method

The historical data set will give you a TOTAL COST.

We know that Total Cost = Total Variable Cost plus Total Fixed Cost.

We now know 2 parts of the above equation.

We can calculate TOTAL FIXED COST We can then forecast any cost total for any

activity level now

High/Low Method

What is a Public Body? A public body is not part of a government

department, but carries out its function to a greater or lesser extent at arm's length from central government.

Ministers are ultimately responsible to Parliament for the activities of the bodies sponsored by their department.

Public Corporations; NHS Bodies; and Public Broadcasting Authorities (BBC and S4C).

Public Bodies

The main aim of all Public Bodies is to carry out their duties as efficiently and effectively as possible, within available resources, for the benefit of taxpayers, customers and staff.

A Public Body has in place sound internal financial, risk management and management information systems including: management accounting systems to enable it to monitor and control its expenditure against budget; to produce annual accounts;

Public Bodies

Try the 4 questions that summarise this First session

End of Session Exercises