Welcome to Strategic Management Accounting · 2011-09-27 · ... M. W., & Selto, F. H., 2006, Cost...
Transcript of Welcome to Strategic Management Accounting · 2011-09-27 · ... M. W., & Selto, F. H., 2006, Cost...
Teaching hours:
Sundays and Tuesdays: 2.00pm-3.15pm
Room: 6B
Office hours:
10:00 – 12:00 Saturday and Sundays
Room: 11H-14
Textbook:
Textbook: Horngren, C, Datar, S, Foster, G, Rajan, M
and C Ittner.(2009). Cost Accounting: A Managerial
Emphasis. 13th edition, Pearson.
Content Outline
Introduction CH2
Cost measurement systems, variable and absorption costing CH9,
CVP analysis CH3
Variations in cost systems, allocation of service-department CH15
Management Control, forecasts, projections and budgets, cost
estimation CH10,
Master budget, variance analysis, flexible budget and variances CH7,
Overhead variances CH8
Management control and transfer pricing CH22
Capital budgeting and cost analysis, CH 21
EOQ Inventory Management, Just-in-Time CH20
Decision Making and Relevant Information, CH11
Expectations
• Prepare readings in advance
• Do practice exercises especially your assignments
• Work throughout semester
• Ask questions!
• Attend all lectures
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Additional Learning Resources
• Eldenburg, L. G., Brooks, A., Oliver, J., Vesty, G. & Wolcott, S. 2008,
Contemporary Management Accounting, John Wiley & Sons Limited,
Australia
• Hilton, R. W., Maher, M. W., & Selto, F. H., 2006, Cost Management
Strategies for Business Decisions, McGraw-Hill Irwin, New York
• Drury, C. 2004, Student’s Manual - Management and Cost Accounting (6th
ed.) Thompson Learning
• Barlow, J, F. 2001, Excel Models: For business and operations management.
Chichester, England: John Wiley & Sons Limited
• Cornes, D., 1996, Evolution Before Revolution, Management Accounting
(UK), April, pp.16-18
• Böer, G., 1994, Five Modern Management Accounting Myths, Management
Accounting (USA), January, pp.22-27
• Gantt, H.L., 1994, The Relation Between Production and Costs, Journal of
Cost Management, Spring, pp.4-11 7
1. Definition of Accounting
the process of identifying, measuring and
communicating
economic information to permit informed
judgements and
decisions by users of the information.
2. Users of accounting information can be
divided into two categories:
(i) External parties outside the organization (financial
accounting).
(ii) Internal parties within the organization
(management accounting).
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3. Major differences between financial and
management accounting:
Statutory requirement for companies to produce
annual financial statements, whereas there is no legal
requirement for management accounting.
Financial accounting reports describe the whole of
the organisation, whereas management accounting
focuses on reporting information for different parts of
the business.
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3. Major differences between financial and
management accounting (continued):
Financial accounting reports must be prepared in
accordance with generally accepted accounting
principles (e.g. SSAPs) –statement of standard accounting practices.
Financial accounting reports historical information,
whereas management accounting places greater
emphasis on reporting estimated future costs and
revenues.
• Management accounting reports are produced at more
frequent intervals.
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Cost terms
• Cost Object: Anything for which a cost is required.
Often a product, but could be a service, activity, cost centre,
department etc.
• Direct cost: A cost that can be traced to a cost object in an
economically feasible (e.g. staple is traceable but not
economically feasible) manner.
• Indirect cost (Also known as Overheads) : a cost that cannot
be traced to a cost object in an economically feasible
manner.
The distinction between direct and indirect costs depends on
what is identified as the cost object. (e.g. for a department
depreciation may be direct cost but it would be indirect cost for a
product produced in that department)
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Cost terms (continued):
Note. A cost can only be described as direct or indirect in
relation to a given cost object – a direct cost for a
particular cost object may be an indirect cost to a different
cost object.
• Cost Assignment: Linking costs to cost objects.
Two methods:
1. Tracing
2. Allocating (using some arbitrary {but rational} base)
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Cost Terms (continued):
• Prime cost: Direct materials + direct labour.
• Conversion cost: Direct labour + manufacturing
overhead.
• Product cost: Cost assigned to a product.
• Period cost: Cost regarded as an expense in the current
accounting period.
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Reasons for Studying Costing
• Stock valuation & profit calculation
• Short-term decision making
• Long-term decision making
• Control
• Pricing
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Cost Terms (continued):
• A cost collection system normally accounts for costs in two
broad stages:
– 1. Accumulates costs by classifying them into certain
categories (e.g. labour, materials and overheads).
– 2. Assigns costs to cost objects.
Cost allocations = process of assigning costs to cost objects
that involve the use of surrogate, rather than direct
measures.
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© 2000 Colin Drury
Categories of Manufacturing Costs
• Traditional cost systems accumulate
product costs as follows:
Direct materials xxx
Direct labour xxx
Prime cost xxx
Manufacturing overhead xxx
Total manufacturing cost xxx
Non-manufacturing overheads xxx
Total cost xxx
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© 2000 Colin Drury
Classification by cost behaviour
• Important to predict costs and revenues at different
activity levels for many decisions.
• Variable costs vary in direct proportion with activity.
• Fixed costs remain constant over wide ranges of activity.
• Semi-fixed costs are fixed within specified activity levels,
but they eventually increase or decrease by some constant
amount at critical activity levels.
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© 2000 Colin Drury
Classification by cost behaviour
• Semi-variable costs include both a fixed and a variable
component (e.g. telephone charges).
Note that the classification of costs depends on the time
period involved. In the short term some costs are fixed, but
in the long term all costs are variable.
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© 2000 Colin Drury
Avoidable and unavoidable costs
• Avoidable costs are those costs that can be saved by not
adopting a given alternative, whereas unavoidable costs
cannot be saved.
• Avoidable/unavoidable costs are alternative terms
sometimes used to describe relevant/irrelevant costs.
Relevant and irrelevant costs and revenues
• Relevant costs and revenues are those future costs and
revenues that will be changed by a decision, whereas
irrelevant costs and revenues will not be changed by a
decision.
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Concepts of Costs & Benefits for
Decision-making
Costs & Benefits
Future Past
economic costs & benefits costs & benefits
Uncommitted Committed
Future economic Future economic
costs & benefits costs & benefits
RELEVANT IRRELEVANT Costs & Benefits Costs & Benefits
(avoidable) (either unavoidable or totally avoided)
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Concepts of Costs & Benefits for
Decision-making
Relevant Costs & Benefits
“to do” “not to do”
Incremental Opportunity Costs & Benefits Costs & Benefits
Net incremental Net opportunity
Costs/Benefits Costs/Benefits
DIFFERENTIAL
COST OR BENEFIT
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TOTAL COSTS Manufacturing Non Manufacturing
Variable
Direct Costs
D. Materials
D. Labour
Sub-
contracts
Variable
Indirect Costs
Electricity
Indirect
materials
Variable Sales
and
Distribution
Commissions
Fuel
Variable
Admin
Telecommuni-
cations
Stationery
Variable
Costing
Fixed
Fixed Indirect
Costs
Rent
Depreciation
Supervisory
salaries
Security
Fixed Sales
and
Distribution
Rent
Depreciation
Salaries
Advertising
Fixed Admin
Rent
Depreciation
Salaries
Absorption Costing (Period Costs) 29
© 2000 Colin Drury
Sunk costs
• Sunk costs are the costs of resources already acquired
and are unaffected by the choice between the various
alternatives (e.g. depreciation).
• Sunk costs are irrelevant for decision-making.
Opportunity costs
• A cost that measures the opportunity that is lost or
sacrificed when the choice of one course of action
requires that an alternative course of action be given up.
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© 2000 Colin Drury
Example To produce product X requires that an order that yields
$1000 contribution to profits is rejected. The lost
contribution of $1000 represents the opportunity cost of
producing product X.
Marginal and incremental costs/revenues
• Incremental costs and revenues are the additional
costs/revenues from the production or sale of a group of
additional units.
• Marginal cost/revenue represents the additional
cost/revenue of one additional unit of output.
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