Ch02 Management Accounting 5e
Ch02 Management Accounting 5e
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Outline
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Costing
Budgeting
Performance measurement
Cost management
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Emphasis on costs
Why do management accountants pay so much attention to
costs?
Historic focus on production coststo value inventory and cost of goods
sold for external reporting
Ready availability of cost data within the transaction-based accounting
system
Importance of cost information in managers decisions
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(cont.)
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Variable costs
Change in total in direct proportion to a change in the
level of activity
Fixed costs
Remain unchanged in total despite changes in the level
of activity
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(cont.)
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(cont.)
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(cont.)
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(cont.)
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Downstream costs
Marketing costs are the costs of selling products and the costs of
advertising and promotion
Distribution costs are the costs of storing, handling and shipping
finished products
Customer service costs are the costs of serving customers,
including after-sales service
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Manufacturing costs
Manufacturing costs are incurred within the factory area
Upstream and downstream costs are non-manufacturing
costs
Manufacturing costs include three categories: direct
material, direct labour and manufacturing overhead
This classification as direct or indirect cost assumes that products
are the relevant cost objects
(cont.)
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Direct labour
The cost of wages and labour on-costs for personnel who work directly on
the manufacture of a product
Usually treated as variable costs, however contractual arrangements
sometimes mean that such labour is a committed cost and so does not
vary with the level of production
(cont.)
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(cont.)
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Prime costs
The total of direct material cost and direct labour cost
The major cost associated with producing a product
(cont.)
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Product costs
Managers need estimates of product costs for different
purposes
In financial accounting reports
Product costs determine cost of goods sold
Product costs help value inventory on hand
All costs that are not product costs are called period costs
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(cont.)
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2-26
(cont.)
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Summary
Management accounting systems are tailored to
an organisations needs
Costing systems focus on the cost of products and
organisational units and are a component of
management accounting systems
We can distinguish between conventional and
contemporary management accounting systems
There may be different costs for different purposes
Costs may be classified by behaviour, traceability,
controllability and function
(cont.)
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2-30
Summary (cont.)
In manufacturing businesses, production costs
typically consist of direct materials, direct labour
and manufacturing overhead, in line with external
reporting requirements
The definition of product costs needed to support
management decision making may be broader
than that used for external reporting purposes
Product costing systems track the manufacturing
costs from the beginning of production to finished
goods and link the product costing system to the
financial accounting reports
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2-31