OVERVIEW OF MANAGEMENT ACCOUNTING Session 11 Session Outline - - PowerPoint PPT Presentation

OVERVIEW OF MANAGEMENT ACCOUNTING

Session 11

Session Outline

Financial vs. Management Accounting Cost Accounting Cost Classification High-Low Method

 Financial Accounting – Preparation of financial statements and presenting historical transactions and events of a certain Accounting entity, to the external parties to enable them to make economic decisions.  Management Accounting - Provision of financial and non-financial information to all levels of management to enable them to act on their responsibility for planning, controlling and decision making.

Financial Accounting vs. Management Accounting

Financial Accounting vs. Management Accounting

Cost Accounting

 Cost accounting is the process of determining and accumulating the cost of a product  It is a process of accounting for the incurrence and the control of cost.  Objectives of Cost Accounting

• To determine the selling price
• To control cost
• To provide information for decision making
• To facilitate the preparation of financial and other

statements

Cost Classification

 This involves arranging costs into groupings

• f similar items.

 Cost classification is important for inventory valuations, measuring profits, planning, decision making and controlling.  Costs can be classified based on their;

• Nature – Material/ Labour/ Expense
• Purpose- Direct/ Indirect (Overheads)
• Behaviour- Fixed/ Variable/ Semi Variable
• Function- Manufacturing/ Administration/ Selling

Distribution/ Finance etc.

Cost Classification: Based on the Nature

 Material Cost

• Costs related to the materials used in

manufacturing (ex: Cost of thread, cost of buttons used to manufacture a T-shirt)  Labour Cost

• All costs relating to the employees of the
• rganisation. (ex: salaries and wages paid to

sewing staff/ supervisors/ accountants etc.)  Expense Cost

• All costs other than material and labour cost (ex:

rent/ electricity/ telephone/ insurance etc.)

Cost Classification: Based on the Purpose

 Direct Cost

• Costs which can be directly identified per unit.
• Direct Material: Cost incurred on materials which can

be directly identified per unit manufactured (ex: cost of cocoa in manufacturing chocolates)

• Direct Labour: Labour cost which can be calculated

per unit directly (ex: amount paid to a carpenter per chair, in manufacturing chairs)

• Direct Expenses: Cost which can be calculated per

unit directly except material and labour cost (ex: royalty fee paid per unit manufactured)

Cost Classification: Based on the Purpose

 Indirect Costs (Overheads)

• Costs which cannot be directly calculated per unit

manufactured.

• Indirect Material: Cost incurred on materials which cannot

be directly calculated per unit (ex: Cost of machine oil used in manufacturing chocolates)

• Indirect Labour: Labour costs which cannot be directly

calculated per unit manufactured ex: Salaries paid to the accountants/ drivers in manufacturing a chair)

• Indirect Expenses: Costs other than material and labour

which cannot be directly calculated per unit manufactured (ex: Rent/ electricity/ telephone/ Insurance paid in manufacturing chocolates)

Cost Classification: Based on the Behavior

Cost Classification: Based on the Behavior

 Fixed Cost

• A cost that will not vary with the level of activity

(output) within a given period of time - ex: rent

• Fixed cost cannot be avoided and cannot be directly

controlled by the management

• Fixed cost per unit will decrease when output

increases.

Cost Classification: Based on the Behavior  Variable Cost

• A cost that will vary in direct proportion with the level of

activity (output) within a given period of time.

• Variable cost can be avoided and can be directly

controlled by the management.

• Variable cost per unit will remain constant.

Cost Classification: Based on the Behavior

 Semi Variable Cost

• A cost which contains both a fixed and a variable

component (ex: telephone cost)

High-Low Method

 A method to separate a semi variable cost into its variable and fixed components.  The cost that changes with the output will be the variable cost, where the difference between the total cost and the variable cost will be the fixed cost.  Example:

• A company produces 10,000 units at a total cost of Rs.

80,000. When the company produces 20,000 units, the total cost amounts to Rs. 120,000. Calculate the variable cost per unit and the total fixed cost.

High-Low Method

 Question:

• When a company produces 12,000 units, the

total cost is Rs. 60,000. When the output is 15,000 units, the total cost is Rs. 69,000. Calculate the variable cost per unit and the total fixed cost.

Cost Classification: Based on the Function

 Manufacturing Cost (Production)

• All costs related to manufacturing of goods and services (ex:

cost of material and labour related to manufacturing)  Administration Cost

• All costs related to controlling of the organization (ex:

Administration staff salaries/ telephone cost/ Insurance)  Selling Cost

• All costs related to sale of goods or services (ex: Sales staff

salaries/ Advertising/ Sales commissions)  Distribution Cost

• All costs related to transferring goods or services from one

location to another (ex: Transportation cost/ Ware house cost)  Finance Cost

• Costs related to borrowing money (ex: Loan interest payments)

Class Activity

Classify the “Cost of Fabric” used in an Apparel company based on different cost classification methods.

Question

 Categorise the following costs based on the four cost classifications.

• Interest on bank overdraft
• Repairs to factory roof
• Tax for vans used for delivering goods
• Chief accountant’s salary
• Lubricants for factory machinery
• Cost of disks for firm’s computer
• Wages of painters engaged in production
• Postal charges for letters

Thank You

Email – anjalee@bms.edu.lk