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What is a definition for management accounting?

It is concerned with the provision of information to people within the organisation to help them make better decisions and improve the efficiency and effectiveness of existing operations.


What are functions of management accounting?

Cost allocation - cost of goods sold and stock/inventories, internal and external profit reporting.

Provision of relevant information: to make informed decisions, to plan, to control, to measure performance, to continue improvement.


What is the Decision Making Process (1)?

1. Identify objectives of the organisation
maximise profits
market leader
high quality goods

2. Search for alternative courses of action
develop new products for sale in existing market
develop new products for new markets
develop new markets for existing products


What is the Decision Making Process (2)?

3. Select appropriate course of action
potential growth rates of alternative activities
ability to establish a market share
projected profits for each activity

4. Implement the decisions
as part of budgeting and long term planning
future cash inflows and outflows
communicate to all in organisation


What is the Decision Making Process (3)?

Control Process:

5. Compare actual and planned outcomes
performance reports

6. Respond to divergences from plan
make any modifications
ensure firm’s objectives and plans achieved


What is the cycle of profit planning and control?

Measuring Performance ->
Examining the Environment ->
Developing objectives ->
Formulating a strategy ->
Translating into operating plans ->
Implementing Plans ->



What are Management Reports (1)?

Decision Making
- Marginal Costing for decision making
- Cost – Volume – Profit Analysis
- Pricing
- Capital Investment


What are Management Reports (2)?

Planning & Control
- Budgeting
- Management control
- Variance analysis


Who are users of Management Information?

- functional
- strategic

In some cases - employees


What are the differences between Management and Financial Accounting?

Legal requirements
Focus (individual parts or whole business)
Frequency of Reports


What is the difference between Management and Financial Reports regarding FREQUENCY?

FR: usually produced annually.

MR: as frequently as necessary for management process


What is the difference between Management and Financial Reports regarding TIMLINESS?

FR: usually there is a significant time lag between the period covered by the report and the date of publication.

MR: can be produced with minimal delay, provided that appropriate systems are in place.


What is the difference between Management and Financial Reports regarding ORIENTATION TO FUTURE OR PAST?

FR: summarise transactions and events that have already taken place, they are not oriented towards the future.

MR: can be orientated towards the future or past, depending upon managers' information requirements.


What is the difference between Management and Financial Reports regarding LEVELS OF DETAIL?

FR: the information is not detailed: transactions are summarised under a few headings.

MR: can be as detailed or as aggregated as necessary.


What are different types of costs?

Most commonly used costs are:

- Direct and Indirect costs
- Fixed and Variable costs
- Period and Product costs
- Cost Behaviour
- Relevant and Irrelevant costs
- Avoidable and Unavoidable costs
- Sunk costs
- Opportunity costs
- Incremental and Marginal costs


What is a Cost Object?

any activity for which a separate measurement of costs is required

- cost of a product
- cost of a service
- cost of operating a department (function)


What is a Cost Collection System?

Stage 1
cost accumulation by cost classification
a. expense type
eg. materials, labour, overheads
b. cost behaviour
eg. fixed, variable

Stage 2 – assign costs to cost objects


What are Direct Costs?

can be specifically identified with a particular cost object

- Direct Materials

- Direct Labour

- Direct Expenses


What are Indirect Costs?

cannot be specifically identified with a particular cost object
- Indirect Labour Costs
- Indirect Material Costs
- Overheads

estimate of resources consumed using Cost Allocations


What is an example of Direct and Indirect Costs?

Producing a greetings card:

- A design is produced.

- The design is printed onto card in a run of an appropriate size – say 1000 cards per production run.

- The card is cut and folded.

- Other processes such as embossing, gilding and over-printing may be required, depending upon the design.

- The cards are matched with envelopes of suitable size.

- Each card and envelope is individually packaged in a cellophane wrapper.


How do you work out the total cost?

Direct Materials + DIRECT COSTS
Direct Labour + DIRECT COSTS
Direct Expenses = DIRECT COSTS
Prime Cost +
Production Overheads = INDIRECT COSTS
Production Costs + INDIRECT COSTS
Other Overheads = INDIRECT COSTS
Total Costs


What are Period and Product Costs?

for profit measurement and stock valuation

Product Cost

identified with goods purchased / produced for sale (include direct & indirect production costs)
Period Cost

not included in the inventory valuation and are treated as expenses in the period in which they are incurred


What is Cost Behaviour?

how costs and revenues vary with different levels of activity / volume

used in decision-making


What are the Cost Classifications?

Variable Costs

Fixed Costs

Semi - Variable Costs

Step costs


Distinguish between variable costs and fixed costs.

A variable cost is one which varies directly with changes in the level of activity, over a defined period of time.

A fixed cost is one which is not affected by changes in the level of activity, over a defined period of time.

Semi-variable = fixed + variable.

Step cost = fixed cost increases by steps.


What are examples of variable costs?

materials used to manufacture a unit of output or to provide a type of service.

labour costs of manufacturing a unit of output or providing a type of service.

commission paid to a salesperson.

fuel used by a haulage company.


What are examples of fixed costs?

Salary paid to a supervisor.

Advertising in the trade journals.

Business rates paid to the local authority.

Depreciation of machinery calculated on the straight-line basis.


What are examples of semi-variable cost?

office salaries where there is a core of long-term secretarial staff plus employment of temporary staff when activity levels rise.

maintenance charges where there is a fixed basic charge per year plus a variable element depending on the number of call-outs per year.


What is an example of Step Cost?

A fixed cost that
increases in steps.

For example, rent storage space until full capacity reached, then expand
by renting second
storage space.

Year 1 £1,000;
Year 2 £1,100 etc.


Distinguish between relevant and irrelevant costs and revenues.

Relevant Costs / Revenues
future costs / revenues that will be changed by a decision

Irrelevant Costs / Revenues
will not be affected by a decision

Example: Going to Glasgow to watch the football and do some shopping.
Do I take my own car or go by train?
Relevant costs – fuel for car, car parking
Irrelevant costs – car tax, car insurance