MANAGEMENT ACCOUNTING Competency Framework: A1: Cost Accounting Nature of costs - Cost Classification 3 - Cost behaviour 3 - CVP 3 - Cost estimation (hi-lo) 3 - Cost objects 3 Costing and cost mgt: Material - Recording material costs 3 - Bases of inventory valuation (FIFO, WA, Std Cost, Sp ID) 3 Costing and cost mgt: Labour 3 Costing and cost mgt: Overheads 3 Management Accounting Systems 3
MANAGEMENT ACCOUNTING Competency Framework (cont): Costing and cost mgt: Labour - Recording labour costs 3 - Bases of assigning costs 3 - Time, Piece, Mgt of labour costs 3 Costing and cost mgt: Overheads - Recording overhead costs 3 - Bases of assigning overheads to cost objects (AC v VC, Trad Vol based measures, ABC and cost drivers) 3 Management Accounting Systems - Types of costing systems 3 (Job Costing, Process, Scrap)
MANAGEMENT ACCOUNTING Topic Drury Advanced Applied Nature of Costs D2 Cost estimation D3 Job Costing D4 AC & VC D7 ABC D10 CVP D8
FIN ACC & MAN ACC Differences Provides data and info for internal use by management: - Plan - Motivate - Organize - Control - Communicate Future oriented Not governed by GAAP Emphasizes relevance and flexibility of data and information Less emphasis on precision and more on non-monetary data Considers segments and functions within the business Draws heavily from other disciplines Not mandatory Similarities: Rely on accounting information system Corporate governance
Competencies in Management Decision Making & Control V1-1 Identifies and analyses factors influencing the financial performance of an entity (Strategic Context) V1-2 Manages an entity s budgeting process and control system (Budgeting, Standard Costing and Control Systems) V1-3 Evaluates internal cost allocation and transfer-pricing options V1-4 Analyses financial and other data to provide information for decision-making (CVP, Relevant Costs & Revenues, Decision-Making) V1-5 Identifies, develops and improves appropriate costing systems in order to meet the information requirements of the entity s control and decision-making processes (AC, VC, ABC)
COST TERMS AND CONCEPTS Classification? Behaviour? Treatment?
Manufacturing Costs Direct Material + Direct Labour + Direct Expenses = Prime Cost How do these costs behave? Indirect Material + Indirect Labour + Indirect Costs How do these costs behave? = + Manufacturing Overheads = Total Manufacturing Cost + Administration & Selling Costs How do these costs behave? = Total Cost
Cost Classification Non-manufacturing Overheads Manufacturing Overheads Prime Cost = Direct Material + Direct Labour + Direct Expenses
Refer to pages 31 to 34 Variable COST BEHAVIOUR Cost Defined Total Graphs Per Unit Example Fixed Defined Example Activity
Semi-fixed Semi-variable Defined Example Defined Example Cost Graphs Hi-Lo Method (Pg 600 Very NB) Always take the highest and lowest activity Change in Cost = VC/Unit Change in Activity Activity
TREATMENT OF COSTS Unexpired cost - Asset in the Balance Sheet Expired cost - Expense in the Income Statement Important in determining profits & valuing assets Product cost cost identified with goods purchased or produced for resale Period cost treated as an expense in the period incurred What point in time are they classified? Manuf Cost Non-Manuf Cost Unsold? Sold? Balance Sheet Income Statement
COST RELEVANCY Decision relevant approach Relevant & irrelevant (Page 35) Avoidable and Unavoidable Sunk Differential Analysis Materials Conversion Revenue Net Reason Opportunity Incremental and marginal Time horizon Job costing and process
Cost Sheet Layout Example 3.1 COST ASSIGNMENT: D3 A B Direct Material 50.00 100.00 This breakdown is assumed Direct Labour 40.00 80.00 Direct Expenses 10.00 20.00 Prime Cost 100.00 200.00 Manufacturing Overheads Production Cost Administration and Selling Expenses Total Cost Net Profit (Cost + or % of SP) Selling Price Blanket or Departmental Rate? For Stock Valuation as per IAS2 Always treat as a period cost Does this serve any purpose? Is this the profit per unit? Is the market prepared to pay?
Blanket Rate As per Example 3.1 Total manufacturing overheads = Labour Hour Rate = TMO DLH for X + Y + Assembly = Machine Hour Rate = TMO MH for X + Y + Assembly = Units of Production = TMO Total Production Units =
Eg 3.1 Pg 55 1. Allocate or apportion overheads to Production Cost Centres and Service Cost Centres respectively Service Cost Centres MP GFS Indirect Wages & Supervision 1100 1480 Indirect Materials 0 10 Lighting & Heating 150 50 Property Taxes 300 100 Etc Departmental Rates: Remember the 3 As Manufacturing Overheads = R11.7m Total 1760 1800 Production Cost Centres 2. Apportion Service Cost Centre costs to Production Cost Centres 3. Absorb overhead rates into product cost using volume based drivers eg DLH or MH X Y Assembly X Y Assembly Ind Wage&S 1000 1000 1500 R4.3m R3.8m R3.6m Ind Mats 500 805 105 2m MH 1m MH 2m LH Light&Heat 100 50 150 =R2.15/MH =R3.80/MH R1.80/DLH Property Tax 200 100 300 Value of Overheads Absorbed: Product A etc Mach X 5MH x R2.15 R1075 MP Re-app 880 660 220 Mach Y 10MH x R3.80 R3800 GFS Re-app 450 450 900 Assembly 10LH x R1.80 R1800 Total 4300 3800 3600
Pre-determined Overhead Rates Why do we pre-determine? (Refer to page 63) 1. Practical consideration 2. Many companies have a real-time accounting system Therefore derive a budgeted overhead rate, based on a long term average of your normal production levels Based on standard activity levels and not actual activity levels Procedure: 1. Budgeted expenditure budgeted activity 2. Absorb overheads: Actual activity x POAR 3. Compare absorbed cost to actual cost 4. Difference will be an over or under-recovery of overheads 5. May be required to reconcile into an expenditure and a volume variance why?
Pre-determined Overhead Rates Budgeted exp R50K Actual exp R65K Budgeted activity 10 000 Actual activity 12 000 Fixed Production Overhead Control Account Actual Absorbed Under-recovery 65000 65000 Expenditure Budget Actual Volume Budget Actual
JOB COSTING: D4 Units or batches of output is unique Integrated or interlocking system? Entries are normally straightforward Pay attention to the issues/flow and the control accounts Raw materials Sales Labour WIP Finished Goods (COS) Overhead = GP Over/under applied o/h (Non-manuf o/h) = NP
Job Costing (cont) 1. Consider the big picture - see the flow 2. Pick up the opening balances, if applicable 3. Purchases and payments 4. Overhead control account Distinguish between direct and indirect costs
Raw Materials Op Bal 0K -WIP 165K WIP Op Bal+ RM+DL+O/Hs-TRF Out=Cl Bal 0K + 165K+145K+140K-300K = 150K Finished Goods 300K 240K = 60K Salaries & Wages Op Bal 0K Direct Labour 145K Indirect Labour 40K Cost of Sales From finished goods = 240K Overheads applied 140K Vs Actual Exp? Sales Less: COS 400K 240K = Normal GP 160K Less Under applied o/h (6K) = Actual GP 154K
Job Costing (cont) 4. Overhead control account Actual expenditure R146K Overhead applied (WIP) R140K Under recovery R6K Over/Under Applied Overhead Overhead Control R6K Income & Exp A/C R6K 5. Must Balance in the End! WIP c/f = Individual jobs c/f COS = Individual jobs completed Sales = Invoice Value of jobs completed