Topic 11 - Management Accounting: Introduction and Cost Concepts

This article is a topic within the subject Accounting 1A.

Required Reading

Trotman, K. & Gibbins, M., 2009 Financial Accounting: An Integrated Approach, 4th edition, Melbourne: Thomson Nelson ITP pp. 'Supplementary Text'.

Management Accounting

Management accounting is the provision of information to all levels of management to allow them to carry out planning, leading, organising and controlling functions. E.g. costing systems, performance measurement systems, strategic decisions, budgeting etc.

Developments in Management Accounting

• Total Quality Management - aiming for continuous improvement, benchmarking (planning, doing, acting, checking)
• Just in Time - the customer 'pulls' the production process (everything is made just in time)
  • Benefits - reduced inventory costs, less warehousing space required, higher quality products
  • Disadvantages - increased dependency on suppliers
• Customer Relationship Management - improving and building upon the current customer base
• Balanced Scorecard - measuring performance against quantitative and qualitative benchmarks

Cost Concepts And Classification

Cost is the value sacrificed for goods or services that are expected to bring current or future economic benefits to the firm

Types of Costs

• Differential - the cost differences between alternative projects
• Controllable - costs that are strongly influenced by a manager
  • All costs are controllable at some management level
• Non Manufacturing Costs
  • Selling, General and Administration Costs - 'period costs'
• Manufacturing Costs
  • Direct - costs that are traceable to a 'cost object', e.g. raw materials of a product or direct labour
  • Indirect - linked to many cost objects e.g. indirect materials and labour and manufacturing overheads (factory electricity) that need to be allocated
  • Manufacturing Overheads - indirect product costs e.g. depreciation of machinery

• Prime Costs = Direct Material Costs + Direct Labour Costs
• Conversion Costs = Direct Labour Costs + Manufacturing Overheads
• Product Cost = Direct Materials + Direct Labour + Allocated Manufacturing Overhead

Cost Classifications

1. Functional - external orientation (traditionally used) covered this topic
2. Behavioural - internal orientation covered next topic

Functional Cost Classification

Management Accounting - Cost Flows

Cost flows deal with how inventory costs (raw material, work in progress, finished goods) flow through the firms accounts.

Cost Flows - Manufacturing Organisations

Total Manufacturing Costs = Direct Materials Used + Direct Labour + Manufacturing Overheads

Cost of Manufactured Goods = Total Manufacturing Costs + Opening Work in Progress - Closing Work in Progress

Cost of Goods Sold = Opening Finished Goods + Cost of Manufactured Goods (Goods available for sale) - Ending Finished Goods

The following images from UNSW School of Accounting and Ken Trotman's supplementary text illustrate the cost flows of a manufacturing firm.

It is extremely important to know the above formulas and the definitions of the costs for ACCT1A exams.

Cost Flows - Retail Firms

In retail firms, inventory only consists of finished goods (merchandise). Cost of Goods Sold = Opening Inventory (Finished Goods) + Purchases - Closing Inventory (Finished Goods)

The following images from UNSW School of Accounting and Ken Trotman's supplementary text illustrate the cost flows of a retail firm.

Cost Flows - Service Firms

All product costs simply expire in the period. Hence they are classified as period costs

End

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References

Textbook refers to Trotman, K. & Gibbins, M., 2009 Financial Accounting: An Integrated Approach, 4th edition, Melbourne: Thomson Nelson ITP