1. Introduction to Accounting IM51005B Lecture 6 Introduction to Management Accounting & Cost terms, concepts and Classification
Dr Sarah Lauwo

2. Objectives of the lecture
Understand different roles of management accountants.
Distinguish between management accounting and financial accounting.
Understand the roles of Management Accountant
Identify the characteristics of ethical behaviour by management accountants.
Understand the different ways of classifying costs
Understand the relevant costs in decision making
Understand costs behaviour

3. Directing and Motivating
Work of Management
Planning
Directing and Motivating
Controlling
Decision- Making

4. Managing Resources, Activities, and People
Planning
An organization . . .
Directing
Acquires Resources
Organized set
of activities
Controlling
Decision
Making
Hires People

5. Management Accounting and Financial Accounting
Managerial accounting provides information for managers of an organization who direct and control its operations.
Financial accounting provides information to stockholders, creditors and others who are outside the organization.

6. Managerial versus Financial Accounting
Accounting System
(accumulates financial and
managerial accounting data)
Managerial Accounting
Information for decision
making, and control
of an organization’s
operations.
Financial Accounting
Published financial
statements and other
financial reports.
Internal
Users
External
Users

7. Key Guidelines 1. Cost-benefit approach
A cost-benefit approach should be used in order to spend resources if they promote decision making that better attains organization goals in relation to the costs of those resources.
2. Full recognition of behavioral as well as
technical considerations
A management accounting system should have two simultaneous missions for providing information:(1)To help managers make wise economic decisions (2) To help managers and other employees to aim and strive for goals of the organization
3. Using different costs for different purposes
A cost concept used for the external reporting purpose need not be the appropriate concept for the purpose of internal routine reporting to managers.

8. Roles of Management Accountants
(1) Problem Solving
(2) Score keeping
(3) Attention Directing
This involves helping managers properly focus their attention.
Attention directing should focus on all opportunities to add value to an organization, not just cost-reduction opportunities.
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9. Problem solving? Score keeping? Attention directing?
Example
Problem solving? Score keeping? Attention directing?
Preparing a monthly statement of UK sales for the IBM marketing manager.
Scorekeeping
2. Analyzing, for a Dyson manufacturing manager, the desirability of having some auto parts made in Malaysia.
Problem solving
3. Preparing a schedule of depreciation for trucks in the receiving departments
Scorekeeping
Attention directing
4. Interpreting why the Canterbury distribution centre exceeded its delivery-cost budget
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10. Code of Ethics for Management Accountants
Avoid activities that could affect your ability to perform duties.
Refrain from activities that could discredit the profession.
Refuse gifts or favours that might influence behavior.
Integrity
Communicate unfavourable as well as favourable information.

11. CIMA Code of Ethics for Management Accountants
Communicate information fairly and objectively.
Objectivity
Disclose all information that might be useful to management.

12. Cost terms , concepts and classification
Next….
Cost terms , concepts and classification

13. Manufacturing vs. Merchandising
Merchandisers . . .
Buy finished goods
Sell finished goods
Keep stocks of finished goods
Manufacturers . . .
Buy raw materials
Manual/automated production of goods
Sell finished goods
Keep stocks of materials + work in progress + finished goods

14. Manufacturing Cost Concepts
Financial Accounting
Cost is a measure of resources used or given up to achieve a stated purpose.
Management Accounting
Product costs are the costs a company assigns to units produced.

15. Manufacturing Overhead
Manufacturing Costs
Direct Materials
Direct Labour
Manufacturing Overhead
The Product

16. Example: A radio installed in a car
(1) Direct Materials
Those materials that become an integral part of the product and that can be conveniently traced directly to it.
Example: A radio installed in a car

17. Example: Wages paid to car assembly workers
(2) Direct Labour
Those labour costs that can be easily traced to individual units of product.
Example: Wages paid to car assembly workers

18. Examples: Indirect labour and indirect materials
(3) Manufacturing Overhead
Manufacturing costs that cannot be traced directly to specific units produced.
Examples: Indirect labour and indirect materials
Wages paid to employees who are not directly involved in production work. Examples: maintenance workers, cleaners and security guards.
Materials used to support the production process. Examples: lubricants and cleaning supplies used in the car assembly plant.

19. Classifications of Costs
Manufacturing costs are often combined as follows:
Direct Materials
Direct Labour
Manufacturing Overhead
Prime Cost
Conversion Cost

20. Non-manufacturing Costs
Marketing and selling costs
Costs of obtaining & processing orders and delivering products to customers
Administrative costs
All executive, organizational, and clerical costs
Also known as ‘PERIOD COSTS’

21. Product Costs Versus Period Costs
Product costs include direct materials, direct labour, and manufacturing overhead.
Period costs are not included in product costs. They are expensed on the profit statement.
Expense
stock
Cost of Good Sold
Sale
Balance Sheet
Profit Statement
Profit Statement

22. Balance Sheet Manufacturer Merchandiser Cash Debtors Prepaid Expenses
Current Assets
Cash
Debtors
Prepaid Expenses
Stock
Raw Materials
Work in Progress
Finished Goods
Merchandiser
Current Assets
Cash
Debtors
Prepaid Expenses
Merchandise Stock

23. The Profit Statement
Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.

24. Manufacturing & Non- Manufacturing Cost Flows
Balance sheet Stock
Profit Statement
Cost
Material Purchases
Raw Materials
Direct labour
Work in Progress
Manufacturing Overhead
Cost of Goods Sold
Finished Goods
Period Costs
Selling and Administrative
Selling and Administrative

25. Product Costs - A Closer Look
Costs associated with the goods that are completed during the period are transferred to finished goods stock.

26. Product Costs - A Closer Look
£ 14,200
£ 234,150
£ 248,350
(12,100)
£ 236,250

27. Cost Classifications for Predicting Cost Behaviour
How a cost will react to changes in the level of business activity (e.g., production volume, further processing)
Total variable costs change when activity changes.
Total fixed costs remain unchanged when activity changes.

28. Total Long Distance Telephone Bill
Total Variable Cost
Your total long distance telephone bill is based on how many minutes you talk.
Total Long Distance Telephone Bill
Minutes Talked

29. Per Minute Telephone Charge
Variable Cost Per Unit
The cost per long distance minute talked is constant. For example, 10 pence per minute.
Per Minute Telephone Charge
Minutes Talked

30. Monthly Basic Telephone Bill
Total Fixed Cost
Your monthly basic telephone bill probably does not change when you make more local calls.
Monthly Basic Telephone Bill
Number of Local Calls

31. Monthly Basic Telephone Bill per Local Call
Fixed Cost Per Unit
The average cost per local call decreases as more local calls are made.
Monthly Basic Telephone Bill per Local Call
Number of Local Calls

32. Cost Classifications for Predicting Cost Behavior

33. Types of Fixed Costs Fixed Costs Committed
Long-term, cannot be reduced in the short term (< 1 year).
Discretionary
May be altered in the short-term by current managerial decisions
Examples
Depreciation on Buildings and Equipment
Examples
Advertising; Research and Development

34. Some Other Cost Terms Direct costs Indirect costs
Costs that can be easily and conveniently traced to a unit of product or other cost objective.
Examples: direct material and direct labour.
Indirect costs
Costs cannot be easily and conveniently traced to a unit of product or other cost object.
Example: manufacturing overhead.

35. Some Other Cost Terms Opportunity Costs Sunk Costs
The potential benefit that is given up when one alternative is selected over another.
Example: If you were not attending university, you could be earning £15,000 per year. Your opportunity cost of attending university for one year is £15,000.
Sunk Costs
Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when making decisions
Example: You bought a car that cost £10,000 two years ago. The £10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the £10,000 cost.

36. Some Other Cost Terms Controllable Costs
Costs that managers have some degree of influence in the department such as variable costs (material+ labour)
Non-Controllable Costs
Generally these are seen as costs to business over which management cannot exert any influence.
These are mostly committed costs related to the possession of fixed assets.
Discretionary fixed costs, for example, advertising and research and development costs can be thought of as being controllable because they are incurred as a result of decision made by management and can be raised or lowered at fairly short notice