Management accounting

Management accounting

1. Nature and purpose

   • MA: provides insightful information and analysis to guide management decisions and actions to achieve an organization's goal
   • Information is data that has been processed in a way that is meaningful to the persons who use it. Good information: relevant, complete, accurate, clear, inspire confidence, appropriately communicated, volume should be manageable, timely, cost < benefit

2. Decision making & relevant costing

   • Relevant costs
     • Characteristics
       • Future costs: as the decision is about the future. Pasts costs are irrelevant (sunk costs)
       • Cash costs: Non-cash costs such as: depreciation will be ignored in the decision making
       • Incremental costs
     • Avoidable costs: costs which would not be incurred if the activity to which they relate did not exist
     • Differential costs and Opportunity costs
       • Differential: the difference in total cost among alternatives
       • Opportunity: the value of the benefits sacrificed when one option is chosen instead of others
     • Controllable/ Uncontrollable costs
     • Fixed/ Variable costs: only Variable costs are relevant in the decision-making process (except for non-relevant variable costs such as suck costs; incremental fixed cost should be considered as relevant)
   • Product mix decisions
     • Limiting factor: factor which limits the organization's activities. Contribution will be maximized by earning the biggest possible contribution per unit of limiting factor
       • They are: Sales, Labour, Materials, Manufacturing capacity
   • Make/Buy decisions: an entity should make a products with its internal resources or pay another entity to make that product for them
     • Outsourcing
       • Pros
         • Frees up time of staff on contracted-out activities
         • Allows the company to take advantage of specialist expertise, equipment
         • Maybe cheaper (once time savings and opportunity costs are taken into account)
         • Gains all the benefits of the extra capacity without having to fund the full cost
       • Cons
         • Quality assurance
         • Maybe more expensive
         • Risk of leaking out sensitive commercial data
         • Staff redundancy

3. Budgeting

   • Purposes
     • Assist with the achievements of the organization by setting up specific targets
     • Co-ordinate activities to ensure maximum integration of efforts towards common goals
     • Establish a system of control by the comparisons of actual results against the budget
     • Allocation of scarce resources among competing uses
   • Budgeting process
     • Step 1: Identify the principal budget factors (factors which limits the activities of an organization)
       • Sales demand/ Inventory
       • Production: capacity, composition, key resources, dispatch plan
     • Step 2: Preparing functional operating budgets
     • Step 3: Cash budget
     • Step 4: Prepare budgeted financial statements

4. CVP (cost-volume-profit) analysis: separation of costs into variable cost and fixed cost to provide information for the decision making process of the management

   • High-low method to break down semi-var cost: var unit cost = (max total cost - min total cost)/(max vol - min vol)
   • Break-even point = number of units to be sold to break even = total fixed costs/ contribution per unit
   • The safety margin: the difference between the budgeted sales volume and the break-even sales volume -> show the management that the actual sales can fall short of the budget before it reaches the break-even point and no profit is made
   • Limitations
     • Can only apply to a single product
     • Assumptions
       • Fixed costs = constant at all level of output
       • Var unit cost = constant at all levels of output
       • Selling price = constant at all levels of output
       • Production = sales (no inventory)
     • Ignore the uncertainty of cost estimation

5. Overheads and marginal costing

   • Direct cost/ Indirect cost: Direct cost can be traced in full to the product, service or department
   • Absorption costing: a method for sharing overheads among different products on a fair basis
     • Purposes
       • For inventories valuation: for the closing balance in the BS and for calculating COGS
       • Pricing decisions: to calculate full cost and add a margin for profit
       • Establishing the profitability of different products
   • Allocation is the process by which whole cost items are charged directly to a product unit or cost center
   • Apportionment: spread indirect costs fairly among cost centers
   • Marginal costing: fixed production costs are treated as period costs and are written off when they incurred
   • Activity-based costing (ABC)

6. Standard costing: use standard costs to estimates COGS, P/L -> simpler than actual costing, can have an overview about the business in-between the month => but should do variance analysis to analyze actual-standard

7. Capital exp (CAPEX): Capital expenditure: expenses incurred in the expansion, improvement in capacity can be treated as CAPEX