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1. Setting of selling prices especially where the cost oriented pricing
approaches are used e/g cost + make up= selling price.
2. The cost information helps you in controlling costs.
MANAGEMENT ACCOUNTING
This is part of the accounting system which provides information that
facilitates the management process of decision making, controlling and
planning.
It is the identifying, presenting and interpreting information used for:-
1. Formulation of strategy
2. Planning and controlling activities of the organizations
3. Decision making
4. Optimizing the use of resources
5. Safe guarding the company’s assets.
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SCOPE OF MANAGEMENT ACCOUNTING SYSTEM.
Financial
accounting system Environmental
factors
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Management accounting system.
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4. Statutory requirements.
Financial statement preparation is a statutory requirement i.e. with
financial is accounting it’s a must that reports are prepared.
Management accounting may or may not prepare financial statements
i.e. it’s optional that why some organizations don’t have cost or
management accountants.
5. Rules and policies followed
Financial accounting has specific standards and rules e.g. ASC, concepts
and principles that are expected to be followed when preparing financial
statements.
For management accounting there are no specific formats that showed
be followed for the preparation of reports
6. Audit requirement
All financial reports must be audited before they are relied on by the
users to satisfy whether they portray whats on the ground.Potray a true
and fair view)
For management information, since it’s an internal issue there is no
requirement of an auditors report.
7.coverage
Financial accounting covers a wider scope as compared to management
accounting since its reports are made to be used by a wide range of users
(public)
Management accounting also may cover a wider coverage in terms of
planning.
Since planning involves different aspects of the organization they it may
be considered to have a wide range as compared to financial accounting.
However management accounts also cover specific aspects.
8. Accurancy
Financial accounting produces estimations where as management
accounting information provides information which is accurate and
detailed e.g. considering materiality in financial accounts is open ones
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willingness i.e. what material to one person may be immaterial to the
other.
You can’t base of f/s to make decisions since they provide data and not
information
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A budget is a control tool that expresses ones intentions or plans in
qualitative terms.
To have a budget you must desire cost information that will enable you
to value some of the items that will be incorporated in the budget.
e) Organisations.The information provided van help managers to
organize firms resources to coordinate different activities and ever
coming up with organization structure.
INTRODUCTION TO COSTS
COST CONCEPTS AND TERMS
1. A cost can be defined as an exchange price, a foregoing or a sacrifice
can be accompanied or represented by decrease in assets or increase in
liabilities. A cash could be a loss, an expense or a production or a
production cost.
2. Cost unit.
A cash unit is a unit of measurement of costs or a unit in which costs
can be expressed e.g kilogram,kilometer,tonne etc.
3. Cost centres
These are divisions or sections within organizations to which cost can be
related or attributed.
Cost centres couid be departments, machines employees so long as they
can attribute or relate to specific costs.
WHY DO WE HAVE COST CENTRES IN ORGANIZATIONS?
It is to have an incentive control ie provide accountability of the
resources provided to the department. It applies to responsibility
accounting (who is supposed to give an answer)
3.Cost objectives
These try to explain why cost information is desired or
required.Managers need information for different purposes.
There are 3 main cost objectives
i) Cost for stock valuation and profit measurement
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Information shouid enable a manager to value what he has produced
( this information can be got from manufacturing costs)
ii) Costs for decision making.
There are relevant costs and irrelevant costs.Relevant costs and
irrelevant costs don’t change and hence do not influence decision
making.
iii) Costs for controlling and planning
Identify controllable and uncontrollable costs
Information meant to achieve a given objective can not be used to achieve
another objective.
CLASSIFICATION OF COSTS
Classification of costs is the grouping of costs basing on their common
characteristics or attributes costs are classified because of the following
reasons:-
1. Evaluate /measure ones performance
2. controlling of costs
3. Decision making
4. budget preparation
5. preparation of final accounts /file
Costs can be classified basing on costs objectives and the following
classification can be analyzed.
A.) Classification of costs under the objective of stock
Valuation and profit measurement
Here we talk about production costs. These costs should be measured in
order to know the level of productivity is profitability
Under this cost objective we have the following classification:-
i) Product costs of period costs
Product costs
These are manufacturing or production costs which are always incurred
in producing goods and services and they are always part of the cost of
the unit produced.
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Manufacturing costs could be direct or indirect manufacturing costs.
Direct manufacturing costs are costs that can be directly or provided by
the organization i.e. the cost is attached directly to the product e.g.
direct material costs, direct labour costs and direct expenses.
The sum of all direct manufacturing costs are known as prime cells.
CLASSIFICATION OF COSTS
Classification of costs is the grouping of costs basing on their common
characteristics ot attributes are classified because of the following
reasons:-
1. evaluate/measure ones performance
2. controlling of costs
3. decision making
4. budget preparation
5. preparation of final accounts
Costs can be classified basing on cost objectives and the following
classifications
COST MANAGEMENT
INDIRECT MANUFACTURING COSTS represents costs which can not be
easily identified with a specific product or service because two or more
products have benefited from such costs. Examples include indirect
labour costs to represent salaries and wages paid to staff who is not
directly involved in producing the product e.g. salaries paid to a factory
guard, the cleaners etc, indirect expenses e.g. electricity. The total sum
of indirect costs provide what we take to be overhead costs
Period costs
These are on manufacturing costs that are usually treated as operating
expenses. They can not be part of the product or services
produced.They are costs incurred in the period and are debated to P& L
a/c. They are incurred in marketing distributing and administrative.
ii) Expired and unexpired costs.
Unexpired costs
These represent the monetary values of unutilized / unused resources
that can be used in future to generate more revenue. They are service
potential not yet utilized in generating revenue e.g. all prepayment,
book values of assets are utilized resources. They are represented in
the balance sheets.
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Expired costs
These represent the monetary values of resources that have already
been utilized in generating revenue and they no longer have a
potential of generating revenue in future. These costs could be
operating expenses or losses and are all debated to P & L a/c at the
end of the year.
Unexpired items are in the balance sheet as prepayments while the
expired items help in measuring profits (p & l a/c)
b) Classification of cost under the objective of decision making.
This is to enable one make economic decisions. Information is meant
for manager to make economic decisions.
Under this we have the following classification
1. Classification according to cost behaviour
2. Classification according to relevant and irrelevant
Classification according to cost behaviour
This classification tries to explain how the costs behave at the volume
of output or level of activity is changed or adjusted.
Behaviour of costs will guide you know how much you should produce.
In attempt to explain from this behaviour, the following terms must be
analyzed
a) variable costs
b) fixed costs
c) semi variable costs
d) semi fixed costs
a) Variable costs
These are costs that change in direct proportion with the level of
activity. There is a direct relationship between the output and total
variable costs.
Increase in out put leads to increase in variable costs.
The variable cost per unit remains statue i.e. it doesn’t change
under the same manufacturing environment or methods. If you
change the methods then it will also change e.g. fuel consumed
under the same driver road or vehicle remains constant but the
more the distance covered the more the costs (fuel) required.
In manufacturing costs, variables could be direct material costs,
direct labour costs part to casual labourers.
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The fixed cost per unit depends/varies according to the level of activity
e.g. if one is operating at 10,000 units FC= 1000000
Fixed cost per unit will be 1000000 = 100/=
If units are increased to 20, 000, FC per unit will be 1000, 000= 50/=
20,000
C Semi-variable costs
These have both attributes of variable and fixed costs. They begin as
fixed costs and at a certain level of activity (output) they tend to be
variable in nature.
Extra costs depend on extra units produced beyond 100, you are
paying per extra unit e.g. making an announcement on radio they say
that the first 40 words the costs are fixed and above towards, the costs
are variable.
If a person is permanently employed he gets a salary that is fixed but
beyond a certain limit he may qualify for a bonus.
e) Semi –fixed costs.
These are costs which remain static or which are fixed according to
ranges of activities or level of output. I.e. they are static between given
ranges of production i.e. between 100 costs is 200, between 100-200
cost is 300 etc.
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They are sometimes called
step-up costs e.g. transport
costs like from tax park to
Wandegeya is 500 and from
Tax Park to Bwaise is 600
etc.
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PROCESS COSTING METHODS
This is a processing approach applied in ascertaining the cost of the
product or service that passes through a series of sequential
stages/processes. At every process an operation/activity is always
carried out and aims at improving on the condition of the product to be
processed.
Such a method is applied in industry including breweries, soap making
industries, chemical processing, oil refinery etc.
Main features of process costing
1. There must be mass production
2. Products must be homogenous
3. Continuous flow of items
4. Processes accumulate costs
5. The cost of each unit is the average cost which can be ascertained by having
total processed cost minus scrap value over expected output
6. There is always closing and opening work in progress
7. As the product passes through different stages, its unit cost increases because
of operations carried out at different stages.
Process costs
Because of activities carried out at every process, the processor is
bound to register a process loss. The loss could be as a result of
chemical reactions, evaporation, inefficiency carelessness etc. A
process loss can be represented by a reduction in weight, volume or
unit and where there is a process loss; inputs are not always equal to
the outputs.
Process losses can be classified into 2 forms
1. Normal process losses
2. Abnormal process losses.
Normal process losses
These are inevitable losses, uncontrollable losses that are always
expected to be incurred whenever there is a process of item. Such
losses are caused by factors which are beyond the control of a
processor and they include:-
Evaporation, chemical reactions etc.
Since normal loss can’t be controlled, it’s always incorporated in the
cost of the product produced and its later passed on to customers
through the selling price.
If normal loss is represented by scrap that can be sold, the realized
amount (scrap sales) is offset from total process costs while computing
the cost of each unit. The scarp value in cost accounts should be
debited to scrap sales account and credited to ----
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