Management accounting

Nature and purpose
1. MA: provides insightful information and analysis to guide management decisions and actions to achieve an organization's goal
2. 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
Decision making & relevant costing
1. Relevant costs
  1. Characteristics
    1. Future costs: as the decision is about the future. Pasts costs are irrelevant (sunk costs)
    2. Cash costs: Non-cash costs such as: depreciation will be ignored in the decision making
    3. Incremental costs
  2. Avoidable costs: costs which would not be incurred if the activity to which they relate did not exist
  3. Differential costs and Opportunity costs
    1. Differential: the difference in total cost among alternatives
    2. Opportunity: the value of the benefits sacrificed when one option is chosen instead of others
  4. Controllable/ Uncontrollable costs
  5. 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)
2. Product mix decisions
  1. Limiting factor: factor which limits the organization's activities. Contribution will be maximized by earning the biggest possible contribution per unit of limiting factor
    1. They are: Sales, Labour, Materials, Manufacturing capacity
3. Make/Buy decisions: an entity should make a products with its internal resources or pay another entity to make that product for them
  1. Outsourcing
    1. Pros
      1. Frees up time of staff on contracted-out activities
      2. Allows the company to take advantage of specialist expertise, equipment
      3. Maybe cheaper (once time savings and opportunity costs are taken into account)
      4. Gains all the benefits of the extra capacity without having to fund the full cost
    2. Cons
      1. Quality assurance
      2. Maybe more expensive
      3. Risk of leaking out sensitive commercial data
      4. Staff redundancy
Budgeting
1. Purposes
  1. Assist with the achievements of the organization by setting up specific targets
  2. Co-ordinate activities to ensure maximum integration of efforts towards common goals
  3. Establish a system of control by the comparisons of actual results against the budget
  4. Allocation of scarce resources among competing uses
2. Budgeting process
  1. Step 1: Identify the principal budget factors (factors which limits the activities of an organization)
    1. Sales demand/ Inventory
    2. Production: capacity, composition, key resources, dispatch plan
  2. Step 2: Preparing functional operating budgets
  3. Step 3: Cash budget
  4. Step 4: Prepare budgeted financial statements
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
1. High-low method to break down semi-var cost: var unit cost = (max total cost - min total cost)/(max vol - min vol)
2. Break-even point = number of units to be sold to break even = total fixed costs/ contribution per unit
3. 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
4. Limitations
  1. Can only apply to a single product
  2. Assumptions
    1. Fixed costs = constant at all level of output
    2. Var unit cost = constant at all levels of output
    3. Selling price = constant at all levels of output
    4. Production = sales (no inventory)
  3. Ignore the uncertainty of cost estimation
Overheads and marginal costing
1. Direct cost/ Indirect cost: Direct cost can be traced in full to the product, service or department
2. Absorption costing: a method for sharing overheads among different products on a fair basis
  1. Purposes
    1. For inventories valuation: for the closing balance in the BS and for calculating COGS
    2. Pricing decisions: to calculate full cost and add a margin for profit
    3. Establishing the profitability of different products
3. Allocation is the process by which whole cost items are charged directly to a product unit or cost center
4. Apportionment: spread indirect costs fairly among cost centers
5. Marginal costing: fixed production costs are treated as period costs and are written off when they incurred
6. Activity-based costing (ABC)
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
Capital exp (CAPEX): Capital expenditure: expenses incurred in the expansion, improvement in capacity can be treated as CAPEX

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	Created by Ngan Ha Nguyen about 7 years ago