HND in Business

Unit 5: Management Accounting

An Introduction to
Managerial Accounting
and Cost Concepts
By Shan Wikoon <shanwikoon@gmail.com>
Accounting for Household management
Management
+
Accounting

= Management
Accounting
The problem:
Managers need accounts for:

Planning
Planning Directing
Directing
and
and
Motivating
Motivating

Controlling
Controlling
 Planning

Identify
Identify
alternatives.
alternatives.

Select
Select alternative
alternative that
that
does
does
the
the best
best job
job of
of furthering
furthering
organizations
organizations objectives.
objectives.

Develop
Develop budgets
budgets to
to guide
guide
progress
progress toward
toward the
the
selected
selected alternative.
alternative.
 Directing and Motivating

Directing and motivating involves managing day-

to-day activities to keep the organization running
smoothly.
Employee work assignments.
Routine problem solving.
Conflict resolution.
Effective communications.
Controlling

The
The control
control function
function ensures
ensures
that
that plans
plans are
are being
being followed.
followed.

Feedback
Feedback inin the
the form
form ofof performance
performance reports
reports
that
that compare
compare actual
actual results
results with
with the
the budget
budget
are
are an
an essential
essential part
part of
of the
the control
control function.
function.
Definition of Management Accounting:

Management accounting is the process of

measuring and reporting information about
economic activity within organizations, for use
by managers in planning, performance
evaluation, and operational control.
- Planning: For example, deciding what products to make,
and where and when to make them. Determining the
materials, labor, and other resources that are needed to
achieve desired output. In not-for-profit organizations,
deciding which programs to fund.

- Performance evaluation: Evaluating the profitability of

individual products and product lines. Determining the
relative contribution of different managers and different
parts of the organization. In not-for-profit organizations,
evaluating the effectiveness of managers, departments
and programs.

- Operational control: For example, knowing how much

work-in-process is on the factory floor, and at what stages
of completion, to assist the line manager in identifying
bottlenecks and maintaining a smooth flow of production.
 Planning and Control Cycle

Formulating
Formulatinglong-
long-
and
andshort-term
short-termplans
plans
(Planning)
(Planning)

Comparing
Comparingactual
actual Implementing
Implementing
to
toplanned
planned Decision plans
performance plans(Directing
(Directing
performance Making and
(Controlling) andMotivating)
Motivating)
(Controlling)

Measuring
Measuring
performance
performance
(Controlling)
(Controlling)
Comparison of Financial and
Managerial Accounting
 Management Financial
Accounting Accounting

Process of identifying, Develops

measuring, information for
accumulating, external decision
analyzing, preparing, makers:
interpreting, and
communicating Stockholders,
information used by: Suppliers,

Managers Banks, Government

Authorities
 Cost Concept
Costs are different from expenses.

Costs are resources sacrificed to achieve an objective.

Expenses are the costs charged against revenue in a particular

accounting period.

Hence, cost is an economic concept, while expense is a term

that falls within the domain of accounting.
 Difference between cost and
expenditure
Let's say your company is in the catering business and will
cater its biggest event this evening. In the morning your
company purchased about 125% of the paper goods that you
believe will be used at the event. (You purchased the
additional 25% for future events and also to ensure you don't
run out of these items at this evening's event.) The paper
goods that were purchased had a cost of 500, and only 400
of the paper items were used at today's event. The remaining
100 were put in your company's storeroom for use at the
events to be catered in the next few weeks. In this example,
the cost of 500 consisted of a 400 expense and a 100
asset.
 Difference between cost and
expenditure
Accountants use the term expense to mean a cost that has being used
up while a company is doing its main revenue-generating activities.
(That's why only 400 of the cost of supplies was expensed in our
example.)

A cost may or may not be an expense. As we had seen above, 400 of

the cost was an expense and 100 of the cost was an asset.

Here is a more extreme example: If a company purchases land to be used

in its business, the cost of the land will be reported an asset and will never
become an expense. (The reason is that land will never be used up and
therefore never depreciated.) The land's entire cost will continue to be
reported on the balance sheet as the asset Land as long as the company
owns the land.
How to find the cost of your business ?

Each part has a different manufacturing process and a different cost

How to find the cost of your business ?

Since 2000, Apple has filed 1,298 patents addressing

hand-held mobile radio telephone technologies. The
vast majority of these have been filed following the
2007 launch of the iPhone.
Manufacturing Costs

Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labour
Labour Overhead
Overhead

The Product
 Direct Materials

Raw materials that become an integral

part of the product and that can be
conveniently traced directly to it.

Example:
Example: A
A radio
radio installed
installed in
in aa car
car
Direct Labour

Those labour costs that can be

easily traced to individual units of
product.

Example:
Example: Wages
Wages paid
paid to
to car
car assembly
assembly workers
workers
 Manufacturing Overhead

Manufacturing costs that cannot be traced

directly to specific units produced.
Examples:
Examples: Indirect
Indirect materials
materials and
and indirect
indirect labour
labour

Materials used to support Wages paid to employees

the production process. who are not directly
involved in production
Examples: Lubricants and work.
cleaning supplies used in the Examples: Maintenance
car assembly plant. workers and security guards.
Classifications of Nonmanufacturing Costs

Administrative
Selling Costs
Costs

Costs necessary to get All executive,

the order and deliver organizational, and
the product. clerical costs.
 Distinguish between
product costs and period
costs and give examples
of each.
Product Costs Versus Period Costs

Product costs include Period costs are not

direct materials, direct included in product
labour, and costs. They are
manufacturing expensed on the
overhead. income statement.
Cost of
Inventory Goods Sold Expense

Sale

Balance Income Income

Sheet Statemen Statemen
t t
Quick Check

Which of the following costs would be

considered a period rather than a product cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
Quick Check

Which of the following costs would be

considered a period rather than a product cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
 Define and give
examples of variable
costs and fixed costs.
Cost Classifications for Predicting Cost
Behaviour
How
How aa cost
cost will
will react
react to
to
changes
changes in
in the
the level
level of
of
business
business activity.
activity.
Total
Total variable
variable costs
costs
change
change when
when activity
activity
changes.
changes.
Total
Total fixed
fixed costs
costs remain
remain
unchanged
unchanged whenwhen activity
activity
changes.
changes.
Total Variable Cost

Your total telephone bill is based on how

many minutes you talk.
Telephone Bill
Total

Minutes Talked
 Variable Cost Per Unit

The cost per minute talked is constant. For

example, 10p per minute.

Telephone Charge
Per Minute

Minutes Talked
Total Fixed Cost

In relation to telephone bills, identify

the fixed cost
 Fixed Cost Per Unit

The average fixed cost per call decreases as

more local calls are made.

Monthly Basic Telephone

Bill
Number of Local Calls
Cost Classifications for Predicting Cost
Behavior
Quick Check

Which of the following costs would be variable

with respect to the number of cones sold at an
ice cream shop? (There may be more than
one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
Quick Check

Which of the following costs would be variable

with respect to the number of cones sold at an
ice cream? (There may be more than one
correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
 Define and give
examples of direct and
indirect costs.
 Assigning Costs to Cost Objects

Direct costs Indirect costs

Costs that can be Costs that cannot be
easily and conveniently easily and conveniently
traced to a unit of traced to a unit of
product or other cost product or other cost
object. object.
Examples: Direct Example: Manufacturing
material and direct overhead
labour
Define and give examples of
cost classifications used in
making decisions: differential
costs, opportunity costs, and
sunk costs.
 Cost Classifications for Decision Making

Every decision involves a choice

between at least two alternatives.
Only those costs and
benefits that differ
between alternatives
are relevant to the
decision. All other
costs and benefits can
and should be ignored.
 Differential Costs and Revenues

Costs and revenues that differ

among alternatives.
Example: You have a job paying K1,500 per week in
your Limbe. You have a job offer in Blantyre that
pays K2,000 per week. The commuting cost to the
Blantyre is K300 per month.

Differential revenue is: Differential cost is:

K2,000 K1,500 = K500 K300

Net Differential Benefit is:

K200
 Opportunity Costs

The potential benefit that is given up

when one alternative is selected
over another.
Example: If you were
not attending college,
you could be earning
K25,000 per year.
Your opportunity cost
of attending college for
one year is K25,000.
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 1,000 two
years ago. The 1,000 cost is sunk because
whether you drive it, park it, trade it, or sell it, you
cannot change the 1,000 cost.
Quick Check
Suppose you are trying to decide whether to
drive or take a minibus to attend a conference
in Mangochi. You have ample cash to do either,
but you dont want to waste money needlessly.
Is the cost of the bus ticket relevant in this
decision? In other words, should the cost of the
bus ticket affect the decision of whether you
drive or take the minibus to Mangochi?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the bus ticket is not
relevant.
Quick Check
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you dont want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not
relevant.
Quick Check

Suppose you are trying to decide whether to

drive or take the minibus to attend a
conference. You have ample cash to do either,
but you dont want to waste money needlessly.
Is the annual cost of licensing your car
relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
Quick Check

Suppose you are trying to decide whether to

drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you dont want to waste money needlessly. Is
the annual cost of licensing your car relevant
in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
Quick Check

Suppose that your car could be sold now for

5000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
Quick Check

Suppose that your car could be sold now for

5000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
 End.

About the tutor...

Shan is an experienced HND tutor and assessor who works in London, UK. He has a Degree of Master
of Laws in Law of International Trade - University of Wales, a Diploma in Business Administration, a
Degree of Bachelor of Law and a Diploma in Computing.

If your institution is in London and seeking reliable tutors, please contact Shan on
shanwikoon@gmail.com