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Sem4 Managerial accounting
accounting and finance (ACF2016)
Islamic University in Uganda
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COURSE OUTLINE
CHAPTER 1: managerial Accounting. Managerial Accounting Basics Objectives of management accounting Management Functions and Organizational Structures Managerial Accounting Practice Today
CHAPTER 2: Managerial Cost Concepts and Cost Behavior Analysis Managerial Cost Concepts Cost Behavior Analysis The High-Low Method of Classifying Costs Manufacturing Costs in Financial Statements
CHAPTER 3: Job-Order Cost Accounting Cost Accounting Systems Job-Order Cost Flow Assigning Manufacturing Costs to Work in Process Manufacturing Overhead Costs Accounting for Jobs Completed and Sold Applied Manufacturing Overhead
CHAPTER 4: Process Cost Accounting The Nature of Process Cost Systems The Flow and Assignment of Manufacturing Costs The Production Cost Report
CHAPTER 5: Activity-Based Costing Traditional Costing Versus Activity-Based Costing Applying an Activity-Based Costing System Benefits and Limitations of Activity-Based Costing Activity-Based Costing in Service Industries
CHAPTER 6: Decision-Making: Cost-Volume-Profit Cost-Volume-Profit Analysis, Income Statement, and the Contribution Margin Break-Even Analysis Target Operating Income and the Margin of Safety
CHAPTER 7: Alternative Inventory Costing Methods: A Decision-Making Perspective Inventory Costing Methods Decision-Making Concerns Other Inventory Costing Methods CHAPTER 8: Pricing Pricing Goods for External Sales Absorption Cost-Plus Pricing Transfer Pricing for Internal Sales
Chapter 9: Budgetary Planning
Budgeting Basics and the Master Budget
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Preparing the Sales, Production, and Direct Materials Budgets Preparing the Direct Labour, Manufacturing Overhead, and S&A Expense Budgets Preparing the Financial Budgets Budgeting in Non-Manufacturing Companies
Chapter10: Budgetary Control and Responsibility Accounting
The Concept of Budgetary Control and Static Budget Reports Flexible Budgets Responsibility Accounting for Cost and Profit Centres. Evaluating Performance in Investment Centres.
CHAPTER 1: managerial Accounting.
Managerial Accounting Basics: Managerial accounting , also called management accounting, is a field of accounting that provides economic and financial information for managers and other internal users.
The management accounting team of Anglo-American Council on Productivity defined management accounting as: <The presentation of accounting information in such a way as to assist management in the creation of policy and in day to day operation of an understanding=. AAA:( American Accounting Association) defines management accounting as:
<The application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives and in the making of rational decisions with a view towards these objectives=. According to CIMA (Chartered Institute of Management Accountants) London:
<Management accounting is an integral part of management concerned with identifying, presenting and interpreting information used for: 1. formulating strategy; 2. planning and controlling activities; 3. decision taking; 4. optimizing the use of resources; 5. disclosure to shareholders and others external to the entity; 6. disclosure to employees; 7. safeguarding assets.
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economic events be quantified and communicated to interested parties. The principal differences between financial accounting and managerial accounting are:
Feature Financial Accounting Managerial Accounting
Primary Users of Reports
External users: shareholders, creditors, and regulators.
Internal users: officers and managers. Types and Frequency of Reports
Financial statements. Quarterly and annually.
Internal reports. As frequently as needed. Purpose of Reports
General-purpose. Special-purpose for specific decisions. Content of Reports
Pertains to business as a whole. Highly aggregated (condensed). Limited to double-entry accounting and cost data. Generally accepted accounting principles.
Pertains to subunits of the business. Very detailed. Extends beyond double-entry accounting to any relevant data. Standard is relevance to decisions.
Verification Process
Audited by CPA (chartered professional accountant).
No independent audits.
Management Functions and Organizational Structures:
Management Functions:
Managers' activities and responsibilities can be classified into three broad functions: 1. Planning 2. Directing 3. Controlling In performing these functions, managers make decisions that have a significant impact on the organization. Planning: requires management to look ahead and to establish objectives. These objectives are often diverse: maximizing short-term profits and market share, maintaining a commitment to environmental protection, and contributing to social programs. For example, Hewlett-Packard, in an attempt to gain a stronger foothold in the computer industry, greatly reduced its prices to compete with Dell. A key objective of management is to add value to the business under its control. Value is usually measured by the trading price of the company's shares and by the potential selling price of the company. Directing: involves coordinating a company's diverse activities and human resources to produce a smoothly running operation. This includes implementing planned objectives and providing necessary incentives to motivate employees. For example, manufacturers such as General Motors of Canada, Magna International, and Dare Foods must coordinate their purchasing, manufacturing, warehousing, and selling. Service corporations such as Air Canada, Telus, and CGI must coordinate their scheduling, sales, service, and acquisitions of equipment and supplies. Directing also involves selecting executives, appointing managers and supervisors, and hiring and
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training employees. Controlling : is the process of keeping the company's activities on track. In controlling operations, managers determine whether planned goals are being achieved. When there are deviations from target objectives, managers must decide what changes are needed to get back on track. Scandals at companies like Nortel Networks and Hollinger attest to the fact that companies must have adequate controls to ensure that the company develops and distributes accurate information. How do managers achieve control? A smart manager in a small operation can make personal observations, ask good questions, and know how to evaluate the answers. But using this approach in a large organization would result in chaos. Imagine the president of Current Designs trying to determine whether planned objectives are being met without some record of what has happened and what is expected to occur. Thus, large businesses typically use a formal system of evaluation. These systems include such features as budgets, responsibility centers, and performance evaluation reports 4 all of which are features of managerial accounting.
Organizational Structures:
In order to assist in carrying out management functions, most companies prepare organization charts that show the interrelationships of activities and the delegation of authority and responsibility within the company. Example of typical organization chart showing the delegation of responsibility
Organizational chart:
Shareholders own the corporation, but they manage it indirectly through a board of directors , which they elect. Even not-for-profit organizations have boards of directors. The board formulates the operating policies for the
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the acquisition of raw materials, production, sales and marketing, delivery, customer relations, and subsequent service. Technological Change Technology has played a large role in the value chain. Computerization and automation have permitted companies to be more effective in streamlining production, thus enhancing the value chain. For example, many companies now employ Enterprise resource planning (ERP) software systems , ERP systems provide a comprehensive, centralized, and integrated source of information that is used to manage all major business processes, including purchasing, manufacturing, and recording human resources. For example, an ERP system can eliminate the need for individual software packages for personnel, inventory management, receivables, and payroll. Because the value chain goes beyond the company walls, ERP systems also collect information from and provide it to the company's major suppliers, customers, and business partners. Computer-integrated manufacturing (CIM). Using CIM, many companies can now manufacture products that are untouched by human hands. An example is the use of robotic equipment in the steel and automobile industries. Workers monitor the manufacturing process by watching instrument panels. Automation significantly reduces direct labour costs in many cases. <the widespread use of computers has greatly reduced the cost of accumulating, storing, and reporting managerial accounting information. Computers now make it possible to do more detailed costing of products, processes, and services than was possible under manual processing.=
Chapter activity
Section one : Direct questions Q1. In your understanding define management accounting by referencing your answers. Q2. What is the fundamental objective of management accounting? Q3. State and explain main objective of management accounting.
Q4. Differentiate between management accounting and financial accounting according to below features.
a) Primary Users of Reports
b) Types and Frequency of Reports
a) Purpose of Reports
b) Content of Reports
c) Verification Process
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Section two: Indicate which statement suits to each of the following to reflect the right answer.
1 accounting. (i) is governed by generally accepted accounting principles. (ii) emphasizes special-purpose information. (iii) pertains to the entity as a whole and is highly aggregated. (iv) is limited to cost data. 2. The management of an organization performs several broad functions. They are: (i) planning, directing, and selling. (ii) planning, directing, and controlling. (iii) planning, manufacturing, and controlling. (iv) directing, manufacturing, and controlling. 3. Which one of the following is not a main component of the value chain sequence?
(i) ERP
(ii) Sales and marketing (iii) Production (iv) Customer relations
4. Managerial accounting information is generally prepared for:
(i) Shareholders. (ii) Managers. (iii) Regulatory agencies. (iv) Investors.
CHAPTER 2: MANAGERIAL COST CONCEPTS AND COST BEHAVIOR ANALYSIS
Managerial cost concepts:
In order for managers in a manufacturing company to plan, direct and control operations effectively, they need good information. One very important type of information is related to costs. Managers should ask questions such as: 1. What costs are involved in making a product or providing a service? 2. If we decrease production volume, will costs decrease? 3. What impact will automation have on total costs? 4. How can we best control costs?
To answer these questions, managers need reliable and relevant cost information.
Cost: is an economic resource given up or forgone to accomplish a particular objective.
Cost object: is anything for which we want to calculate a cost, such as a product (soft drink), a product line, a
service, or a process for which cost information is measured and accumulated.
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Prime costs and conversion costs are two other terms that managers and accountants use in manufacturing accounting systems. Prime costs are the sum of all direct materials costs and direct labour costs. These are all direct manufacturing costs. Conversion costs are the sum of all direct labour costs and manufacturing overhead costs, which together are the costs of converting raw materials into a final product
Direct materials + Direct Labour + Manufacturing overhead
Prime cost conversation cost
Product versus Period Costs:
Each of the manufacturing cost components (direct materials, direct labour, and manufacturing overhead) are product costs.
Product costs: are costs that are a necessary and integral part of producing the finished product.
Companies record product costs, when incurred, as inventory. Under the matching principle, these costs do not become expenses until the company sells the finished goods inventory. At that point, the company records the expense as a cost of goods sold.
Period costs : are costs that are matched with the revenue of a specific time period rather than included as part
of the cost of a saleable product. These are non-manufacturing costs. Period costs include selling and administrative expenses. They are deducted from revenues in the period in which they are incurred, in order to determine net income.
All costs
Product costs period costs
Manufacturing costs Non- manufacturing costs Direct Materials Direct labour
Manafacturing Overhead
- Indirect materials
- Indirect labour
- Other indirect expenses
Selling expenses
Administrative expenses
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Example : Terian park is a snowboard manufacturer company and following are some costs that the factory would incur.
- The materials cost of each snowboard (wood cores, fiberglass, resins, metal screw holes, metal edges, and ink) is $30.
- The labour costs (for example, to trim and shape each board using jigsaws and band saws) are $40.
- Depreciation on the factory building and equipment (for example, presses, grinding machines, and lacquer machines) used to make the snowboards is $25,000 per year.
- Property taxes on the factory building (where the snowboards are made) are $6,000 per year.
- Advertising costs (mostly online and catalogue) are $30,000 per year.
- Sales commissions related to snowboard sales are $20 per board.
- Salaries for maintenance employees are $45,000 per year.
- The plant manager’s salary is $70,000.
- The cost of shipping is $8 per board.
Required: show how snowboard would assign these manufacturing and selling costs to the various categories.
Solution: Product Costs Cost item Direct Materials
Direct Labour
Manufacturing Overhead
Period Costs
- Material cost $30 board
- labour costs $40. per board
- Depreciation on factory equipment $25,000 per year.
- Property taxes on the factory building$6,000 per year.
- Advertising costs $30,000 per year.
- Sales commissions $20 per board
- Salaries for maintenance employees $45,000 per year.
- plant manager’s salary $70,000.
- cost of shipping is $8 per board.
Sem4 Managerial accounting
Course: accounting and finance (ACF2016)
University: Islamic University in Uganda
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