1.

Concepts:
a. Differences between Financial accounting and management accounting

Analysis of financial statements is of limited use to managers:

Aggregated to corporate rather than business unit level
Aggregated to annual figures
Aggregated to headline items
No comparison to plan to assess progress in achieving goals

Solution: management accounting - providing managers with

financial and non-financial information:

More frequent report, typically monthly

Managerial Accounting

Financial
Accounting

Users

Internal(Managers)

Creditors, investors,
analysts, and other
external users

Guidelines

Flexible

GAAP-rigid

Purpose

Decision making and control

information

General information
for credit and
investment
decisions

Frequency of
preparation

As needed(more frequently)
like monthly

Annually or
quarterly

Independent
opinin

None required

Auditor's opinion

Type of info

Specific to project or
management action-may be
detailed and include estimates

General purpose very few estimates.

b. The types of internal controls for information systems

Internal control - The whole system of controls, financial and otherwise, established to provide
reasonable assurance of effective and efficient operation, internal financial control and
compliance with laws and regulations(COSO, 2007)
Security controls
to prevent unauthorised access,
modification or destruction of data
Recruitment, training, supervision
Personnel: separation of duties
Access to computers and data
Software authorisation

Application controls
to prevent, detect and correct transaction
processing errors
Input, Processing & Output controls for each application
Network controls
for protection against hacking and viruses
Firewalls, data encryption, etc.
Contingency controls
to restore business operations as quickly
as possible
Backups, business continuity plans
c. Operating leverage
The ability to use fixed costs to generate a contribution
:
Two companies sell the same product at same price with same profits. Only the mix of variable
and fixed costs is different.
:
Company B has a higher operating leverage, lower VC, higher
CM and BP, and could make a higher profit (beyond BP) but with higher risk
d. Costs

A longer term view

Labour is traditionally
a variable cost but in the short term is a fixed cost

Distinction between FC and VC is not

sufficient for making decisions about labor
o
Spare capacity: if
there is surplus labor which will be paid whether
a particular decision is taken or not, the labor
cost is irrelevant to the decision in bidding for a
special order
o
Full capacity: the
relevant cost could be the additional labor cost
which may have to be incurred, or the opportunity
cost following from the inability to sell
product/services or the cost of diverting labor
from alternative work.
5. Avoidable / unavoidable costs

Avoidable costs: costs

that are identifiable with and able to be influenced by decisions made at the
business unit level

Will no longer be incurred where a

segment or business unit closes(FC)
o
Specific to each
business segment

Unavoidable costs: A
cost that cannot be influenced at the business unit level but is controllable at the
corporate level.

Allocated to business unit

o
Typically businesswide such as head office(corporate) costs
6. Product / period costs

Product costs: The

cost of goods or services produced

Dictated by the accounting rules(DM, DL,

POH)

Period costs: The

costs that related to a period of time, not to a product/service

No such rules as to how growth profit is

calculated)
7. Direct(prime) cost / indirect cost

Direct(prime) costs:
Costs that are readily traceable to particular products or services.; prime cost is
an umbrella term used to refer to the total of all direct costs.

Indirect costs: costs

that are necessary to produce a product/service but are not readily traceable to
particular products or services

Production OverheadL: any cost other

than a direct cost - may refer to an indirect production cost and /
or to a non-production expense; total of all indirect material and
labour costs and other indirect costs
8. conversion cost: costs from resources ( materials, PP&E, People) to
products/services that are sold to customers(manufacturing)

'quality, speed,
dependabiltiy & flexibility' (Slack et al., 1995)
9. production overhead/ nonproduction overhead

Production overhead:
A general term referring to indirect cost of production

Nonporduction
overhead: a general term referring to period costs, such as selling,
administration and financial expenses
10. Production cost/total cost of product

Production cost:

Total cost of product:

e. the theory of constraints and throughput accounting
1. The theory of constraints(TOC): Concept of improving operations by identifying and reducing
bottlenecks in a process(goldratt&cox, 1986)
*Bottleneck - an operation in which the work to be performed equals or exceeds the available
capacity
2. throughput accounting: Sales revenue less the cost of materials

Sales - cost of
materials

Rank and select

optimum product/service mix based on throughput contribution per unit of
bottleneck resource(limited capacity: capacity utilization and product mix)
f. Spare capacity(cost of labor) and limited capacity(throughput accounting)
1. Capacity : the maximum volume of products/services that can be produced given limitations
of space, people, equipment or financial resources
2. Spare capacity

Cost of spare
capacity(D<S) = Cost of resources supplied - cost of resources used
3. limited capacity(Demand>Supply)
g. the method of overhead allocation using absorption costing or activity-based costing

Still comes from the same accounting system (supplemented by other data) and
thus cannot be divorced completely from the practices of financial accounting

may include recruitment and training costs

Not regulated by accounting standards and not audited

Methods of budgeting:
zero based budgeting; incremental budgets; priority based budgets; activity based budgeting

Zero-based budgeting: as if its activities

were now.
Approaches to
budgeting: Top-Down; bottom-up
Phasing and profiling:
spread annual budgets over a number of accounting periods(e.g. quarters or months)
j. Flexible budgeting: a budget that is flexed(i.e., the standard cost per unit is applied to the
actual level of business activity; a method of budgetary control that flexes, I.e. adjusts the
original budget, by applying standard prices and costs per unit to the actual production volume.
Advantages

Identifies the two separate components of

the variance: Volume and Price Variance
o
Volume variance:
$10000 favorable variance(in terms of cost) because of the
reduction in volume from 40000 to 35000 units at $2 each
o
Price Variance: $3,500
adverse variance because the 35,000 units produced each cost
10c more than the standard cost.

These may be controllable by diff.

managers.
K. Transfer Pricing: The price at which goods or services are bought and sold within divisions of
the same organization, as opposed to an arm's length price at which sales may be made to an
external customer
Problem: transfer
prices that are suitable for evaluating divisional performance may lead to divisions acting
contrary to the corporate interest(Solomons, 1965)

What is good for a single division may not

be the best for the organization as a whole.

Rewarding divisional performance which is

not in the best corporate interests.
What price incompany transactions

Market price to external customers,

including a normal(or lower) profit margin

Full cost or cost-plus, including total costs,

with or without a profit margin

Marginal cost, including only VC, with or

without a profit margin

Negotiated price
L. Strategic management accounting(SMA): The provision and analysis of management
accounting data about a business and its competitors, which is of use in the development and
monitoring of strategy.
1. Main features
Collect competitor
information on pricing, costs, volume, market share for benchmarking
Exploit process for
cost reduction opportunities through a focus on continuous improvement and on non-financial
performance measures
Focus on delivering
value to customers
-> Link accounting
with strategy to achieve long-term goals.
2. Tools: Value chain and supply chain mgmt.; HR accounting; Activity based cost MGMT.
Lifecycle, target,kaizen, backflush, costing; lean accounting; just in time.

More detailed for decision making, planning and control

4. cost of labor

Disaggregated to business unit level

Cash costs:a process

of cash basis accounting that categorizes costs as they paid in cash; the
amount of cash expended for something
Sunk costs: and
depreciation are not relevant; costs that have been incurred in the past

Example: cost of original kitchen is a sunk

cost
3. standard costs: A budget cost for materials and labour used for decision
making, usually expressed as a per unit cost that is applied to standard
quantities from a bill of materials and to standard times from a routing; a budget
cost for a unit or batch of a product.
Since actual costs are
not known for some time after the accounting period standard costs are
epressed in unit, generally used for decision making

1. Accounting costs / relevant costs

Accounting costs : monetary value of economic resources
used in performing an activity.( signal the past)
Relevant costs : future, incremental cash flows that result from
a decision; the cost that is relevant to a particular decision - future, incremental,
cash flows.

Understand the impact on cash flows of

future decisions
o
Make vs. Buy :
outsourcing decisions
o
Equipment
replacement
o
Relevant cost of
materials in a contact

Avoidable costs

Unavoidable costs are not relevant! :

irrespective of what a decision is, unavoidable costs will still be
incurred.( so, sunk costs are not relevant)

Opportunity costs: the loss of a future cash

flow that takes place as a result of making a particular decision;
the opportunity foregone by making a choice among
alternatives, which involves the inability to undertake the
alternative not selected. The opportunity cost may be financial or
non-financial.
o
Accounting system
does not take into account the opp cost of the
lost revenue(why relevant costs should be used
in managerial decision making)

Relevant costs of materials

o
Purchas price : if
material is purchased specifically
o
Replacement price: if
material is already in stock and used regularly
o
Opportunity costs: if
the already in stock material is surplus and has
alternative use
2. Cash costs/ sunk costs

o
o
o
o

Divisional profit:

Production budget

Variable costing

Absorption costing

Allocates only variable costs as product costs

Allocates all fixed and variable production costs as product costs

All fixed costs are treated as period costs

All non-production costs are treated as period costs

Accumaltes costs in cost centres and measures activity in each cost centre
Budgeted overhead rate(e.g. labour hours) = cost centre costs / unit of activity
Calculate product/service cost for each cost centre as the unit of activity(e.g. labour
hours) x budgeted overhead rate and adds this for all cost centres to give total
product/service cost

h. responsibility center: cost, profit, investment

1. Responsibility center: a business unit, through its manager, is held responsible for achieving
certain standards of performances; three types
Cost centre: no
income generation responsibility; managed by ability to operate within cost budget
Profit centre:
Responsible for 'bottom line' profits; cost budget may be exceeded if it results in higher
profits(higher sales, higher margin, etc.)
Investment centre:
Responsible for ROI - contribution to corporate ROI; controls of profits and level of investment
i. Budget:zero based budget, phasing and profiling
1. Budget: a financial plan based on a defined level of activity to estimate the results of future
operation
Budgeting: Link to
strategy; method of resource allocation decisions; coordination/communication; motivation(with
incentives); control mechanism; evaluate performance

RI: