Summary Class notes - Management Accounting and Control

Course
- Management Accounting and Control
- Philip Vergauwen
- 2019 - 2020
- Maastricht School of Management (MSM)
- IEMA
190 Flashcards & Notes
1 Students
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Summary - Class notes - Management Accounting and Control

  • 1538776800 Lecture 1: Introduction & Recap

  • What are examples of decision making related to product management?

    * Add new product
    * Terminate and existing product line
    * Accept or reject special order

    Related topics:
    - Operations management
    - Budgeting - capital and operating
    - Just-in-time (JIT)
  • What are examples of decision making related to pricing?

    * Set selling price to achieve desired profits
    * Set selling price to achieve positive cash flow

    Related topics:
    - Marketing
    - Microeconomics - price theory
    - Corporate Finance
  • What are examples of decision making related to cost control?

    * Add new equipment
    * Change production process
    * Make internally versus buy externally (outsource)

    Related topics:
    - Process engineering
    - Management information systems
    - Activity-based costing (ABC)
  • 1538863200 Lecture 1: Cost Analysis & Cost Allocation

  • Opportunity costs

    Opportunity costs measure wwhat the firm forgoes when it chooses a specific action or by accepting a special order.

    Opportunity costs:
    - include tangible and intangible assets
    - are measured in cash equivalents
    - rely on estimates of future benefits
    - are useful for decision making
  • Accounting expenses

    - Costs consumed to generate revenues
    - Rely on historical costs of resources actually expended
    - Are designed to max expeses to revenues
    - Are useful for control
  • Sunk costs
    Sunk costs are costs which were incurred in the past and cannot be changed no matter what future action is taken. They are irrelevant for decision making and are excluded from the opportunity costs.
  • When might sunk costs be useful?
    Sunk costs might be useful for control purposes and ex-post evaluations (learning, accountability, responsibility)
  • Relevant costs
    Relevant costs are expected future costs that will deiffer under alternatives. Opportunity costs encompasses "relevant costs".
  • Cost driver

    Measure of physical activity most highly associated with total costs in an activity center.

    Examples:
    - Quantity produced
    - Direct labour hours
    - Number of set-ups
    - Number of different orders processed

    It's important to use different activity drivers for different decisions. Costs could be fixed, variable, or semivariable in different situations.
  • Formula break-even point
    BE = Fixed costs / (sales revenue per unit - variable costs per unit)
  • What are weaknesses of break-even analysis?

    There are three general problems:
    - non-linear relationships
    - stepped fixed costs
    - multi-product businesses
  • Operating Leverage
    Ratio of fixed costs to total costs
  • Firms with high operating leverage have:

    - Rapid increases in profits when sales expand
    - Rapid increases in losses when sales fall
    - Greater variability in cash flow
    - Greater risk
  • Knowledge of a competitor's cost structure is valuable strategic information in designing marketing campaigns.
  • Product costs

    All costs related to products:
    - accounting costs related to the purchase or manufacture of goods
    - accumulated in inventory accounts (asset)
    - expensed when sold (costs of goods sold)
    - includes fixed and variable costs of goods
  • Period costs

    All costs related to a certain period;
    - All accounting costs not included in product costs
    - expensed in period incurred
    - included fixed and variable selling and administrative expenses
  • Direct costs

    - Costs easily traced to product or service produced or sold
    - Include direct materials (materials used in making products)
    - Included direct labor (cost of laborers making product)
    - Direct costs are uasually variable
  • Overhead costs

    - Costs that cannot be directly trace to product or service produced or sold
    - Include general manufacturing (supervisors, maintenance, depreciation, etc)
    - Include other administrative, marketing, interest and taxed
    - Overhead costs are primarily fixed with respect to number of units produced or sold, but may include some variable costs related to number of units produced or sold.
  • Format of Income Statement - Financial Accounting

    Revenue
    - Costs of goods sold
    = Gross profit
    - General, selling, administrative and taxes (period costs)
    = Net income
  • Format of Income Statement - Decision Making

    Revenue
    - Variable costs
    = Contribution margin
    - Fixed costs and taxes
    = Net income
  • Cost Accounting
    Cost accounting measures and reports financial and non-financial information related to the organisation's acuisition or consumption of resources.
  • How can the cost/management accounting system be designed?

    The design of the accounting system should be guided by the challenges facing the manager.

    Additionally, there are 4 key themes that are important to managers seeking to make effective planning and control decisions (see next flashcard)
  • What are the four key themes in management decision making?

    1. Customer Focus
    2. Value-chain and supply-chain
    3. Key succes factors: cost and efficiency, quality, time and innovation
    4. Continuous improvement and benchmarking
  • How does the value chain of business functions look like?

    1. Research and development
    2. Product/service/process design
    3. Production
    4. Marketing
    5. Distribution
    6. Customer service

  • Why analyse costs?

    - To enable decision making using cost-benefit guidelines through out the value and supply chain
    - What is the most profitable way of organizing my business?
    - Which kind of information is relevant for certain decisions, and which kind is not.
    - Analysing why cost-benefit estimations didn't turn out to be as planned
    - Budgetting and variance analysis
    - Where ded we go wrong and who is responsible for that?
  • Cost Analysis - cost assignment

    Managers prefer to make decisions on direct cost as it is more accurate. However, several factors affect the classification of a cost as direct or indirect:

    1. The materiality of the cost
    2. Available information-gathering technology
    3. Design of operations

    Note: a cost can be both direct and indirect as this would depend on the choice of the cost object.
  • Cost driver
    A cost driver is any factor that affects total costs. A change in the usage level of the cost dirver will cause a change in the level of the total cost of a cost object. Costs that do not have a cost drive in the short run may have a cost driver in the long run.
  • Cost management
    Cost management is the central task of managers. It's the actions managers undertake (by managing cost drivers) in the short-run and long-run planning and control of costs that increase value for customers and lower the costs of products and services.
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