Mgmt Accounting for a business of automation

management ppt

1. Key Learning Objectives Standard Costing and Variance Analysis. Marginal Costing & Cost Volume Profit Analysis. Job and Process Costing. Understanding Costs – An Introduction to various Cost. Introduction to Management Accounting. Overhead Cost Analysis. Activity Based Costing. Budgetary Control and Responsibility Accounting.

2. Chapter 1 What is Management Accounting? Accounting for Planning, Control, and Evaluation

3. Why Do We Have Accounting Systems? Accounting systems are artifacts. They are created by men to help accomplish tasks. Audited statement reduce investors risk. Audited statements allow a company to borrow capital from someone else. Records and internal financial controls safeguard the company’s assets Balance Sheets allow the comparison of Assets, Liabilities and Owner’s Equity. Income Statements describe the change in Owners’ Equity from operations.

4. The Three Management Functions Questions asked: What do I want to do? How can I do it? Am I getting it done? How well did I do it? Management functions: Planning for the future (Strategic) Planning for the future (Operational) Monitoring and controlling the present Evaluating the past

5. Data Characteristics of Financial vs. Managerial Accounting Financial Accounting rules are set by users who agree among themselves on the regulations . This is hard data, objectively verifiable, that must meet audit criteria to be acceptable. It is therefore considered reliable . Managerial Accounting rules are set within the company to accomplish management objectives related to adding value to the company. This is data that could be soft , or estimates, that must only improve the value of decisions more than the cost of information. Managerial accounting data must only be relevant for management decisions.

6. Comparison between Financial and Management Accounting Determining the unit cost of manufacturing a product is part of Management Accounting. However, reporting the total cost of goods manufactured and sold is part of Financial Accounting. Particulars Financial Accounting Management Accounting Primary Users of Reports * External Users: Stakeholders, Creditors and Lenders and the Government. Internal Users: Managers and Officers . Purpose of Reports * General purpose. * Special Purpose for specific Decision making. Contents of Reports * It pertains to business as a whole. * Generally accepted accounting principles. * it pertains to subunits of the business. * As relevant to specific decisions. Audit * Audit by a qualified CA. * No such independent audits.

7. An Example The Sudbury Redi Mix company purchased a new ready mix truck last year. The following information pertains to this truck:   a.    On the Balance Sheet: Trucks and Equipment $200,000 less: Accumulated Depreciation* 40,000 Net Book Value $160,000 *This depreciation schedule is acceptable by the IAS for tax purposes.   b.   Book Value: $160,000 c.    Net cash flows expected from the additional truck over its service life is $300,000. Different financial data is needed for different purposes or decisions!!

8. New Management Trends to Create Value Encourage Management Accounting Systems Redesign, for example. Customer focus Quality focus Delivery focus Outsourcing and the virtual company Communications Shortening product life cycles Team development Deregulation in the service sector

9. Managerial Accounting Systems: Unregulated Decision Support — Management accounting data has value if it improves management decisions. Control Support — Management accounting data reports the results of management actions, thus it is useful for control if management behavior is influenced by the accounting reports. WHAT GETS MEASURED GETS DONE! SUITABLE CONTROL MOTIVATES GOOD JUDGEMENT GOOD JUDGMENT REQUIRES GOOD INFORMATION !

10. Characteristics of Management Accounting Systems Key Ideas: The costs and benefits of better decisions. One set of books for many different uses. Enhanced information quality for better decisions.

11. The Professional Management Accountant Professional Certifications Certified Public Accountant (CPA) Certified Management Accountant (CMA) Certified Internal Auditor (CIA) Certified Information Systems Auditor (CISA) Certified in Financial Management (CFM) Chartered Accountant (CA)

12. Ethical Responsibilities of the CMA Competence Objectivity Integrity Confidentiality Maintain professional knowledge and skills Follow laws and regulations Analyze all relevant data and provide complete information Communicate all information fairly Fully disclose all relevant information Communicate favorable as well as unfavorable information including limitations of the information Avoid apparent or actual conflicts of interest Support attaining the legitimate goals of the organization Avoid activities that will discredit the profession Do not disclose confidential information unless legally obligated to do so Do not allow subordinates to disclose confidential information

13. Professional Characteristics of the Management Accountant Most Important Work ethic Analytical and problem solving skills Interpersonal skills Listening Spreadsheet abilities Understanding the business Understanding bottom line implications of management decisions Writing Familiarity with business processes Least Important Interpreting financial statements Measuring and reporting revenues and expenses Accruals, deferrals, and adjusting journal entries

14. Understanding Costs Chapter 2 An introduction to Various costs

15. Cost Classification by Nature (i.e. Direct or Indirect Cost) by Function (e.g. Production, Marketing, R&D, Administration etc.) by behaviour (i.e. Fixed or Variable Cost) by Element (i.e. Material, Labour or Expense) Cost Concept

16. Cost Objects and Cost Drivers Cost objects are anything for which a separate measurement of costs is desired. (example - car) Cost drivers are any factors that affect cost. (example - alloy wheels, tubeless tyres etc.)

17. 17 Direct Costs Definition : Direct costs are identifiable to a final cost objective (a particular contract). Examples: direct material and direct labor. All costs identified specifically with a contract are direct costs for that contract and shall not be charged to another contract directly, or indirectly. For example , the cost of the bottle is a direct cost of Maggi Tomato Ketchup. Classification of Cost By Nature

18. 18 Indirect Costs Definition : Indirect costs are not directly identifiable with a final cost objective (e.g. a particular contract), but identified with two or more final cost objectives. The distribution of indirect costs to various contracts should roughly be based on the benefits received on each contract. No cost shall be charged to a contract as an indirect cost if other costs incurred for the same purpose in like circumstances have been charged as a direct cost to that contract or any other contract.

19. 19 For example, the salaries of supervisors who oversee production of the many different products manufactured at a Nestle plant is an indirect cost of Kitkat Chocolate. Supervision costs are related to the cost object (Kitkat chocolate) because supervision is a must for managing of production of kitkat chocolate. But the supervision costs shall be termed as indirect costs because supervisors also oversee the production of other products, such as Maggi Noodles etc.

20. 20 Variable Costs Definition : Variable costs are those costs that vary in total directly and proportionately with changes in the activity level. If the activity level increases by 20%, total variable costs will also increase by 20%. However if the activity level decreases by 10%, variable costs will also decrease by 10%. Some Examples: Direct material and Direct labour for a manufacturer, costs of goods sold and sales commissions for a merchandiser etc. Classification of Cost By Behavior

21. 21 All Costs

22. 22 Fixed Costs Definition : Fixed costs are the costs that remain the same in total regardless of changes in the activity level or quantity of the cost driver, within the relevant range. Examples: Insurance, rent, property taxes, staff salaries etc. We should take care that while considering fixed costs, we should always focus on the total fixed costs and not just the fixed cost per unit.

23. 23 Material Costs Definition : Raw materials are the materials that will be converted into the finished product by the manufacturers. These raw materials that can be physically and directly associated with the finished product during the manufacturing process are called Direct materials . E xamples: (a) Flour in the making of bread, (b) Steel, plastics and glass in making of cars by Maruti Udhog , Tata Motors etc. (c) PCB, hard drives, plastics, processing chips in making of Computers by HP etc. But some raw materials that cannot be easily associated with the finished product is called Indirect materials . Examples: (a) Do not physically becomes part of the product such as Lubricants & polishing compounds. (b) Nails & Fevicol used by the Furniture manufacturer. Classification of Cost By Element

24. 24 Labour Costs Definition : The work of factory employees that can be physically and directly associated with converting raw materials into finished goods is called as Direct labour . In contrast, the wages of maintenance people, time-keepers and supervisors are called Indirect labour . Their efforts have no physical association with the finished product or it is impractical to trace the costs to the goods produced. Apart from the material and labour , many a times there is need to insert some specific expenses such as production royalties to be paid to the holders of manufacturing/patent rights, hire/purchase of certain special machine tools for one-time jobs etc. This category of cost is termed as Direct expenses . Direct Expenses

25. 25 Manufacturing Overheads Definition : Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the finished product. These costs may also be manufacturing costs that cannot be classified as Direct materials or Direct Labour . Manufacturing Overhead includes Indirect materials, Indirect Labour , Depreciation on factory assets etc.

26. Direct Materials Direct Labour Indirect Labour Indirect Materials Other Manufacturing Overhead Inventoriable Product Costs

27. 27 Production related: Indirect material such as oil, grease etc. Indirect lab our such as wages of factory watchman. Indirect expenses such as factory rent and insurance. Office and Administration related: Indirect material such as general office stationery. Indirect lab our such as salary of office staff. Indirect expenses such as office rent and lighting. Sales and Distribution related: Indirect material such as packing material, price list etc. Indirect lab our such as salary of sales manager. Indirect expenses such as advertising and travel expenses. Classification of Cost By Function

28. Exercise

29. Overhead Cost Analysis Chapter 3 Cost Allocation, Types of Overhead Rates

30. 30 Traditional cost accounting systems accumulate product cost as follows: Direct Materials xxx Direct Lab our xxx Direct Expenses xxx Prime cost xxx Manufacturing overhead xxx Total Manufacturing cost xxx Traditional Cost Accounting (TCA)

31. Inventoriable Product Costs Direct Materials Direct Lab our Prime Costs = Direct Materials + Direct Lab our

32. How to determine the cost of goods manufactured?

33. 33 All the direct cost is first distributed to all production and service departments. A suitable base is found for each of the indirect costs, which are then distributed to all production and service departments (on the basis of that chosen base). The total of direct cost allocation + indirect cost allocation to various production and service departments ( as given steps 1 & 2 above) is known as Primary distribution. The cost of the service departments now needs to be redistributed to various production departments , because ultimately the entire cost needs to be booked only to various production departments. This process is known as Secondary distribution. Cost Allocation

34. Methods of Cost Allocation

35. Example - 1

36. Solution

37. 37 Direct Materials Cost Percentage Rate : The overheads are absorbed as per the direct material consumed by each cost object. This rate is calculated by dividing the total overheads by the total cost of direct materials relating to all the cost objects. Production Overheads Overhead Rate = x 100 Direct Materials Direct Lab our Cost Percentage Rate : In this case, the overhead rate is calculated by dividing the production overheads by the direct lab our cost. Production Overheads Overhead Rate = x 100 Direct Lab our cost Production Overhead rates

38. 38 Prime Cost Percentage Rate : In this method, we find the overhead rate by dividing the production overheads by prime cost (direct material + direct lab our + direct expenses) . Production Overheads Overhead Rate = x 100 Prime cost Direct Lab our Hour Rate : This is actually a rate per hour and is calculated by dividing the total production overheads by the total direct lab our hours for the period. Production Overhead Overhead Rate per lab our hour = Direct Lab our hours

39. 39 Machine Hour Rate : The machine hour rate refers to cost of running the machine for one hour and accordingly the overhead is applied.

40. 40 Actual overhead Rate : Overhead absorption rate may be based on actual figures or estimated figures. Actual rate is calculated by dividing the actual overheads by the actual base. Actual amount of Overheads Overhead Rate = Actual base Predetermined (budgeted) Rate : are determined in advance of the period in which they are to be used. Such a rate is computed by dividing the budgeted amount of overhead by the budgeted base. Budgeted amount of Overheads Predetermined Rate = Budgeted base Non Production Overhead rates

41. 41 Actual overhead Rate : Overhead absorption rate may be based on actual figures or estimated figures. Actual rate is calculated by dividing the actual overheads by the actual base. Actual amount of Overheads Overhead Rate = Actual base Predetermined (budgeted) Rate : are determined in advance of the period in which they are to be used. Such a rate is computed by dividing the budgeted amount of overhead by the budgeted base. Budgeted amount of Overheads Predetermined Rate = Budgeted base Non Production Overhead rates

42. Activity Based Costing Chapter 4 Activity Based Costing vs. Traditional Costing

43. 43 Activity based costing (ABC) refines a costing system by focusing on individual activities as the fundamental cost objects. An activity can be an event, or unit of work with a specified purpose, such as designing products, setting up machines, operating machines etc. ABC systems calculate the costs of individual activities and assign costs to cost objects such as products and services on the basis of the actual consumption of activities needed to produce such a product or service. Activity Based costing (ABC) allocates overhead to multiple activity cost pools, and then assigns the activity cost pools to products by means of cost drivers. In ABC, an activity is any event, action, transaction, or work sequence which incurs cost when producing a product or providing a service. A cost driver is any factor or activity that has a direct cause effect relationship with the resources consumed. Activity Based Costing

44. The Steps in ABC costing are as under:- Identify major activities. Grouping cost or activities into cost pools. Identify measures of activities, i.e. the cost drivers. Find out cost driver quantities. Allocate overhead cost to products using cost drivers.

45. Example - 1

46. Solution of Example - 1

47. Job and Process Costing Chapter 5 Job order costing system & Process costing

48. 49 Job Costing is a form of cost accounting which is used in situations where the customer order determines the nature of the work to be done. Such orders will therefore be specific to the requirements of the customer, and thus job costing is one of the methods of cost accounting which are referred to as specific order costing methods. Once a customer comes with an order, the organization provides the customer with an estimate of the price and the probable time of completion of the job. If the customer agrees with the estimated price and the time, then the organization issues a job number code which is used to record the costs associated with the customer’s order. Job costing is based around a customer order. Examples are – An example of a job would be manufacture of a specially designed set of furniture. An example of a batch would be the printing of 150 birthday invitations, 400 seminar brochures of an Institute by a local print shop. Job Costing

49. 50 Job Order sheet