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ACCG921/613 Managerial Accounting

Week 1 Lecture

Management Accounting
Chapter 1

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What is management accounting?

 …the processes and techniques that focus on the

effective use of organisational resources, to support
managers in their tasks of enhancing both customer
value and shareholder value

Faculty of Business and Economics

DEPARTMENT OF ACCOUNTING AND 3
CORPORATE GOVERNANCE

Management accounting systems

 A management accounting system is an information

system that produces the information required
by managers to create value and manage resources.

What is big data? (Refer to p.9 textbook)

Faculty of Business and Economics

DEPARTMENT OF ACCOUNTING AND 4
CORPORATE GOVERNANCE

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Management accounting vs financial accounting

The role of management accountants

 Dependent on organisational structure

 Frequently falls within span of control of Chief
Financial Officer (CFO)
 To work towards the formulation, implementation
and achievement of organizational strategies

What are the important attributes of a CFO?

(see p.13 of textbook)
Faculty of Business and Economics
DEPARTMENT OF ACCOUNTING AND 6
CORPORATE GOVERNANCE

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Planning and controlling systems

What are the ethical responsibilities of

management accountants?
 Management accountants have an obligation to
themselves, their colleagues, their organization and
the public interest to adhere to high standards of ethical conduct.
The fundamental principles include:
• Integrity
• Objectivity
• Professional competence and due care
• Confidentiality
• Professional behaviour

Faculty of Business and Economics

DEPARTMENT OF ACCOUNTING AND 8
CORPORATE GOVERNANCE

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Basic cost concepts and terms

Chapter 2

Cost management systems

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Cost behaviour
 Variable costs
Change in total in direct proportion to a change
in the level of activity

 Fixed costs
Remain unchanged in total despite changes
in the level of activity

Faculty of Business and Economics

DEPARTMENT OF ACCOUNTING AND 11
CORPORATE GOVERNANCE

Direct and indirect costs

DIRECT COSTS INDIRECT COSTS

A direct cost is a cost that can be An indirect cost is a cost that cannot
identified with or traced to, a be identified with or traced to, a cost
particular cost object in an object in an economic manner.
economic manner.

Faculty of Business and Economics

DEPARTMENT OF ACCOUNTING AND 12
CORPORATE GOVERNANCE

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Controllable and uncontrollable costs

Costs across the value chain

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Manufacturing costs
 Manufacturing costs are incurred within the factory area,
whereas upstream and downstream costs are sometimes called
non-manufacturing costs
 Manufacturing costs include three categories:
1. Direct material
2. Direct labour and
3. Manufacturing overhead
This classification assumes that products are the relevant cost objects
View: https://www.youtube.com/watch?v=ITAgME9mZIs
Faculty of Business and Economics
DEPARTMENT OF ACCOUNTING AND 15
CORPORATE GOVERNANCE

Manufacturing costs
 Direct material cost is the cost of materials consumed
in the manufacturing process to produce a product, physically
incorporated in the product and able to be traced to the
product in an economic manner.

 Direct labour is the cost of salary, wages and labour

on-costs for personnel who work directly on the
manufactured product.
Faculty of Business and Economics
DEPARTMENT OF ACCOUNTING AND 16
CORPORATE GOVERNANCE

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Manufacturing costs
 Manufacturing overhead
All manufacturing costs other than direct material
and direct labour
Also called indirect manufacturing costs or factory burden
Includes the cost of indirect material and indirect labour,
depreciation and insurance on factory equipment, utilities and
the costs of manufacturing support departments
Also includes cost of overtime premium and idle time
Faculty of Business and Economics
DEPARTMENT OF ACCOUNTING AND 17
CORPORATE GOVERNANCE

Idle time example

 An employee normally works 35 hours per week,
however due to a machine breakdown four hours were
spent doing nothing. The employee earns $20 per hour.
How much is the total wage for the week?
=
What is the direct labour cost?
=
What is the overhead cost?
=

Faculty of Business and Economics

DEPARTMENT OF ACCOUNTING AND 18
CORPORATE GOVERNANCE

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Overtime premium example

 An employee earns $25 per hour and $45 for each
overtime hour. They worked 42 hours during the previous
week instead of the normal 35 hours.
What is the total wage for the employee?
=
How much is the direct labour cost?
=
How much is the overhead cost?
=

Faculty of Business and Economics

DEPARTMENT OF ACCOUNTING AND 19
CORPORATE GOVERNANCE

Other cost terms

• Conversion costs
The total of direct labour and manufacturing overhead costs
The cost of converting material into product

• Prime costs
The total of direct material and direct labour costs
The major cost associated with producing a product

• Period costs – all costs that are not product costs.

These costs are expensed in the period in which they are incurred.
Faculty of Business and Economics
DEPARTMENT OF ACCOUNTING AND 20
CORPORATE GOVERNANCE

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Class exercise

The Outdoor Living Company manufactures a range of furniture.

During July, the company incurred the following costs:

Timber $27000
Paint $15000
Indirect material - Glue $ 100
Wages – assembly personnel $22000
Wages – factory supervisor $12000
Factory cleaner’s wages $ 1800
Sales commissions $ 7500
Administrative staff salaries $ 4200
Depreciation – factory equipment $ 6000
Depreciation – sales office equipment $10000
Utilities, insurance – factory $ 3000
Utilities, insurance – sales office $ 5500
Advertising
OFFICE I FACULTY I DEPARTMENT
$12000 21

Cost flows in a manufacturing business

Faculty of Business and Economics

DEPARTMENT OF ACCOUNTING AND 22
CORPORATE GOVERNANCE

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Ringo Percussion Instruments Data Field
Schedule of Cost of Goods Manufactured for the year ended 31 December Work in process inventory, 1 January $25,000
Direct Material: Selling and admininstration expenses 175,000
Raw Material inventory, 1 January $10,000 Insurance on Factory 5,000
Add  Purchases of raw material 100,000 Work in process inventory, 31 December 30,000
Raw material available for use 110,000 Finished goods inventory, 1 January 80,000
Deduct  Raw Material inventory, 31 December 5,000 Indirect materials used 8,000
Raw material used 105,000 Depreciation on factory 50,000
Direct Labour 200,000 Depreciation on equipment 20,000
Raw Material inventory, 1 January 10,000
Manufacturing overhead Finished goods inventory,31 December 70,000
Indirect material 8,000 Purchases of raw materials 100,000
Indirect labour 17,000 Electricity for factory 15,000
Depreciation on factory 50,000 Indirect labour costs incurred 17,000
Depreciation on equipment 20,000 Direct labour cost incurred 200,000
Electricity 15,000 Raw Material inventory, 31 December 5,000
Insurance 5,000 Sales revenue 700,000
Total manufacturing overhead 115,000 Income tax expense 40,000
Total manufacturing costs 420,000
Work in process inventory, 1 January 25,000
Subtotal 445,000
Deduct  Work in process inventory,31 December 30,000
Cost of goods manufactured $415,000

Schedule of Cost of Goods Soldfor the year ended 31 December
Finished goods inventory, 1 January $80,000
Add  Cost of Goods Manfactured $415,000
Cost of goods available for sale $495,000
Deduct  Finished goods inventory,31 December 70,000
Cost of goods sold $425,000

Income Statement for the year ended 31 December
Sales revenue $700,000
Less  Cost of goods sold $425,000
Gross profit $275,000
Selling and administration expenses 175,000
Profit before taxes $100,000
Income tax expense 40,000 23
Net profit $60,000

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