Cost Management

Systems 22321
Lecture 1
Basics of cost accounting

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Lecture outline
• Subject overview
• Differences between management and financial accounting
• Management accounting systems
• The role of management accountants
• Cost categorisation
• Product versus period
• Direct versus indirect
• Variable versus fixed
• Management accounting in specific industries
• Services
• Merchandising
• Manufacturing

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Subject overview

How much
does it cost?

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Subject overview
• How costs arise in organisations and how they can be managed
Lecture 3 – Cost behaviour

• How to identify the cost of an object (e.g. a product, service)

Lecture 4 – Job costing systems
Lecture 5 – Conventional overhead allocation
Lecture 6 – Contemporary overhead allocation
Lecture 7 – Process costing systems

• How cost information is used for planning and control

Lecture 8 – Using budgets for planning
Lecture 9 – Using budgets for evaluation

• Understand how cost information can be used in decision making models

(e.g. pricing, outsourcing, re-structuring, product mix)
Lecture 10 – Cost-Volume-Profit modelling

• How cost information can be used to manage organisational sustainability

Lecture 11 – Sustainability accounting

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Subject overview
There is an emphasis on the understanding and practical application of theory
(i.e. problem solving, not rote learning!)

“When something has been learned by

rote, it can be regurgitated more or less
literally, but it cannot be used as a
cognitive tool. Laboratory experiments
have shown that material can usually
be learned more rapidly with
understanding than by rote, is retained
over longer periods of time, and can be
transferred to new tasks.”

Herbert Simon (1996)

Awarded the Nobel Prize in Economics in 1978

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Course information
• How is CMS delivered?
1. Lectures
2. Tutorials (start in Week 2)
3. UTS Online (lecture notes, notifications, tutorial solutions, revision problems, discussion board)

• How do I get help and feedback about the subject coursework?

1. Ask questions on the UTS online discussion board
2. Ask questions in your tutorial
3. Ask questions during or after (if time!) the lecture
4. Complete Connect multiple-choice quizzes

• Some tutorials are conducted in computer labs (check your timetable)

Tutorial 1 – Cost accounting in Excel
Tutorial 2 – Group assignment
Tutorial 3 – Cost behaviour
Tutorial 6 – Activity based costing
Tutorial 10 – CVP analysis

• Who is the subject coordinator?

Dr Greg Pazmandy
Email: Greg.Pazmandy@uts.edu.au
Phone: 9514 3585
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Assessments
There are three assessments in this subject.

• Online multiple choice quizzes (15%) – average of your 2 best marks from 3 tests
Cost behaviour: Thursday 4th to Sunday 7th April (non-assessable practice test)
Product costing: Thursday 11th to Sunday 14th April
Activity-based costing: Thursday 2nd to Sunday 5th May
Budgeting 1: Thursday 16th to Sunday 19th May

• Group Assignment (25%)

Analysis of a real world organisation and development of a costing system. Completed in
groups of 3 or 4 students. All students in the group must be enrolled in the same tutorial.
Groups will be formed in Week 3 / Tutorial 2 (8th August). If you are unable to attend, you
must email your tutor before this tutorial. Details of the assignment task are available on
UTS Online under the Assignments tab.
Part 1 due: In-class Wednesday 17th April
Part 2 feedback (optional): In-class Wednesday 8th May
Complete assignment due: Email and TurnItIn Monday 27th May
(by 11:59am)

• Final exam (60%)

Held in the formal exam period at the end of the session.
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Other information

• Special consideration and missed assessments

• No alternate assessments for online multiple choice exams. Only the two best out of the three exams will
count towards your final grade.
• You can only sit the final exam once.
• If you sit the exam and are affected by illness, misadventure or other circumstances, you must submit a
special consideration form within two days of the exam. The circumstances will be taken into account when
awarding your final grade in the subject. For eligibility and submission process:
https://www.uts.edu.au/current-students/managing-your-course/classes-and-assessment/special-
circumstances/special
• If you face circumstances preventing you from sitting the final exam, supporting documentation must be
submitted with two days of the exam. For eligibility and submission process:
https://www.uts.edu.au/current-students/managing-your-course/classes-and-
assessment/exams/alternative-examinations

• Additional resources (see subject outline)

• Ongoing medical conditions - contact the academic liaison office in the first few weeks of semester
• Want to improve your English language and academic writing skills? Contact HELPS:
https://www.uts.edu.au/current-students/support/helps/about-helps
• Want additional tuition? Try the U:PASS program: https://www.uts.edu.au/current-
students/support/upass/upass
Textbook
Langfield-Smith, Thorne, Smith, & Hilton (2018) Management Accounting: Information
for Creating and Managing Value, 8th Edition, McGraw Hill
• Purchase the 8th Edition. The same textbook is used in the subject Management Decisions and Control.
• Purchase the version that includes Connect access. Connect provides online multiple choice tests for revision and
additional textbook resources.

1. All Digital Options

• (Connect or Connect Plus)
Make full use of Connect including eBook by following the instructions that follows
in this document. 15% discount code BTU2019SJ

http://connect.mheducation.com/class/g-pazmandy-2019-autumn

Connect (NO EBOOK) Price AU$ $42.95

Connect Plus (Connect and eBook) Price AU$ $74.95

2. Pack (Includes Connect)

https://www.mheducation.com.au/9781760423506-aus-value-pack-management-
accounting-connect-8e or www.mheducation.com.au search ISBN
9781760423506 ( 2yr license does not work with other websites)

Price AU$ 169.95

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McGraw Hill Connect
Connect is an online platform associated with the textbook. We have specially curated this
platform for Cost Management Systems.

For each topic there are a set of revision questions that include multiple choice,
algorithmically-derived exercises, and problems. Each topic also includes Smartbook – a
guided reading of each textbook chapter, with staged multiple choice questions that track
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Connect website: http://connect.mheducation.com/class/cms-2019-autumn

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Use the code included with your textbook to gain access. If you have a second hand version
of the textbook, you can purchase access by going to the Connect website, and near the
bottom of the webpage click on How to buy ACCESS ONLINE

17
Animated mini-series
Cost Management Systems is on YouTube! You can access the CMS channel here:

https://www.youtube.com/channel/UCRN2xyBIfao4E50-zoMxZpA

This animated mini-series follows Bob who is a student at UTS. For an introduction to Bob
and the subject of Cost Management Systems, check out the first video in the mini-series:

https://www.youtube.com/watch?v=hz3O_8SQg-A

Links will be provided to videos in the relevant lectures.

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Management vs. financial accounting

• Management accounting measures and reports financial and non-financial

information that assist managers in fulfilling the goals of the organisation.
This information is used for decision making by those internal to the
organisation.

• Financial accounting focuses on reporting to shareholders and regulatory

bodies and is guided by generally accepted accounting principles. This
information is used for decision making by those external to the
organisation.

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Management accounting systems (MAS)
Management accounting systems are tailored to the needs of an individual
organisation, however the following are common components of MAS:

• Cost accounting system

Used to estimate the costs of goods and services, activities, departments etc.

• Budgeting system
Used to estimate revenues and costs for organisational units

• Performance measurement system (PMS)

Monitors financial and non-financial (e.g. quality, environmental, innovation)
performance by tracking actual performance against budgeted targets

• Cost management system

Provides information to actively manage resources and increase organisational value

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The role of management accountants
The conventional role of the management accountant is to prepare
information for use by decision makers. Accounting is the main “quantitative”
form of information in a business used to plan, coordinate and evaluate the
diverse range of activities of an organisation is involved in.

In many firms the management accountant takes on a more contemporary role

as a business partner or specialist advisor to support decision making.

• Less involved in processing accounting transactions, more involved in

interpreting and advising on key decisions (e.g. restructuring, new business
opportunities)
• Involved in the development and implementation of strategy
• Require not only accounting skills but also business competency skills (e.g.
leadership, communication, problem solving)

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The role of management accountants

The most important use of accounting is to provide information that is

useful for decision making. But what are the decisions or purposes that
accounting information is useful for?

• Strategic planning
• Resource allocation and operational planning
• Control and coordination of activities
• Performance evaluation and compensation of employees
• Meeting external regulatory and legal reporting requirements.

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The role of management accountants
This diagram depicts the Strategy
control cycle.

Feedback is central to the

control cycle. It involves
examining past performance
to find ways to improve
future performance,
including:
Evaluation Planning
• Changing targets and goals
• Searching for new methods
of operating
• Revising predictions about
the future
• Adjusting the reward and
compensation system Coordination
• Attention directing & Monitoring
• Problem solving
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The role of management accountants
In 2004 Qantas introduced the low-cost airline Jetstar to compete with Virgin Blue.
In 2006 the operation of Australian Airlines is ceased.

Differentiation Cost Leader

Creating competitive advantage
through differentiation (e.g.
Strategy
innovation, product customisation,
intensive marketing) meaning you
can increase prices and margins.
Pursuing the lowest cost of
production. Requires efficient
processes and aggressive cost
management. Economies of scale
are usually employed.

Resources and Planning

New planes, staff, terminals, inventory (how much to stock per flight?)

Control
Increased focus on efficiency and minimal cost. Competing through cost means that margins
are small – cost information needs to be accurate!

Performance evaluation
Success of venture requires both financial (profit, return on investment) and non-financial
(safety, customer satisfaction, market share) outcomes to be met.
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Product costing
When costing “cost objects” a major consideration concerning costs is whether
the cost has a direct or indirect relationship to a particular cost object.

• Direct costs are those that are related and can be traced easily/economically to
the cost object. These costs are assigned to the cost object directly, based on
the measured quantity of the resources consumed.

• Indirect costs (also called overheads) are those that are related to a particular
cost object that cannot be traced easily/economically to the cost object. Indirect
costs are allocated to the cost object using a cost allocation method.

• Prime Costs includes all direct manufacturing costs (i.e. DL +DM)

• Conversion Costs comprise all manufacturing costs for transforming direct

materials into finished goods (i.e. MOH + DL)

• Period costs are non-product costs that are expensed in the period in which
they are incurred.

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Categorising costs
Whether a cost is categorised as direct or indirect depends on the cost object.

What costs are direct to the manufacturing plants, but indirect to the product, for a firm
that produces ice-creams?

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Product costing
In a normal costing system (using absorption costs), product costs are
comprised of actual direct costs and allocated indirect costs:

Direct Direct
Overhead Product Cost
Materials Labour

Actual costs incurred Estimated using pre-

determined rate

A common means of pricing is the cost-plus method:

Product Cost (1 + Markup %) Product Price

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MA in specific industries
There are three main industry sectors:

• Services

• Merchandising

• Manufacturing

We will be generally concerned with manufacturing companies in CMS, but you

need to understand the basics of all three.

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Costing systems – Service sector
Service sector companies provide services or intangible products to their customers – for
example, legal profession, accountants, banks, insurance companies etc.

These companies do not have any tangible products at the end of the accounting period.
Labour costs are typically the most significant cost category, often being as high as 70% of
total costs.

Work in Cost of
Overhead
Process Goods Sold

Indirect Direct

Labour

Although there exists WIP Inventory there is no inventory of Raw Materials and Finished
Goods in the service sector.

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Costing systems – Merchandising sector
Merchandising firms provide tangible products that they have previously purchased in
the same form from their suppliers (e.g. supermarkets). Merchandising and
manufacturing firms differ from service firms in their holding of inventory.

• Capitalised inventoriable costs include the purchase of goods held for resale (not sold
by the end of the accounting period), and the manufacturing costs associated with
the acquisition and conversion of raw materials into completed goods.

• Capitalised inventoriable costs become expenses and are included as part of COGS
when the inventory items are sold.

Cost of Expenses
Goods Sold (P&L)

Finished
Goods
Assets
Inventory
(Balance Sheet)

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Costing systems – Manufacturing sector
Manufacturing Sector Companies

The manufacturing sector differs from the merchandising sector in that the products sold to
customers are converted to a different form from that of the products purchased from
suppliers. Manufacturers typically have the following inventory (balance sheet) accounts:

1. Raw Materials (RM)

Materials used in the production process.

Opening RM + Purchases – Closing RM = RM Used

2. Work in Process (WIP)

Goods which have been partially completed in the production process.

Opening WIP + New Production – Closing WIP = Cost of Goods Manufactured (COGM)

3. Finished Goods (FG)

Goods that have been fully completed which have not been sold.

Opening FG + COGM – Closing FG = Cost of Goods Sold (COGS) (Expense on the P&L)

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Costing systems – Manufacturing sector
Resources Balance Sheet Profit & Loss

Materials Raw Materials

Revenue
Indirect Materials Direct Materials
─
Work in Finished Cost of
Overheads
Process Goods Goods Sold
=
Indirect Labour Direct Labour
Gross Profit
Labour ─
Period
Expenses
=

Profit

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Product cost questions
Question 1
Direct Material $20
Direct Labour $24
Factory Overhead $30
Selling price mark-up on cost 120% of manufacturing cost

Required
(a) Unit manufacturing cost
(b) Prime cost
(c) Conversion cost
(d) Selling price based on the cost-plus method

Question 2
Conversion costs amount to 60% of the unit manufacturing cost.
The unit manufacturing cost is $40.00
Direct Labour is equal to 40% of prime cost.

Required
Calculate the unit cost of direct materials, direct labour and factory overhead.
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Product cost questions
Workings – Question 1

Workings – Question 2

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Cost categorisation
Costs can also be categorised in terms of how they change in relation to an
activity (such as production). This is called cost behaviour.

Variable Costs:

Fixed Costs:

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Cost categorisation

Classify the following costs as variable or fixed:

Cost Categorisation

1. Oil consumed by sewing machines at Levi Strauss

2. Salary of the financial controller of clothing manufacturer R.M. Williams

3. Straight line depreciation of factory machine at Toyota

4. Grain costs incurred in manufacturing Sanitarium cereals

5. Printed circuit boards used in manufacturing Dell notebooks

6. Plant insurance costs of glass maker Pilkington

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Tutorial 1

The first tutorial (next week) will be conducted in computer labs.

Check your timetable carefully for the room that you are enrolled in.

To prepare complete the Tutorial 1 prep sheet in your subject outlines.

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Tutorial 1

We hope you enjoy CMS.

See you next week!

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