Management Accounting Midterm
Financial accounting is all about standardization, objectivity, reliability, accuracy and verifiability.
How are management accounting and financial accounting different from each other?
They serve different purposes for different users and therefore they need different qualities to serve
them properly
A cost object is any output or goal for which resources were consumed and for which decision-
makers desire a separate estimation of costs.
Purpose of costing Estimating the value of specific goals
When comparing the cost of achieving different goals we should use the smallest possible cost of
achieving each goal, this has to do with process optimization.
Process = the sequence of tasks and activities consuming resources (inputs like materials, labour,
equipment) to produce an out put (e.g. a product or service).
output
Efficiency=
input
By revealing for what goals resources are concretely consumed, managers are given both direction
and motivation for process optimization.
Asset valuation = consists in estimating the value of an asset (e.g. receivable, inventory, piece of
equipment, etc.)
How to identify a cost?
, - Does it change the value of the assets of the company in the current period?
- Will it eventually impact equity?
- Does it impact the income statement?
The timing of resource consumption matters (change in wealth)
The timing of the payment does not matter (change in cash)
Always ask yourself, is there a change in cash or in wealth???
If the cash flow happens before resource consumption, the expense is deferred.
If the cash flow happens after resource consumption, the expense is accrued.
Not Costs:
- Payments in advance for services (The resource will be consumed in the next period)
- Late payments for services (resources have already been consumed)
- Purchases and investments (does not reduce wealth, only trades assets for another)
- Reimbursements and dividends (these did not belong to the company)
- Negative externalities (wealth destroyed does not destroy wealth of the company)
(1) Indicate whether the following are transaction costs in the current period (given the
perspective of financial accounting) does not mean you have to answer differently, you
can ignore
- Purchase of equipment NO
- Depreciation of equipment YES
- Transformation of raw materials YES
- Income taxes accrued in the current period YES
Different types of costs:
, (1) Manufacturing costs = Anything to do with creating a product (resources)
First is goes to Inventory
Once they are sold it goes to Cost of good sold
a. Indirect Production costs that cannot be directly associated with the produced unit
(maintenance of machinery) (Example: Machine that makes cupcakes and bread,
maintenance cant be connected to one of these, but to both)
b. Direct Production costs that can be directly associated with the produced unit (Raw
materials) (example: the egg and the flour used to make a cake)
Determining if a cost is inventoriable: Only manufacturing costs can be inventoriable,
given that they are related to resources used to make products (Can they be placed in
inventory?)
Determining if a cost is traceable: Only for manufacturing costs, whether it it indirectly or
directly related to the production of a product (is it directly traceable to the product?)
(2) Period costs = Resources used for anything other than to make products (cannot be placed
in the inventory account)
a. Upstream period costs = Cost incurred to prepare for production (example: preparing for
production or for designing products
b. Downstream period costs (also known as SG&A, selling general and administrative costs) =
Costs incurred at the same time or after the production process (example: advertising, sale
and delivery of products and general management costs.
Period or Is it traceable? Is it inventoriable?
manufacturing?
Rent for the factory Manufacturing Indirect Inventoriable
building (anything to do with
producing products)
Wages for employees Manufacturing Direct Inventoriable
working on the
production line
Advertising campaign Downstream period - Non-inventoriable
cost
Financial accounting is all about standardization, objectivity, reliability, accuracy and verifiability.
How are management accounting and financial accounting different from each other?
They serve different purposes for different users and therefore they need different qualities to serve
them properly
A cost object is any output or goal for which resources were consumed and for which decision-
makers desire a separate estimation of costs.
Purpose of costing Estimating the value of specific goals
When comparing the cost of achieving different goals we should use the smallest possible cost of
achieving each goal, this has to do with process optimization.
Process = the sequence of tasks and activities consuming resources (inputs like materials, labour,
equipment) to produce an out put (e.g. a product or service).
output
Efficiency=
input
By revealing for what goals resources are concretely consumed, managers are given both direction
and motivation for process optimization.
Asset valuation = consists in estimating the value of an asset (e.g. receivable, inventory, piece of
equipment, etc.)
How to identify a cost?
, - Does it change the value of the assets of the company in the current period?
- Will it eventually impact equity?
- Does it impact the income statement?
The timing of resource consumption matters (change in wealth)
The timing of the payment does not matter (change in cash)
Always ask yourself, is there a change in cash or in wealth???
If the cash flow happens before resource consumption, the expense is deferred.
If the cash flow happens after resource consumption, the expense is accrued.
Not Costs:
- Payments in advance for services (The resource will be consumed in the next period)
- Late payments for services (resources have already been consumed)
- Purchases and investments (does not reduce wealth, only trades assets for another)
- Reimbursements and dividends (these did not belong to the company)
- Negative externalities (wealth destroyed does not destroy wealth of the company)
(1) Indicate whether the following are transaction costs in the current period (given the
perspective of financial accounting) does not mean you have to answer differently, you
can ignore
- Purchase of equipment NO
- Depreciation of equipment YES
- Transformation of raw materials YES
- Income taxes accrued in the current period YES
Different types of costs:
, (1) Manufacturing costs = Anything to do with creating a product (resources)
First is goes to Inventory
Once they are sold it goes to Cost of good sold
a. Indirect Production costs that cannot be directly associated with the produced unit
(maintenance of machinery) (Example: Machine that makes cupcakes and bread,
maintenance cant be connected to one of these, but to both)
b. Direct Production costs that can be directly associated with the produced unit (Raw
materials) (example: the egg and the flour used to make a cake)
Determining if a cost is inventoriable: Only manufacturing costs can be inventoriable,
given that they are related to resources used to make products (Can they be placed in
inventory?)
Determining if a cost is traceable: Only for manufacturing costs, whether it it indirectly or
directly related to the production of a product (is it directly traceable to the product?)
(2) Period costs = Resources used for anything other than to make products (cannot be placed
in the inventory account)
a. Upstream period costs = Cost incurred to prepare for production (example: preparing for
production or for designing products
b. Downstream period costs (also known as SG&A, selling general and administrative costs) =
Costs incurred at the same time or after the production process (example: advertising, sale
and delivery of products and general management costs.
Period or Is it traceable? Is it inventoriable?
manufacturing?
Rent for the factory Manufacturing Indirect Inventoriable
building (anything to do with
producing products)
Wages for employees Manufacturing Direct Inventoriable
working on the
production line
Advertising campaign Downstream period - Non-inventoriable
cost
