Management Accounting 3 Notes
MAN3086
Module
• (Accredited).
Lecturer:
Gavin Midgley
Textbook
Management & Cost Account
Colin Drury, 11th Edition
Exam Information:
Mid-Term:
• Weighting:
o 30%
• Duration:
o 50 Minutes.
• Type:
o In Person on Campus.
o 15 MCQs.
▪ Qualitative and Theoretical Questions.
• Content:
o Weeks 1-5.
Final Exam:
• Duration:
o 2 hours.
• Date:
o Week 13-15 (TBC)
• Weighting:
o 70%.
• Consists of:
o 3 Compulsory Scenario/ Case Study Questions.
o Questions both Quantitative and discursive. (25-40 Marks).
• Content:
o Weeks 1-11.
Week 1
Traditional & Activity-Based Costing
Cost Assignment: Traditional Methods
,What is Cost?
• In accounting, what is cost depends on the context of use; i.e., for what purpose do we
need to know the cost of ‘something’.
• Costs can be classified (collected into logical groups) in many ways. The particular
classification selected will depend upon the purpose for which the resulting analysed
data will be used.
• Examples:
Purpose Classification
Financial Accounts By Function- Cost of Sales, Distribution
Costs, Administrative Expenses
Cost Control By Element- Materials, Labour, Other
Expenses
Cost Accounts By Relationship to Cost Units- Direct,
Indirect
Budgeting, Decision Making By Behaviour- Fixed, Variable, or Relevant/
Irrelevant.
What are the Aims of Costing?
• Ascertaining of cost of each product, process, job, or service rendered.
• Establishing the selling price and profitability of each product, process, job, or service
rendered.
• Valuation of inventories.
• Provision of management information for planning, decision-making, control and
performance management.
Cost Assignment to Cost Objects
• A Cost Object is any activity for which a separate measurement of cost is desired, e.g.,
cost of a service, operating a department, etc…
• The costs associated to a cost object can be divided into direct and indirect costs.
,Direct and Indirect Costs
• Direct Costs:
o Can be traced in full to a product. They are specifically and exclusively identified
with a cost object.
• Indirect Costs (Overheads):
o Cannot be related in whole to any individual project or cost object, i.e., they
cannot be identified specifically and exclusively with the cost object.
Note: The distinction between direct and indirect costs depends on what is identified as the
cost object.
Note: It is often assumed that direct costs are variable while indirect costs are fixed. However,
this is not always the case, e.g., variable overheads or direct labour being paid a fixed salary
regardless of level of activity.
Product and Period Costs
• Product Costs:
o Are costs that are identified with goods purchased or produced for sale to
customers. They are included in inventory valuation if goods remain unsold.
Costs will include Direct Material, Direct Labour & manufacturing Overhead*
(Indirect Materials, Labour & Expenses).
• Period Costs:
o Are those costs that are not included for inventory valuation and are treated as
expenses in the period in which they are incurred. E.g., Rent of Sales office,
Marketing, Selling Costs, etc…
Note: Fixed Manufacturing Overhead is treated as period cost under marginal costing system.
Note: The sum of all direct costs is known as Prime Cost and the sum of direct labour and
manufacturing overheads is known as Conversion Cost.
Product and Period Costs under Absorption and Marginal (Variable) Costing Systems
• Marginal Costing is the accounting system in which variable costs are charged to cost
units and fixed costs of the period are written off in full against the aggregate
contribution.
• Absorption Costing is a method of building up a full product cost which adds direct costs
and a proportion of production overhead costs by means of one or a number of
overhead absorption rates (OAR).
, Two Stage Allocation Process for Fixed Manufacturing Overhead Under Absorption
(Traditional) Costing System
• Cost Centres are allocating places for costs before they are further analysed into cost
units.
o Examples include a machine, a department or a project.
• A Cost Unit is a unit of a product or service to which costs can be ascertained.
o E.g., guest per night in a hotel, patient episode in a hospital, etc…
Absorption Costing
Applying the Two-Stage Allocation Process Requires the Following Four Steps:
1. Assigning all manufacturing overheads to production and service cost centres.
2. Reallocating the costs assigned to service cost centres to production cost centres.
3. Computing separate overhead rates for each production cost centre.
4. Assigning cost centre overheads to products or other chosen cost objects.
The 3 A’s of Absorption Costing
1. Allocation- Whole cost assigned (allocated) to cost centres that they relate to.
2. Appointment- Where costs can relate to a number of cost centres, they are shared
(apportioned) using a suitable basis.
MAN3086
Module
• (Accredited).
Lecturer:
Gavin Midgley
Textbook
Management & Cost Account
Colin Drury, 11th Edition
Exam Information:
Mid-Term:
• Weighting:
o 30%
• Duration:
o 50 Minutes.
• Type:
o In Person on Campus.
o 15 MCQs.
▪ Qualitative and Theoretical Questions.
• Content:
o Weeks 1-5.
Final Exam:
• Duration:
o 2 hours.
• Date:
o Week 13-15 (TBC)
• Weighting:
o 70%.
• Consists of:
o 3 Compulsory Scenario/ Case Study Questions.
o Questions both Quantitative and discursive. (25-40 Marks).
• Content:
o Weeks 1-11.
Week 1
Traditional & Activity-Based Costing
Cost Assignment: Traditional Methods
,What is Cost?
• In accounting, what is cost depends on the context of use; i.e., for what purpose do we
need to know the cost of ‘something’.
• Costs can be classified (collected into logical groups) in many ways. The particular
classification selected will depend upon the purpose for which the resulting analysed
data will be used.
• Examples:
Purpose Classification
Financial Accounts By Function- Cost of Sales, Distribution
Costs, Administrative Expenses
Cost Control By Element- Materials, Labour, Other
Expenses
Cost Accounts By Relationship to Cost Units- Direct,
Indirect
Budgeting, Decision Making By Behaviour- Fixed, Variable, or Relevant/
Irrelevant.
What are the Aims of Costing?
• Ascertaining of cost of each product, process, job, or service rendered.
• Establishing the selling price and profitability of each product, process, job, or service
rendered.
• Valuation of inventories.
• Provision of management information for planning, decision-making, control and
performance management.
Cost Assignment to Cost Objects
• A Cost Object is any activity for which a separate measurement of cost is desired, e.g.,
cost of a service, operating a department, etc…
• The costs associated to a cost object can be divided into direct and indirect costs.
,Direct and Indirect Costs
• Direct Costs:
o Can be traced in full to a product. They are specifically and exclusively identified
with a cost object.
• Indirect Costs (Overheads):
o Cannot be related in whole to any individual project or cost object, i.e., they
cannot be identified specifically and exclusively with the cost object.
Note: The distinction between direct and indirect costs depends on what is identified as the
cost object.
Note: It is often assumed that direct costs are variable while indirect costs are fixed. However,
this is not always the case, e.g., variable overheads or direct labour being paid a fixed salary
regardless of level of activity.
Product and Period Costs
• Product Costs:
o Are costs that are identified with goods purchased or produced for sale to
customers. They are included in inventory valuation if goods remain unsold.
Costs will include Direct Material, Direct Labour & manufacturing Overhead*
(Indirect Materials, Labour & Expenses).
• Period Costs:
o Are those costs that are not included for inventory valuation and are treated as
expenses in the period in which they are incurred. E.g., Rent of Sales office,
Marketing, Selling Costs, etc…
Note: Fixed Manufacturing Overhead is treated as period cost under marginal costing system.
Note: The sum of all direct costs is known as Prime Cost and the sum of direct labour and
manufacturing overheads is known as Conversion Cost.
Product and Period Costs under Absorption and Marginal (Variable) Costing Systems
• Marginal Costing is the accounting system in which variable costs are charged to cost
units and fixed costs of the period are written off in full against the aggregate
contribution.
• Absorption Costing is a method of building up a full product cost which adds direct costs
and a proportion of production overhead costs by means of one or a number of
overhead absorption rates (OAR).
, Two Stage Allocation Process for Fixed Manufacturing Overhead Under Absorption
(Traditional) Costing System
• Cost Centres are allocating places for costs before they are further analysed into cost
units.
o Examples include a machine, a department or a project.
• A Cost Unit is a unit of a product or service to which costs can be ascertained.
o E.g., guest per night in a hotel, patient episode in a hospital, etc…
Absorption Costing
Applying the Two-Stage Allocation Process Requires the Following Four Steps:
1. Assigning all manufacturing overheads to production and service cost centres.
2. Reallocating the costs assigned to service cost centres to production cost centres.
3. Computing separate overhead rates for each production cost centre.
4. Assigning cost centre overheads to products or other chosen cost objects.
The 3 A’s of Absorption Costing
1. Allocation- Whole cost assigned (allocated) to cost centres that they relate to.
2. Appointment- Where costs can relate to a number of cost centres, they are shared
(apportioned) using a suitable basis.
