FINM6221 LU4
FINM6221 LU4 – Intro to Managerial
Accounting
4.1 Intro
Managerial accounting = The process of identifying, analyzing and measuring costs to
prepare internal financial reports, and thus enabling management to make decisions that are
aligned with the organization’s goals.
Managerial accounting doesn’t have to align with any standards like financial accounting.
4.2 Costing your product
The cost of your product is classified into 2 main categories:
1. Production (manufacturing) costs
2. Non-manufacturing costs (admin, selling and distribution)
4.2.1 Production (manufacturing) costs
Expenses occurred by a business when materials are converted into completed goods for
resale.
Can be:
- Direct costs
o Costs that are directly traceable to a cost object – wood used to make a table
- Indirect costs
o Costs that cannot be directly traced to a specific cost object – salaries of
factory cleaners
Manufacturing costs consist of 3 elements:
1. Direct material – direct cost
2. Direct Labour – direct cost
3. Manufacturing overheads – indirect cost
Direct Costs
Direct Costs = material that can be traced directly to the finished product.
- Variable cost – increases in units = increase in direct costs
- The cost of direct materials excludes the cost of small qtys of materials that can’t be
clearly identified in the final product – indirect materials – these form part of
manufacturing overheads.
Direct labour = cost incurred to remunerate workers who are directly involved in the
manufacturing process.
- Variable cost
- Cost of direct labour doesn’t include the cost of indirect workers (supervisors,
cleaning teams, managers), this is known as indirect labour and will form part of
manufacturing overheads.
, FINM6221 LU4
Indirect costs
Manufacturing overheads = term used to describe all the other manufacturing costs incurred
while producing the finished product.
- Admin, marketing and distribution should be excluded from this category!
Examples of manufacturing overheads:
Cost Description
Labour not directly involved in production. Includes pay for
supervision, cleaning of the factory (not admin areas),
Indirect labour
factory security (not admin building), and other staff who
don’t handle the product but work in the factory.
Materials used in production but not part of the final
Indirect materials product. Includes glue, lubricants, small nuts and bolts,
polish, etc., which can’t be traced to a specific unit.
Rent paid Rent for the factory, not the admin building.
Maintenance of machinery Maintenance of machines and equipment used in
and equipment production.
Depreciation of factory Cost of wear and tear on factory equipment (not admin
equipment equipment).
Insurance Insurance on the factory plant and its equipment.
Costs to check if products (like plastic bags) are properly
Quality control costs
sealed after being made.
Water and electricity Costs for water and electricity used during manufacturing.
Some manufacturing overheads costs are fixed in nature (rental / insurance) others are
variable in nature
4.2.2 Non-production (non-manufacturing) costs
Subclassified into 2 categories:
1. Administrative costs
o Costs associated with general management of org
2. Marketing, distribution and selling costs
o Costs necessary to ensure customer orders and that the product gets to the
customers
FINM6221 LU4 – Intro to Managerial
Accounting
4.1 Intro
Managerial accounting = The process of identifying, analyzing and measuring costs to
prepare internal financial reports, and thus enabling management to make decisions that are
aligned with the organization’s goals.
Managerial accounting doesn’t have to align with any standards like financial accounting.
4.2 Costing your product
The cost of your product is classified into 2 main categories:
1. Production (manufacturing) costs
2. Non-manufacturing costs (admin, selling and distribution)
4.2.1 Production (manufacturing) costs
Expenses occurred by a business when materials are converted into completed goods for
resale.
Can be:
- Direct costs
o Costs that are directly traceable to a cost object – wood used to make a table
- Indirect costs
o Costs that cannot be directly traced to a specific cost object – salaries of
factory cleaners
Manufacturing costs consist of 3 elements:
1. Direct material – direct cost
2. Direct Labour – direct cost
3. Manufacturing overheads – indirect cost
Direct Costs
Direct Costs = material that can be traced directly to the finished product.
- Variable cost – increases in units = increase in direct costs
- The cost of direct materials excludes the cost of small qtys of materials that can’t be
clearly identified in the final product – indirect materials – these form part of
manufacturing overheads.
Direct labour = cost incurred to remunerate workers who are directly involved in the
manufacturing process.
- Variable cost
- Cost of direct labour doesn’t include the cost of indirect workers (supervisors,
cleaning teams, managers), this is known as indirect labour and will form part of
manufacturing overheads.
, FINM6221 LU4
Indirect costs
Manufacturing overheads = term used to describe all the other manufacturing costs incurred
while producing the finished product.
- Admin, marketing and distribution should be excluded from this category!
Examples of manufacturing overheads:
Cost Description
Labour not directly involved in production. Includes pay for
supervision, cleaning of the factory (not admin areas),
Indirect labour
factory security (not admin building), and other staff who
don’t handle the product but work in the factory.
Materials used in production but not part of the final
Indirect materials product. Includes glue, lubricants, small nuts and bolts,
polish, etc., which can’t be traced to a specific unit.
Rent paid Rent for the factory, not the admin building.
Maintenance of machinery Maintenance of machines and equipment used in
and equipment production.
Depreciation of factory Cost of wear and tear on factory equipment (not admin
equipment equipment).
Insurance Insurance on the factory plant and its equipment.
Costs to check if products (like plastic bags) are properly
Quality control costs
sealed after being made.
Water and electricity Costs for water and electricity used during manufacturing.
Some manufacturing overheads costs are fixed in nature (rental / insurance) others are
variable in nature
4.2.2 Non-production (non-manufacturing) costs
Subclassified into 2 categories:
1. Administrative costs
o Costs associated with general management of org
2. Marketing, distribution and selling costs
o Costs necessary to ensure customer orders and that the product gets to the
customers
