Management Information
Chapter 1: The fundamentals of costing:
Management Information: information prepared to assist management with planning,
decision making and control. Includes financial, non-financial, current and historical data.
Management Accounting: identification, generation, presentation, interpretation and
use of the relevant information to prepare accounts and schedules. This is for planning and
control.
Cost Accounting: production of cost information to assist management.
Cost Object: anything for which we are trying to determine the cost (item, object, service,
person)
An operating theatre in a hospital or a branch of a bank
Cost Centre: a department, process or function where costs can be accumulated. Functions
or locations for which costs are ascertained and related to cost units for control purposes
Cost Element: assets, materials, all used in production (wood, glue, labour etc)
Cost Unit: a unit of the product/service which has costs attached (student, audit of a client,
cost of making a widget)
Composite cost unit: cost unit which is made up of 2 parts (usually a service).
Cost of a customer at a hotel per day (since the cost is made up of the accommodation, food
and services within the hotel).
Direct costs: these can be traced in full to a department/product/service.
If a company pays a fee per unit (as a royalty) to the designer of a product which it
manufactures and sells – this is a direct cost (directly attributable to the product)
Direct Materials: cost of materials used to make and a sell a cost unit.
Direct labour: cost of labour to make a unit (i.e, carpenters fees)
Direct expenses: costs incurred in full as a direct consequence of making the product (i.e,
license fee).
The sum of the direct costs is known as the prime cost. Always remember that the prime
cost does not include any overheads (even production overheads)
Indirect costs (overheads): cannot be traced directly in full to a cost unit (i.e, a
supervisors salary, depreciation of factory building, insurance).
Production overheads: Includes indirect materials, labour and expenses. These can be
included in the value of inventory
Other (non production) overheads: these cannot be included in the value of inventory
Admin Overheads: FD salary, depreciation of office computers
Selling overheads: Sales rep commissions, light in showrooms
Distribution overheads: packaging and delivery costs
,Note: If only a tiny insignificant amount of a material is used (i.e, a smear of oil), this
would classify as an indirect cost instead of a direct cost.
If the member of staff is working overtime, this is also an indirect cost due to a heavy
workload. Only the overtime aspect is an indirect cost (i.e, paid time and a half for 8hours
– 8 hours at regular time is a direct cost and the remaining 8hrs at half rate is an indirect
cost)
Idle time payment is also indirect since it is not directly traced to a service or unit.
Overtime/idle time payment to a production line worker would be a factory overhead.
Product cost: any costs incurred in the manufacture of goods/services. These are included
in the cost of sales expense.
Include direct production costs (direct materials, labour and expenses) and production
overheads.
Includes: salary of a factory supervisor, depreciation of plant and machinery, electricity for
the factory.
Period costs: deducted as an expense and not included in inventory valuation. Includes:
salary of a salesman/accountant since not involved in the production.
Fixed costs: remain constant in total over a range of activity levels. Therefore, horizontal
graph.
However, fixed cost per unit decreases since the cost is now spread over a greater production
of units. Therefore, downwards sloping graph.
D = fixed costs
The upwards sloping line = total costs.
,Variable costs: these change in total as the level of activity changes. Therefore, the graph is
upwards sloping. This intercepts the y axis at 0.
However, the variable cost per unit remains constant so is a horizontal graph.
Semi variable costs/mixed costs/semi fixed: these have a fixed and a variable element
so is partially affected by changes in activity.
For example, the telephone line bill: this has a fixed monthly line rental and a price per
minute of calls.
The graph is upwards sloping (like with a variable cost graph). However, the y intercept is
not at zero (as it is with a variable cost graph).
Stepped fixed costs: costs are constant within the relevant range for each activity level but
when a critical activity level is reached, the total costs incurred increase to the next step.
Responsibility accounting: system ensuring that responsibility for all activities of the
business can be assigned – helps to monitor and assess performance.
Responsibility centres: department/function/process/division whose performance is the
responsibility of a specific manager.
Controllable costs: Costs can be influenced/changed by managers decisions.
Uncontrollable costs: cannot be changed or influenced by a managers decision.
VCs are usually controllable in the short term. Most FC are usually uncontrollable in the
short term but controllable in the long term.
, Chapter 2: Inventory Valuation
Inventory valuation is important for: financial reporting and costing.
FIFO Basis: Assumes that materials are issued out of inventory in the order in which they
are delivered (particularly useful for businesses dealing with fresh products).
+ Logical – reflects the likely flow
+ Easily understood
+ Inventory is valued at up to date prices
+ Acceptable to HMRC (IAS2)
- Slow and complicated to calculate so inefficient
- When prices are rising (inflation) profits are high due to lagging issue prices
- Cost comparison between jobs is difficult.
- Decision making can be difficult because of the variations in price
LIFO Basis: assumes that the materials are issued out of inventory in the reverse order to
which they were delivered. This is only appropriate to a few businesses.
A coal merchant would use LIFO since the coal is stored in a large bin so the items that will
be used most recently will be the coal that has been added most recently.
+ Issue prices are up to date
+ In times of rising prices, reported profits are lower.
+ Managers are aware of costs
- Rarely reflects the physical use/flow of inventory
- Cumbersome (complicated and slow and therefore inefficient)
- Not usually acceptable to HMRC per IAS2
- Inventory values are out of date
- Cost comparison between jobs is difficult
- Decision making can be difficult because of the variations in price
Cumulative Weighted Average: values all issues and inventory at an average price.
Price is recalculated after each receipt.
Average price = running total of costs/running total of units
This is appropriate for businesses such as oil merchants where deliverables are fully mixed
with existing inventory.
+ Acceptable to HMRC as per IAS2
+ Logical since all units have the same value
+ Fluctuations in prices are smoothed out
- Issue prices and inventory values may not be an actual purchase price
- Issue prices and inventory may lag behind the actual prices/value
Periodic Weighted Average: values each issue at the same average price which is based
on all purchases for the period.
Periodic weighted average price = total costs for the period/total units purchased for the
period.
Closing Inventory = average price x number of units in closing inventory
Chapter 1: The fundamentals of costing:
Management Information: information prepared to assist management with planning,
decision making and control. Includes financial, non-financial, current and historical data.
Management Accounting: identification, generation, presentation, interpretation and
use of the relevant information to prepare accounts and schedules. This is for planning and
control.
Cost Accounting: production of cost information to assist management.
Cost Object: anything for which we are trying to determine the cost (item, object, service,
person)
An operating theatre in a hospital or a branch of a bank
Cost Centre: a department, process or function where costs can be accumulated. Functions
or locations for which costs are ascertained and related to cost units for control purposes
Cost Element: assets, materials, all used in production (wood, glue, labour etc)
Cost Unit: a unit of the product/service which has costs attached (student, audit of a client,
cost of making a widget)
Composite cost unit: cost unit which is made up of 2 parts (usually a service).
Cost of a customer at a hotel per day (since the cost is made up of the accommodation, food
and services within the hotel).
Direct costs: these can be traced in full to a department/product/service.
If a company pays a fee per unit (as a royalty) to the designer of a product which it
manufactures and sells – this is a direct cost (directly attributable to the product)
Direct Materials: cost of materials used to make and a sell a cost unit.
Direct labour: cost of labour to make a unit (i.e, carpenters fees)
Direct expenses: costs incurred in full as a direct consequence of making the product (i.e,
license fee).
The sum of the direct costs is known as the prime cost. Always remember that the prime
cost does not include any overheads (even production overheads)
Indirect costs (overheads): cannot be traced directly in full to a cost unit (i.e, a
supervisors salary, depreciation of factory building, insurance).
Production overheads: Includes indirect materials, labour and expenses. These can be
included in the value of inventory
Other (non production) overheads: these cannot be included in the value of inventory
Admin Overheads: FD salary, depreciation of office computers
Selling overheads: Sales rep commissions, light in showrooms
Distribution overheads: packaging and delivery costs
,Note: If only a tiny insignificant amount of a material is used (i.e, a smear of oil), this
would classify as an indirect cost instead of a direct cost.
If the member of staff is working overtime, this is also an indirect cost due to a heavy
workload. Only the overtime aspect is an indirect cost (i.e, paid time and a half for 8hours
– 8 hours at regular time is a direct cost and the remaining 8hrs at half rate is an indirect
cost)
Idle time payment is also indirect since it is not directly traced to a service or unit.
Overtime/idle time payment to a production line worker would be a factory overhead.
Product cost: any costs incurred in the manufacture of goods/services. These are included
in the cost of sales expense.
Include direct production costs (direct materials, labour and expenses) and production
overheads.
Includes: salary of a factory supervisor, depreciation of plant and machinery, electricity for
the factory.
Period costs: deducted as an expense and not included in inventory valuation. Includes:
salary of a salesman/accountant since not involved in the production.
Fixed costs: remain constant in total over a range of activity levels. Therefore, horizontal
graph.
However, fixed cost per unit decreases since the cost is now spread over a greater production
of units. Therefore, downwards sloping graph.
D = fixed costs
The upwards sloping line = total costs.
,Variable costs: these change in total as the level of activity changes. Therefore, the graph is
upwards sloping. This intercepts the y axis at 0.
However, the variable cost per unit remains constant so is a horizontal graph.
Semi variable costs/mixed costs/semi fixed: these have a fixed and a variable element
so is partially affected by changes in activity.
For example, the telephone line bill: this has a fixed monthly line rental and a price per
minute of calls.
The graph is upwards sloping (like with a variable cost graph). However, the y intercept is
not at zero (as it is with a variable cost graph).
Stepped fixed costs: costs are constant within the relevant range for each activity level but
when a critical activity level is reached, the total costs incurred increase to the next step.
Responsibility accounting: system ensuring that responsibility for all activities of the
business can be assigned – helps to monitor and assess performance.
Responsibility centres: department/function/process/division whose performance is the
responsibility of a specific manager.
Controllable costs: Costs can be influenced/changed by managers decisions.
Uncontrollable costs: cannot be changed or influenced by a managers decision.
VCs are usually controllable in the short term. Most FC are usually uncontrollable in the
short term but controllable in the long term.
, Chapter 2: Inventory Valuation
Inventory valuation is important for: financial reporting and costing.
FIFO Basis: Assumes that materials are issued out of inventory in the order in which they
are delivered (particularly useful for businesses dealing with fresh products).
+ Logical – reflects the likely flow
+ Easily understood
+ Inventory is valued at up to date prices
+ Acceptable to HMRC (IAS2)
- Slow and complicated to calculate so inefficient
- When prices are rising (inflation) profits are high due to lagging issue prices
- Cost comparison between jobs is difficult.
- Decision making can be difficult because of the variations in price
LIFO Basis: assumes that the materials are issued out of inventory in the reverse order to
which they were delivered. This is only appropriate to a few businesses.
A coal merchant would use LIFO since the coal is stored in a large bin so the items that will
be used most recently will be the coal that has been added most recently.
+ Issue prices are up to date
+ In times of rising prices, reported profits are lower.
+ Managers are aware of costs
- Rarely reflects the physical use/flow of inventory
- Cumbersome (complicated and slow and therefore inefficient)
- Not usually acceptable to HMRC per IAS2
- Inventory values are out of date
- Cost comparison between jobs is difficult
- Decision making can be difficult because of the variations in price
Cumulative Weighted Average: values all issues and inventory at an average price.
Price is recalculated after each receipt.
Average price = running total of costs/running total of units
This is appropriate for businesses such as oil merchants where deliverables are fully mixed
with existing inventory.
+ Acceptable to HMRC as per IAS2
+ Logical since all units have the same value
+ Fluctuations in prices are smoothed out
- Issue prices and inventory values may not be an actual purchase price
- Issue prices and inventory may lag behind the actual prices/value
Periodic Weighted Average: values each issue at the same average price which is based
on all purchases for the period.
Periodic weighted average price = total costs for the period/total units purchased for the
period.
Closing Inventory = average price x number of units in closing inventory
