Lecture 1 costs
woensdag 3 februari 2021
13:15
What is Managerial Accounting?
MA is concerned with providing information for internal use: to help managers in their decision
making, for the control of business activities, MA information is only used by the firm's management
and is rarely given to anyone outside the company.
- see Schmidgall p15 and Gowthorpe chap 10 (on Teams)(always a question in the exam about this!!)
Costs
'Costs' is the money, time and resources associated with a purchase or activity. Usually for the
ultimate purpose of increasing revenues.
They are many different costs incurred in the running of a business
E.g. cleaning & gardening materials & equipment; electricity, oil & gas; wages of bar
staff, cleaners & gardeners;
Salaries of accountants, marketing, HR;
Rent / mortgage; verhicles; Depreciation etc etc
Direct & indirect costs
Direct costs: can be directly traced to a specific operation, e.g. hospitals will have FB, cleaning stuff,
laundry, etc costs traceable to each department --> usually appear in 'Costs of sales' in P&L
Indirect costs: but other stuff not so easy, e.g. Admnistration, Property Maintenance, Utilities,
Insurance, Depreciation; Marketing / HR / Strategic Planning costs in HQ attributable to Compass,
Breda or Sodexo, Netherlands. Tend to appear in 'Operating expenses'. Often called Overheads
Fixed & Variable Costs
FC: Stay the same in the short-run, even if sales / business activity changes (e.g. salaries (not wages),
Rent, Insurance, Interest of Loans)
VC: These costs change as sales change (e.g. cost of food, beer, cleaning materials, packaging,
electricity, part-time staff etc)
Be aware!! FC are variable & VC are fixed!
Step costs
These stay the same within a range of sales, but eventually rise, when activity increases above a
certain level
E.g. wages costs if employ more staff, supervisors' salaries if in charge of 30 rather than
10 subordinates. E.g. rent / mortgage / property taxes if build annex
Semi-variable, or Mixed costs
Thee have an element of both fixed and variable costs. E.g. phone has fixed line rental plus charge for
calls; verhicles have road tax + insurance, but variable fuel & maintenance costs
Marginal costs (MC)
These are the same as variable costs with on subtle difference: they tell us by how much costs have
risen if one extra unit is produced add by how much costs have fallen if one less unit is produced.
,Contribution
This determines how much if any, units sold contribute towards paying Fixed Costs or to making a
profit
Euros
Sales A
Minus Variable cost B
Equals Contribution A-B
Minus Fixed Costs C
Equals Profit (A-B)-C
, Lecture 2 Absorption costing
dinsdag 16 februari 2021
20:40
What is it?
Absorption costing is the process of allocating costs (variable and fixed) to the appropriate
department.
Also known (in Schmidgall) as Allocation of Overheads
Get this wrong and a lot of people are left dissatisfied
(Fixed, Overhead, Indirect are the same; Variable, COGS or COS, Direct are the same)
Equity Theory Monkeys and Grapes movie in the slides!!
Full, or Absorption Costing
So how are these Overheads, or Indirect Costs allocated to the proper departments?
Proper allocation enables an organization to see how well or badly each department is
performing.
Problem is to select the correct method of allocation
Example 1
Assume 2 department, Dining Room & Snack Bar. If we amalgamate (=put them all
together) the figures we get:
Dining room Snack bar Total
Sales Rev 105,000 45,000 150,000
Direct costs (75,000) (39,000) (114,000)
Contribution 30,000 6,000 36,000
Overhead Costs (24,000)
Operating Profit 12,000
You try these
1. Use percentage sales as a way of allocating overheads. Does this mean the Snack Bar is a liability?
ANSWER: Total sales are 150,000, dining room sales are 105,000 and snack bar sales are 45,000 -->
105/150=0,7; so 70% dining room and snack bar 30% --> dining room 16,800 and snack bar 7,200 and
operating profit dining room is 13,200 and snack bar is -1,200 --> which means a loss!! (so it is a
liability)
2. Use labour per department. Assume the Dining Room has 8 FTE's and the Snack Bar has 2.
24000/10=2400 8x2400=19200 for the dining room and 2x2400=4800 for the snack bar.
Operating profit = 10800 for the dining room and 1200 for the snack bar.
ANSWER: check answer above, it is correct.
3. Use floor space. Assume the Dining room is 950 m2 and the Snack Bar is 50 m2.
24000/1000=24; 950x24=22.800 for the dining room and 24x50=1.200 for the snack bar. Operating
profit is 7200 for the dining room and 4800 for the snack bar.
ANSWER: check anwer above, it is correct.
Answer to cutting your losses 1
If the company rent out the snack bar for 2,000 per month
As you can see the Operating Profits actually fall
woensdag 3 februari 2021
13:15
What is Managerial Accounting?
MA is concerned with providing information for internal use: to help managers in their decision
making, for the control of business activities, MA information is only used by the firm's management
and is rarely given to anyone outside the company.
- see Schmidgall p15 and Gowthorpe chap 10 (on Teams)(always a question in the exam about this!!)
Costs
'Costs' is the money, time and resources associated with a purchase or activity. Usually for the
ultimate purpose of increasing revenues.
They are many different costs incurred in the running of a business
E.g. cleaning & gardening materials & equipment; electricity, oil & gas; wages of bar
staff, cleaners & gardeners;
Salaries of accountants, marketing, HR;
Rent / mortgage; verhicles; Depreciation etc etc
Direct & indirect costs
Direct costs: can be directly traced to a specific operation, e.g. hospitals will have FB, cleaning stuff,
laundry, etc costs traceable to each department --> usually appear in 'Costs of sales' in P&L
Indirect costs: but other stuff not so easy, e.g. Admnistration, Property Maintenance, Utilities,
Insurance, Depreciation; Marketing / HR / Strategic Planning costs in HQ attributable to Compass,
Breda or Sodexo, Netherlands. Tend to appear in 'Operating expenses'. Often called Overheads
Fixed & Variable Costs
FC: Stay the same in the short-run, even if sales / business activity changes (e.g. salaries (not wages),
Rent, Insurance, Interest of Loans)
VC: These costs change as sales change (e.g. cost of food, beer, cleaning materials, packaging,
electricity, part-time staff etc)
Be aware!! FC are variable & VC are fixed!
Step costs
These stay the same within a range of sales, but eventually rise, when activity increases above a
certain level
E.g. wages costs if employ more staff, supervisors' salaries if in charge of 30 rather than
10 subordinates. E.g. rent / mortgage / property taxes if build annex
Semi-variable, or Mixed costs
Thee have an element of both fixed and variable costs. E.g. phone has fixed line rental plus charge for
calls; verhicles have road tax + insurance, but variable fuel & maintenance costs
Marginal costs (MC)
These are the same as variable costs with on subtle difference: they tell us by how much costs have
risen if one extra unit is produced add by how much costs have fallen if one less unit is produced.
,Contribution
This determines how much if any, units sold contribute towards paying Fixed Costs or to making a
profit
Euros
Sales A
Minus Variable cost B
Equals Contribution A-B
Minus Fixed Costs C
Equals Profit (A-B)-C
, Lecture 2 Absorption costing
dinsdag 16 februari 2021
20:40
What is it?
Absorption costing is the process of allocating costs (variable and fixed) to the appropriate
department.
Also known (in Schmidgall) as Allocation of Overheads
Get this wrong and a lot of people are left dissatisfied
(Fixed, Overhead, Indirect are the same; Variable, COGS or COS, Direct are the same)
Equity Theory Monkeys and Grapes movie in the slides!!
Full, or Absorption Costing
So how are these Overheads, or Indirect Costs allocated to the proper departments?
Proper allocation enables an organization to see how well or badly each department is
performing.
Problem is to select the correct method of allocation
Example 1
Assume 2 department, Dining Room & Snack Bar. If we amalgamate (=put them all
together) the figures we get:
Dining room Snack bar Total
Sales Rev 105,000 45,000 150,000
Direct costs (75,000) (39,000) (114,000)
Contribution 30,000 6,000 36,000
Overhead Costs (24,000)
Operating Profit 12,000
You try these
1. Use percentage sales as a way of allocating overheads. Does this mean the Snack Bar is a liability?
ANSWER: Total sales are 150,000, dining room sales are 105,000 and snack bar sales are 45,000 -->
105/150=0,7; so 70% dining room and snack bar 30% --> dining room 16,800 and snack bar 7,200 and
operating profit dining room is 13,200 and snack bar is -1,200 --> which means a loss!! (so it is a
liability)
2. Use labour per department. Assume the Dining Room has 8 FTE's and the Snack Bar has 2.
24000/10=2400 8x2400=19200 for the dining room and 2x2400=4800 for the snack bar.
Operating profit = 10800 for the dining room and 1200 for the snack bar.
ANSWER: check answer above, it is correct.
3. Use floor space. Assume the Dining room is 950 m2 and the Snack Bar is 50 m2.
24000/1000=24; 950x24=22.800 for the dining room and 24x50=1.200 for the snack bar. Operating
profit is 7200 for the dining room and 4800 for the snack bar.
ANSWER: check anwer above, it is correct.
Answer to cutting your losses 1
If the company rent out the snack bar for 2,000 per month
As you can see the Operating Profits actually fall
