Summary Principles of Management Accounting - PART 1: VALUING INVENTORIES USING BASIC TECHNIQUES

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MAC2601
PRINCIPLES OF MANAGEMENT ACCOUNTING

PART 1: VALUING INVENTORIES USING BASIC TECHNIQUES

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, CONTENTS

INTRODUCTION AND OVERVIEW ix

PART 1: VALUING INVENTORIES USING BASIC TECHNIQUES 1
Topic 1 – Nature and behaviour of costs 3

Study unit 1: Cost objects, classification and behaviour 5
1 Introduction 5
2 Cost objects and traceability 5
3 Classification of costs according to their nature or origin 7
4 Further classification of manufacturing costs according to
its components 8
5 Classification of costs according to cost behaviour 10
6 A closer look at relevant range and specific time frame 15
7 Classification of cost as product or period cost 16
8 Summary 17
Self-assessment Activity 17

Study unit 2: Estimation techniques and the linear equation 20
1 Introduction 20
2 The linear equation 20
3 The high-low method 21
4 The scatter diagram 22
5 Simple regression analysis (least squares method) 23
6 Summary 27
Self-assessment Activity 28

Study unit 3: Cost-volume-profit analysis 32
1 Introduction 32
2 What is the cost-volume-profit analysis? 32
3 Assumptions of the cost-volume-profit analysis 33
4 Contribution 33
5 Breakeven analysis 37
6 The effects of price and cost changes on the breakeven point 39
7 Margin of safety 42
8 Target profit analysis 43
9 Breakeven graph 45
10 Summary 46
Self-assessment Activity 46




iii . . . . . C. o.n.t .e n.t .s

,Topic 2 – Accounting for material, labour and overheads 59
Study unit 4: Material 61
1 Introduction 61
2 Material recording procedures 62
3 Accounting entries 63
4 Inventory planning and control 65
5 Summary 72
Self-assessment Activity 72

Study unit 5: Labour 76
1 Introduction 76
2 Labour cost control 76
3 Payroll accounting 79
4 Accounting entries in respect of labour remuneration 87
5 Labour recovery rate 90
6 Summary 94
Self-assessment Activity 94

Study unit 6: Overheads 98
1 Introduction 98
2 Why do manufacturing overheads present a problem? 98
3 Budgeted, applied and actual manufacturing overheads 101
4 Accounting entries in respect of manufacturing overheads 103
5 Multiple range of products: expanding on the overhead
concepts to date 105
6 Multiple range of products: departmentalisation/allocation of
overheads 115
7 Summary 125
Self-assessment Activity 125
Comprehensive Self-assessment Activity 131

Topic 3 – Methods of inventory valuation 135
Study unit 7: First-in-first-out (FIFO) method 137
1 Introduction 137
2 Categories of inventory 138
3 The FIFO method 139
4 Summary 140
Self-assessment Activity 141

Study unit 8: Weighted average method 144
1 Introduction 144
2 Weighted average method 144
3 Summary 146
Self-assessment Activity 146




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C o n t e n t s

, Topic 4 – Valuing completed inventories: the variable/direct costing method
versus the traditional absorption costing method 151
Study unit 9: The direct costing method versus the absorption
costing method 153
1 Introduction 153
2 Allocating manufacturing cost 153
3 Different costing concepts 154
4 Presentation formats of the different statements of
comprehensive income 155
5 Impact of the weighted average method and the FIFO
method on both costing methods 159
6 Summary 164

Study unit 10: Reconciling differences between net profits 165
1 Introduction 165
2 Reconciling profits that were determined using different bases 166
3 Advantages, disadvantages and uses of the direct costing
method 168
4 Advantages, disadvantages and uses of the absorption
costing method 169
5 Summary 171
Comprehensive Self-assessment Activity 172

Part 2: VALUING INVENTORIES USING MORE ADVANCED TECHNIQUES
Topic 5 – The activity-based costing (ABC) system 183
Study unit 11: Comparing ABC and the traditional costing method 185
1 Introduction 185
2 The emergence of a more complex business environment 185
3 Optimal environment for the ABC method 186
4 Comparison of the two-stage allocation process (between
traditional and ABC) 187
5 Differences between ABC and traditional costing 189
6 Advantages of the ABC method 189
7 Disadvantages of the ABC method 189
8 Summary 189
Self-assessment Activity 189

Study unit 12: ABC system design and application 191
1 Introduction 191
2 Designing an ABC system 191
3 Product costing with ABC 197
4 Summary 200
Comprehensive Self-assessment Activity 201




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C o n t e n t s