lOMoARcPSD|15781725
WEEK 1
Lecture 1
Management accounting: involves partnering in management decision making, planning
and performance measurement to assist in the formulation and implementation of an
organization’s strategy.
A successful organization:
- Implements a strategy: a plan for using resources to achieve sustainable goals
within a competitive environment.
- The strategy has a long-term focus and adapts to the changing environment.
- Cost management to develop cost and other information to help achieve
the strategic goals.
Strategic focus of cost management
- Cost management information consists of financial and non-financial
information that is used to implement the strategy.
- Cost management is the development and use of cost management information
by the management accountant.
Cost definitions:
- Cost: a resource used to achieve a specific objective.
- Cost pools: costs assembled into groups, by type, by source or by responsibility.
- Cost driver: a variable that causes a change in total cost.
- Cost object: any product, service, customer, activity or organizational unit to
which costs are assigned.
Direct and indirect costs
- Cost assignment: the process of assigning costs to cost pools or from cost pools
to cost objects.
- Direct costs can be conveniently and economically traced to a specific cost
object (direct tracing).
1
, lOMoARcPSD|15781725
- Indirect cost can’t be conveniently and economically traced to a specific object, but
is assigned to a cost object according to an allocation schedule (cost allocation
through cost pool).
- The classification of direct/indirect cost classification depends on the choice of
the cost object.
Variable and fixed cost: cost behavior
- Variable cost: change in proportion with volume of a cost driver.
- Fixed cost: don’t change in proportion with volume of a cost driver.
Total dollars Cost per unit
Variable cost Change in proportion with Unchanged in relation to
output output
Fixed cost Unchanged in relation to Change inversely with
output output
Cost drivers provide two roles for the management accountant:
- Assigning costs to cost objects.
- Explaining cost behavior.
A cost function isn’t a straight line, due to variability of marginal costs. First, the cost
increases at a decreasing rate. At higher levels of the cost driver, the cost increases at an
increasing rate, since the production level is now no longer efficient. Within the relevant
range, the cost function is linear. Fixed costs are only considered fixed within this range.
Cost formulas
- Total cost: TC =FC +VC
- Average cost: AC =TC / X
- Marginal cost: MC=dTC / dX
Relevant vs irrelevant costs:
- A relevant cost is a future cost that differs between/among decision alternatives.
o Both characteristics must be present for a cost to be relevant.
2
, lOMoARcPSD|15781725
o Relevant costs can be fixed or variable, more generally variable.
o Relevant cost analysis and total cost analysis produce the same results.
The flow of product and period costs:
- Product costs: include only the costs necessary to complete the product at the
manufacturing step in the value chain (manufacturing) or to purchase and
transport the product to the location of sale (merchandising).
o Direct materials.
o Direct labor.
o Factory overhead, indirect materials, indirect labor, other indirect costs.
- Period cost (non-product costs): include all other costs incurred by the firm
in managing or selling the product.
o Selling expenses.
o Administrative expenses.
Different costs for different purposes
Purpose Cost classification
Understand cost behavior Fixed vs variable
Estimating costs of products, customers, … Direct vs indirect
External financial reporting Product vs period
Internal decision making Relevant vs irrelevant
WEEK 2
3
WEEK 1
Lecture 1
Management accounting: involves partnering in management decision making, planning
and performance measurement to assist in the formulation and implementation of an
organization’s strategy.
A successful organization:
- Implements a strategy: a plan for using resources to achieve sustainable goals
within a competitive environment.
- The strategy has a long-term focus and adapts to the changing environment.
- Cost management to develop cost and other information to help achieve
the strategic goals.
Strategic focus of cost management
- Cost management information consists of financial and non-financial
information that is used to implement the strategy.
- Cost management is the development and use of cost management information
by the management accountant.
Cost definitions:
- Cost: a resource used to achieve a specific objective.
- Cost pools: costs assembled into groups, by type, by source or by responsibility.
- Cost driver: a variable that causes a change in total cost.
- Cost object: any product, service, customer, activity or organizational unit to
which costs are assigned.
Direct and indirect costs
- Cost assignment: the process of assigning costs to cost pools or from cost pools
to cost objects.
- Direct costs can be conveniently and economically traced to a specific cost
object (direct tracing).
1
, lOMoARcPSD|15781725
- Indirect cost can’t be conveniently and economically traced to a specific object, but
is assigned to a cost object according to an allocation schedule (cost allocation
through cost pool).
- The classification of direct/indirect cost classification depends on the choice of
the cost object.
Variable and fixed cost: cost behavior
- Variable cost: change in proportion with volume of a cost driver.
- Fixed cost: don’t change in proportion with volume of a cost driver.
Total dollars Cost per unit
Variable cost Change in proportion with Unchanged in relation to
output output
Fixed cost Unchanged in relation to Change inversely with
output output
Cost drivers provide two roles for the management accountant:
- Assigning costs to cost objects.
- Explaining cost behavior.
A cost function isn’t a straight line, due to variability of marginal costs. First, the cost
increases at a decreasing rate. At higher levels of the cost driver, the cost increases at an
increasing rate, since the production level is now no longer efficient. Within the relevant
range, the cost function is linear. Fixed costs are only considered fixed within this range.
Cost formulas
- Total cost: TC =FC +VC
- Average cost: AC =TC / X
- Marginal cost: MC=dTC / dX
Relevant vs irrelevant costs:
- A relevant cost is a future cost that differs between/among decision alternatives.
o Both characteristics must be present for a cost to be relevant.
2
, lOMoARcPSD|15781725
o Relevant costs can be fixed or variable, more generally variable.
o Relevant cost analysis and total cost analysis produce the same results.
The flow of product and period costs:
- Product costs: include only the costs necessary to complete the product at the
manufacturing step in the value chain (manufacturing) or to purchase and
transport the product to the location of sale (merchandising).
o Direct materials.
o Direct labor.
o Factory overhead, indirect materials, indirect labor, other indirect costs.
- Period cost (non-product costs): include all other costs incurred by the firm
in managing or selling the product.
o Selling expenses.
o Administrative expenses.
Different costs for different purposes
Purpose Cost classification
Understand cost behavior Fixed vs variable
Estimating costs of products, customers, … Direct vs indirect
External financial reporting Product vs period
Internal decision making Relevant vs irrelevant
WEEK 2
3
