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Introduction to Cost and Management Accounting Notes Essay

Decision Making
Decision making involves making a selection among competing alternatives. * What should we be selling?
* Who should we be serving?
* How should we execute?
Strategy is a game plan that enables a company to attract customers by distinguishing itself from competitors. Focal point of a company’s strategy should be its target customers. Customer Intimacy Strategy – Understand and respond to individual customer needs. Operational Excellence Strategy – Deliver products and services faster, more conveniently and at lower prices. Product Leadership Strategy – Offer higher quality products.

Enterprise Risk Management
A process used by a company to proactively identify and manage risk.

Lean Production – Just-in-time (JIT) production
Customer orders – create order – generate component requirements – components are ordered – production begins – goods delivered. Only manufactured when product is ordered.
Theory of Constraints
A constraint is anything that prevents you from getting more of what you want. TOC based on observation that effectively managing the constraint is the key to success. The constraint in a system is determined by the step that has the smallest capacity. Only actions that strengthen the weakest link in the “chain” improves the process. Steps: Identify weakest link. – Allow weakest link to set the tempo. – Focus on improving weakest link. – Recognize that weakest link is no longer so.

Leadership Skills
* Technical competence
* High Integrity
* Understand how to implement organizational change
* Strong communication skills
* Capable of motivating and mentoring other people
* Effective manage team-based decision processes

IMA Guidelines for Ethical Behavior
* Recognize and communicate professional limitations that preclude responsible judgment. * Maintain professional competence.
* Provide accurate, clear, concise and timely decision support information. * Follow applicable laws, regulations and standards.
* Do not disclose confidential information unless legally obligated to do so * Ensure that subordinates do not disclose confidential information. * Do not use confidential information for unethical/illegal advantage. Integrity

* Mitigate conflicts of interest and advise others of potential conflicts. * Refrain from conduct that would prejudice carrying out duties ethically. * Abstain from activities that might discredit the profession. Credibility

* Communicate information fairly and objectively.
* Disclose delays or deficiencies in information timeliness, processing, or internal control. * Disclose all relevant information that could influence a user’s understanding of reports and recommendations. Follow employer’s established policies.

For an unresolved ethical conflict:
* Discuss the conflict with immediate supervisor or next highest uninvolved managerial level. * If immediate supervisor is the CEO, consider the board of directors or the audit committee. * Except where legally prescribed, maintain confidentiality. * Clarify issues in a confidential discussion with an objective advisor. * Consult an attorney for legal implication.

Corporate Social Responsibility
Corporate social responsibility (CSR) is a concept whereby organizations consider the needs of all stakeholders when making decisions. CSR extends beyond legal compliance to include voluntary actions that satisfy stakeholder expectations.

Manufacturing Costs:
1. DM
2. DL
3. Mfg. OH – IM
Direct Materials- Raw materials that become an integral part of the product and can be conveniently traced directly to it. Direct Labor – Costs that can be traced to individual units of product. Manufacturing Overhead Costs – Cost that cannot be traced directly to specific units produced.

IL – Wages paid to employees who are not directly involved in production work. E.g. maintenance, workers, janitors, security guards etc.
IM- Materials used to support the production process. E.g. lubricants/cleaning supplies used in the automobile assembly plant. (FOR Mfg. OH sometimes it can be traced but it is minute or not worth the effort) Non-Manufacturing Costs

Selling Costs (SC) – Costs necessary to get the order and deliver product. Administrative Costs (AC) – All executive, organizational and clerical costs. Product Costs vs. Period Costs

Product Costs: all costs involved in acquiring/ making a product – DM, DL, and Mfg. OH. Recognized as expenses when products are sold. Period Costs: all SC and AC. Recognized as expenses in period incurred. Prime Costs vs. Conversion Cost

Prime Cost = DM + DL
Conversion Cost = DL + Mfg. OH

The Activity Base (Cost Driver)
A measure of what causes the incurrence of a variable cost:
* Units Produced
* Machine Hours
* Miles driven
* Labor Hours

Fixed Cost and Variable Costs
Fixed Costs do not charge depending on activity level
Variable Costs charge per unit used.
Types of Fixed Costs:
1. Committed – Long-term, cannot be significantly reduced in short-term. E.g. Depreciation on buildings/equipment/real estate taxes. 2. Discretionary – May be altered in the short-term by current managerial decisions. E.g. Advertising.

Cost Classifications for Predicting Cost Behavior
Cost| In Total| Per Unit|
Variable| Total VC changes as activity level changes.| VC per unit remains the same over wide ranges of activity.| Fixed| Total FC remains the same even when the activity level changes.| Average FC per unit decreases as activity levels rise and increases when activity levels fall.|

| Total| Per Call|
| 10 mins| 100 mins| 10 mins| 100 mins|
VC/Unit is $.10| 10*10 = $1| 10*100 = $10| $.10| $.10| FC is $50| $50| $50| $50/10 min = $5| $50/100 min =$.50|

| Total| Per Unit|
VC| Changes Upwards| Constant|
FC| Constant| Changes Downwards|

Mixed Costs

A mixed cost had both fixed and variable components.


Y = a + bX
Where Y = Total Mix Cost
a= Total F.C
b= the V.C per unit of activity
X= Level of activity

Three Methods: The High- Low Method
The Least-Squares Regression Method
The Scattergraph Method

The High-Low Method
The high-low method focuses exclusively in the high and low levels of activity. e.g.
Month| Hours of Maintenance| Total Maintenance Cost|
January| 625| $7,950|
February| 500| $7,400|
March| 700| $5.275|
April| 550| $7,625|
May| 775| $9,100|
June| 800| $9,800|
| | |
High Level| 800| $9,800|
Low Level| 500| $7,400|
Change| 300| $2,400|
| | |

$2400/300 = $8.00/hour
Using formula Y= a + bX
Therefore using for June : $9800 = a + $8 (800)
a = $3400
The cost equation for maintenance : Y = $3400 + $8 X

Cost Classification for Decision Making
* Every decision involves a choice between at least two alternatives. * Only those cost and benefits that differ between alternatives are relevant in a decision. All other costs and benefits can and should be ignored.

Opportunity Cost – The potential benefit that is given up when one alternative is selected over another.

Sunk Costs – Costs that have already been incurred and cannot be changed now or in the future. They should be ignored when making decisions. e.g. Company paid $50,00 in 1990 for a special purpose machine which was used to manufacture a product that is now obsolete.

Types of Product Casting Systems
Job Order Costing
* Many different types of products are produced.
* Products are manufactured in order
* Each order unique – trace or allocate costs to each of them Direct material and Direct Labor costs are charged to each job as worked is performed. Mfg. OH is allocated to all jobs rather than directly to each job. Why use an allocation base?

Mfg. OH is applied to jobs that are in process. An allocation base such as DLH, DL$ or MH is used to assign Mfg. OH to individual jobs.

Manufacturing Overhead Application
The predetermined overhead rate (POHP) used to apply OH to jobs is determined before the period begins. POHR = Est. Total Mfg.OH for the coming period . Est. Total units in the allocation base for the coming period

OH applied = POHR + Actual activity

RM – Materials waiting to be processed.
Work in process (WIP) – Partially completed product- some material, labor or OH added Finished Goods – Completed products waiting for sale

RM| | WIP|
Material Purchases| DMDL| | DMDL| Cost of goods manufactured| | | | OH Applied| |
| | | | |
| | | | |
Mfg. OH| | Salaries + Wages Payable Account|
IM| OH Applied| | | DL|
IL| | | | IL|
Other OH.| | | | |
| | | | |
Finished Goods A/C| | COGS|
Cost of Goods Manufactured| COGS| | F.G| |
| | | | |
| | | | |

General Journal
Date| Description| Post. Ref.| Debit| Credit|
| | R.M| | X| |
| | A.P| | | X|
| | | | | |
| | W.I.P| | X| |
| | Mfg. OH | | X| |
| | R.M| | | X|
| | W.I.P| | X| |
| | Mfg. OH| | X| |
| | Salaries & Wages Paid| | | X|
| | Mfg. OH | | X| |
| | Accounts Payable| | | X|
| | Property taxes Payable| | | X|
| | Prepaid Insurance| | | X|
| | Acc. Dep.| | | X|
| | | | | |
| | W.I.P | | X| |
| | Mfg. OH| | | X|
| | | | | |
| | Salaries Expense| | X| |
| | Salaries Payable| | | X|
| | | | | |
| | Advertising Expense| | X| |
| | Advertising Payable| | | X|
| | | | | |
| | Finished Goods| | X| |
| | W.I.P| | | X|
| | | | | |
| | COGS| | X| |
| | Finished Goods| | | X|
| | | | | |
| | Accounts Receivable| | X| |
| | Finished Goods| | | X|

DM issued to a join increase WIP and decrease RM. IM used are charged to Mfg.OH and also decrease RM .

In addition to IM and IL

When FG are sold, 2 entries are required:
1) To record the sale
2) To record COGS and reduce FG
Accounting for Nonmanufacturing Cost
Nonmanufacturing costs (period expenses) are charged to expenses when they are incurred.

Basic Equation for Inventory Accounts
RM, WIP, FG: Beginning, plus, minus, equal
(review in text)

Problems of Overhead Application
The difference between the OH cost applied to WIP and the actual OH costs of a period is referred to as either underapplied or overapplied OH.

Underapplied OH exists when the amount of OH applied to jobs during the period using the predetermined OH rate is less than the total amount of OH actually incurred during the period.

Overapplied OH exists when the amount of OH applied to jobs during the period using the predetermined OH rate is greater than the total amount of OH actually incurred during the period.

Allocating Under-or-Overapplied Overhead between Accounts
When there is under-or-overapplied overhead there are two methods of disposing of it : 1) Allocate the under-or-overapplied overhead to COGS
2) Distribute the under-or-overapplied overhead between the WIP FG and COGS accounts by closing the accounts, totaling them and finding the percentage of the total each account is and allocating that percentage to each account.

If Mfg. OH is| Alternative 1Close to COGS| Alternative 2Allocation| UNDERAPPLIED| INCREASE COGS| INCREASE WIP, FG, COGS|

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