Colin Rdury Chapter 01
- 1. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury MANAGEMENT AND COST ACCOUNTING SIXTH EDITION COLIN DRURY
- 2. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury © 2000 Colin Drury Part One: Introduction to Management and Cost Accounting Chapter One: Introduction to management accounting
- 3. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.1a 1. Definition of accounting • the process of identifying,measuring and communicating • economic information to permit informed judgements and • decisions by users of the information. 2. Users of accounting information can be divided into two categories: (i) External parties outside the organization (financial accounting). (ii) Internal parties within the organization (management accounting). © 2000 Colin Drury
- 4. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.1b 3. Major differences between financial and management accounting: • Statutory requirement for public companies to produce annual financial accounts,whereas there is no legal requirement for management accounting. • Financial accounting reports describe the whole of the organization,whereas management accounting focuses on reporting information for different parts of the business. • Financial accounting reports must be prepared in accordance with generally accepted accounting principles (e.g.SSAPs). • Financial accounting reports histo ical information, whereas management accounting places g eater emphasis on reporting estimated future costs and revenues. •Management accounting reports are produced at more frequent intervals. © 2000 Colin Drury
- 5. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.2a The changing business environment 1. Organizations have faced dramatic changes in their business environment. • Move from protected markets to highly competitive global markets • Deregulation • Declining product life-cycles © 2000 Colin Drury
- 6. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.2b 2. To compete successfully in today’s environment companies are: • Making customer satisfaction an overriding priority. • Adopting new management approaches. • Changing their manufacturing systems. • Investing in AMT ’s. 3. Above changes are having a significant impact on the MAS. © 2000 Colin Drury
- 7. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.3 © 2000 Colin Drury Focus on Customer Satisfaction
- 8. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.4a © 2000 Colin Drury Focus on customer satisfaction and new management approaches 1. Key success factors • Cost efficiency –increased emphasis on accurate product costs and cost management. • Quality –TQM,quality measures. • Time – educed cycle time,focus on non-value-added activities. • Innovation – responsiveness in meeting customer requirements. Product comparisons. Feedback on customer satisfaction.
- 9. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.4b © 2000Thomson Learning 2. Continuous improvement • Static historical standards no longer appropriate. Benchmarking. 3. Employee empowerment • Delegate more responsibility to people closest to operating processes and customers. 4. Value chain analysis • Suppliers,R &D,design,production,marketing, distribution,customer service,customers. Internal customer perspective. 5. Social responsibility and corporate ethics
- 10. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.5a © 2000Thomson Learning International convergence of management accounting 1. Management accounting practices can be observed at the macro or micro levels: • Macro refers to concepts and techniques • Micro refers to the behavioural patterns of use. 2. Tendency towards globalization at the macro level
- 11. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.5b © 2000Thomson Learning 3. Drivers of convergence include: • Global competition • Information technology (e.g. ERP systems) • Standardization by transnational companies • Global consultancy • Use of global textbooks 4. At the micro level accounting information may be used in different ways due to influence of different national and local cultures
- 12. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.6a © 2000 Colin Drury Primary functions of cost/management accounting systems 1. Inventory valuation for internal and external profit measurement • Allocate costs between products sold and fully and partly completed products that are unsold. 2. Provide relevant information to help managers make better decisions • Profitability analysis • Product pricing • Make or buy (Outsourcing) • Product mix and discontinuation
- 13. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.6c © 2000 Colin Drury 3. Provide information for planning,control and performance measurement • Long-term and short-term planning (budgeting) • Periodic performance reports for feedback control • Performance reports also widely used to evaluate managerial performance • Note that costs should be assembled in different ways to meet the above three requirements.
- 14. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.7a © 2000 Colin Drury Inventory Valuation and Profit Measurement 1. Consider a situation where a company has produced three products (A,B and C)during the period.The total costs for the period are £40 000.Product A has been sold for £20 000, product B has been completed but is in finished goods stock,and product C is partly completed.Costs must be traced to products to value stocks and cost of goods sold. £ £ Sales 20 000 Production cost 40 000 Less Closing stocks (B =£18 000,C =£8 000) 26 000 Cost of goods sold (A =£14 000) 14 000 Profit 6 000
- 15. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.7b © 2000 Colin Drury 2. Approximate but inaccurate individual product costs may be appropriate for profit measurement for financial accounting. Example Production expenses for the period = £10m Costs of products sold = £7m Cost of products not sold = £3m Note focus is on aggregate figures for financial accounting.
- 16. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.8a © 2000 Colin Drury Cost information for providing guidance for decision-making In theory cost information computed for stock valuation ought not to be used for decision-making. Example:Short-term decision A company is negotiating with a customer for the sale of XYZ. The cost recorded for stock valuation purposes is: £ Direct materials 200 Direct labour 150 Fixed overheads 300 650
- 17. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.8b © 2000 Colin Drury The maximum selling price that can be negotiated is £500 per unit for an order of 100 units over the next three months. Should the company accept the order? Spare capacity Additional relevant costs (100 × £200) £20 000 Additional sales revenue £50 000 Contribution to profits £30 000
- 18. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.9a © 2000 Colin Drury Operational control and performance measurement The allocation of costs to products is not particularly useful for cost control purposes.Instead,costs should be traced to responsibility/cost centres to the person who is accountable for controlling the costs. Example Budgeted costs per unit: Product 1 Product 2 Product 3 Total £ £ £ £ Cost centre A 10 40 70 120 Cost centre B 20 50 80 150 Cost centre C 30 60 90 180 60 150 240 450 Budgeted and actual production (units) 1000 1000 1000
- 19. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.10a © 2000 Colin Drury Operational control and performance measurement Comparison of actual with budgeted costs by products Product 1 Product 2 Product 3 Total £000 £000 £000 £000 ______________________________________________________________ Budgeted cost 60 150 240 450 (1,000 ×£60) Actual cost 70 170 270 510 ______________________________________________________________ Variance 10A 20 A 30A 60A ______________________________________________________________ The variances are not identified to responsibility (cost centres)
- 20. Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8 © 2004 Colin Drury 1.10b © 2000 Colin Drury Comparison of actual with budgeted costs by cost centres Cost centre Cost centre Cost centre A B C Total £000 £000 £000 £000 _______________________________________________________ Budgeted cost 120 150 180 (1,000 ×£120) Actual costs 130 150 230 _______________________________________________________ Variance 10A – 50A 60A _______________________________________________________ Notes 1. Performance reports analysed in far more detail for cost centre managers. 2. Should not be used as a punitive device (identify areas where managers need to focus their attention). 3. Non-financial critical success factors are also of vital importance and should be included on the performance reports.