Intro (Wk 1)
MA & Theory of the Firm
• Firm: intermediary btw factor & product markets
• Adds value transforming resources (e.g. raw material, labour, OH) from one form to another (goods & services).
o We know firms are adding value as the price customers are willing to pay for products > sum of all input costs o If customers don't pay more than the input costs, firms don't make profit
• Role of (MA) accounting info: help managers formulate strategy to create value
𝑉𝑎𝑙𝑢𝑒 𝐴𝑑𝑑𝑒𝑑 = (𝐴)𝑆𝑎𝑙𝑒𝑠 𝑝𝑟𝑖𝑐𝑒 − (𝐵)𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑟𝑒𝑠𝑜𝑢𝑟𝑐𝑒𝑠 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑑 𝑡𝑜 𝑝𝑟𝑜𝑑𝑢𝑐𝑒 Value (and profit) is added if: A > B
MA
• MA “is a profession that involves partnering in management decision making, devising planning & performance measurement systems, and providing expertise in financial reporting & control to assist management in the formulation & implementation of an organisation’s strategy.”
o MAs develop systems to identify whether processes & employee actions are under control: everyone is doing what they need to do to meet the org goals
Difference btw Financial & Management Accounting
Management Accounting Financial Accounting
Purpose Decision making Use financial & non-financial info to
communicate financial position to outsiders Primary users Internal managers External users (e.g. ATO, shareholders, banks) Focus/emphasis
Future-oriented (focus on preparing budgets, forecasting buyers, future products/costs);
emphasis on relevance for planning & control
Past-oriented; verifiability emphasis
Rules
Don’t have to follow GAAP (but often MA reports align with financial reports); cost vs benefit (is cost of preparing reports/systems <
benefits)
GAAP compliant; CPA/CA audited
Time orientation
Ultra-current (can report hourly labour use) to very long-time horizons
Historical monthly, quarterly & annual reports
Behavioural issues
Designed to influence employee behaviour Indirect effects on employee behaviour (e.g.
reports showing unprofitability)
Purposes of Cost Info…
External Reporting
• Inventory valuation (of material, WIP, finished goods in BS) & COGS (in income statement) Internal reporting
• Decision making
o Pricing: how much making products costs (helps to price products)
▪ Pricing at less than the long-run/lifecycle cost: makes no profit
o Product mix: how much of each product to make to max the firm’s value
o Cost management (reduction/control): why costs differ from budget (e.g. produced more, input costs more, used more input than the standard) → may need to find diff suppliers, train labour, find cheaper inputs o Encourage desired ‘behaviours’ (& reduce waste, increase skill): e.g. monitor workers if more hours are spent
• Performance measurement: compare budgeted to actual
Costing Systems
• Job costing: each product is diff/heterogeneous; all costs traced to individual jobs.
• Activity based costing (ABC): produce diff types of products that use activities in diff proportions, use ABC to understand how diff activities drive the cost of each product
• Process costing: homogeneous product, costs traced to process/department & averaged across all units
• Actual costing: reports only the actual production costs (accurate but not timely)
• Normal costing: reports actual DL & DM, uses a budgeted/predetermined OH (timely may not be accurate)
• Standard costing: uses a standard amount & $ cost for DM & DL & OH (everything is budgeted) o Can calc a variance btw actual cost vs budget
Classification of Costs
Direct vs Indirect (AASB)
Product (Inventoriable) vs Period (Non-Manufacturing) Costs
• Product costs include DM, DL, & MOH o Included in inventory a/c on the BS
• When goods are sold, it moves out of the finished goods a/c (CR) & into the COGS a/c on the IS (DR)
• Period costs are not included in product costs. They are expensed on the income statement.
o E.g. sales commission
Variable vs Fixed Costs
Behaviour of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes as activity level changes
Variable cost per unit remains the same over wide
ranges of activity Fixed Total fixed cost remains the
same even when the activity level changes
Fixed cost per unit goes down as activity level goes up
