ACCT2012 NOTES
INTRODUCTION TO MANAGEMENT ACCOUNTING
1.1 RECOGNISE THE TYPES OF DECISIONS MANAGERS MAKE FOR AN ORGANISATION
ORGANISATIONAL VISION
• Organisational vision is the core purpose and ideology which guides an entity’s:
o Overall direction
o Approach to its stakeholders
ORGANISATIONAL COMPETENCIES
• Organisational core competencies are the entity’s strengths relative to competitors:
ORGANISATIONAL STRATEGIES
• Tactics that managers use to work toward the organisational vision while taking advantage of the core competencies
• Long term in nature
• Include organisation structure, financial structure, and long‐term resource allocation strategies
• Strategy specifies how an organization matches its own capabilities with opportunities and risks in the marketplace to
`accomplish its objectives
• Strategy examples:
o Origin Energy https://www.originenergy.com.au/about/who-we-are/our-story.html
o AGL https://www.agl.com.au/about-agl/who-we-are/our-strategy
• Management accountants provide information to management such as:
o Who are our customers and suppliers
o Sensitivity of market to price, quality and service
o Industry characteristics (size, growth)
OPERATING PLANS
• Involve short‐term implementation of organisational strategies
• Include specific performance objectives such as budgeted revenues and costs
ACTUAL OPERATIONS
• Actions taken and the results achieved over a period of time
• Data is collected and measured by the organisation’s information system
MEASURING, MONITORING AND MOTIVATING PERFORMANCE
• Managers use results of operations to monitor performance and ensure it is in line with organisational vision
• Results of operations make managers re‐think organisational vision or their view of the organisation’s core competencies
1
,1.2 DISCUSS THE ROLE OF COST AND MANAGEMENT ACCOUNTING INFORMATION IN
MANAGEMENT DECISION MAKING
• Cost accounting is a “method for measuring the cost of a project, process, or
thing”
• Includes both financial and nonfinancial information
• Used for both financial and management accounting
o Financial accounting
§ Prepares reports most frequently used by decision makers
external to the organisation
o Management accounting
§ Prepares reports most frequently used by decision makers
internal to the organisation
COST AND MANAGEMENT ACCOUNTING, YESTERDAY AND TOMORROW
• Early 1900s to mid 1970s
o Cost accounting practices changed little.
• More global environment
o Term ‘management accounting’ used for range of activities undertaken
• Today, cost and accounting information used for:
o Decision making
o Measuring and monitoring performance (control)
o Goal alignment
KEY INFLUENCES ON MANAGEMENT ACCOUNTING SYSTEM STRUCTURE
• Organisational structure, IT, organisational strategies, culture and organisational vision, view of management accounting,
types of decisions, external influences
RELEVANT INFORMATION FOR DECISION MAKING
• Relevant information:
o Helps decision maker to evaluate and choose among alternative courses of action
o Concerns the future
§ If it is past (sunk cost) then not relevant information
o Varies with the action taken
• Relevance of information depends on type of decision and other factors
• Irrelevant information does not vary with the action taken and therefore is not useful for decision making
1.3 COMMUNICATE HOW MANAGERS CAN MAKE HIGHER‐QUALITY DECISIONS USING
ACCOUNTING INFORMATION
• When management accounting is used in decision-making, two issues often arise:
o Quality and relevance of the management accounting information
o Quality of decision‐making processes in use within organisation
• Higher quality information will generally have fewer uncertainties if it is based on viable assumptions
PATH TO HIGHER QUALITY MANAGEMENT DECISIONS
• Decision‐useful information needs to be considered in light of:
o Opportunity costs
o Cost‐benefit analysis
• Opportunity costs are the benefits foregone when we choose one alternative
over the next best alternative
• Cost‐benefit analysis is an evaluation of the benefits derived from info and
costs of collecting it
2
,1.4 DESCRIBE THE VALUE CHAIN FRAMEWORK AND ITS APPLICATIONS IN
MANAGEMENT ACCOUNTING
• A value chain consists of the key activities engaged in by an organisation or
industry
o At the organisational level, the value chain is usually viewed as a
combination of key activities and support activities that, in sequence, add
utility to a product or service
o The value chain provides a suitable framework for considering a range of
management accounting issues
• Value chain analysis (FEBEREC)
o Focuses on activities
o Encourages a broader organisational view
o Breaks down more traditional representations of organisational
activity
o Externalises thinking by incorporating suppliers and customers
o Reflects value chain relationships in terms of costs
o Enables financial measurement of downstream and upstream
activities
o Categorises activities as value‐added and non‐value‐added
• The supply chain is the flow of resources from the initial suppliers through the
delivery of goods and services to customers and clients
• A value‐added activity is one that is necessary and that the customer would
normally be prepared to pay for
• A non‐value‐added activity is one that is wasteful (unnecessary) and that the
customer would not normally be prepared to pay for
COST OBJECTS AND COST DRIVERS
• A cost object is anything to which you can allocate costs and, for which you can
therefore measure costs
o A cost object can be a product, as well as a service
• A cost driver is anything that causes a change in the total costs of a cost object
o Cost drivers can be classified in a number of ways
THE VALUE CHAIN AND ORGANISATIONAL STRUCTURE
CENTRALISED ORGANISATIONAL STRUCTURES
DECENTRALISED ORGANISATIONAL STRUCTURES
MATRIX ORGANISATIONAL STRUCTURES
3
, COST CONCEPTS, COST BEHAVIOUR, JOB COSTING (ABSORPTION COSTING) AND
COST ALLOCATION
2.1 DEMONSTRATE AN UNDERSTANDING OF THE CONCEPT OF COST BEHAVIOUR
• A cost is the measure of resources given up to achieve a particular purpose
• Cost behaviour is the variation in costs relative to the variation in an organisation’s activities
• Ability to analyse cost behaviour requires knowledge of an organisation’s economic environment and operations
• Costs can be categorised by how they are used in decision making
• Costs can also be distinguished by the way they change as activity or volume levels change
2.2 EXPLAIN THE DIFFERENT TYPES OF COST BEHAVIOUR
• Total variable costs are costs that increase (in total) in proportion to the increase in activity
levels
o E.g. Grapes, cooperage, packaging, mobile bottling, labour, utilities
• Total fixed costs are costs that do not change (in total) as activity levels change
o E.g. Insurance, maintenance, property tax, depreciation, interest
• Mixed costs are partly fixed and partly variable
RELEVANT RANGE
• The relevant range is the span of activity levels for which the cost behaviour patterns hold
• A marginal cost is the incremental cost of an activity, such as producing a unit of goods or
services
o E.g. if $30 000 sales has a fixed cost of $6000 for rental space another increment of
sales (above $30 000) will require an expansion of retail space, adding extra fixed
costs
3.1 DESCRIBE THE ROLE OF COST OBJECTS AND HOW THEY SUPPORT DECISION MAKING
• A cost object is anything for which a separate measurement of cost is desired
• Depending on cost object to determine direct or indirect costs
3.2 EXPLAIN AND COMPARE DIRECT AND INDIRECT COSTS
DIRECT COSTS
• Direct costs have a cause‐and‐effect relationship with cost object
• A cost/benefit test will assess the cost of tracing cost to cost objects
against benefits of having more detailed cost information tracing system
INDIRECT COSTS
• Indirect costs are used for the benefit of many cost objects and cannot be easily
related to any specific cost object
• Whether a cost is classified as direct or indirect depends on the:
o Specific cost object which is being analysed
o Cost/benefit assessment of tracing the cost
4
INTRODUCTION TO MANAGEMENT ACCOUNTING
1.1 RECOGNISE THE TYPES OF DECISIONS MANAGERS MAKE FOR AN ORGANISATION
ORGANISATIONAL VISION
• Organisational vision is the core purpose and ideology which guides an entity’s:
o Overall direction
o Approach to its stakeholders
ORGANISATIONAL COMPETENCIES
• Organisational core competencies are the entity’s strengths relative to competitors:
ORGANISATIONAL STRATEGIES
• Tactics that managers use to work toward the organisational vision while taking advantage of the core competencies
• Long term in nature
• Include organisation structure, financial structure, and long‐term resource allocation strategies
• Strategy specifies how an organization matches its own capabilities with opportunities and risks in the marketplace to
`accomplish its objectives
• Strategy examples:
o Origin Energy https://www.originenergy.com.au/about/who-we-are/our-story.html
o AGL https://www.agl.com.au/about-agl/who-we-are/our-strategy
• Management accountants provide information to management such as:
o Who are our customers and suppliers
o Sensitivity of market to price, quality and service
o Industry characteristics (size, growth)
OPERATING PLANS
• Involve short‐term implementation of organisational strategies
• Include specific performance objectives such as budgeted revenues and costs
ACTUAL OPERATIONS
• Actions taken and the results achieved over a period of time
• Data is collected and measured by the organisation’s information system
MEASURING, MONITORING AND MOTIVATING PERFORMANCE
• Managers use results of operations to monitor performance and ensure it is in line with organisational vision
• Results of operations make managers re‐think organisational vision or their view of the organisation’s core competencies
1
,1.2 DISCUSS THE ROLE OF COST AND MANAGEMENT ACCOUNTING INFORMATION IN
MANAGEMENT DECISION MAKING
• Cost accounting is a “method for measuring the cost of a project, process, or
thing”
• Includes both financial and nonfinancial information
• Used for both financial and management accounting
o Financial accounting
§ Prepares reports most frequently used by decision makers
external to the organisation
o Management accounting
§ Prepares reports most frequently used by decision makers
internal to the organisation
COST AND MANAGEMENT ACCOUNTING, YESTERDAY AND TOMORROW
• Early 1900s to mid 1970s
o Cost accounting practices changed little.
• More global environment
o Term ‘management accounting’ used for range of activities undertaken
• Today, cost and accounting information used for:
o Decision making
o Measuring and monitoring performance (control)
o Goal alignment
KEY INFLUENCES ON MANAGEMENT ACCOUNTING SYSTEM STRUCTURE
• Organisational structure, IT, organisational strategies, culture and organisational vision, view of management accounting,
types of decisions, external influences
RELEVANT INFORMATION FOR DECISION MAKING
• Relevant information:
o Helps decision maker to evaluate and choose among alternative courses of action
o Concerns the future
§ If it is past (sunk cost) then not relevant information
o Varies with the action taken
• Relevance of information depends on type of decision and other factors
• Irrelevant information does not vary with the action taken and therefore is not useful for decision making
1.3 COMMUNICATE HOW MANAGERS CAN MAKE HIGHER‐QUALITY DECISIONS USING
ACCOUNTING INFORMATION
• When management accounting is used in decision-making, two issues often arise:
o Quality and relevance of the management accounting information
o Quality of decision‐making processes in use within organisation
• Higher quality information will generally have fewer uncertainties if it is based on viable assumptions
PATH TO HIGHER QUALITY MANAGEMENT DECISIONS
• Decision‐useful information needs to be considered in light of:
o Opportunity costs
o Cost‐benefit analysis
• Opportunity costs are the benefits foregone when we choose one alternative
over the next best alternative
• Cost‐benefit analysis is an evaluation of the benefits derived from info and
costs of collecting it
2
,1.4 DESCRIBE THE VALUE CHAIN FRAMEWORK AND ITS APPLICATIONS IN
MANAGEMENT ACCOUNTING
• A value chain consists of the key activities engaged in by an organisation or
industry
o At the organisational level, the value chain is usually viewed as a
combination of key activities and support activities that, in sequence, add
utility to a product or service
o The value chain provides a suitable framework for considering a range of
management accounting issues
• Value chain analysis (FEBEREC)
o Focuses on activities
o Encourages a broader organisational view
o Breaks down more traditional representations of organisational
activity
o Externalises thinking by incorporating suppliers and customers
o Reflects value chain relationships in terms of costs
o Enables financial measurement of downstream and upstream
activities
o Categorises activities as value‐added and non‐value‐added
• The supply chain is the flow of resources from the initial suppliers through the
delivery of goods and services to customers and clients
• A value‐added activity is one that is necessary and that the customer would
normally be prepared to pay for
• A non‐value‐added activity is one that is wasteful (unnecessary) and that the
customer would not normally be prepared to pay for
COST OBJECTS AND COST DRIVERS
• A cost object is anything to which you can allocate costs and, for which you can
therefore measure costs
o A cost object can be a product, as well as a service
• A cost driver is anything that causes a change in the total costs of a cost object
o Cost drivers can be classified in a number of ways
THE VALUE CHAIN AND ORGANISATIONAL STRUCTURE
CENTRALISED ORGANISATIONAL STRUCTURES
DECENTRALISED ORGANISATIONAL STRUCTURES
MATRIX ORGANISATIONAL STRUCTURES
3
, COST CONCEPTS, COST BEHAVIOUR, JOB COSTING (ABSORPTION COSTING) AND
COST ALLOCATION
2.1 DEMONSTRATE AN UNDERSTANDING OF THE CONCEPT OF COST BEHAVIOUR
• A cost is the measure of resources given up to achieve a particular purpose
• Cost behaviour is the variation in costs relative to the variation in an organisation’s activities
• Ability to analyse cost behaviour requires knowledge of an organisation’s economic environment and operations
• Costs can be categorised by how they are used in decision making
• Costs can also be distinguished by the way they change as activity or volume levels change
2.2 EXPLAIN THE DIFFERENT TYPES OF COST BEHAVIOUR
• Total variable costs are costs that increase (in total) in proportion to the increase in activity
levels
o E.g. Grapes, cooperage, packaging, mobile bottling, labour, utilities
• Total fixed costs are costs that do not change (in total) as activity levels change
o E.g. Insurance, maintenance, property tax, depreciation, interest
• Mixed costs are partly fixed and partly variable
RELEVANT RANGE
• The relevant range is the span of activity levels for which the cost behaviour patterns hold
• A marginal cost is the incremental cost of an activity, such as producing a unit of goods or
services
o E.g. if $30 000 sales has a fixed cost of $6000 for rental space another increment of
sales (above $30 000) will require an expansion of retail space, adding extra fixed
costs
3.1 DESCRIBE THE ROLE OF COST OBJECTS AND HOW THEY SUPPORT DECISION MAKING
• A cost object is anything for which a separate measurement of cost is desired
• Depending on cost object to determine direct or indirect costs
3.2 EXPLAIN AND COMPARE DIRECT AND INDIRECT COSTS
DIRECT COSTS
• Direct costs have a cause‐and‐effect relationship with cost object
• A cost/benefit test will assess the cost of tracing cost to cost objects
against benefits of having more detailed cost information tracing system
INDIRECT COSTS
• Indirect costs are used for the benefit of many cost objects and cannot be easily
related to any specific cost object
• Whether a cost is classified as direct or indirect depends on the:
o Specific cost object which is being analysed
o Cost/benefit assessment of tracing the cost
4
