Management Accounting
Week 2, what is costing?
Purpose of costing:
A cost accounting system or costing system is a set of rules, methods and techniques used to
estimate the resources consumed to achieve specific goals. A cost objective is anything for which
decision-makers desire a separate measurement of costs.
Why do we need to know how much resources were consumed to achieve a goal?
Resource allocation consists in deciding for which goals limited resources should be consumed.
Two questions are a source of major economic, ethical, and political concern:
is a specific goal worth the resources required for its achievement?
Management accounting cannot asses the value of specific goals. But it can estimate the
value of the resources consumed and, therefore, provide half the information necessary to
allocate resources to their best possible use. Also, answering what some goals are worth is
rather difficult. This is because everything which has value is not necessarily exchanged on
the market (human life).
is there a better use for the resources it takes?
What is really consumed to achieve a goal is hard to determine (waste, health dangers etc).
You can make something with twice the materials just by wasting twice as much.
A process is the sequence of tasks and activities consuming resources (materials, labour) to produce
results (output, product). It can be difficult to determine who consumed what to do what, since
resources are often shared by several steps of the same process. Because resources are constrained,
bottlenecks can appear.
Efficiency refers to the quantity of resources consumed to obtain a result. The less resources are
consumed to produce the same result, the more efficient a process is. Efficiency is often computed as
output divided by input.
A well designed cost system, can give managers both direction and motivation for process
optimization:
- It shows inefficient used of available resources (bottlenecks, non-value added tasks)
- Greater control over costs by identifying their cause (cost drivers)
- Reveals best practices by comparing the resources consumed by different processes to
produce the same result and select the most efficient.
- Assuming identifying both the problem (waste) and solutions, is not enough to make
managers act it can associate achieving targets with rewards.
, How does product costing contribute to asset valuation?
Asset valuation consist in estimating the value, or monetary equivalent, of an asset.
Financial accounting cannot asses all the resources which went into the finished product, since it
does not follow the flow of resources within the organization.
One of the purposes of financial accounting is assigning to products the value of all (or at least most)
resources which were consumed to produce them, so that their cost of production could
be estimated and therefore a value given to the inventory
Steps of product costing process:
1. Cost recognition and accumulation
2. Cost classification
3. Preparation for allocation
4. Cost assignment
5. Asset valuation and reporting
Costing consists in:
1. Accumulating and dividing the flow of resources consumed into various streams
2. Progressively regrouping these streams towards the cost objects consuming these resources
3. Channelling these streams into their dedicated outlet in the financial statements.
The quality of a costing system depends on how faithfully it manages to represent this flow of
resources. (VIDEO)
Week 2, what is costing?
Purpose of costing:
A cost accounting system or costing system is a set of rules, methods and techniques used to
estimate the resources consumed to achieve specific goals. A cost objective is anything for which
decision-makers desire a separate measurement of costs.
Why do we need to know how much resources were consumed to achieve a goal?
Resource allocation consists in deciding for which goals limited resources should be consumed.
Two questions are a source of major economic, ethical, and political concern:
is a specific goal worth the resources required for its achievement?
Management accounting cannot asses the value of specific goals. But it can estimate the
value of the resources consumed and, therefore, provide half the information necessary to
allocate resources to their best possible use. Also, answering what some goals are worth is
rather difficult. This is because everything which has value is not necessarily exchanged on
the market (human life).
is there a better use for the resources it takes?
What is really consumed to achieve a goal is hard to determine (waste, health dangers etc).
You can make something with twice the materials just by wasting twice as much.
A process is the sequence of tasks and activities consuming resources (materials, labour) to produce
results (output, product). It can be difficult to determine who consumed what to do what, since
resources are often shared by several steps of the same process. Because resources are constrained,
bottlenecks can appear.
Efficiency refers to the quantity of resources consumed to obtain a result. The less resources are
consumed to produce the same result, the more efficient a process is. Efficiency is often computed as
output divided by input.
A well designed cost system, can give managers both direction and motivation for process
optimization:
- It shows inefficient used of available resources (bottlenecks, non-value added tasks)
- Greater control over costs by identifying their cause (cost drivers)
- Reveals best practices by comparing the resources consumed by different processes to
produce the same result and select the most efficient.
- Assuming identifying both the problem (waste) and solutions, is not enough to make
managers act it can associate achieving targets with rewards.
, How does product costing contribute to asset valuation?
Asset valuation consist in estimating the value, or monetary equivalent, of an asset.
Financial accounting cannot asses all the resources which went into the finished product, since it
does not follow the flow of resources within the organization.
One of the purposes of financial accounting is assigning to products the value of all (or at least most)
resources which were consumed to produce them, so that their cost of production could
be estimated and therefore a value given to the inventory
Steps of product costing process:
1. Cost recognition and accumulation
2. Cost classification
3. Preparation for allocation
4. Cost assignment
5. Asset valuation and reporting
Costing consists in:
1. Accumulating and dividing the flow of resources consumed into various streams
2. Progressively regrouping these streams towards the cost objects consuming these resources
3. Channelling these streams into their dedicated outlet in the financial statements.
The quality of a costing system depends on how faithfully it manages to represent this flow of
resources. (VIDEO)
