Lectures Management Account
Lecture 1
Strategy
A plan that defines the purpose and long-term direction of the
company
Firms arrive (by choice of market forces) at one of two competitive
strategies:
o Product differentiation – firm offers a superior/unique product or
service relative to the products or services of its competitors.
Leads to brand loyalty and the willingness of customers to
pay high prices
o Cost leadership – firm outperforms competitors in producing
products or services at the lowest costs. Focus on productivity and
efficiency improvements, elimination of waste, and tight cost control
Leads to lower selling prices
Management accounting provides metrics and tools to assess results.
Cost allocation: direct versus indirect costs
Cost objects = things we want to know the cost of
Direct costs can be easily traced to cost objects
o For example material costs
Overhead costs (aka indirect costs) can’t be traced; instead they must be
allocated to cost objects using a cost driver (aka cost allocation base).
A cost driver is a factor that causes a change in cost (e.g. production
volume)
, Costs may be direct for some cost objects but indirect for other
cost objects
o Two cost objects: car vs. production plant
o Costs for salary of a manager overseeing the production plant is
indirect for individual car but direct for a production plant
Costs are not only classified whether they are direct of indirect, but also
whether they are fixed or variable.
Cost behavior: variable and fixed costs
Variable costs do change in proportion with volume of a cost driver, such
as production or sales quantity
o Material costs such as tired and engines are variable costs, they
increase with the number of cars produced
Fixed costs do not change in proportion with volume of a cost driver, at
least not within the relevant range
Lecture 1
Strategy
A plan that defines the purpose and long-term direction of the
company
Firms arrive (by choice of market forces) at one of two competitive
strategies:
o Product differentiation – firm offers a superior/unique product or
service relative to the products or services of its competitors.
Leads to brand loyalty and the willingness of customers to
pay high prices
o Cost leadership – firm outperforms competitors in producing
products or services at the lowest costs. Focus on productivity and
efficiency improvements, elimination of waste, and tight cost control
Leads to lower selling prices
Management accounting provides metrics and tools to assess results.
Cost allocation: direct versus indirect costs
Cost objects = things we want to know the cost of
Direct costs can be easily traced to cost objects
o For example material costs
Overhead costs (aka indirect costs) can’t be traced; instead they must be
allocated to cost objects using a cost driver (aka cost allocation base).
A cost driver is a factor that causes a change in cost (e.g. production
volume)
, Costs may be direct for some cost objects but indirect for other
cost objects
o Two cost objects: car vs. production plant
o Costs for salary of a manager overseeing the production plant is
indirect for individual car but direct for a production plant
Costs are not only classified whether they are direct of indirect, but also
whether they are fixed or variable.
Cost behavior: variable and fixed costs
Variable costs do change in proportion with volume of a cost driver, such
as production or sales quantity
o Material costs such as tired and engines are variable costs, they
increase with the number of cars produced
Fixed costs do not change in proportion with volume of a cost driver, at
least not within the relevant range
