CIMA C1 Unit 1 2012(2)
description
Transcript of CIMA C1 Unit 1 2012(2)
CIMA C1Fundamentals of Management Accounting
Introduction to Cost Accounting
CIMA C1Fundamentals of Management Accounting
Class Slides – Ian Wilson
1. Define management/Cost Accounting2. Explain the importance of Cost Control &
Planning in an organisation3. Describe how information can be used to
measure performance in a company4. Explain the differences between financial
information requirements for Companies, public bodies & society.
Learning Aims (CIMA)
1. Explain the concept of Direct & Indirect Cost
2. Explain why the concept of cost is meaningful & essential to business
3. Explain how different types of costs behave in relation to changes in the Level of Activity
4. Distinguish between Fixed, Variable & Semi-Variable Costs
5. Explain Step Costs6. Calculate the Fixed & Variable elements of
Semi-Variable costs
Learning aims continued
Management & Cost Accounting: A Management Information System which
provides analysis of past, present & future cost data for management action
Management/Cost Accountant: Provide key financial data for planning,
controlling & decision making in the organisation
What is Management/Cost Accounting?
Key Emphasis in 4 areas of use:1. Stock Valuations, what is the value/cost of
inventory?2. Planning, future forecasts3. Control, actual against planned
performance4. Decision Making, the ‘right’ outcome in
terms of cost/profit for the business
Cost Systems
Financial
The ‘Financial’ Accountant
Management
The ‘Management’ Accountant
Mostly Historic, Financial Data Past, Present & Future
External Audience: Lenders, Stakeholders in plc’s
Internal measure of Performance, qualitative & financial
Content Regulated by Standards & Legislation
Flexible content, Layout & Analysis
Annual for Shareholders Over any time period, weekly-monthly-annual, as and when required
Financial v’s Management?
2 Branches of Profession:
Financial v’s Management?
Information & data that is collected & analysed by a Management Accountant will be used to assist the business in the following areas:
1. Planning : ‘Failing to plan, is planning to fail!’
2. Decision Making : making the ‘Right’ choice at the ‘Right’ time for the ‘Right’ reasons
3. Control : Making sure Actual results fall in line with those planned – corrections if necessary
Management Activities
Strategic Long Term
TacticalMedium Term
OperationalShort Term
Levels of Management
Directors & Senior Managers – 1/3/5 yrs +
Middle Managers – up to 1 Year
Junior Managers/Team Leaders Day to Day focus
Board
Production
Machining Assembly
Admin
I.T.
Company Structures & Cost
Having seen the ‘family tree’ of how a company may be structured, various departments may be responsible for differing levels of business processes:
Cost Centre: responsible for ‘COST’ control ONLY
Revenue Centre: responsible for ‘REVENUE’ ONLY
Profit Centre: Accountable for REVENUE & COSTS
Company Structures
Investment Centre: responsible for: Costs Revenue…….& Investment in the ‘Investment’ Centre, ie
Capital equipment etc. As such, the ‘Manager’ is responsible for
obtaining the ‘Return on the Investment’ (ROI), or the ‘Return on Capital Employed’ (ROCE)
Company Structures
You will need to learn this key measure:
ROCE = Profit before Interest & Tax x 100%
Capital Employed
Now try Exercise 1 page 18
ROCE
Look at your class notes (page 4) You need to be able to recognise &
describe:1. Cost Units2. Cost Centres (already studied) 3. Cost Objects4. Cost Classification – see the next area of
study on the following slides:
Cost Units & Cost Centres
What are theses 2 aspects about? Cost Units: A unit of product or service for which costs
can be obtained Usually measured in the ‘currency’ in which
the product/service is sold in: Litre of Petrol Tin of Paint Loaf of Bread
Cost Units & Objects
Cost Objects: Often spoken about in ABC Costing Cost Objects may be a unit of product but
could equally be a customer or supplier You will re-visit this with P1 later in your
CIMA studies
Cost Units & Objects
Costs fall into 3 broad categories:1. Materials2. Labour3. Expenses(called ‘Overheads’)
Materials & Labour speak for themselves, Expenses are varied, typically Rent/Rates/Heating/Lighting/Depreciation and so on…
Cost Classification
Direct Costs: those that are directly involved in the making of the product. The sum of the direct costs is called ‘Prime Cost’.
Indirect costs: incurred for other reasons and cannot be allocated DIRECTLY to the product
Consider: A Factory Operative A Shift Supervisor leading a team of
operatives
Direct & Indirect Costs
Costs: Which is Direct & Indirect?.
Direct & Indirect Costs
Production: costs that relate to manufacturing the product. They are included in income statement as ‘cost of sales’ and are included in stock valuation.
Non-Production: incurred as business costs but NOT relating to production/manufacturing:
a. Distributionb. Sales/Marketingc. Administration
Production & Non-Production Costs
I often draw out a structure for costs.
Make sure you note this down.
Cost Classification
Practice your skills with True or False
We have 5 questions to deal with, I will read these out
True or false, which do you think is the correct one based on the narrative given:
Exercise 1
Different thoughts on costs when Decision Making, Planning & Controlling:
1. Relevant Costs2. Avoidable Costs3. Opportunity Costs4. Sunk Costs5. Controllable Costs6. Uncontrollable Costs We can consider each in turn:
Cost Behaviour
Relevant Costs: Future ‘cash flows’ arising as a direct
consequence of a decision. They are: Future Costs Cash Flows Incremental Costs
Cost Behaviour
Avoidable Costs: Costs which would not be incurred if the
activity to which they relate did not exist Important to know if you wish to discontinue
a product/operation
Cost Behaviour
Opportunity Costs: The value of the benefit sacrificed when one
course of action is chosen in preference to an alternative.
Sunk Costs: This is a past cost which is not directly
relevant in decision making Controllable Costs: That which can be influenced by
management decisions & actions
Cost Behaviour
Uncontrollable Costs: This cost cannot be affected by
management within a given time span
Can you think of examples of controllable & uncontrollable costs?
Cost Behaviour
Decision making in the future will depend on the accountant’s ability to predict how costs will behave in a variety of scenarios.
Your syllabus will require you to deal with 4 types of Cost:
1. Fixed 2. Step3. Variable4. Semi-Variable
Cost Behaviour
Cost Behaviour is the way in which a cost changes as activity levels change
Level of Activity refers to the amount or volume of work done
It may seem easy to agree that costs increase as the level of activity increases.
Study pages 7 to 9 in your notes.
Cost Behaviour
Make sure you learn the 4 diagrams connected with each cost.
1. Fixed Cost2. Step Cost3. Variable Cost4. Semi-Variable Cost
Consider examples of each
Cost Behaviour diagrams
They tend to remain constant over time: Examples?
Fixed Costs: Graph
Fixed Costspend
Look at the graph shapes:
Fixed Cost, Total & per Unit
Costs step up as activity increases: Examples?
Step Costs: Graph
Fixed Cost reaches a point at which resources are increased
Cost increase in proportion to activity changes: Examples?
Variable Costs: Graph
Part Fixed & part Variable cost elements which are partly affected by a change in activity.
Semi-variable costs have both a fixed & variable element.
Consider the earlier definitions of ‘Fixed’ & ‘Variable’
A graph helps to follow what is going on:
Semi-Variable Costs
Semi-Variable Costs
Examples: Electric Bill Gas Bill Sales Reps Salary Water Bill
Semi-Variable Costs
Bring ALL the elements together:
Total Costs
So, we know that Semi-Variable costs have 2 parts:
Fixed & Variable However, in your exam you may be given
data, based on historical spends, for Semi-Variable Costs. How do we know or find out what part is Fixed & what is variable?
You may need this ‘split’ so you can forecast forward how much costs will be, given a level of activity
Semi-Variable Costs
The fixed & variable elements can be predicted by this method.
Look at Exercise 2 in your notes on page 26
I will demonstrate this for you You need to learn this It is VITAL!
High/Low Method
Subtract ‘Low’ values from ‘High’ values given(you need at least 2 values), keeping the Cost as the numerator(on top) & the Volume as the denominator(below).
This answer is the VARIABLE COST per UNIT. Substitute your variable cost per unit into
any of the historical data sets given. No of Units X Variable Cost per unit will
equal the TOTAL VARIABLE COST
High/Low Method
The historical data set will give you a TOTAL COST.
We know that Total Cost = Total Variable Cost plus Total Fixed Cost.
We now know 2 parts of the above equation.
We can calculate TOTAL FIXED COST We can then forecast any cost total for any
activity level now
High/Low Method
What is a Public Body? A public body is not part of a government
department, but carries out its function to a greater or lesser extent at arm's length from central government.
Ministers are ultimately responsible to Parliament for the activities of the bodies sponsored by their department.
Public Corporations; NHS Bodies; and Public Broadcasting Authorities (BBC and S4C).
Public Bodies
The main aim of all Public Bodies is to carry out their duties as efficiently and effectively as possible, within available resources, for the benefit of taxpayers, customers and staff.
A Public Body has in place sound internal financial, risk management and management information systems including: management accounting systems to enable it to monitor and control its expenditure against budget; to produce annual accounts;
Public Bodies
Try the 4 questions that summarise this First session
End of Session Exercises