Management Accounting

1
Management Accounting

• Lecture Two
• - Drury, chapter 3-5

2
Drury part 2

• Cost Accumulation for Inventory Valuation and
  Profit Measuremnt.
• ( If it is manufactured and not sold inventory)
• (If it is manufactured and sold profit)
• Ch 3 Acconting for direct costs
• Ch 4 Cost assigment for indirect costs
• Ch 5 Accounting for a job costing system

3
Labor costs

• Payroll accounting Computations of gross pay
  for employees
• Labor cost accounting Allocating labor costs to
  cost objects
• (products, services, customs order, overhead
  accounts)

4
Payroll accounting
Clock card
Personal record card
Key code Employee number
Hourly/monthly wages Overtime premiums Shift-work
premiums
X
Gross Pay
Attendance time
Job record card
Piecework ticket
Gross Pay
Rate per item
Number of pieces
X
Bonus schemes
Job card
Gross Pay
of saved time
Time used
X
Personal record card

• Deductions
• Net Pay

Taxes, pensions, insurances
5
Labor cost accounting

• Rules of thumb
• Classify ordinary labor costs (employment costs,
  insurance, holiday pay etc.) as direct labor
  costs
• Additional costs due to overtime or shift-work
  premiums are usually not charged directly to
  products

Key code Job number Product code Customer
number Overhead account
Job card
Personal record card
Time used
Hourly/monthly wages
X
Idle time card
Time used
Hourly/monthly wages
X
6
Materials recording procedure

• 1. Purchase of materials
• Purchase requisitions to the purchasing
  department
• Purchase order to the supplier
• 2. Receipt of materials
• Good received note to the
• Purchasing department (to be compared to the
  order)
• Accounting department to ensure correct payment
  and to ensure correct internal treating
• 3. Issue of materials
• Store requisition

7
Enter on the account

• Store ledger account Creditors account
• xx 500 xx 500
• yy 500
• Work in progress
• yy 500
• Customer order account
• Product code

8
Pricing the issue of materials

• FIFO (First In First Out)
• LIFO (Last In Last Out)
• Average cost
• LIFO normally not be used in financial
  accounting.
• (not the actual cost during the period)

9
Issues relating to accounting for materials

• Treatment of store losses
• Complete periodic stock-count
• Continuous stocktaking
• Treatment of materials delivery costs
• Treatment of materials handlings costs

10
Relevant stock costs

• Holding costs
• Interest on the value
• Material handling costs
• Storage costs
• Ordering costs
• Clerical costs to handle the order
• The dilemma By lowering the holding costs, the
  ordering costs will increase

11
The economic order quantity formula

• Q The economic order quantity
• D Total demand for the period
• O Cost per order
• H Holding cost per unit
• Assumptions
• The holding cost per unit will be constant
• The average balance in stock is 0.5Q

12
When to order?

• Use the EOQ-formula and the lead time
• Lead time The time from placing the order to
  delivery

13
MRP, MRP II and JIT

• Materials Requirement Planning
• Overview (computerized) of the manufacturing-value
  chain by linking finished goods to direct
  material
• Manufacturing Resource Planning (MRP II)
• Includes machine capacity and labor, also
• Just-in-time systems
• Product flows
• Pull manufacturing system
• Long-term contracts with suppliers

14
Assignment of direct and indirect costs

• Costs
• Direct costs can be traced to a specific cost
  object
• Indirect costs (Overhead costs) can not be
  traced to a specific cost object
• Cost allocation is used to allocate indirect
  costs to cost objects
• Cause-and-effect allocations
• Arbitrary allocations

15
Cost information
This information if sufficient for external
reporting of asset valuation and profit
16
Different costs for different purposes

• Inventory valuation and profit measurement
• No individual product cost is needed
• Information for decision making
• Cost-information of every single product is
  needed (in order to distinguish between
  profitable and unprofitable products)

17
The two stage allocation process

• Four steps
• Assign all manufacturing overheads to production
  and service cost centers
• Reallocate costs assigned to service centers to
  production centers
• Compute separate overhead rates for each
  production cost center
• Assign cost centre to products (or other cost
  objects)

18
Under- and over-recovery of overheads
19
Under- and over-recovery
20
Job- and process costing systems

• Job costing system (chapter 5)
• The cost of each unit need to be calculated
  separately
• Used when products or services are customized
• Process costing system (chapter 6)
• Used when it is unnecessary to assign costs to
  individual units
• Average cost per unit is calculated by dividing
  total cost with total quantity

21
Material recording procedure
22
Accounting procedure for labor costs
23
Accounting procedure for manufacturing overheads
24
Contract costing

• Large projects which usually takes several years
• How to estimate the profit each year instead of
  waiting until the project is completed?
• Deduct the total cost of sales (this year and
  previous years) of the Value of work (at the end
  of the year) and compare with the contract price.

25
Guideline when foreseeing profit/losses in
contracts

• If the contract is in its early stages, no profit
  should be taken
• Losses Incurred or foreseen should immediately
  be added to the cost of sales
• If the contract is near completion, the size of
  eventual profit should be foreseen with
  reasonable certainty