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It's Chartered Institute of Management Accountants Course: C-01 Fundamentals of Management Accounting ,Class LSBF Manchester ,Unit 1 2012 Q's By Sir Ian Wilson.
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CIMA C1Fundamentals of Management Accounting
Class Slides – Ian Wilson
CIMA C1Fundamentals of Management Accounting
Introduction to Cost Accounting
The following slides will cover the learning aims covered in your Lsbf notes for Chapters 1 & 2.
Chapter 1 – Nature & purpose of Management Accounting
Chapter 2 – Cost classification & behaviour What do you need to study? See the next slides & the objectives:
Chapter 1 & 2
• Define management/Cost Accounting• Explain the importance of Cost Control &
Planning in an organisation• Describe how information can be used to
measure performance in a company• Explain the differences between financial
information requirements for Companies, public bodies & society.
Learning Aims (CIMA)
• Explain the concept of Direct & Indirect Cost• Explain why the concept of cost is
meaningful & essential to business• Explain how different types of costs behave
in relation to changes in the Level of Activity• Distinguish between Fixed, Variable & Semi-
Variable Costs• Explain Step Costs• 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?
Management accountants develop & use
Cost Systems: 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 & FutureExternal Audience: Lenders, Stakeholders in plc’s
Internal measure of Performance, qualitative & financial
Content Regulated by Standards & Legislation
Flexible content, Layout & Analysis, depends on requirements
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?
Key position & role include:1. Guiding management on the financial
implications of decisions proposed & made2. Formulating business & financial strategy3. Monitoring spending & financial control4. Internal audit of business performance5. Understanding & interpreting events in the
external business climate & environment Role CRITICAL to BUSINESS SUCCESS
Role of Management Accountant
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 TermTactical
Medium TermOperationalShort 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 17) You need to be able to recognise &
describe:1. Cost Units – to follow2. Cost Centres (already studied) 3. Cost Objects – to follow4. 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
Definition: Cost Unit: In cost accounting, a unit of product or
service for which a cost is computed. Cost units are selected to allow for comparison between actual cost and standard cost, or between different actual costs.
Cost Units & Objects
Definition: 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
Material Costs: Direct Material costs include Raw Materials
used to PRODUCE units of output or service. In garment manufacturing, the CLOTH for a
suit would be a DIRECT MATERIAL Indirect Materials are ALL other materials
used by the business, ie materials for cleaning a sewing machine used to make a suit would be an INDIRECT MATERIAL
Material & Labour Costs
Labour Costs: Direct Labour is the cost of the BASIC RATE
of PAY for a PRODUCTION worker. Added to this may be OVERTIME premiums IF the overtime is requested by a customer.
Indirect Labour costs:1. Overtime premiums except for above.2. Idle Time3. Bonus & Incentive payments4. Wages to NON-PRODUCTION Staff
Material & Labour Costs
Chapter 2 Lsbf Notes: Page 23 Exercise 1 Johnson – calculate wages that should be
treated as a DIRECT COST & INDIRECT COST Total Pay = £485 Direct Cost = £375 Indirect Cost = £110
Material & Labour 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 & Finance
Production & Non-Production Costs
I often draw out a structure for costs.
Make sure you note this down on the next slide.
Learn this, it is important for you.
Cost Classification
Direct Material - variable Direct Labour - variable Direct Expenses - variable = Total Direct Cost or Prime Cost Production Overheads (O.A.R.) -fixed = Total Production Cost Admin Overheads - fixed & variable Selling Overheads – fixed & variable Distribution Overheads – fixed & variable = Total Cost fixed + variable
Cost Classification
Practice your skills with these verbal questions:
We have 16 questions to deal with, I will read these out
Are the costs:1. Production2. Selling & Distribution3. Administration4. Research & Development
Exercise (BPP 33)
What is this? The way in which costs will vary or change
as the Level of Activity changes. Why is this important? As we have seen, an Accountant will play a
major role in advising management as they make crucial business decisions
Let’s say managers want to double output. What will happen to costs? Will they double or not?
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 & behaviour patterns:
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 completed
It may seem easy to agree that costs increase as the level of activity increases.
The picture is complex however. Study pages 24 to 29 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 - fixed plus usage charge Gas Bill – fixed plus usage charge Sales Reps - Salary basic plus commission Water Bill – fixed element plus usage
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 You are given 2 Total Costs for 2 Levels of
Activity The change in cost for the 2 levels MUST be
down to VARIABLE costs alone. 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
Pages 28 to 29
End of Session Exercises