Welcome to ACCG200 Fundamentals of Management Accounting Week 1 Department of Accounting and Corporate Governance 1 Unit Guide and Assessment Guide Staff: Unit Convenor: Ms Sophia Su Lecturers: Ms Sophia Su (Tuesday stream) Dr Ranjith Appuhami (Friday stream from week 3) Teaching Administrator: Ms Claudia Chau Unit Email: [email protected] Unit Webpage: http://ilearn.mq.edu.au/login/MQ/ 2 Assessments To PASS the unit you MUST pass the final exam To APPLY for a special consideration in the final exam you MUST have attained a minimum of 45% in the coursework completed up to the application closing date (i.e. 40Г—45%=18 marks) 3 Class Participation: 5% вЂў Attendance: 11 out 12 вЂў The willingness to express ideas in each class вЂў The ability to articulate your thoughts 4 Weekly Assignments: 15% Weekly assignments will be collected by your tutor at the end of each weekвЂ™s tutorial: S+: 1.5 marks S: 1 S-: 0.75 I: 0.5 Best 10 (out of 11) will count with marks towards the 15% weightings. 5 Excel Assignments: 20% Topic Due in Time and Date for submission Cost volume profit analysis Week 4 Friday 6pm 24 August Product costing system- job costing Week 7 Friday 6pm 14 September Variable and absorption costing Week 10 Friday 6pm 19 October Activity-based costing Week 12 Friday 6pm 2 November 1. The excel assignment questions will be emailed to your student email account by the end of week 3. 2. Must read the document вЂњACCG200 Excel Assignment Notes S2 2012вЂќ provided in the вЂњExcel AssignmentsвЂќ folder on iLearn website. 3. Submit your assignment via iLearn. 6 Final Exam: 60% 20% Multiple choice questions Practice multiple choice questions will be available under the folder вЂњPractice online quizzesвЂќ on the iLearn website 80% Practical questions Lecture examples and tutorial questions 7 Peer Assisted Learning (PAL) вЂў PAL is offered in this unit вЂ“ go to BESS (E4A106) for more information вЂў This is a free program that is run by students who have previously studied the unit and achieved excellent grades. 8 Introduction and Course Overview This unit consists of four main parts: 1.Cost concepts, cost classifications and cost flow (week 1) 2.Using costs for decision making (week 2-4) 3.Costing techniques, including job/process costing and overhead cost allocation (week 5-10) 4.Budget setting and evaluating performance against the budget (week 11-12) 9 What is Management Accounting? Management accounting can be defined as: вЂ¦ the processes and techniques that focus on the effective and efficient use of organisational resources to support managers in their tasks of enhancing both customer value and shareholder value. Examples of management accounting decisions: вЂўPricing вЂўAdd or drop a product вЂўAccept a special order or not 10 Difference between Management Accounting and Financial Accounting Management accounting Financial accounting ? 11 Cost concepts What are costs? вЂ“ Resources given up to achieve a particular objective вЂ“ Measured in monetary terms What is a cost object? An item for which management wants a separate measure of costs What is a cost driver? A factor or activity that causes a cost to be incurred What is the level of activity? The level of work performed in the organisation (e.g. hours worked, units produced) 12 Cost classifications Different cost classifications are used for different purposes, and the same cost can be classified in a number of ways depending on the intended use of the cost information. Basis of classifications Cost Classifications 1.Behaviour Variable and fixed costs 2.Traceability Direct and indirect costs 3.Timing of the expense Product and period costs 4.Manufacturing costs Direct material, direct labour and manufacturing overhead 5.Value chain Upstream, manufacturing and downstream costs 6.Controllability Controllable and uncontrollable costs 13 Cost classifications cont. 1. Basis of classification: Behaviour вЂў Variable cost вЂ“ Changes in total in proportion to changes in the level of activity ( e.g. cost of electricity used to manufacture a product) вЂў Fixed cost вЂ“ Remain unchanged in total despite changes in the level of activity (e.g. rent paid for factory remains unchanged no matter how many units we produce) 14 Lecture example 1 ABC Ltd manufactures wooden toys. Activity level (No. of toys produced) Variable Annual total cost per toy fixed costs Total Fixed cost variable cost per toy 1 $12 $10,000 1000 $12 10,000 12,000 10 2000 $12 10,000 24,000 5 $12 $10,000 15 Cost classifications 2. Basis of classification: Traceability вЂў Direct cost can be directly identified with or traced or linked to a cost object in an economic manner. вЂў Indirect costs cannot be identified with or traced or linked to a cost object in an economic manner. Example: Assume a office desk is a cost object, then: 1.Cost of wood: Direct or Indirect? Direct 2.Cost of glue: Direct or Indirect? Indirect 3.Salary of the production supervisor: Direct or Indirect? Indirect 16 Cost classifications cont. 3. Basis of classification: timing of the expense вЂў Product cost вЂўThe cost assigned to goods/services that were manufactured or purchased for resale. Product cost is regarded as a part of the asset / inventory until goods are sold. вЂў Period cost п‚—The costs expensed in the accounting period in which they are п‚—incurred rather than being attached to units purchased or produced. п‚—(e.g. salaries of sales staff, advertising expense, depreciation of office п‚— equipment) 17 Cost classifications cont. 4. Basis of classification: Manufacturing/ product costs вЂў Direct material - Materials that eventually become part of the cost object - Can be directly traced and linked to the cost object in an economic manner вЂў Direct Labour - All manufacturing labour that can be directly traced or linked to cost object (e.g. wages paid to production workers, workersвЂ™ compensation insurance and superannuation contributions) вЂў Manufacturing overhead (indirect manufacturing costs) - All manufacturing costs other than direct material and direct labour. (e.g. the cost of indirect material, indirect labour, depreciation and insurance on factory equipment) 18 Lecture example 2 For each of the costs listed below, indicate whether it is direct material (DM), direct labour (DL), manufacturing overhead (MOH) or period cost Cost Classifications Flour used in making pizza DM Salary of production supervisor MOH Wages of production workers DL Depreciation on factory building MOH Depreciation on head office building Marketing cost Period cost Period cost 19 Manufacturing Overhead Manufacturing overhead costs also usually include overtime premium and the cost of idle time: вЂў Overtime premium: extra wages paid to an employee who works beyond normal working hours. e.g. Assume regular wage =$30/hr ; overtime wage = $45/hr, assume John worked an additional hour and was paid $45 , then the $45 can be classified into: DL: $30 MOH (overtime premium): $15 вЂў Idle time: the cost of employeesвЂ™ non-productive time, arising from events such as equipment breakdowns or new setups of production runs. 20 Lecture example 3 Highlander Cutlery manufactures kitchen knives. One of the employees, whose job is to cut out wooden knife handles, worked 48 hours during a week in January, including 1 hour idle time due to power outage. The employee earns $10 per hour for a 38-hour week. For additional hours, the employee is paid an overtime rate of $15 per hour. Calculate: (1)The total cost of the employeeвЂ™s wages during the week (2)Determine the portion of this cost to be classified in DL, MOH (idle time), MOH (overtime premium). 21 Lecture example 3 solutions (1) = = = Total wages 38Г—$10+ (48-38)Г—$15 $380+ $150 $530 (2) Direct Labour = (48-1) Г—$10 = $470 MOH (overtime premium) = (48-38) Г—($15-$10) = 10 hrs Г—$5 = $50 MOH (idle time) = 1 Г— $10 = $10 22 Cost classifications cont. Total Manufacturing cost Direct Material cost Direct labour cost Prime cost Manufacturing overhead Conversion cost 23 Lecture example 4 The following data relates to a greeting card manufacturer, Haven Ltd. Calculate each of the following costs: (1) Total prime costs; (2) Total manufacturing overhead costs (3) Total conversion costs; (4) Total product costs (5) Total period costs 24 Lecture example 4 solutions (1) Total prime costs: Direct Materials Direct labour (wages) Total prime costs 2100 150 $2250 (2) Total manufacturing overhead costs Depreciation on factory building Indirect wages Plant managerвЂ™s salary Overtime premium paid Cost of idle (production) Fire Insurance on plant equipment Total MOH costs $100 200 40 60 40 10 $450 25 Lecture example 4 solutions (3) Total conversion costs Direct labour Manufacturing overhead Total Conversion costs $150 450 $600 (4) Total product costs Direct materials Direct labour Manufacturing overhead Total product costs $ 2100 150 450 $2700 (5) Total period costs Administrative cost Sales commissions Total period costs 130 15 145 26 Cost classifications cont. 5. Basis of classification: Value chain 27 Lecture example 5 Ivory Company produces and sells ice-cream. Classify the costs listed below, using these value chain classifications: Cost Classifications Cost of cream used to make the ice-cream Manufacturing- DM Electricity used to store finished ice-cream products Distribution Cost of fuel for delivery trucks Distribution Wages paid to staff who make the ice-cream Manufacturing -DL Wages paid to staff who develop recipes for new ice-cream flavours Cost of advertising in the food trade magazines Research & development Marketing 28 Cost classifications cont. 6. Basis of classification: controllability вЂў Controllable cost a cost that a specific manager can control or significantly influence. вЂў Uncontrollable cost a cost that a manager cannot control or significantly influence. Example: For a production manager, are the salaries of the CEOs controllable costs? No. Are the wages of production workers controllable costs? Yes 29 Cost flow in a manufacturing business Raw material (RM) Work in Process (WIP) Begin. Bal. DM purchased DM used Begin.Bal. DM DL MOH End. Bal. COGM Finished goods Begin.Bal. COGM COGS End. Bal. End. Bal. Total manu. cost Cost of goods manufactured = Begin. WIP (COGM) Cost of goods sold (COGS) = + Total manufacturing вЂ” End. WIP costs Begin. Finished + COGM вЂ” End. Finished goods goods 30 Cost flow in a manufacturing business Explanations of T-accounts: 1. Material is purchased: the cost is added to RM inventory; 2. DM are consumed in production: cost is removed from RM inventory and added to WIP inventory; 3. DL and MOH are accumulated in WIP inventory; 4. Products are completed: costs are transferred from WIP inventory and added to finished goods inventory; 5. Products are sold: costs are transferred from finished goods inventory to cost of goods sold expense 31 Lecture example 6 The following data refer to NaniвЂ™s Fashions for the current year. Sales revenue $ 475,000 Electricity: plant $20,000 Work in progress inventory, 31 Dec. 15,000 Depreciation: plant and equipment 30,000 Work in progress inventory, 1 Jan. 20,000 Finished goods inventory, 31 Dec. 25,000 Selling & Administrative expenses 75,000 Finished goods inventory, 1 Jan. 10,000 Purchase of raw material 90,000 Indirect material 5,000 Raw material inventory, 31 Dec. 12,500 Indirect labour 7,500 Raw material inventory, 1 Jan. 20,000 Other manufacturing overhead Direct labour 40,000 100,000 (1) Prepare the schedule of cost of goods manufactured for NaniвЂ™s Fashions; (2) Prepare the schedule of cost of goods sold for NaniвЂ™s Fashions. 32 Lecture example 6 solutions (1) Cost of goods Total manufacturing вЂ” End. WIP manufactured = Begin. WIP + costs (COGM) 20,000 DM+DL+MOH Direct material: Raw material inventory, 1 January Add: Purchases of raw material Raw material available for use Deduct: Raw material inventory, 31 December Raw material used Direct labour Manufacturing overhead: Indirect material Indirect labour Electricity: plant Depreciation: plant and equipment Other Total manufacturing overhead Total manufacturing costs Add: Work in process inventory, 1 January Subtotal Deduct: Work in process inventory, 31 December Cost of goods manufactured (COGM) 15,000 $20 000 90 000 110 000 12 500 $97 500 100 000 5 000 7 500 20 000 30 000 40 000 102 500 300 000 20 000 320,000 15 000 $305 000 33 Lecture example 6 solutions (2) Cost of goods sold (COGS) = Begin. Finished + COGM вЂ” End. Finished goods goods 10,000 305,000 Finished goods inventory, 1 January Add: Cost of goods manufactured (COGM) Cost of goods available for sale Deduct: Finished goods inventory, 31 December Cost of goods sold (COGS) 25,000 $10 000 305 000 315 000 25 000 $290 000 34