1.

Intro to Management Accounting

Introduction
Managerial accounting is a branch of accounting that is concerned with the identification,
measurement, analysis, and interpretation of accounting information so that it can be used to help
managers when making necessary decisions to efficiently manage a company’s operations.

Management acc Financial acc

Internal reporting External reporting
No standards Financial standards
Report focus Report focus
Reporting Reporting frequency
frequency

• Managerial accounting involves the presentation of financial information for internal purposes.
This information is used by the management when making business decisions
• Techniques used by managerial accountants are not set out by accounting standards.
• The presentation of managerial accounting information can be modified to meet the specific
needs of management.
• Focused on budgeting, forecasting, and various financial analysis.

Planning and control cycle

Formulate long/short term plans
(Planning) - begin

Compare actual with planned Decision making Implement plans

Performance (control) (direction and motivation)

Performance management
(control)

Steps in planning process

1 Identify objectives
2 Identify potential strategies
3 Evaluate strategic options
4 Select alternative possibilities
5 Implement long-term plans in form of annual budget
6 Monitor actual results
7 Respond to deviations
Code of conduct
• Integrity
• Objectivity
• Confidentiality and professional competence
• Compliance with relevant laws and regulations
Summary
• Management accounting used for internal reporting
• Are used for planning, control and decision making
• Information to influence future decision making
• Code of conduct

Introduction
Financial accounting and management accounting requires cost information
to perform certain tasks
But, different usage of cost information requires different classification

MERCHANT
• Buy and sell completed goods
MANUFACTURER
• Buy raw materials
• Produce and sell finished products

General cost classification

• Direct material
• Direct labour
• Manufacturing overheads

DIRECT MATERIAL
• The material that forms an integral of the product and that can be
easily be traced back to the product.
DIRECT LABOUR
• That labour that can be easily be traced back to individual units of the
product.
MANUFACTURING OVERHEADS
• Manufacturing cost that cannot be traced back directly to specific units
• Manufacturing cost that cannot be traced back directly to specific units
produced.
Indirect labour and material
PRODUCT COST PERIOD COST
Product cost include direct Period cost is not included in
material, direct labour, and product cost. It is expensed in the
manufacturing overheads income statement.

Inventory COS Expense

Total variable cost

Total material is based on the
number of units produced

Variable cost per unit

The cost per unit is
constant.

Total fixed cost

Monthly rent does not change
as production changes

Fixed cost per unit

The average cost per unit
decreases as production increases
 DIRECT COST
• Cost that can be easily and comfortably
traced to a unit of a product.
• Examples: direct material and direct
labour
INDIRECT COST
• Cost that cannot be easily and comfortably
traced to a unit of a product.
• Example: manufacturing overheads

DIFFERENTIAL COST AND INCOME

Cost and income that differs between alternatives.
Example: You have a job that pays R1 500 per month in your home
town. You have a job offer in a nearby city that pays R2 000 per
month. The transport cost to the city is R300 per mo

Differential income is:

R2 000 – R1 500 = R500
Differential cost is:
R300

OPPORTUNITY COST
Def : The potential benefit that is sacrificed when one alternative is
chosen over another.
Example: If you do not attend university this year, you could earn
R90 000 per annum?
Your opportunity cost to attend university is
R90 000 for one year.

SUNK COST
Def : Sunk costs cannot be changed by any decision. This is not
differential cost and should be ignored in decision making
Example: You have two years ago bought a car which cost R15 000.
The R15 000 cost is a sunk cost because if you drive the car,
parking, exchange or sell, you cannot change the R15 000 cost.
Introduction to cost classification and behaviour
1. Predicting: how costs will change in relation to changes in activity levels is
important for decision making, planning and control.
2. Cost classification: costs are classified as fixed or variable based on cost
behavioural patterns
3. Cost behaviour: cost behaviour has to do with the way in which costs react to
changes in the business activity
4. Important: cost behaviour is important for accurate cost predictions

Cost behaviour patterns/terminology

1. Variable costs:
• Total variable costs change in relation to the activity level
• Variable cost per unit stays constant within the relevant range
2. Fixed costs:
• Total fixed cost stays constant within the relevant range irrespective of the
change in activity level
• Fixed cost per unit changes if the activity level changes
3. Step-fixed costs:
• Remain fixed within a specified activity levels for a given amount of time but
which eventually changes by a constant amount at critical activity levels.
• Increases in jumps
4. Committed fixed costs
• Fixed costs that can not be changed in the short term
5. Discretionary fixed costs (manageable)
• Fixed costs that can be changed or corrected in the short term
6. Mixed costs (semi-variable costs):
• Costs with a fixed and variable component.
7. The activity base (cost driver)
• Cost driver is that factor that causes a change in the total cost of an activity.
8. The relevant range
• Identifying costs as fixed or variable is only valid within a specific range, thus the
range where the total fixed costs and variable cost per unit do not change.

Evaluation of methods for cost analysis

Mixed cost
ANALYSIS
• Mixed cost consists of a fixed and variable component
• Can be plotted on a graph
• Can also be expressed as a formula/function

Steps :
1. Draw fixed cost line
2. Draw variable cost line
3. Combine graphs y = Total mixed cost
a = Total fixed cost
b = Variable cost per unit of activity
X= Activity level
Graph method
• A range of observations are plotted on a graph, then a
regression line is drawn.
• The regression line represents the average of all the
observations, thus also the average total cost of the mixed cost
• The Y-intercept represents the fixed cost element
• The slope of the line represents the variable cost

• The regression line intercepts the y-axis at

R240 000. Thus the fixed cost is R240 000.
• NB! The slope (b) can now be calculated by
substitution in the function – NB The point
chosen for substitution should be as close as
possible to the regression line
Y = a + bX
R880 000 = R240 000 + b(320)
320b = R640 000
b = 2 000
• Thus the variable cost is R2 000/mh
• Thus the cost function is as follows:
Y = R240 000 + R2 000/mh

Least squares regression method

• Statistical method that takes all points into account.

X = Activity level
Y = total mixed cost for the activity level
A = total fixed cost
B = variable cost per cost driver
N = the number of observations
Σ = sigma – means the sum of
High-low method
• Based on linear relationship between total mixed cost and the activity level
• Use only two observations – highest and lowest activity levels
• This method assumes that fixed cost will stay constant during the period within
the relevant range
• The difference in total mixed cost can thus only be as a result of a change in
variable cost.

• The difference in total mixed cost (R1 800) is as a results of a change in the
activity level (150mh).
• The variable cost can be calculated as follows:
• Variable cost per ∆ in mix cost
cost driver = ∆ in act level
• Variable cost per R1 800
machine hour = 150 mh
= R12.00/machine hour
• Now that the variable cost per machine hour is known, the total fixed cost can be
calculated by means of the cost function:
○ Y = a + bX
• Substitute any of the two points in the function:
R900 = a + (R12/mh x 30mh)
a = R900 – R360
= R540
• Cost function:
Y = R540 + R12X(mh)

Summary
• Managerial activities are dependent on accurate cost estimation – it is necessary to
understand cost behaviour
• To understand cost behaviour costs should be classified into fixed and variable cost
• A relevant range exists within which behavioural patterns of costs are valid
• Mixed costs consists of a variable and a fixed component and should be analysed by one of
the following techniques: High Low method; Scatter graph method; Least square regression
method
• Cost equation can be set