Management

Accounting:

A Road of Discovery

Presentations by:
Syed Tauseef Raza (SNHU &
ITM)
 Needs Determine the Form of
Accounting Data
 Managers need changing information to meet
changing needs!
 Types of Accounting Systems
 Financial Accounting

 Rules and procedures

 Accounting information systems and internal controls
 Auditing
 Cost Accounting
 Product costing
 Activity-based costing
What is Management
Accounting?

Accounting for Planning,

Control, and Evaluation
 What’s COST ?

Cost means the amount of

expenditure incurred.
 Problems in Identifying and
Measuring Benefits
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of
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isthe
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the monetary
monetarybenefit
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monetary aahappy
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customer?
quality?
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benefit of
ofanan
improved
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working
working
environment
environment
??
Problems in Identifying and
Measuring Costs

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high?
Cost Classification and Cost
Behavior

SMBA 01
Fall 2010
SNHU & ITM
Cost Classifications for Predicting
Cost Behavior

By
By reaction
reaction to
to changes
changes in in the
the level
level of
of
activity
activity within
within the
the relevant
relevant range.
range.
 Total
Total variable
variable costs
costs change
change when
when activity
activity
changes.
changes.
 Total fixed costs remain unchanged when
Total fixed costs remain unchanged when
activity
activity changes.
changes.
 Variable Cost

 Raw materials
 Direct labor
 Power and fuel
 Packing material
 Product consumables.
 Fixed Cost

 Factory /Office/Go down Rent

 Staff/Management Salaries
 Depreciation
 Annual maintenance contracts
 Legal fees
 Director fees
 Auditors fees
 Property tax
 Printing and stationary costs
 Interest on loans
 ON THE BASIS OF MANAGERIAL
DECISION MAKING

 MARGINAL COSTS
 SUNK COSTS
 IMPUTED COSTS
 OPPORTUNITY COSTS
 AVOIDABLE COSTS
 UNAVOIDABLE COSTS
 DIFFERENTIAL COSTS
 Marginal Cost (MC)

 The marginal cost of an additional unit of output is the cost of the additional
inputs needed to produce that output. 

 Marginal cost and average cost can differ greatly.  For example, suppose it
costs $1000 to produce 100 units and $1020 to produce 101 units.  The
average cost per unit is $10, but the marginal cost of the 101st unit is $20
 IMPUTED COSTS (IC)
 Imputed costs a.k.a implicit costs.
 Implicit Cost + Explicit Cost = Total Cost.

E.g.
Tauseef builds a cabinet. He spends 2 hours building the cabinet. He could
have been working instead and normally makes $25/hour at his job. Since he
was building a cabinet he wasn't paid for this time. The materials to make
the cabinet cost him $20.

 His Explicit Costs are: $20 in materials

 His Implicit Costs are: $25/hr x 2 hrs= $50 of foregone pay
 Avoidable and unavoidable costs

 Definition of Avoidable Cost: A cost that can be avoided by not producing a

particular good. For example, if you are building cars, an avoidable costs
would be the raw materials.

 If you stopped producing a car, you would no longer have to pay for the raw
materials such as steel and aluminium. However, other costs of a firm maybe
unavoidable, at least in the short term. For example, the firm still has the
fixed costs such as rent and paying some safety workers.

 For this reason avoidable costs are often variable costs.

 Differential Costs

 Differential cost is only calculated for decision making.

 For example:
If the work is done in machine the cost is Rs. 2,55,000/- if the work is done
with the labor the cost will be Rs. 2,00,000/- the differential cost is Rs.
55,000.
 Opportunity Costs

The potential benefit that is given up when one alternative is

selected over another.

Example: If you were not attending this

program, you could save $10,000 per year.
Your opportunity cost?
 Sunk Costs

Sunk costs have already been incurred and cannot

be changed now or in the future. They should
be ignored when making decisions.

Example: You bought an automobile that cost

$10,000 two years ago. The $10,000 cost is
sunk because whether you drive it, park it, trade
it, or sell it, you cannot change the $10,000 cost.
COST SHEET
 
DIRECT MATERIAL
DIRECT LABOUR
DIRECT EXPENSES
 

PRIME COST
FACTORY OVERHEADS
 

FACTORY COST
OFFICE OVERHEADS
 

COST OF PRODUCTION
SELL & DIST OVERHEADS
 

COST OF SALES
PROFIT
 

SALES
Summary of the Types of Cost
Classifications

 Financial reporting
 Predicting cost behavior
 Products- determining unit costs
 Decision making
The Goal of Good Management is
to Create Value

 Cost Management is applying the value

criteria to every decision we make, every
activity we perform, and every process we
complete.
 Management accounting systems are used to
enhance both decision making and
management control.
 Management accounting systems do not
need to be perfect, only ‘good enough’ to
increase value.
Any Query ?
 Thank You