Chapter 2

Management accounting:
cost terms and concepts

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 Outline

• Management accounting systems

• Emphasis on costs
• Cost classifications
• Direct and indirect costs
• Controllable and uncontrollable costs
• Costs across the value chain
• Manufacturing costs and cost flows

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Management accounting systems
• Management accounting systems are
tailored to an organisation’s needs
• Components may include
– Costing systems
– Budgeting systems
– Performance measurement systems
– Cost management systems
• Traditional versus modern approaches

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Traditional versus modern management

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 Emphasis on costs
• Why do management accountants pay
so much attention to costs?
– Historic focus on production costs
– Ready availability of cost data
– Importance of cost information
• Non-financial information is increasingly
important in modern management
accounting systems

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 Different cost classifications
for different purposes
• Before we classify costs, we need to
understand how managers intend to use
the information
• Different costs and classifications are
used for different purposes
• The same cost can be classified in a
number of ways depending on the
intended use of the cost information
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 What are costs?
• Resources given up to achieve a
particular objective
• In financial accounting
─Asset
─Expense
• Measured in monetary terms

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 Common cost classifications

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 Classifying costs according
to their behaviour (là phân loại
theo biến phí và định phí)
• Biến phí bị tác động lớn bơi mức độ hoạt động của đơn
vị (tổng biến phí thay đổi, biến phí đơn vị thay đổi # với
định phí)
• Managers need to understand how costs change as the
level of activity in the business changes
• Level of activity
• Cost driver (khi nào phân loại là định phí khi nào là biến
phí vd: đp: tiền lương của giảm đốc, bv,..bp: lương nhân
viên sx
• Variable costs
• Fixed costs

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 Direct and indirect costs
• An important function of management
accounting is to measure the cost of cost
objects
– Cost objects are the items for which
management wants a separate measure of
costs
– Direct costs can be identified with or traced
to a particular cost object
– Indirect costs cannot be economically
identified or traced to a cost object (cont.)
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Direct and indirect costs (cont.)
• Responsibility centres
– A responsibility centre is a unit of an
organisation where the manager is held
accountable for the unit’s activities and
performance
– The costing system may measure the
costs of managers’ individual areas of
responsibility
– Assigning costs to units is part of
responsibility accounting (cont.)

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Direct and indirect costs (cont.)
• Product costs
– Direct product costs
– Indirect product costs
– Nature of the cost object
– Do we wish to know the cost of a
department, a product, a project, or an
entire company?
– A cost can be a direct cost of one cost
object and an indirect cost of another cost
object
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 Controllable and
uncontrollable costs
• Managers’ performance evaluation can be
enhanced by classifying responsibility centre
costs as either controllable by the manager or
uncontrollable
• Ideally, managers should be held responsible
only for costs they can control or significantly
influence
• Some costs are controllable in the long term
but not in the short term
(cont.)
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 Controllable and
uncontrollable costs (cont.)

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 Costs across the value chain
• The value chain
– A set of linked processes or activities that
begins with acquiring resources and ends
with providing and supporting products and
services that customers value
• Various cost classifications can be used
within the upstream, downstream and
manufacturing areas
(cont.)

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 Costs across the value
chain (cont.)
• Upstream costs
– Research and development ,design and supply
costs
• Production costs
– The costs incurred to collect and assemble the
resources used to produce a product
• Downstream costs
– Marketing, distribution and customer service
costs (cont.)
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 Costs across the value
chain (cont.)

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 Manufacturing costs
• Manufacturing costs
• Non-manufacturing costs
• Classification of manufacturing costs
– Direct material, direct labour and
manufacturing overhead
– Direct or indirect cost classification assumes
that products are the relevant cost objects
• Traditional product costing
(cont.)
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 Manufacturing costs (cont.)
• Direct material is
– Consumed in the manufacturing process
– Physically incorporated into the finished
products
– Can be economically traced to products
– A variable cost (with respect to products)
• Direct labour is
– directly traced to a product
– Usually treated as a variable cost unless
contractual arrangements in place (cont.)
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 Manufacturing costs (cont.)
• Manufacturing overheads include:
– Indirect manufacturing costs or factory burden
– Indirect material and indirect labour,
depreciation and insurance on factory
equipment, utilities and the costs of support
departments for manufacturing
– Overtime premium and idle time
– Manufacturing support departments do not
work directly on producing products
(cont.)
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 Manufacturing costs (cont.)
• Conversion costs
– The total of direct labour cost and
manufacturing overhead cost
– The cost of converting material into a product
• Prime costs
– The total of direct material cost and direct
labour cost
– The major cost associated with producing a
product
(cont.)
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 Manufacturing costs (cont.)
• Modern costing systems analyse costs in greater
detail than traditional costing systems
– Classifying direct material
– Analysing labour costs may be analysed as part of
activity costs
• In many industries, direct material is the largest
proportion of the manufacturing cost and direct
labour costs are the smallest

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 Product costs
• Managers need estimates of product costs
for different purposes
• In financial accounting reports
– Product costs determine cost of goods sold
– Product costs help value inventory on hand
(hang tồn kho)
– Period costs
• For management decision making
– Definitions of product costs may include non-
manufacturing costs
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 Cost flows in a manufacturing
business
• Material is purchased: the cost is added
to raw materials inventory
• Direct materials are consumed in
production: cost is removed from raw
materials inventory and added to work in
process inventory
Direct labour and manufacturing
overhead are accumulated (tích lũy) in
work in process inventory (cont.)
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 Cost flows in a manufacturing
business (cont.)
• Products are completed: costs are
transferred from work in process inventory
and added to finished goods inventory
• Products are sold: costs are transferred
from finished goods inventory to cost of
goods sold expense
• Cost of goods sold is deducted (trừ) from
sales revenue to determine gross profit
(lãi gộp)
(cont.)
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 Cost flows in manufacturing
business (cont.)
• Raw materials, work in process and
finished goods inventory balances are
reported in the balance sheet
• Cost of goods sold expense can be found
in the income statement
• The schedule of cost of goods
manufactured and schedule of cost of
goods sold summarise the flow of
manufacturing costs (cont.)

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Cost flows in
manufacturing
business (cont.)

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 Summary
• Traditional and modern approaches to
management accounting can be distinguished
• Costing systems focus on the cost of products and
organisational units and are a component of
management accounting systems
• The classification of costs may vary depending on
the different intended uses of those costs
• Costs may be classified by behaviour, traceability,
controllability and function
• The value chain provides a framework to identify
where cost are incurred in an organisation
(cont.)
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 Summary (cont.)
• In manufacturing businesses, production costs
typically consist of direct materials, direct labour
and manufacturing overhead, in line with external
reporting requirements
• The definition of product costs needed to support
management decision making may be broader
than that used for external reporting purposes
• Product costing systems track the manufacturing
costs from the beginning of production to finished
goods and link the product costing system to the
financial accounting reports

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