Introduction to Management

Accounting and cost concepts

ACCY918: Applied
Management Accounting
 Part 1:Introduction to
management accounting
1. Differentiate management
accounting from financial
accounting and cost
management
2. Identify five broad purposes of
accounting systems
 Financial Accounting
Concerned with reporting financial information to users
external to an entity in order to help them to make sound
economic decisions about the entity’s performance and
financial position.

Management Accounting
Concerned with reporting financial and other information to
all level of management in an organisation to enable them to
carry out their panning, controlling and decision-making
responsibilities
IFAC Definition of Management
Accounting

The process and techniques that focus

on the effective use of organisational
resources, to support managers in the
tasks of enhancing both customer value
and shareholder value
Management Accounting
Information System

•Collecting •Special reports

•Measuring •Product costs
•Storing •Customer costs
•Analysing •Budgets
•Reporting •Performance reports
Economic events •Managing •Personal communication

Inputs Processes Outputs

Users
 Key differences between financial
accounting, management accounting,
cost accounting and cost management
Financial Management Cost Cost
Accounting Accounting Accounting management
Financial accounting Management accounting Cost accounting provides Cost management describes the
focuses on reporting measures and reports financial information for both actions of managers in short-run
to external parties. It and non-financial information management accounting and and long-run planning and
measures and records that helps managers make financial accounting. It control of costs that increase
business transactions. decisions to fulfil the goals of measures and reports the value for customers and
It provides financial an organisation. financial and non-financial lower the costs of products and
statements based on data that relates to the cost services. It entails the
generally accepted of acquiring or consuming continuous reduction of costs. It
accounting principles. resources by an is a key part of general
organisation. management strategies and their
implementation.
Major Differences Between
Financial & Managerial Accounting
Financial Accounting Managerial Accounting
1. Purpose Communicate financial position and Help managers make decisions
operating results
2. Users External persons who make financial Managers who plan for and control an
decisions (e.g.. Shareholders, creditors, organization and all employees
banks, stock exchange, trade unions,
government agencies)
3. Regulations Accounting standards and corporations No accounting standards or external rules are
laws regulate the contents of external imposed. Information is generated to satisfy
financial reports managers' information needs
4. Source of data Financial data almost exclusively drawn Both financial and non financial data drawn from
from the organization's core-transaction many sources--The core accounting system,
based accounting system production system, external databases
5. Focus Past oriented Future oriented
6. Time span Annual/Quarter Varies
7. Reports General purpose financial reports Special purpose reports
8. Verifiability vs relevance Emphasis on verifiability Emphasis on relevance for planning and control

4. Precision vs. timeliness Emphasis on precision Emphasis on timieliness

 Major purposes of
accounting systems
1) Formulating overall strategies and long-range plans –
internal non-routine reporting
2) Resource allocation decisions, for example, product
and customer emphasis and pricing – internal
routine reporting.
3) Cost planning and cost control of operations and
activities – internal routine reporting
4) Performance measurement and evaluation of people
– internal non-routine reporting
5) Meeting external regulatory and legal reporting
requirements – external reporting.
 Types of reporting
Internal Routine Internal non-routine
External reporting
Reporting reporting
• This purpose • This purpose • This purpose
covers information covers information covers information
provided for for decisions that provided to
decisions that occur irregularly or investors,
occur with some even without government
regularity: precedent: authorities and
• Daily reports • Outsourcing other outside
• Weekly reports. • Design of a company
special cost stakeholders on
control tracking the organisation’s
system. financial position,
operations and
related activities.
Part 2: Strategic directions and
management accounting

1. Recognise the growing role

of strategy in management
accounting processes
2. Understand how
accounting can influence
planning, control and
decision making
The key to company’s success?

Creating value for customers

while distinguishing itself from competitors

Customer Value

Shareholder Value

To crate shareholder value a business must develop its source of

competitive advantage which refers to the advantages that a
business may have over another, which are difficulty to imitate.
Michael Porter suggests to adopt business strategy for gaining
sustainable competitive advantage.
Strategy
A strategy
is a “game plan”
that enables a company
to attract customers
by distinguishing itself
from competitors.
The focal point of a company’s strategy should
be its target customers.

The direction that the organisation intends to take over the long term to meet its
mission and achieve its objectives.
A business is might be though to follow one of the two broad strategies (cost
leaderships or product differentiation).
Management accountants work closely with the managers to formulate strategies
by providing information about the source of competitive advantage.
Strategy concepts
Vision
•The desired future state or aspiration of an
organisation
•Used by senior managers to focus the attention
and energies of staff
Mission statement
Defines the purpose and boundaries of the
organisation
Objectives
•Specific statement of what the organisation aims to
achieve
•Often quantified
•Relates to a specific period of time
Strategy concepts Retails Brands Group (RBG)
Vision Vision:
The desired future state or Preferred franchise choice in quick service retail food
aspiration of an organisation

Mission statement Mission statement:

Defines the purpose and Creating profitable Business Opportunities for
Passionate People through :
boundaries of the
•Living our Values;
organisation •Delivering the best retail experience,
•recruiting and developing the best people,
•commitment to the success of all stakeholders,
• Worldclass business innovation, contributing to
the community.
Objectives Objectives:
• Specific statement of what •Innovation—World class business innovation
the organisation aims to •Brand image—Build great profitable brands
achieve •Retail Experience—Delivering the best retail
• Often quantified experience
• Relates to a specific period of •Community—Be part of the community in which we
operate
time
•Inspire—Live our values, recruit and develop the
best people
Formulating and implementing strategy

Key Questions Major Decisions

Strategic planning
A. Corporate strategy Making choices
(1) In what business about the types of businesses to operate in, which
businesses to acquire and divest, and how best to
will we operate? structure and finance the organisation

(2) How should we B. Business (Completive) strategy

complete in that - Cost leadership?
business?
- Production differentiation?

(3) What systems and C. Strategy Implementation

structures should we Putting plans into place to implement and support
a chosen business strategy
have in place to New structures, new systems, new production
processes, new marketing approaches, new HRM
support our policies
strategies?
 Formulation Mission
Vision of Statement
objectives

Formulation
of strategy

Planning
(Managers prepare plans
to support strategies)

Implement Control
plans
(Managers evaluate
performance against
plans and take
corrective actions)

Customer Value

Organizational Value
 Planning
 A broad concept that is concerned with
formulating the direction for future operations
 Allows an organisation to consider and specify
all resources needed in the future
 Occurs at all levels of the organisation
 A budget is an example of a short-term plan that
summarises the consequences of an
organisation’s operating activities for a specified
time period
 Controlling
 Involves putting mechanisms in place to ensure
that operations proceed according to plan and
that objectives are achieved
 Management accounting information provides
information for control by comparing actual
performance with plans, targets or budgets
 Control systems are the systems and procedures
that provide regular information to assist in
control
Planning and Controlling

Management Decision Management Accounting System

Planning Budgets
Feedback

Control Accounting
System
Action

Performance Performance
Evaluation Reports
What is planning?

Setting
goals

Predicting
results

Deciding how
to attain goals
What are budgets? What are controls?

They are Deciding

quantitative and
expressions taking
of a proposed actions
plan of action.

They aid in the Deciding on

coordination performance
and evaluation
implementation and feedback
of the plan.
 What are performance reports?
These are reports that compare actual results
with budgeted amounts.

Example-1
Boone Shop, July 2009
Budget Actual Variance
Revenues $59,000 $60,000 $1,000 F
Cost of goods sold 42,000 43,400 1,400 U
Wages 6,700 7,000 300 U
General 1,300 900 400 F
Fixed costs 5,000 5,000 0
Operating income$ 4,000 $ 3,700 $ 300 U
 Example-2
Budget % Actual %
Revenues $59,000 100 $60,000 100
Cost of goods sold 42,000 71 43,400 72
Gross margin $17,000 29 $16,600 28
Actual cost of goods sold were
72% of revenues instead of the budgeted 71%.
Feedback
This involves managers examining past performance
and systematically exploring alternative ways to
make better informed decisions in the future.
 Example: A Daily News Paper

Management Decision Management Accounting System

Planning Budgets
# increase advertising rates # Expected advertising pages sold,
rates per page, and revenue
by 4%

Accounting System
Feedback

Control # Source documents

(1) Implement 4% rate #recording in general and
increase to relevant Subsidiary ledgers
parties
(2) Performance
Evaluation: Performance Reports
#Advertising #Comparing actual advertising pages
revenues 7.2% lower sold, average rate per page, and
than budgeted. revenue to budgeted amounts
Part 3: Functions and challenges of
management accountants

1. Distinguish between the scorekeeping,

attention-directing and problem-
solving functions of management
accounting
2. Recognise that economic benefits,
costs as well as contextual and
organisational process issues are
relevant to accounting systems design
and operation
3. Understand how companies add value
4. Explain why digitalisation is
management accounting’s most
important challenge today
 Functions of Management Accountants

(1) Problem Solving

This involves comparative analysis for decision making.
This role asks: Of the several alternatives available, which is the
best?
(2) Score keeping
This involves accumulating data and reporting reliable results to
all levels of management.
This role asks: How is the business doing?
(3) Attention Directing
This involves helping managers properly focus their attention.
This role asks: Which opportunities and problems should be
emphasized first.
Attention directing should focus on all opportunities to add value
to an organization, not just cost-reduction opportunities.
12:01
 Functions of Management Accountants

Management accountants serve each of these three

roles in both planning and control decisions.
 The problem-solving role is most marked for
planning decisions.
 The scorekeeping and attention-directing

roles are most important for control decisions.

 Management accountants often simultaneously
perform two or all of the problem-solving,
scorekeeping and attention-directing roles.
 Management accountants increasingly are
viewing managers as their customers.
 Example
Problem solving? Score keeping? Attention directing?
1. Preparing a monthly statement of
Australian sales for the IBM marketing Scorekeeping
manager.

2. Analyzing, for a Toyota manufacturing

manager, the desirability of having some Problem solving
auto parts made in Korea.

3. Preparing a schedule of depreciation for

Scorekeeping
trucks in the receiving departments

4. Interpreting why Sydney distribution Attention directing

centre exceeded its delivery-cost budget
Some important considerations in the
design of management accounting systems

1. Full recognition of behavioral considerations

• Behavioural issues
• Information may impact on individual behaviour, so
management accounting systems may have expected and
unexpected outcomes
• A key purpose of management accounting systems is to
motivate managers and employees to direct their efforts
towards achieving the organisation’s goals
• Budgeting systems, performance measurement and
reward systems may be used as motivational tools
2. Cost-benefit approach

 There are costs and benefits of generating and providing

management accounting information
Costs
Salary of accounting personnel
Purchasing and operating computers
Gathering, storing and processing data,
Managers’ time to read, understand and use the information
Benefits
Improved decisions
More effective planning
Greater operational efficiency at lower costs
Better control
Improved customer and shareholder value
3. Using different costs for different purposes

A cost concept used for the external reporting purpose

need not be the appropriate concept for the purpose of
internal routine reporting to managers.
 4 themes managers need to
consider value creation
(1) Customer Focus

Invest sufficient (but not excessive) resources in customer satisfaction to

attract and retain profitable customers.
 4 themes managers need to
consider for value creation
(1) Customer Focus
Value chain – Sequence of business
functions in which usefulness is added to the
(2) products or services of an organization
Value Chain
and
Supply Chain
Analysis

Supply chain – the flow of goods, services,

and information from cradle to grave
 4 themes managers need to
consider for value creation
(1) Customer Focus

(2) (3)
Value Chain Key Success Factors:
and (Cost, Quality,
Supply Chain Time, innovation,
Analysis sustainability)

These are operational factors that directly affect the

economic viability of the organization.
 4 themes managers need to
consider for value creation
(1) Customer Focus

(2) (3) (4)

Value Chain Key Success Factors: Continuous
and (Cost, Quality, Improvement
Supply Chain Time, innovation, and
Analysis sustainability) Benchmarking

Continuous improvement by competitors creates a never-ending search

for higher levels of performance within many organizations.
Digitalisation: The management accounting’s most
important challenge today

• Digitalisation is the process by which they become digital business, where the
use of business technologies changes the business model and provide new
revenue and value producing possibilities.
Digitalisation: The management accounting’s most
important challenge today

Two key points

• Digital disruption and rapid cognitive development
• Data availability
What technologies management accountants should
be aware of?

 Artificial intelligence and robotics

 Blockchain

 Big data and analytics

 The cloud/cloud computing

What professional ethics mean to management
accountants?
To achieve the objectives of the profession, management accountants have to observe the
following fundamental principles:

• Integrity: Being straightforward, honest and truthful in all professional and business
relationships. You should not be associated with any information that you believe contains a
materially false or misleading statement, or which is misleading by omission.
• Objectivity: Not allowing bias, conflict of interest or the influence of other people to override
your professional judgement.
• Professional competence and due care. An ongoing commitment to your level of professional
knowledge and skill. Base this on current developments in practice, legislation and techniques.
Those working under your authority must also have the appropriate training and supervision.
• Confidentiality. You should not disclose professional information unless you have specific
permission or a legal or professional duty to do so.
• Professional behaviour. To comply with relevant laws and regulations. You must also avoid any
action that could negatively affect the reputation of the profession.

(Source: www.cimaglobal.com/Professionalism/Ethics/CIMAs-code-at-a-glance/)
Cost terms and concepts
Part 4: Cost terms, concepts
and classifications

1. Define and illustrate a cost object

2. Distinguish between direct costs and
indirect costs
3. Explain variable costs and fixed costs
4. Understand why unit costs must be
interpreted with caution
5. Distinguish between service-sector,
merchandising-sector and manufacturing-
sector companies
6. Differentiate between capitalised costs and
period costs
7. Explain how different ways of computing
product costs are appropriate for different
purposes
Basic Cost Terminology
• Cost – sacrificed resource to achieve a specific
objective
• Actual Cost – a cost that has occurred
• Budgeted Cost – a predicted cost
• Cost Object – anything of interest for which a cost
is desired
Cost Object Examples at BMW

Cost Object Illustration

Product BMW X 5 sports activity vehicle
Service Dealer-support telephone hotline
R&D project on DVD system
Project enhancement
Herb Chambers Motors, a dealer that
Customer purchases a broad range of BMW
vehicles

Activity Setting up production machines

Department Environmental, Health & Safety
How to account for costs?
Stage
Cost Object 1
(1) Cost
Accumulation

Cost Object 2

Cost
Assignment
(2) Cost Object 3
Through Tracing
& Allocating
 Assigning Costs to Cost Objects
Direct costs Indirect costs
• Costs that can be • Costs that cannot be
easily and conveniently easily and conveniently
traced to a unit of traced to a unit of
product or other cost product or other cost
object. object.
• Examples: direct • Example:
material and direct manufacturing
Labour overhead, Electricity
 Cost Assignment

Direct Costs
Example: Paper on which
Cost tracing COST
Sports Illustrated magazine OBJECT
is printed

Example:
Indirect Costs Cost Allocation Sports
Illustrated
Example: Lease cost for the magazine
building housing the senior
editors of Sports illustrated
and other magazines.
Example: Indirect Costs

Assume that lease cost for the building housing the senior
editors of Sports illustrated, People and Time magazines
amounts to $900,000 per annum.

How much is allocated to each magazine ?

[Use the total floor space occupied by the staff of each

magazine as the allocation base. Assume that each
magazine uses same amount of floor space.]
Example: Indirect Costs

Lease
$900,000

Sports Illustrated
Magazine People Magazine Time Magazine

Product Cost Product Cost Product Cost

Direct costs xxxx Direct costs xxxx Direct costs xxxx
Indirect costs Indirect costs Indirect costs
????? xxxxxx ????? xxxxxx ????? xxxxxx
Lease $300,000 Lease $300,000 Lease $300,000
???? xxxxxxx xxxx ???? xxxxxxx xxxx ???? xxxxxxx xxxx
xxxx xxxx xxxx
 Cost Driver
The cost driver of variable costs is the level of activity
or volume whose change causes the (variable) costs to change
proportionately.

Units Machine
produced hours
A measure of what
causes the
incurrence of a
variable cost
Miles Labour
driven hours
The number of bicycles assembled is a cost driver of the
cost of handlebars.
 The Relevant Range
Relevant range is the band of normal activity level (or volume)
in which there is a specific relationship between the level of
activity (or volume) and a given cost.
Total Dollars

Relevant
Range

Output
Start-up Normal Exceeding
Range Operations Capacity
 Example: Relevant Range
Assume that fixed (leasing) costs are $94,500 for a year and that they
remain the same for a certain volume range (1,000 to 5,000 bicycles).
What is the relevant range?
120000
100000
Fixed Costs

80000
60000
40000
$94,500
20000
0
0 1000 2000 3000 4000 5000 6000
Volume

1,000 to 5,000 bicycles is the relevant range.

Cost Classifications based on Cost Behaviour
Cost Behaviour refers to how a
cost will react to changes in the
level of activity. The most
common classifications are:

Variable costs.
Fixed costs
 Variable cost

Total
Dollars
Total Variable Cost

Total Variable
Costs (TVC)
are costs that
change with
Output the rate of
output.
 Example: Variable Cost
X Company buys a handlebar at $52 for each of its
bicycles.

Total Cost Unit Cost

What is the total handlebar What is the handlebar cost
cost when 1,000 bicycles per bicycle when 1,000
are assembled ? bicycles are assembled ?

What is the total

What is the handlebar cost
handlebar cost when
per bicycle when 3,500
3,500 bicycles are
bicycles are assembled ?
assembled?
 Fixed Cost
Within the relevant
range, Total Fixed
Total Costs (TFC) do not
Dollars change with the
rate of output.

Total Fixed Cost

Output
 Fixed Cost per unit

Total
Dollars

Output
 Example: Fixed Cost
X Company incurred $94,500 in a given year
for the leasing of its plant.

Total Cost Unit Cost

What is the total leasing What is the leasing cost
cost when 1,000 bicycles per bicycle when 1,000
are assembled? bicycles are assembled?

What is the leasing (fixed) What is the leasing cost

cost 3,500 bicycles are bicycle when 3,500
assembled? bicycles are assembled?
Cost Behavior Summarized
Total Costs Cost Per Unit
Variable Change in proportion Unchanged in relation to output
costs with output
More output = More cost
Example
1,000 units =$52,000 1,000 units =$52
3,500 units=$182,000 3,500 units= $52
Fixed Unchanged in relation to Change inversely with output
Costs output
More output = lower cost per unit
Example Example
1,000 units =$94,500 1,000 units =$94.50
3,500 units =$94,500 3,500 units=$27.00
Relationships of Types of Costs

Direct

Fixed
Variable

Indirect
Cost Concepts in Different Sectors
(1) Manufacturing
Manufacturing companies purchase materials and
components and convert them into finished goods.
A manufacturing company must also develop,
design, market, and distribute its products
(2) Merchandising
Merchandising companies purchase and then sell
tangible products without changing their basic form.

(3) Servicing
Service companies provide services or intangible
products to their customers. Labor is the most
significant cost category.
 Types of Inventory
Manufacturing-sector companies typically have one or
more of the following three types of inventories:
1. Direct materials inventory
2.Work in process inventory (work in progress)
3. Finished goods inventory

Merchandising-sector companies hold only one type of

inventory – the product in its original purchased form.

Service-sector companies do not hold inventories of

tangible products.
 Classification of
Manufacturing Costs

Direct materials costs

Product
Direct labour costs Cost

Indirect manufacturing costs

Direct Materials
Raw materials that become an integral part of the product
and that can be conveniently traced directly to it.

Example: A radio installed in an automobile

Direct Labor

Those labor costs that can be

easily traced to individual units
of product.

Example: Wages paid to automobile assembly workers

Manufacturing Overhead

Manufacturing costs that cannot be traced

directly to specific units produced.

Examples: Indirect materials and indirect labor

Materials used to support Wages paid to employees

the production process. who are not directly
involved in production
Examples: lubricants and work.
cleaning supplies used in the Examples: maintenance
automobile assembly plant. workers, janitors and
security guards.
Nonmanufacturing Costs

Selling Administrative
Costs Costs

Costs necessary to All executive,

secure the order and organizational, and
deliver the product. clerical costs.
 Product Costs Vs Period Cost
Product Costs

Product costs (assets)…

become cost of goods sold after a sale takes place

Period Costs

Period costs are all costs in the income statement

other than cost of goods sold.
Period costs are recorded as expenses of the
accounting period in which they are incurred.
 The Income Statement
Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for retailers.
Manufacturing Company
Retail Company
Cost of goods sold:
Cost of goods sold: Beg. finished
Beg. Finished goods inv. $ 10,000
goods inventory $ 10,000 + Cost of goods
+ Net Purchases 495,000 manufactured 495,000
Goods available Goods available
for sale $ 505,000 for sale $ 505,000
- Ending - Ending
inventory (15,000) finished goods
= Cost of goods inventory (15,000)
= Cost of goods
sold $ 490,000
sold $ 490,000

Manufacturing firms must work out the cost of their Finished

Goods Inventory, adding together all the Costs of making the
product. This is the key difference.
 A Manufacturing Entity
Cost of Goods Manufactured Statement
Direct materials:
Beginning raw materials xxxx
Net purchases of raw materials xxxx
Costs of raw materials availble xxxx
Less:Ending raw materials (xxxx) Costs
Direct materials used xxxx
Direct labour xxxx associated with
Factory overhead: the goods that
Indirect labour xxxx are completed
Supplies xxxx
Electricity xxxx during the
Rent xxxx period are
Insurance xxxx transferred to
Rates & taxes xxxx
Depreciation xxxx
finished goods
Miscellaneous xxxx inventory.
Total factory overhead xxxx
Manufacturing costs for the period xxxx
Add:Beginning work in progress xxxx
Total work in progress xxxx
Less: Ending work in progress xxxx
COST OF GOODS MANUFACTURED xxxx
 Example: Direct materials used
X Company had $50,000 of direct materials inventory at the beginning of
the period. Purchases during the period amounted to $180,000 and
ending inventory was $30,000.

How much direct materials were used?

Beginning Inventory, January 1 $ 50,000

Add: Purchases 180,000
Available for Use 230,000
Less: Ending Inventory, December 31 30,000
Direct Materials Used 200,000
Example: Total manufacturing costs
Direct Labour costs incurred were $105,500.
Indirect manufacturing costs were
Indirect labour $75,000
Factory supplies $20,000
Heat and power $ 5,000
Depreciation –plant building $50,000
Depreciation –plant equipment $20,000
Miscellaneous $24,500 $194,500

What are the total manufacturing costs incurred?

Direct materials used $200,000
Direct Labour 105,500
Indirect manufacturing costs 194,500
Total manufacturing costs $500,000
Example: Cost of goods manufactured

Assume that the work in process inventory

at the beginning of the period was $30,000,
and $35,000 at the end of the period.

What is the cost of goods manufactured?

Beginning work in process $ 30,000
Total manufacturing costs 500,000
Ending work in process (35,000)
Cost of goods manufactured $495,000
Cost of Goods Manufactured
ABC Company
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 20xx (in thousands)
Direct Materials:
Beginning Inventory, January 1 $ 50,000
Add: Purchases 180,000
Cost of Direct Materials Available for Use 230,000
Less: Ending Inventory, December 31 30,000
Direct Materials Used 200,000
Direct Labor 105,500
Manufacturing Overhead:
Indirect Labor 75,000
Supplies 20,000
Heat, Light & Power 5,000
Depreciation - plant building 50,000
Depreciation - plant equipment 20,000
Miscellaneous 24,500
Total Manufacturing Overhead Costs 194,500
Manufacturing costs incurred during 2008 500,000
Add: Beginning WIP, January 1 30,000
Total Manufacturing Costs to account for 530,000
Less: Ending WIP, December 31 35,000
Cost of Goods Manufactured $ 495,000
Example: Cost of goods sold
Assume that the finished goods inventory
at the beginning of the period was $10,000,
and $15,000 at the end of the period.

What is the cost of goods sold?

Beginning finished goods $ 10,000

Cost of goods manufactured 495,000
Ending finished goods (15,000)
Cost of goods sold $490,000
 Income Statement

ABC Company
Income Statement
For the Year Ended December 31, 20XX (in thousands)
Revenues $700,000 Figure carries
Cost of Goods Sold forward from the
Beginning Finished Goods, January 1 10,000
Cost of Goods Manufactured 495,000
Schedule of Cost
Cost of Goods Available for sale 505,000 of Goods
Ending Finished Goods, December 31 15,000 Manufactured
Cost of Goods Sold 490,000
Gross Profit 210,000 Period Costs are
Operating Costs:
Marketing, distribution, and customer-service 70,000
expensed as
Total operating costs 70,000 incurred
Operating Income $140,000
 Classifications of Costs
Manufacturing costs are often
classified as follows:

Direct Direct Manufacturing

Material Labour Overhead

Prime Conversion
Cost Cost
Direct materials used $200,000 Direct Labour $105,500
+ Direct Labour 105,500 + Indirect manufacturing costs 194,500
= $305,000 = $300,000
 Costs by business functions
Value chain is sequence of business functions in which usefulness is
added to the products or services of an organization.
Elimination of non-value- Customer
added activities Service

Distribution
Marketing
Production
Design
Research and
Development
 Measuring costs requires judgment
Different meanings of product costs
Pricing and product-mix decisions – the
manager’s interest is in the overall (total)
profitability of different products.
Australian Accounting Standards state
that product costs include only
inventoriable (manufacturing) costs.
 Measuring costs requires judgment
Different costs for different purposes

R&D Design Production Marketing Distribution Service

External Reporting?

Product costs for Pricing and Product-Mix decisions?

 Next Lecture…

Job Order Costing