- Cost Classification & Behaviour Prepared by: Yaeesh Yasseen, - PowerPoint PPT Presentation

MANAGEMENT ACCOUNTING - Cost Classification & Behaviour Prepared by: Yaeesh Yasseen, Jade Jansen, Rashied Small & 1 Lucinda Smidt Reviewed by: Achmad Joseph MANAGEMENT ACCOUNTING FRAMEWORK

Managerial Accounting - Introduction 2 2 MANAGEMENT ACCOUNTING FRAMEWORK

Cost & Management Accounting 3 Cost Accounting Management Accounting Scope Limited to providing cost data & Providing all types of information information to management for (financial and non-financial) to operating decision-making and management for business decision- appraisal making Objective Measure of production/service Assist management by providing and costs and cost control analyzing information Nature System is concerns with both past Concern with future information and and present information use of past information for forecasting Techniques Budgetary and costing methods Budgetary and costing methods and techniques together with analytical analysis (ratio analysis) Application Cost assertions and cost control to Planning, controlling and decision- maximize profits making to maximize profit MANAGEMENT ACCOUNTING FRAMEWORK

Cost Classification – Learning objectives 4  Defining the cost object  Identifying direct and indirect costs  Identifying variable and fixed costs  Separate costs for mixed costs MANAGEMENT ACCOUNTING FRAMEWORK

Cost Object 5 Cost Object Cost object is defined the activity (product/service) for which the cost needs to be determine. MANAGEMENT ACCOUNTING FRAMEWORK

Direct & indirect Costs 6 MANAGEMENT ACCOUNTING FRAMEWORK

Cost vs Expenses 7 Cost: Resources sacrifice to Expense: achieve the cost object – cost incurred to acquire Cost incurred to conduct the resource/benefit operating activities of the business MANAGEMENT ACCOUNTING FRAMEWORK

Cost vs Expenses - Illustration 8 Cost Expense Cost of a machine acquired Depreciation charged for the use of the machine Cost of the goods purchased Cost of goods sold when the for resale sale is concluded Cost to insure the business Insurance charged to and its assets income statement for the period Production costs to produce Administrative and selling the product – overhead expenses incurred to costs conduct the business MANAGEMENT ACCOUNTING FRAMEWORK

Types of Costs 9 MANAGEMENT ACCOUNTING FRAMEWORK

Direct & Indirect Costs 10 TYPE OF COST COST ASSIGNMENT Direct costs Cost tracing Bricks, cement, tiles to build an apartment COST OBJECT Indirect costs Costing of leasinga Cost allocation cement mixing machine or electricity MANAGEMENT ACCOUNTING FRAMEWORK

Direct & Indirect Costs 11 Direct costs Materials used in the manufacture of products (bricks, sand & cement used in construction) Salaries & wages paid to the production staff – actively involved in the manufacturing process (construction employees) Indirect costs Cost accountant who administers all the products undertaken by the business Salaries paid to the project manager who supervisors a number of projects in the construction industry MANAGEMENT ACCOUNTING FRAMEWORK

Cost Behaviours 12 Cost Behaviour: Provides an indication of the sensitivity of costs in relation to changes in the level of activities or output Importance of Cost Behaviour: Cost behavior assist management in carrying out their managerial function of cost management and control as well as operational decision-making MANAGEMENT ACCOUNTING FRAMEWORK

Cost Behaviours 13 Cost Cost Behaviour Material cost Material costs changes as the number of units produce changes – direct relation between materials used and output Factory rent Rental for the factory will not be affected by the number of units produced – floor space has not relationship to output Salaries paid Salaries is one of the challenging cost behaviours as if is affected by the basis of payment – if the basis in not linked to output then it will not change even if the output changes MANAGEMENT ACCOUNTING FRAMEWORK

Variable Costs 14 Total variable costs changesin relation to the level of activity Price Variable cost per unit remains fixed Volume (Level of Activity ) MANAGEMENT ACCOUNTING FRAMEWORK

Variable Cost - Test 15 Units 10,000 20,000 30,000 Total cost 40,000 80,000 120,000 Cost/unit 4.00 4.00 4.00 Total cost changes as the number of units changes Cost per unit remains fixed irrespective of the changes in the number of units produced MANAGEMENT ACCOUNTING FRAMEWORK

Fixed Costs 16 Total fixed costs remains constant for all levels of activity Price Average fixed cost per unit varies as level of activity changes Volume (Level of Activity) MANAGEMENT ACCOUNTING FRAMEWORK

Fixed Cost - Test 17 Units 10,000 20,000 30,000 Total cost 90,000 90,000 90,000 Cost/unit 9.00 4.50 3.00 Change in units 100% 50% Change in cost/unit 100% 50% Total cost remains unchanged as the Cost per unit changes number of units changes as the number of units produced changes Rate of change in output is equivalent to the rate of change in the average cost per unit MANAGEMENT ACCOUNTING FRAMEWORK

GROUP WORK – ACTIVITY 1: PERAJ 18 [Classification between variable & fixed costs] MANAGEMENT ACCOUNTING FRAMEWORK

Total Cost 19 y = a + bX Price Total cost TC = FC + VC Variable costs Total average cost per unit Fixed costs Volume (Level of Activity) MANAGEMENT ACCOUNTING FRAMEWORK

Total Cost - Profitability 20 Units 50,000 100,000 Sales 1,000,000 2,000,000 Variable costs 500,000 1,000,000 Fixed costs 300,000 300,000 Profit 200,000 700,000 Profit per unit 4.00 7.00 Variable cost per unit 10.00 10.00 Fixe cost per unit 6.00 3.00 Increase in profit per unit of R 3.00 is attributed to the decrease in fixed cost per unit MANAGEMENT ACCOUNTING FRAMEWORK

GROUP WORK – ACTIVITY 2: CHAPLEEN 21 [Impact of costs on decision-making] MANAGEMENT ACCOUNTING FRAMEWORK

Mixed Cost 22 Mixed costs contain botha fixed and variable component Costs varies beyond the critical point Price Costs are fixed for a certain levelof activity Volume (Level of Activity) MANAGEMENT ACCOUNTING FRAMEWORK

Mixed Cost 23 Units 5,000 10,000 20,000 Total cost 20,000 30,000 50,000 Average cost per unit 4.00 3.00 2.50 Based on the average cost per unit, the cost is not a variable cost as the average cost per unit changes in relation to the level of output – variable cost is fixed per unit Change in output 100% 100% Change in average cost 33% 20% Based on the change in the output and change in average cost per unit, the cost is not a fixed costs as there is not a direct relationship between the change in output and change in cost – changes in fixed cost represent an inverse proportionate change in output and cost MANAGEMENT ACCOUNTING FRAMEWORK

Mixed Costs - Separation 24 Management techniques High-low method: Best-fit method: Applies the principleof Applies statisticaland differential analysis regression analysis High-Low Method Average cost per unit based on the variances of the output and costs represent the variable cost MANAGEMENT ACCOUNTING FRAMEWORK

Mixed Costs – High-Low Method 25 Calculating the Selecting Determine the average per unit information for the difference between based on the higher & lowest the outputs and differences periods costs Highest Lowest Difference Output 60,000 80,000 20,000 Total cost 580,000 640,000 60,000 Average cost per unit 3.00 Total variable cost 180,000 240,000 Total fixed cost 400,000 400,000 Total cost 580,000 640,000 MANAGEMENT ACCOUNTING FRAMEWORK

GROUP WORK – ACTIVITY 3: SERVICE CENTRE 26 [Separate of mixed-costs – High-Low method] MANAGEMENT ACCOUNTING FRAMEWORK