This summary covers the main topics to pass the final exam of management accounting for IB.
1. Cost recognition and accumulation
2. Cost classification (inventoriability and traceability)
3. Computation of allocation rates
4. Cost assignment (tracing and allocation)
5. Asset valuation an...
1. Cost recogni-on and accumula-on
2. Cost classifica-on (inventoriability and traceability)
3. Computa-on of alloca-on rates
4. Cost assignment (tracing and alloca-on)
5. Asset valua-on and repor-ng
Lecture 1: What is product cos2ng?
1.1 Financial Accoun-ng: informs about all external transac2ons which occurred between
organiza2on and its stakeholders; records and reports about flows of resources
- Focus on external transac2ons
- Informa2on useful for external decision makers
- Past transac2ons, not futuris2c ones
Characteris2cs of financial accoun2ng
- Main users: external decision makers (creditors, suppliers) ! public
o Do decide whether they should do business with a company
▪ Invest their money in business
- Regula2on: mandatory (allow external users to make comparisons between firms),
standardized (to make fair comparisons), and audited (avoid false, unreal
transac2ons; can be compared with partner company)
- Timing and nature of informa2on produced: periodic financial synthesis and
- Content of informa2on: transac2ons with, rights and du2es towards, external
stakeholders
- Suppliers etc. focus on whole organiza2on, not specific departments
Limita2ons of financial accoun2ng
- Unuseful for managers; doesn’t give informa2on about how and why stgh happened
(relevance)
- Long period, managers need con2nuous informa2on to improve (-meliness)
- Damage of externali-es (nature, CO2 etc.) will not be men2oned in income
statement
o MA ability to go beyond everything that is accounted in FA
2.1 Management accoun2ng
- Financial accoun2ng does not inform about flows of resources within organiza2on +
does not facilitate forecasts (only necessary if company grows: diverse porLolio)
- Distrac2on vs. crea2on of wealth; everything that influences retained earnings
Management accoun-ng: branch of accoun2ng producing for internal decision-makers l
informa2on needed to obtain resources/make best possible use of available resources
- Designed to complement FA and overcomes its limita2ons
- Serves internal decision makers
o Customized to fit specific needs of organiza2on
▪ Each management accoun2ng system: unique
o Avoid as many waste as possible; ensure best possible use of resources
- Flexible and adaptable instead of mandatory and standardized (future-oriented)
- Detailed and specific
- Produced on demand rather than periodically and included non-financial informa2on
, o Relevant (only necessary informa2on) and 2mely informa2on produc2on
(management accoun2ng)
- Focuses on internal flows of resources (internal transac2ons) (within organiza-on)
instead of transac2ons with external stakeholders
- Oriented towards future; prospec-ve
- Should remain private and not be communicated out of organiza2on
- Voluntary (implies addi2onal costs)
Usage of management accoun2ng
- Direc2ng aYen2on
o Signaling opportuni2es and threats managers should address
- Formula2ng problems
o Iden2fying stakes and formalizing goals/constraints
- Designing solu2ons
o Showing manager levers on which they can act to achieve their goals
- Evalua2ng and selec2ng solu2ons
o An2cipa2ng and assessing poten2al financial and non-financial consequences
of alterna2ve courses of ac2on
- Organiza2onal learning
o Linking decisions made to actual and unexpected financial and non-financial
consequences
- Evalua2ng and rewarding performance
o Making managers accountable for financial and non-financial consequences of
decisions they make
- Four happen before decisions are made
- Last two happen a[er decisions are made
How does management accoun2ng help managers before decision making?
- Shows gap between expecta2ons and realiza2on
- Shapes course of ac2on
- Assesses expected impact on implemen2ng each course of ac2on
o Managers can priori2ze best ac2ons
How does management accoun2ng help managers aRer decision making?
- Ques2ons the rela2on between decisions, ac2ons and success or failure
o Learning from experience
o Evalua2ng and rewarding performance
Lecture 2: Product cos2ng
- Principles/methods/techniques used to value inventory and COGS (to assess
profitability)
- Asset valua2on (inventory, self-produced equipment, intangibles)
Purposes of cos2ng
- Cost accoun2ng system: set of rules, methods, and techniques used to es2mate the
resources consumed to produce an output or achieve a goal
- Cost objects (products made by company): any output/goal for which resources were
consumers and for which decision-makers desire a separate es-ma-on (instead of
accurate measurement?) of costs
- Es-ma-ng value of resources consumes (purpose of cos2ng)
o Goal: products, services, customer segments, pieces of equipment etc.
,Purposes for es2ma2ng the consump2on of resources
- Resource alloca-on
o Consists in deciding for which goals limited resources should be consumed
o 1. Is a Is a specific goal worth sacrificing the resources consumed for its
achievement?
o 2. Is there a beYer use for these resources?
▪ By comparing the cost of achieving different goals, we should use
smallest possible cost of achieving the goal (fair comparison)
• Ques2on of process op2miza2on
- Process op-miza-on:
o Process: sequence of tasks and ac2vi2es consuming resources (materials,
labor, equipment) to produce an output (product/service)
▪ Complex, many steps with different kinds of resources
▪ Resources shared by different processes
• Difficult to determine who consumed what to do what
o BoYlenecks (limita2on of resources): steps in process which constraint total
produc2on and force other steps to remain idle for some period of 2me
o Efficiency: quan2ty of resources consumed to obtain a result
▪ Less resources = the more efficient (output:input)
o Op2miza2on be become more efficient either by alloca2ng addi2onal
resources or by realloca2ng them on tasks crea2ng more value
- Well-designed cost system (revealing for what goals resources are consumes) can give
direc2on and mo2va2on for process op2miza2on:
o Shows inefficient uses of resources (boYlenecks, spillage, etc)
o Gives greater control over costs by iden2fying causes
o Reveals best prac2ces by comparing resources consumes by different
processes to produce same result
- Asset valua-on
o Consists in es2ma2ng value (monetary equivalent) of asset
o Economic value (u2lity, discounted cash flows)
o Market value (price, opportunity costs)
o Book value (historical costs)
▪ Alterna2ve ways of valuing don’t result in same number
Example:
1. Add produc2on costs to the inventory in the balance sheet. (asset valua-on)
2. Compare the produc2on costs of different factories making the same product in
similar quan22es. (process op-miza-on)
3. Compute the costs of goods sold in the income statement. (asset valua-on)
4. Compare the cost of making a product to its market price. (process op-miza-on or
resource alloca-on)
5. Benchmark the resources consumed by different departments for the same kind and
level of services. (process op-miza-on or resource alloca-on)
, What is a cost for financial repor-ng?
- Financial accoun2ng perspec2ve: whether a cost changes the value of an asset in
current period and will impact equity through income statement (-ming of resource
consump-on not payment)
o Deferred expense: cash flow happens before cost/expense is recognized
o Accrued expense: cash flow happens a[er cost/expense is recognized
• Service is consumed, not yet paid
▪ Changes in wealth are accounted for when they happen
- Are not costs over the period
o Payments in advance for services
o Late payments for services (debts)
o Purchases and investments (do not reduce wealth)
o Reimbursements and dividend (cash did not belong to it anyway)
o Nega2ve externali2es
▪ Poten2al gain (not a cost)
▪ Poten2al loss (a cost)
- Labor costs: total wages paid – wages paid in current period for labor used in prior
period + accrued wages due (not paid yet)
What is a cost for management accoun-ng?
- Scope of cost it recognizes (composi2on)
- Monetary value given to the cost it recognizes (valua2on)
- Nega2ve externality: cost suffered by a third party as consequence of ac2on of
company (destruc2on of resources by company, but of which someone else bears
costs)
o FA does not include those (limita2ons) + no poten2al gains
▪ Result in disconnect between book value and economics value
Are to parallel accoun2ng systems worth their costs?
- Addi2onal administra2ve costs
- Two different sets of numbers (external repor2ng vs internal management)
- Introduces lot of subjec2vity in valua2on
Lecture 2: How do you classify costs in product cos2ng?
2. Cost classifica2on
- Source document: explicit evidence of a transac2on (sales slips, purchase invoices,
employee 2me records)
o Informa2on about purpose to evaluate urgency
- Classifica2on based on inventoriability (absorp-on cos-ng)
o Manufacturing costs (inventoriability): follow products in inventory
(manufacture products)
▪ Deprecia2ons of produc2ve equipment
▪ Rent of produc2on factory
o Period costs: cannot go in inventory (prepare, sell products)
▪ Deprecia2on of salespeople’s cars
▪ Cost of produc2on chain redesign
▪ Consump2on of administra2ve supplies
- Classifica2on based on inventoriability (variable cos-ng)
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