Professional Documents
Culture Documents
Management accounting
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Inventory costs
As inventory is usually purchased at different rates (or manufactured at different costs) over an
accounting period
Method needed to determine what cost needs to be assigned to inventory
FIFO
+ve
Inventory asset recorded on
the balance sheet contains
costs quite close to the most
recent costs that could be
obtained in the marketplace.
-ve
Results in older historical
costs being matched against
current revenues and
recorded in the cost of
goods sold
gross margin may not reflect
proper matching of revenues
and costs.
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LIFO
Last item of inventory purchased is the first one sold
I.e. company can reduce its reported level of profitability = postpone income taxes
-ve
rarely encountered in practice
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AVCO
Average cost method
Average cost method (AVCO) calculates the cost of ending inventory and cost of goods sold for a
period on the basis of weighted average cost per unit of inventory
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Weighted Average = Total Cost of InventoryUnit Cost / Total Units in Inventory
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Cost classifications
Product costs
▪ Direct materials: Represents the cost of the materials that can be identified directly
with the product at reasonable cost.
▪ Direct labor: Represents the cost of the labor time spent on that product
Period costs
Prime costs
• sum of all direct costs such as direct materials, direct labor and any other direct costs
Conversion costs
• sum of direct labor, other direct costs (other than materials) and manufacturing
overheads.
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Cost classifications (continued)
> Element
> Function
> Nature
1. Element
indirect Costs
2. Overheads
Overhead is ordinarily used for costs incurred that are not direct costs, but that can be
attributed to a job centre.
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Types of cost by behavior
FIXED COSTS:
Does not change with the level of activity within the relevant range
There are costs even if no units are produced
e.g. rent expense, straight-line depreciation expense
Example
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VARIABLE COSTS:
Change in direct proportion to the level of production.
STEPPED-COSTS
Costs are fixed in nature until a certain output is reached where they rise to a new fixed level
e.g. When a capacity is reached on a fixed cost
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Cost Volume Profit Analysis
Formula
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Absorption costing
<inventory and units produced must include a share of all production costs (fixed + variable)
incurred in getting them to their present condition>
Includes a portion of fixed costs in each unit cost - e.g. calculating selling price
Used for :
Preparing financial statements for external purposes
Inventory valuations
Profit calculations in financial statement
Marginal costing
• Variable costs incurred when producing one extra unit (ONLY WHEN ARRIVING AT COST PER
UNIT) Fixed costs are incorporated.
The usual variable costs included are labor and materials, plus the estimated increases in fixed
costs such as: administration, overhead, and selling expenses.
Used for :
Decision making
Identifies extra costs
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FORMULAS
1. CONTRIBUTION
1.1 CONTRIBUTION PER UNIT =
(TOTAL SALES( SP x Q )) - ( VC x Q )
Total revenue - Total variable costs
CONTRIBUTION-TO-SALES
FIXED COST/ (TOTAL CONTRIBUTION/SALES)
2. PROFIT =
3. BREAK EVEN =
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3.1 MARGIN OF SAFTEY =
THEREFORE:
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JOB&BATCH
1)Job costing
Single contract, order
Business produces a good or services to specific customer requirements and each job is different.
Incur both direct material and direct labour as well as overheads -> total job cost (to base the
selling price
2) Batch costing
Form of specific order costing (separate identifiable group of product unit)
Are in batches
Situation :
• where a customer orders a quantity of identical items; or
• where an internal manufacturing order is raised for a batch of identical parts.
3) Unit costing
Measure company’s costs to produce one unit of a product.
UNIT COSTING =
TOTAL VARIABLE COST + TOTAL FIXED COST / NUM. OF PRODUCT
PRODUCED
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RATIO ANALYSIS
Liquidity Ratios
CURRENT RATIO
QUICK RATIO
Liquidity ratios measure a company's ability to pay debt obligations and its margin of safety.
Current liabilities are analyzed in relation to liquid assets to evaluate the coverage of short-term
debts in an emergency.
Current ratio > = Basic analysis regarding coverage ability to pay debts obligation,
Quick ratio = Includes only cash marketable securities and accounts receivable. (CA - I)
Reflects the potential difficulty in selling inventory or prepaid assets in the result of an
emergency.
This information is useful to compare the company's strategic positioning in relation to its
competitors when establishing benchmark goals
GROSS MARGIN
MARK UP
PROFIT MARGIN
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Net Profit After Interest And Taxes/ Shareholders Funds or Investments X 100
Receivables x Months or days in a year / Net Credit Sales for the year
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