UNIT 14: ADVANCED MANAGEMENT ACCOUNTING - PowerPoint Presentation

1. UNIT 14: ADVANCED MANAGEMENT ACCOUNTING Unit code: Y/508/0537 Credit value: 15

2. UNIT 14: ADVANCED MANAGEMENT ACCOUNTING Learning Outcome 2 : Evaluate the use of management accounting techniques to support organisational performance

3. THE BASIC SYLLABUS1 Analyse the purpose for developing and presenting financial information. 2 Evaluate the use of management accounting techniques to support organisational performance. 3 Analyse actual and standard costs to control and correct variances. 4 Evaluate how a changing business environment impacts on management accounting.

4. LEARNING OUTCOMESLO 2:Evaluate the use of management accounting techniques to support organisational performanceP2: Evaluate the use of different accounting microeconomic techniques in application to supporting organizational performance .

5. OVERVIEW Absorption costing recognises fixed costs (usually fixed production costs) as part of the cost of a unit of output and hence as product costs, marginal costing treats all fixed costs as period costs. Two such different costing methods obviously each have their supporters and so we will be looking at the arguments both in favour of and against each method. Each costing method, because of the different inventory valuation used, produces a different profit figure and we will be looking at this particular point in detail.

6. ABSORPTION COSTINGAbsorption costing principles must be used when preparing financial statements for external purposes. One of the key principles of absorption costing is that inventory and units produced must include a share of all production costs, both fixed and variable, incurred in getting them to their present condition.

7. ABSORPTION COSTINGAbsorption costing takes account of all manufacturing costs: direct materials, direct labour, direct expenses and production overheads – ie, costs at cost-centre and factory levels. As a result, this method calculates the total cost of production.

8. ABSORPTION COSTINGThe starting point of absorption costing is to calculate the budget prime cost – ie, the budget direct cost required to make a product or provide a service. The next step is to charge a share of the budget production overheads to the budget output.

9. ABSORPTION COSTINGInventory values will therefore be different at the beginning and end of a period under marginal and absorption costing.If inventory values are different, then this will have an effect on profits reported in the income statement in a period. Profits determined using marginal costing principles will therefore be different to those using absorption costing principles.

10. MARGINAL COSTING The marginal cost of an item is its variable cost. The marginal production cost of an item is the sum of its direct materials cost, direct labour cost, direct expenses cost (if any) and variable production overhead cost. So as the volume of production and sales increases total variable costs rise proportionately.

11. MARGINAL COSTING Fixed costs, in contrast are cost that remain unchanged in a time period, regardless of the volume of production and sale.Marginal production cost is the part of the cost of one unit of production service which would be avoided if that unit were not produced, or which would increase if one extra unit were produced.From this we can develop the following definition of marginal costing as used in management accounting:

12. MARGINAL COSTING Marginal costing is the accounting system in which variable costs are charged to cost units and fixed costs of the period are written off in full against the aggregate contribution.Note that variable costs are those which change as output changes - these are treated under marginal costing as costs of the product. Fixed costs, in this system, are treated as costs of the period.

13. MARGINAL COSTING Marginal costing is also the principal costing technique used in decision making. The key reason for this is that the marginal costing approach allows management's attention to be focussed on the changes which result from the decision under consideration.

14. MARGINAL COSTING The contribution conceptThe contribution concept lies at the heart of marginal costing. Contribution can be calculated as follows.Contribution = Sales price - Variable costs The idea of profit is not a particularly useful one as it depends on how many units are sold.

15. MARGINAL COSTING For this reason, the contribution concept is frequently employed by management accountants.Contribution gives an idea of how much 'money' there is available to 'contribute' towards paying for the overheads of the organisation.

16. MARGINAL COSTING At varying levels of output and sales, contribution per unit is constant.At varying levels of output and sales, profit per unit varies.Total contribution = Contribution per unit x Sales volume.Profit = Total contribution - Fixed overheads.

17. MARGINAL COSTING Cost allocation, cost-effectiveness analysis, and cost-benefit analysis represent a continuum of types of cost analysis which can have a place in program evaluation. They range from fairly simple program-level methods to highly technical and specialized methods.

18. THE ADVANTAGES AND DISADVANTAGES OF ABSORPTION AND MARGINAL COSTING Advantages of marginal costingAdvantages of absorption costingContribution per unit is constant unlike profit per unit which varies with changes in sales volumesThere is no under or over absorption of overheads (and hence no adjustment is required in the income statement).Fixed costs are a period cost and are charged in full to the period under considerationMarginal costing is useful in the decision-making processIt is simple to operateAbsorption costing includes an element of fixed overheads in inventory values (in accordance with SSAP 9).Analysing under/over absorption of overheads is a useful exercise in controlling costs of an organisationIn small organisations, absorbing overheads into the costs of products is the best way of estimating job costs and profits on jobs

19. REFERENCES Kfknowledgebank.kaplan.co.uk. (2018). [online] Available at: http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/CVP%20Analysis%20(Single%20product).aspx [Accessed 29 Jan. 2018].Media, B. (2009). ACCA Paper F2 - Management Accounting Study Text, 2009. London: BPP Learning Media.Fmapp.cimaglobal.com. (2018). App Studio. [online] Available at: http://fmapp.cimaglobal.com/seven/financialprototype/index.html#issue/september2014/portrait/28 [Accessed 30 Jan. 2018].