Management accounting is the process of preparation of reports on business operations to enhance management decisions to improve efficiency and profitability. This blog looks at the basic concepts of managerial accounting.
Cost Accounting: The process of accumulation and allocation of costs to cost objects or cost centers for internal profit measurement.
Management Accounting: The process of providing economic information to insiders to make informed decisions and enhance the performance of the organization. It provides information for planning, budgeting, control, measurement, and performance evaluation.
Cost Object: Any given activity for which a separate cost measurement is required. This may be a product, service, or activity for which management desire to allocate cost;
Users of Cost and Management Accounting Information: The internal people within the business are the user of cost/management accounting information. Such users include top management, managers, and staff. Armed with relevant costing data and information, the people running the business are better placed to make better judgments and economically viable decisions;
Cost Behaviour: This examines how costs will change given changes in activity level. There are three types of cost behaviours; variable cost, fixed cost, and mixed/semi-variable cost;
Fixed Costs: These are costs that remain constant regardless of the level of activity of the business. An example is a depreciation on manufacturing buildings;
Variable Costs: These are costs that change in proportion to the level of activity. For instance, the higher the unit produced, the higher the variable cost. Variable cost exhibits a linear relationship with the level of activity while unit cost is constant;
Direct Cost: Costs that can be specifically, accurately, and exclusively traced to a particular cost object e.g direct material cost, direct labour costs, direct expenses;
Indirect Cost: These are costs that cannot be specifically, accurately, and exclusively identified with a particular cost object;
Relevant and Irrelevant Costs: Relevant costs are those that will be affected by the decision while irrelevant costs are those that are not affected by the decision; thus they are of no effect;
Cost Allocation: This is the process of estimating and assigning the cost of resources consumed by cost objects when a direct measure is not practicable. Cost allocation involves the use of surrogates rather than direct measures;
Manufacturing Costs: Manufacturing costs consist of direct material, direct labour, and manufacturing overheads;
Prime cost is the addition of direct material and direct labour;
Sunk Costs: Costs that have already been incurred based on prior decisions. They do not have any effect on the choice of various alternatives at hand. Sunk costs are irrelevant to decision-making;
Cost Analysis: This is the process of breaking cost items into their various components for examination, reporting, and decision-making;
Opportunity Costs: These measure the benefit of the opportunity that is sacrificed for a particular decision. It is called alternative forgone. It is an imputed cost because it does not require cash outlay;
Cost-Volume-Profit Analysis: The systematic technique of examining the relationship between changes in activity level, sales volume; and expenses and net profit;
Contribution Margin: This is equal to sales minus variable expenses. Because the selling price per unit and variable cost per unit is constant, the contribution per unit is also constant;
Break-even point: This is the point at which total cost equals total revenue. The Break-even point in units = fixed costs/contribution per unit. At the break-even point, there is no net profit or loss.
