1. Compare and contrast the role of financial accounting and ...
ACCT10001 ARA 2014 Semester 1 Summary Sarinie Ning
Week7 1. Compare and contrast the role of financial accounting and management accounting in firms
Financial accounting –Highly regulated, bound by accounting standards – Statutory accounts – Externally focused Management accounting information: •Is unregulated, not rule‐bound •May be future focused, based on estimates • Relevance more important than faithful representation
2 Identify the components of product/service costs 2.1 Discuss the notion of direct and indirect costs Direct Costs: Costs that can be directly traced to a cost object. Indirect Costs (overheads): Costs that are not economically feasible to trace to the cost object. Full cost: Direct costs plus allocated indirect costs.
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ACCT10001 ARA 2014 Semester 1 Summary Sarinie Ning
2.2 Explain why the need to allocate indirect costs arises The allocation of indirect costs enables the full cost of the cost object to be determined. However, unless required by an external party, the motivation for such allocation is to provide information for internal purposes only, and is done at the discretion of each entity. eg • to determine the full cost of a specific cost object in order to undertake profitability analysis, which will provide a basis for pricing decisions, and assist in resource allocation decisions • to allocate the cost of shared services such as accounts payable, payroll and information technology. Cost assignment will remind business unit managers of the full economic impact of their decisions. • to encourage the use of central resources by business units. If managers are charged for the costs of a service (e.g. legal services and training services) whether they use it or not, they will be encouraged to use it. • to encourage mutual monitoring to control costs. If a manager is to be charged for a shared service, the allocated costs will be benchmarked against external providers to ensure that the allocation is within commercial limits. • to comply with external requirements/regulations, for example, calculating inventoriable product costs in line with International Financial Reporting Standards (IFRSs). 2.3 Apply indirect costs to products/services • Product/service costs are not stable: depends on the cost structure of the firm To interpret unit cost information, we need to understand cost behavior patterns –We also need to consider the concept of relevant range: •The range where the relationship between the cost and the level of volume/activity is valid or ‘holds true’
2.4 Interpret product/service costs •Only manufacturing overheads form part of product cost for inventory valuation • Administrative overheads are more difficult to assign to products – However, these costs must be covered by overall revenues – Thus must be considered in some way when setting sales price
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Week7 1. Compare and contrast the role of financial accounting and management accounting in firms
Financial accounting –Highly regulated, bound by accounting standards – Statutory accounts – Externally focused Management accounting information: •Is unregulated, not rule‐bound •May be future focused, based on estimates • Relevance more important than faithful representation
2 Identify the components of product/service costs 2.1 Discuss the notion of direct and indirect costs Direct Costs: Costs that can be directly traced to a cost object. Indirect Costs (overheads): Costs that are not economically feasible to trace to the cost object. Full cost: Direct costs plus allocated indirect costs.
43
ACCT10001 ARA 2014 Semester 1 Summary Sarinie Ning
2.2 Explain why the need to allocate indirect costs arises The allocation of indirect costs enables the full cost of the cost object to be determined. However, unless required by an external party, the motivation for such allocation is to provide information for internal purposes only, and is done at the discretion of each entity. eg • to determine the full cost of a specific cost object in order to undertake profitability analysis, which will provide a basis for pricing decisions, and assist in resource allocation decisions • to allocate the cost of shared services such as accounts payable, payroll and information technology. Cost assignment will remind business unit managers of the full economic impact of their decisions. • to encourage the use of central resources by business units. If managers are charged for the costs of a service (e.g. legal services and training services) whether they use it or not, they will be encouraged to use it. • to encourage mutual monitoring to control costs. If a manager is to be charged for a shared service, the allocated costs will be benchmarked against external providers to ensure that the allocation is within commercial limits. • to comply with external requirements/regulations, for example, calculating inventoriable product costs in line with International Financial Reporting Standards (IFRSs). 2.3 Apply indirect costs to products/services • Product/service costs are not stable: depends on the cost structure of the firm To interpret unit cost information, we need to understand cost behavior patterns –We also need to consider the concept of relevant range: •The range where the relationship between the cost and the level of volume/activity is valid or ‘holds true’
2.4 Interpret product/service costs •Only manufacturing overheads form part of product cost for inventory valuation • Administrative overheads are more difficult to assign to products – However, these costs must be covered by overall revenues – Thus must be considered in some way when setting sales price
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