PAPER NO. 10 FUNDAMENTALS OF MANAGEMENT ACCOUNTING
UNIT DESCRIPTION
This unit covers the competencies required to maintain management accounts for business decisions. Competencies include: Identifying concepts used in management accounting, using appropriate techniques to estimate business costs, Accounting for different business costs, applying costing methods in determining the cost of a product or service, preparing income statements using marginal costing and absorption costing techniques, applying break-even analysis in business decision making and preparing budgets for management decisions making.
LEARNING OUTCOMES
• Identify concepts used in management accounting
• Use appropriate techniques to estimate business costs
• Account for different business costs
• Apply costing methods in determining the cost of a product or service
• Prepare income statements using marginal costing and absorption costing techniques
• Apply break-even analysis in business decision making
• Prepare budgets for management decisions making
CONTENT:
1. Identify concepts used in management accounting
1.1 Definitions of key terms:
1.1.1 Cost
1.1.2 Cost unit/object
1.1.3 Cost accounting
1.1.4 Cost accountant
1.1.5 Management accounting
1.1.6 Management accountant
1.1.7 Cost centre
1.1.8 Profit centre
1.1.9 Responsibility centre
1.2 Role of Management Accounting in decision making
1.3 Users of Management accounting information
1.3.1 Executives
1.3.2 Production managers
1.3.3 Sales managers
1.3.4 Employees
1.4 Difference between management accounting and financial accounting
1.5 Relationship between cost accounting and management accounting
1.6 Limitations of management accounting
1.7 Cost control vs cost reduction
1.7.1 Definitions
1.7.2 Advantages of cost control
1.7.3 Differences between cost control and cost reduction
1.8 Selection of an ideal cost accounting system
1.8.1 Definition of cost accounting system
1.8.2 Factors to be considered in designing an ideal cost accounting system
1.9 Professional ethics for management accounting
1.9.1 Competence
1.9.2 Confidentiality
1.9.3 Integrity
1.9.4 Credibility
1.10 Cost classification:
1.10.1 Definition of cost classification
1.10.2 Purpose of cost classification
1.11 Bases of classification
1.11.1 Functions
1.11.2 Behaviour
1.11.3 Nature of expense
1.11.4 Relation to cost centre or cost unit
1.11.5 Time
1.11.6 Costs for management decision making
1.11.7 Nature of production or process
2. Use appropriate techniques to estimate business costs
2.1 Introduction to cost estimation
2.1.1 Definition of cost estimation
2.1.2 Purpose of cost estimation
2.1.3 Methods of cost estimation:
2.1.4 Non-mathematical methods;
2.1.4.1 Accounts Analysis method;
2.1.4.2 High-Low method;
2.1.4.3 Industrial Engineering method
2.1.5 Mathematical methods;
2.1.5.1 Scatter graph method;
2.1.5.2 Simple linear regression
3. Account for different business costs
3.1 Accounting for materials and inventories
3.1.1 Objectives of material control
3.1.2 Essential requirements of material control system
3.1.3 Centralised and decentralised purchasing:
3.1.3.1 Definitions
3.1.3.2 Advantages
3.1.3.3 Disadvantages
3.1.4 Periodic inventory system
3.1.5 Perpetual inventory system
3.2 Stores ledger card
3.2.1 Definition of a store ledger card
3.2.2 Methods of preparation
3.2.2.1 FIFO
3.2.2.2 LIFO
3.2.2.3 Weighted average methods
3.3 Determining optimal stock levels
3.3.1 Stock levels and its control
3.3.2 Factors influencing stock levels
3.3.3 Relevant costs for inventory management:
3.3.3.1 Purchase
3.3.3.2 Ordering
3.3.3.3 Holding/carrying
3.3.4 The Economic Order Quantity (EOQ)
3.3.4.1 Definition
3.3.4.2 Assumptions
3.3.4.3 Determination
3.4 Accounting for labour
3.4.1 Factors influencing wages
3.4.2 Methods of labour remuneration:
3.4.2.1 Time rate
3.4.2.2 Piece rate
3.4.2.3 Bonus schemes (individual and Group)
3.4.3 Labour turnover
3.5 Accounting for overheads
3.5.1 Definition
3.5.2 Classification:
3.5.2.1 Nature
3.5.2.2 Function
3.5.2.3 Element
3.5.2.4 Behaviour
3.5.3 Overhead allocation, apportionment and reapportionment
3.5.4 Factors to be considered when apportioning overheads
3.5.5 Methods of overheads distribution:
3.5.5.1 Primary
3.5.5.2 Secondary
3.5.6 Absorption of overheads
3.5.6.1 Definition
3.5.6.2 Methods of overheads absorption
3.5.6.3 Factors to consider in selection overhead absorption rates
3.5.7 Over/under absorption of overheads
3.5.7.1 Definition
3.5.7.2 Causes
3.5.7.3 Computation
4. Apply costing methods in determining the cost of a product or service
4.1 Job order costing
4.1.1 Definition
4.1.2 Features
4.1.3 Advantages
4.1.4 Limitations
4.1.5 Costing
4.2 Batch costing
4.2.1 Definition
4.2.2 Features
4.2.3 Applications
4.2.4 Costing
4.3 Process costing (excluding work in progress, joint and by-products)
4.3.1 Definition
4.3.2 Features
4.3.3 Applications
4.3.4 Differences between job costing and process costing
4.3.5 Losses (Normal loss, abnormal loss/gain)
4.3.6 Preparation of process accounts
4.4 Service costing
4.4.1 Definition
4.4.2 Features
4.4.3 Costing
5. Prepare income statements using marginal costing and absorption costing techniques
5.1 Differences between marginal costing and absorption costing
5.1.1 Features
5.1.2 Merits/demerits
5.1.3 Limitations
5.2 Comparative income statements
5.3 Reconciliation statement
5.3.1 Difference in stock valuation
5.3.2 Over/under absorbed overheads
5.3.3 Preparation of the statement
6. Apply break-even analysis in business decision making
6.1 Introduction to cost volume profit (C-V-P) analysis
6.1.1 Objectives of C-V-P analysis
6.1.2 Assumptions/Limitations of C-V-P analysis
6.1.3 Break-even chart
6.2 Profit-volume chart
6.2.1 Definition
6.2.3 Derivation
6.2.4 Single product C-V-P analysis
6.3 Applications of marginal costing in decision making:
6.3.1 Make/buy decisions
6.3.2 Continue/discontinue a product
6.3.3 Choice of a product where limiting factor exists
6.3.4 Acceptance of a special offer
6.3.5 Overriding considerations to the above decisions
7. Prepare budgets for management decisions making
7.1 Definition of terms:
7.1.1 Budget
7.1.2 Budget centre
7.1.3 Budget bias(slack)
7.1.4 Budget manual
7.1.4.1 Essential features of a budget
7.1.4.2 Objectives of the budgets
7.1.4.3 Limitations of the budgets
7.1.4.4 Difference between forecasts and budgets
7.2 Classification of budgets
7.2.1 Classification based on time:
7.2.1.1 Long-term budgets
7.2.1.2 Short-term budgets
7.2.2 Classification based on nature of expenditure and receipts:
7.2.2.1 Capital budget
7.2.2.2 Revenue budget
7.2.3 Classification based on functions
7.2.3.1 Sales budget
7.2.3.2 Production budget
7.2.3.3 Materials cost budget
7.2.3.4 Materials purchase budget
7.2.3.5 Cash budget
7.2.4 Classification based on capacity
7.2.4.1 Fixed budgets
7.2.4.2 Flexible budgets
7.3 Preparation of budgets
7.3.1 Functional budgets
7.3.2 Fixed and flexible budgets
Suggested Methods of Delivery
• Presentations and practical demonstrations by trainer;
• Group discussion
• Guided learner activities and research to develop underpinning knowledge;
The delivery may also be supplemented and enhanced by the following, if the opportunity allows:
• Visiting expert/trainer from the chemicals manufacturing sector
• Industrial visits.
Recommended Resources Tools
• Computers
• Calculators
• Stationery
• Internet
• Digital instructional material including DVDs and CDs
• Online lectures and revision videos
Sample Reading and Reference materials
1. Tayles, M., & Drury, C. (2020). Management and Cost Accounting (11th edition). Cengage Learning EMEA.
2. Arora, M. N. (2013). Cost Accounting: Principles & Practice (12th edition). New Delhi: Vikas Publishing.
3. Storey, R. (Revised Edition). Introduction to Cost and Management Accounting. New York: Palgrave Macmillan.
4. Kasneb e-learning resources (link on the Kasneb website).
5. Kasneb approved study packs.