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Block 8: Management Accounting - Coggle Diagram
Block 8: Management Accounting
Features
Produce frequent confidential reports throughout the year
Work very closely with managers across business functions to promote best practices, reduces cost and guide strategic decisions
Forward looking
Cost Management
Enables calculation of BEP
Helps make or buy decision
Example: Nike outsource manufacturing to focus on product design and branding, which enhances customer value by ensuring high-quality design and strong brand recognition
To evaluate the impact of cost changes
To control cost
Enables competitive strategy (whether to compete on price or quality)
Cost Classification
Fixed Vs Variable
Enables BEP and margin of safety analysis
Limitation: some cost are neither fixed or variable, but could also be semi-variable or stepped-fixed cost
Semi-variable example: salesperson's salary with performance-based commission
Stepped-fixed cost: cost remain fixed with certain activity but increases when activity surpasses a threshold; example: construction of an extension of factory where cost remains fixed until business needs more capacity, in which cost increases significantly
Direct Vs Indirect
3 Elements of Direct Costs & Implications of Managers
Direct Material: reducing bargaining power of suppliers, using JIT
Direct Labour: comparing internal labour costs with external labour costs
Direct Expenses: using standard costing (estimating cost) to control cost; using standard cost as benchmark
Total direct cost allow managers to calculate contribution per limiting factor to maximise profits when there's resource constraint
Advantages
Enables managers to find ways to reduce input cost for new product
Enables clear shareholder communication about how costs are derived or created (reducing information asymmetry)
Example
: gym with high fixed cost means managers should focus on covering cost through aggressive marketing or memberships, while window cleaning business with high variable cost means managers should set an appropriate sales price to corver cost of each job while ensuring profit
Limitations
Difficult to allocate indirect cost in departments serving entire business (HR, IT, marketing) as it may involve subjectivity
Costing
2 Types
Absorption Costing
Example: in a restaurant that serves burger and fries, it would allocate costs based on number of each item produced
Activity-based Costing
Example: electricity costs are assigned based on actual usage; if fried require more kilowatt hours than burger, it will be allocated a higher share of electricity costs
Purpose
To derive selling price by adding profit margin to cost; prevents loss
To compare with future revenue to see whether it is worthwhile to produce the product
To negotiate with suppliers to reduce cost or how best to reduce cost
Transparent and fair appraisal systems