Paper 10

FUNDAMENTALS OF MANAGEMENT ACCOUNTING

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.

On completion, a candidate should be able to

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. 1.1
  Definitions of key terms:
  1. 1.1.1
    Cost
  2. 1.1.2
    Cost unit/object
  3. 1.1.3
    Cost accounting
  4. 1.1.4
    Cost accountant
  5. 1.1.5
    Management accounting
  6. 1.1.6
    Management accountant
  7. 1.1.7
    Cost centre
  8. 1.1.8
    Profit centre
  9. 1.1.9
    Responsibility centre
2. 1.2
  Role of Management Accounting in decision making
3. 1.3
  Users of Management accounting information
  1. 1.3.1
    Executives
  2. 1.3.2
    Production managers
  3. 1.3.3
    Sales managers
  4. 1.3.4
    Employees
4. 1.4
  Difference between management accounting and financial accounting
5. 1.5
  Relationship between cost accounting and management accounting
6. 1.6
  Limitations of management accounting
7. 1.7
  Cost control vs cost reduction
  1. 1.7.1
    Definitions
  2. 1.7.2
    Advantages of cost control
  3. 1.7.3
    Differences between cost control and cost reduction
8. 1.8
  Selection of an ideal cost accounting system
  1. 1.8.1
    Definition of cost accounting system
  2. 1.8.2
    Factors to be considered in designing an ideal cost accounting system
9. 1.9
  Professional ethics for management accounting
  1. 1.9.1
    Competence
  2. 1.9.2
    Confidentiality
  3. 1.9.3
    Integrity
  4. 1.9.4
    Credibility
10. 1.10
  Cost classification:
  1. 1.10.1
    Definition of cost classification
  2. 1.10.2
    Purpose of cost classification
11. 1.11
  Bases of classification
  1. 1.11.1
    Functions
  2. 1.11.2
    Behaviour
  3. 1.11.3
    Nature of expense
  4. 1.11.4
    Relation to cost centre or cost unit
  5. 1.11.5
    Time
  6. 1.11.6
    Costs for management decision making
  7. 1.11.7
    Nature of production or process
2
Use appropriate techniques to estimate business costs
1. 2.1
  Introduction to cost estimation
  1. 2.1.1
    Definition of cost estimation
  2. 2.1.2
    Purpose of cost estimation
  3. 2.1.3
    Methods of cost estimation:
  4. 2.1.4
    Non-mathematical methods;
    1. 2.1.4.1
      Accounts Analysis method;
    2. 2.1.4.2
      High-Low method;
    3. 2.1.4.3
      Industrial Engineering method
  5. 2.1.5
    Mathematical methods;
    1. 2.1.5.1
      Scatter graph method;
    2. 2.1.5.2
      Simple linear regression
3
Account for different business costs
1. 3.1
  Accounting for materials and inventories
  1. 3.1.1
    Objectives of material control
  2. 3.1.2
    Essential requirements of material control system
  3. 3.1.3
    Centralised and decentralised purchasing:
    1. 3.1.3.1
      Definitions
    2. 3.1.3.2
      Advantages
    3. 3.1.3.3
      Disadvantages
  4. 3.1.4
    Periodic inventory system
  5. 3.1.5
    Perpetual inventory system
2. 3.2
  Stores ledger card
  1. 3.2.1
    Definition of a store ledger card
  2. 3.2.2
    Methods of preparation
    1. 3.2.2.1
      FIFO
    2. 3.2.2.2
      LIFO
    3. 3.2.2.3
      Weighted average methods
3. 3.3
  Determining optimal stock levels
  1. 3.3.1
    Stock levels and its control
  2. 3.3.2
    Factors influencing stock levels
  3. 3.3.3
    Relevant costs for inventory management:
    1. 3.3.3.1
      Purchase
    2. 3.3.3.2
      Ordering
    3. 3.3.3.3
      Holding/carrying
  4. 3.3.4
    The Economic Order Quantity (EOQ)
    1. 3.3.4.1
      Definition
    2. 3.3.4.2
      Assumptions
    3. 3.3.4.3
      Determination
4. 3.4
  Accounting for labour
  1. 3.4.1
    Factors influencing wages
  2. 3.4.2
    Methods of labour remuneration:
    1. 3.4.2.1
      Time rate
    2. 3.4.2.2
      Piece rate
    3. 3.4.2.3
      Bonus schemes (individual and Group)
  3. 3.4.3
    Labour turnover
5. 3.5
  Accounting for overheads
  1. 3.5.1
    Definition
  2. 3.5.2
    Classification:
    1. 3.5.2.1
      Nature
    2. 3.5.2.2
      Function
    3. 3.5.2.3
      Element
    4. 3.5.2.4
      Behaviour
  3. 3.5.3
    Overhead allocation, apportionment and reapportionment
  4. 3.5.4
    Factors to be considered when apportioning overheads
  5. 3.5.5
    Methods of overheads distribution:
    1. 3.5.5.1
      Primary
    2. 3.5.5.2
      Secondary
  6. 3.5.6
    Absorption of overheads
    1. 3.5.6.1
      Definition
    2. 3.5.6.2
      Methods of overheads absorption
    3. 3.5.6.3
      Factors to consider in selection overhead absorption rates
  7. 3.5.7
    Over/under absorption of overheads
    1. 3.5.7.1
      Definition
    2. 3.5.7.2
      Causes
    3. 3.5.7.3
      Computation
4
Apply costing methods in determining the cost of a product or service
1. 4.1
  Job order costing
  1. 4.1.1
    Definition
  2. 4.1.2
    Features
  3. 4.1.3
    Advantages
  4. 4.1.4
    Limitations
  5. 4.1.5
    Costing
2. 4.2
  Batch costing
  1. 4.2.1
    Definition
  2. 4.2.2
    Features
  3. 4.2.3
    Applications
  4. 4.2.4
    Costing
3. 4.3
  Process costing (excluding work in progress, joint and by-products)
  1. 4.3.1
    Definition
  2. 4.3.2
    Features
  3. 4.3.3
    Applications
  4. 4.3.4
    Differences between job costing and process costing
  5. 4.3.5
    Losses (Normal loss, abnormal loss/gain)
  6. 4.3.6
    Preparation of process accounts
4. 4.4
  Service costing
  1. 4.4.1
    Definition
  2. 4.4.2
    Features
  3. 4.4.3
    Costing
5
Prepare income statements using marginal costing and absorption costing techniques
1. 5.1
  Differences between marginal costing and absorption costing
  1. 5.1.1
    Features
  2. 5.1.2
    Merits/demerits
  3. 5.1.3
    Limitations
2. 5.2
  Comparative income statements
3. 5.3
  Reconciliation statement
  1. 5.3.1
    Difference in stock valuation
  2. 5.3.2
    Over/under absorbed overheads
  3. 5.3.3
    Preparation of the statement
6
Apply break-even analysis in business decision making
1. 6.1
  Introduction to cost volume profit (C-V-P) analysis
  1. 6.1.1
    Objectives of C-V-P analysis
  2. 6.1.2
    Assumptions/Limitations of C-V-P analysis
  3. 6.1.3
    Break-even chart
2. 6.2
  Profit-volume chart
  1. 6.2.1
    Definition
  2. 6.2.3
    Derivation
  3. 6.2.4
    Single product C-V-P analysis
3. 6.3
  Applications of marginal costing in decision making:
  1. 6.3.1
    Make/buy decisions
  2. 6.3.2
    Continue/discontinue a product
  3. 6.3.3
    Choice of a product where limiting factor exists
  4. 6.3.4
    Acceptance of a special offer
  5. 6.3.5
    Overriding considerations to the above decisions
7
Prepare budgets for management decisions making
1. 7.1
  Definition of terms:
  1. 7.1.1
    Budget
  2. 7.1.2
    Budget centre
  3. 7.1.3
    Budget bias(slack)
  4. 7.1.4
    Budget manual
    1. 7.1.4.1
      Essential features of a budget
    2. 7.1.4.2
      Objectives of the budgets
    3. 7.1.4.3
      Limitations of the budgets
    4. 7.1.4.4
      Difference between forecasts and budgets
2. 7.2
  Classification of budgets
  1. 7.2.1
    Classification based on time:
    1. 7.2.1.1
      Long-term budgets
    2. 7.2.1.2
      Short-term budgets
  2. 7.2.2
    Classification based on nature of expenditure and receipts:
    1. 7.2.2.1
      Capital budget
    2. 7.2.2.2
      Revenue budget
  3. 7.2.3
    Classification based on functions
    1. 7.2.3.1
      Sales budget
    2. 7.2.3.2
      Production budget
    3. 7.2.3.3
      Materials cost budget
    4. 7.2.3.4
      Materials purchase budget
    5. 7.2.3.5
      Cash budget
  4. 7.2.4
    Classification based on capacity
    1. 7.2.4.1
      Fixed budgets
    2. 7.2.4.2
      Flexible budgets
3. 7.3
  Preparation of budgets
  1. 7.3.1
    Functional budgets
  2. 7.3.2
    Fixed and flexible budgets