PAPER 10: FUNDAMENTALS OF MANAGEMENT ACCOUNTING
GENERAL OBJECTIVE
This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to apply the fundamental principles of management accounting in decision making.
LEARNING OUTCOMES
A candidate who passes this paper should be able to:
- Estimate the cost of goods and services
- Analyse product costs for manufacturing and non-manufacturing activities
- Prepare marginal and absorption cost statements
- Analyse an organisation’s activities through budgetary control process
- Use computers in cost
CONTENT
Nature and purpose of cost and management accounting
- The nature of cost accounting and costing terms
- The role of cost accounting in management
- The purposes of cost accounting information
- Scope of cost accounting
- Meaning of management accounting, scope, limitations, applications
- Relationship between cost, financial and management accounting
- Selection of an ideal cost accounting system
Cost classification
– Definition and purpose of cost classification
– Methods of cost classification: By nature/elements of manufacturing costs; Functional classification; Behavioral classification; Controllability; Time; Financial accounting; Identification with inventory
Cost estimation
- Meaning of cost estimation
- Methods of estimating cost; non-mathematical methods like engineering method, accounts analysis method and high-low method; mathematical methods like scatter graph method, OLS regression method
Cost accumulation
- Accounting for materials and inventory; material cost records, purchasing procedures, receipt and issues of material, methods of valuing material issues, stock control procedures
- Accounting for labour: methods of labour remuneration, labour control procedures, maintenance of labour records
- Accounting for overheads: types of overheads, manufacturing, distribution and administration, departmental cost allocation and apportionment, overheads analysis, overhead absorption rates, over or under absorption
- Accounting for materials and inventory; material cost records, purchasing procedures, receipt and issues of material, methods of valuing material issues, stock control procedures
- Accounting for labour: methods of labour remuneration, labour control procedures, maintenance of labour records
- Accounting for overheads: types of overheads, manufacturing, distribution and administration, departmental cost allocation and apportionment, overheads analysis, overhead absorption rates, over or under absorption
Cost bookkeeping
- The flow of costs in a business enterprise
- Cost bookkeeping- interlocking and integrated ledger systems
Costing methods
- Job order costing
- Batch costing
- Process costing (excluding work in progress, joint and by-products)
- Service costing
- Unit costing
Marginal and absorption costing
- Distinction between marginal and absorption costing, valuation of products under marginal and absorption costing
- Preparation of marginal and absorption statements; cost of production and profit determination
- Reconciliation of marginal profits and absorption profits, application of marginal costing: break-even analysis and charts (single product), simplified decision problems; accept or reject, special order, dropping a product, make or buy and choice of a product where a limiting factor exists
Budgeting and budgetary control
- Nature and purposes of budgets
- Preparation of budgets; master budgets, functional (department budgets, cash budgets), proforma financial reports (income statements and balance sheets)
- Purpose of budgetary control; Operation of a budgetary control system, organisation and coordination of the budgeting function
Emerging issues and trends