BSNS107

Cost concepts

PLANNING BY MANAGEMENT AND THE CONTROL CYCLE

Revisit plans Strategic, Operational, and Financial Planning Implement plans

Planning and control cycle

Performance analysis: Plans vs actual results (Controlling) Data collection and performance feedback Executing operational activities (Managing)

MANAGEMENT ACCOUNTING VS FINANCIAL ACCOUNTING

Management Accounting supports the internal planning (futureoriented) decisions made by management. Financial Accounting has more of a scorekeeping, historical orientation that provides information to owners and others outside the organisation.

MANAGEMENT ACCOUNTING VS FINANCIAL ACCOUNTING

Management Accounting
Service perspective Time Frame Breadth of concern Reporting frequency and promptness Degree of precision Reporting standards Internal to managers Present and Future Micro - Individual units of organisation Frequent and timely one day after period ends Relevance more important than reliability None imposed

Financial Accounting
External to investors and creditors Historical perspective Macro - Entire organisation Annually High accuracy desired reliability very important Must follow GAAP and AASB's

COST BEHAVIOUR PATTERNS

The relationship of total cost to volume of business activity.
Total

variable costs change when activity changes. Total fixed costs remain unchanged when activity changes.

COST BEHAVIOUR PATTERNS

TOTAL VARIABLE COST
Example: Raw Materials Increased number of units produced results in an increased total cost of raw materials.

RM Cost $ Units of production

COST BEHAVIOUR PATTERNS

TOTAL FIXED COSTS
Depn Cost $
Example: Factory building depreciation Will not change with level of production.

Units of production

COST BEHAVIOUR PATTERNS

Typical variable costs: Raw materials Direct labor (wages) Factory water, light, electricity Sales commissions Delivery costs. Typical fixed costs: Land tax Insurance Supervisory salaries Depreciation Advertising.

TOTAL COST

Total cost = fixed cost + variable cost Total cost = fixed cost + (variable cost per unit * units)

COST BEHAVIOUR PATTERNS

Y

Total Cost ($)

ost c tal To

Variable

Fixed

Activity (units)

ASSUMPTIONS

Two assumptions regarding cost behaviour:

Relevant Linearity

range

RELEVANT RANGE
The relevant range is the level of activity over which a particular cost behaviour pattern exists Example: Office space is available at a rental rate of $30,000 per year in increments of 1,000 square metres. As the business grows, more space is rented, increasing the total cost.

COST BEHAVIOUR PATTERNS

FIXED COSTS General rule: do not unitise fixed expenses as they do not behave on a per unit basis.

FIXED COSTS AND THE RELEVANT RANGE

90 Rent cost in $000 60 Relevant 30 Range

Total cost does not change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity.

1,000 2,000 3,000 Rented area (square metres)

LINEARITY
LINEARITY
Actual cost behaviour pattern

Total Cost

Activity

COST-VOLUME-PROFIT ANALYSIS
Assumed cost behaviour pattern

LINEARITY
Actual cost behaviour pattern

Total Cost

Relevant range

A straight line closely approximates a curvilinear cost line within the relevant range.

Activity

COST BEHAVIOUR PATTERNS

SEMI-VARIABLE COSTS
Some costs are partly fixed and partly variable. Also known as mixed costs. Total electricity cost = fixed supply cost + variable per unit cost
Total cost = fixed supply cost + (variable rate per unit * level of activity)

COST BEHAVIOUR PATTERNS

Example: Electricity Costs
Y Total Electricity Cost

ost c tal To

Variable Elect. charge

Fixed monthly Elect. charge

Activity (kilowatt hours)

COST-VOLUME-PROFIT ANALYSIS

How can cost behaviour patterns be estimated? By analysing cost and activity over a period of time.