CIMA C1

CIMA C1Fundamentals of Management AccountingClass Slides Ian WilsonCIMA C1Fundamentals of Management AccountingIntroduction to Cost Accounting The following slides will cover the learning aims covered in your Lsbf notes for Chapters 1 & 2.Chapter 1 Nature & purpose of Management AccountingChapter 2 Cost classification & behaviourWhat do you need to study?See the next slides & the objectives:Chapter 1 & 2Define management/Cost AccountingExplain the importance of Cost Control & Planning in an organisationDescribe how information can be used to measure performance in a companyExplain the differences between financial information requirements for Companies, public bodies & society.Page 12 Lsbf notesLearning Aims (CIMA) Chapter 1Explain the concept of Direct & Indirect CostExplain why the concept of cost is meaningful & essential to businessExplain how different types of costs behave in relation to changes in the Level of ActivityDistinguish between Fixed, Variable & Semi-Variable CostsExplain Step CostsCalculate the Fixed & Variable elements of Semi-Variable costs

Learning Aims (CIMA) Chapter 2Management & Cost Accounting:A Management Information System which provides analysis of past, present & future cost data for management action

A Management/Cost Accountant:Provide key financial data for planning, controlling & decision making in the organisationWhat is Management/Cost Accounting?Management accountants develop & use Cost Systems:Key Emphasis in 4 areas of use:Stock Valuations, what is the value/cost of inventory(Stock)?Planning, future forecastsControl, actual against planned performanceDecision Making, the right outcome in terms of cost/profit for the businessCost SystemsFinancial

The Financial AccountantManagement

The Management AccountantMostly Historic, Financial DataPast, Present & FutureExternal Audience: Lenders, Stakeholders in plcsInternal measure of Performance, qualitative & financialContent Regulated by Standards & LegislationFlexible content, Layout & Analysis, depends on requirementsAnnual for ShareholdersOver any time period, weekly-monthly-annual, as and when requiredFinancial vs Management?2 Branches of Profession:Financial vs Management?

Key position & role include:Guiding management on the financial implications of decisions proposed & madeFormulating business & financial strategyMonitoring spending & financial controlInternal audit of business performanceUnderstanding & interpreting events in the external business climate & environmentRole CRITICAL to BUSINESS SUCCESSRole of Management AccountantInformation & data that is collected & analysed by a Management Accountant will be used to assist the business in the following areas:Planning : Failing to plan, is planning to fail!Decision Making : making the Right choice at the Right time for the Right reasonsControl : Making sure Actual results fall in line with those planned corrections if necessary

Management ActivitiesLevels of ManagementDirectors & Senior Managers 1/3/5 yrs +Middle Managers up to 1 YearJunior Managers/Team Leaders - Day to Day focusCompany Structures & CostCompany Structures & Cost

Having seen the family tree of how a company may be structured, various departments may be responsible for differing levels of business processes:Cost Centre: responsible for COST control ONLYRevenue Centre: responsible for REVENUE ONLYProfit Centre: Accountable for REVENUE & COSTS

Company Structures

Investment Centre: responsible for:CostsRevenue.&Investment in the Investment Centre, ie Capital equipment etc.As such, the Manager is responsible for obtaining the Return on the Investment (ROI), or the Return on Capital Employed (ROCE)Company Structures

You will need to learn this key measure:

ROCE = Profit before Interest & Tax x 100% Capital Employed

ROCE = P.B.I.T. Capital Employed Now try Exercise (1) page 18

ROCE

Look at your class notes (page 17)You need to be able to recognise & describe:Cost Units to followCost Centres (already studied) Cost Objects to followCost Classification see the next area of study on the following slides:Cost Units & Cost CentresWhat are theses 2 aspects about?Cost Units:A unit of product or service for which costs can be obtainedUsually measured in the currency in which the product/service is sold in:Litre of PetrolTin of PaintLoaf of Bread

Cost Units & Objects

Definition:Cost Unit:In cost accounting, a unit of product or service for which a cost is computed. Cost units are selected to allow for comparison between actual cost and standard cost, or between different actual costs.

Cost Units & ObjectsDefinition:Cost Objects:Often spoken about in ABC CostingCost Objects may be a unit of product but could equally be a customer or supplierYou will re-visit this with P1 later in your CIMA studies Cost Units & ObjectsLets examine 4 Questions on Page 19Q1 Management Accounting concerned with?.Q2 Information separated into:Q3 R.O.I. =Q4 R.O.I. Division 1 or 2 better?End of Chapter Questions (1)Explain the concept of Direct & Indirect CostExplain why the concept of cost is meaningful & essential to businessExplain how different types of costs behave in relation to changes in the Level of ActivityDistinguish between Fixed, Variable & Semi-Variable CostsExplain Step CostsCalculate the Fixed & Variable elements of Semi-Variable costs

Learning Aims (CIMA) Chapter 2Costs fall into 3 broad categories:MaterialsLabourExpenses(called Overheads)

Materials & Labour speak for themselves, Expenses are varied, typically Rent/Rates/Heating/Lighting/Depreciation and so onCost ClassificationDirect Costs: those that are directly involved in the making of the product. The sum of the direct costs is called Prime Cost.Indirect costs: incurred for other reasons and cannot be allocated DIRECTLY to the productConsider:A Factory OperativeA Shift Supervisor leading a team of operatives

Direct & Indirect CostsCosts: Which is Direct & Indirect?.Direct & Indirect Costs

Material Costs:Direct Material costs include Raw Materials used to PRODUCE units of output or service.In garment manufacturing, the CLOTH for a suit would be a DIRECT MATERIALIndirect Materials are ALL other materials used by the business, ie materials for cleaning a sewing machine used to make a suit would be an INDIRECT MATERIALMaterial & Labour CostsLabour Costs:Direct Labour is the cost of the BASIC RATE of PAY for a PRODUCTION worker. Added to this may be OVERTIME premiums IF the overtime is requested by a customer.Indirect Labour costs:Overtime premiums except for above.Idle TimeBonus & Incentive paymentsWages to NON-PRODUCTION StaffMaterial & Labour CostsChapter 2 Lsbf Notes:Page 25Exercise 1Johnson calculate wages that should be treated as a DIRECT COST & INDIRECT COSTTotal Pay = 485Direct Cost = 375Indirect Cost = 110 Material & Labour CostsProduction: costs that relate to manufacturing the product. They are included in income statement as cost of sales and are included in stock valuation.Non-Production: incurred as business costs but NOT relating to production/manufacturing:DistributionSales/MarketingAdministration & FinanceProduction & Non-Production CostsI often draw out a structure for costs.

Make sure you note this down on the next 2 slides.

Learn this, it is important for you.

Cost ClassificationPrime Cost is the TOTAL of:DIRECT MATERIAL ie ClothDIRECT LABOUR ie Cutting & SewingDIRECT EXPENSE ie Royalty to PoloTOTAL DIRECT COST = PRIME COSTPRIME COST is calculated as a:COST PER UNITThe Total of ALL the Direct Cloth, Labour & Direct Expenses to make ONE SUIT is the prime cost.

Prime CostPrime Cost is the TOTAL of:DIRECT MATERIAL ie ClothDIRECT LABOUR ie Cutting & SewingDIRECT EXPENSE ie Royalty to PoloTOTAL DIRECT COST = PRIME COSTPRIME COSTS are VARIABLE COSTS.The prime cost per unit is Fixed, however Total Cost varies as each additional unit is produced.

Prime CostDirect Material - variableDirect Labour - variableDirect Expenses - variable= Total Direct Cost or Prime CostProduction Overheads (O.A.R.) -fixed= Total Production Cost Admin Overheads - fixed & variableSelling Overheads fixed & variableDistribution Overheads fixed & variable= Total Cost fixed + variableCost ClassificationQuiz Test based on last weekPhonesRegistersToday:Cost BehaviourHigh Low MethodThe 3 As, allocation, Apportionment & AbsorptionExam style questionsPlan for TodayPractice your skills with these verbal questions:We have 16 questions to deal with, I will read these outAre the costs:ProductionSelling & DistributionAdministrationResearch & Development

Exercise (BPP 33)What is this?The way in which costs will vary or change as the Level of Activity changes.Why is this important?As we have seen, an Accountant will play a major role in advising management as they make crucial business decisionsLets say managers want to double output. What will happen to costs?Will they double or not?

Cost BehaviourDecision making in the future will depend on the accountants ability to predict how costs will behave in a variety of scenarios.Your syllabus will require you to deal with 4 types of Cost & behaviour patterns:Fixed StepVariableSemi-Variable Cost BehaviourCost Behaviour is the way in which a cost changes as activity levels changeLevel of Activity refers to the amount or volume of work completed It may seem easy to agree that costs increase as the level of activity increases.The picture is complex however.Study pages 24 to 29 in your notes.Cost BehaviourMake sure you learn the 4 diagrams connected with each cost.Fixed CostStep CostVariable CostSemi-Variable Cost

Consider examples of eachCost Behaviour diagramsThey tend to remain constant over time:Examples?Fixed Costs: Graph

Fixed CostspendLook at the graph shapes:Fixed Cost, Total & per Unit

Costs step up as activity increases: Examples?Step Costs: Graph

Fixed Cost reaches a point at which resources are increasedCost increase in proportion to activity changes: Examples?Variable Costs: Graph

Part Fixed & Part Variable cost elements which are partly affected by a change in activity.Semi-variable costs have both a fixed & variable element.Consider the earlier definitions of Fixed & VariableA graph helps to follow what is going on:

Semi-Variable CostsSemi-Variable Costs

Examples:Electric Bill - fixed plus usage chargeGas Bill fixed plus usage chargeSales Reps - Salary basic plus commissionWater Bill fixed element plus usageTelephone Bill part based on calls, variable Fixed element for line & equipment rental - fixed

Semi-Variable CostsBring ALL the elements together:Total Costs

So, we know that Semi-Variable costs have 2 parts:Fixed & VariableHowever, in your exam you may be given data, based on historical spends, for Semi-Variable Costs. How do we know or find out what part is Fixed & what is variable?You may need this split so you can forecast forward how much costs will be, given a level of activitySemi-Variable CostsThe fixed & variable elements can be predicted by this method.Look at Exercise 2 in your notes on page 28You are given 2 Total Costs for 2 Levels of ActivityThe change in cost for the 2 levels MUST be down to VARIABLE costs alone.I will demonstrate this for youYou need to learn thisIt is VITAL!

High/Low MethodExercise 2 Lsbf Page 28The following cost information is available.Output 65,000 units 105,000 unitsCost 133,000 210,000RequiredUsing the above data, calculate the fixed and variable costs for the business andthe total cost for 165,000 units.Exercise 2Subtract Low values from High values given(you need at least 2 values), keeping the Cost as the numerator(on top) & the Volume as the denominator(below).This answer is the VARIABLE COST per UNIT.Substitute your variable cost per unit into any of the historical data sets given.No of Units X - Variable Cost per unit will equal the TOTAL VARIABLE COSTHigh/Low MethodThe historical data set will give you a TOTAL COST.We know that Total Cost = Total Variable Cost plus Total Fixed Cost.We now know 2 parts of the above equation.We can calculate TOTAL FIXED COSTWe can then forecast any cost total for any activity level nowHigh/Low MethodWhat is a Public Body?A public body is not part of a government department, but carries out its function to a greater or lesser extent at arm's length from central government.Public Bodies

Ministers are ultimately responsible to Parliament for the activities of the bodies sponsored by their department.Public Corporations; NHS Bodies; and Public Broadcasting Authorities (BBC and S4C).

Public Bodies

The main aim of all Public Bodies is to carry out their duties as efficiently and effectively as possible, within available resources, for the benefit of taxpayers, customers and staff.

Public Bodies

A Public Body has in place sound internal financial, risk management and management information systems including: management accounting systems to enable it to monitor and control its expenditure against budget; to produce annual accounts;

Public Bodies

Try the 5 questions that summarise this First sessionPages 31 to 32End of Session Exercises