CIMA C1

Fundamentals of Management Accounting

Introduction to Cost Accounting

CIMA C1
Fundamentals of Management Accounting
Class Slides Ian Wilson

Learning Aims (CIMA)

1.
2.

3.

4.

Define management/Cost Accounting

Explain the importance of Cost Control &
Planning in an organisation
Describe how information can be used to
measure performance in a company
Explain the differences between financial
information requirements for Companies,
public bodies & society.

Learning aims continued

1.

2.

3.

4.

5.
6.

Explain the concept of Direct & Indirect

Cost
Explain why the concept of cost is
meaningful & essential to business
Explain how different types of costs
behave in relation to changes in the Level
of Activity
Distinguish between Fixed, Variable &
Semi-Variable Costs
Explain Step Costs
Calculate the Fixed & Variable elements of
Semi-Variable costs

What is Management/Cost
Accounting?
Management & Cost Accounting:
A Management Information System which
provides analysis of past, present & future
cost data for management action

Management/Cost Accountant:
Provide key financial data for planning,
controlling & decision making in the
organisation

Cost Systems
Key Emphasis in 4 areas of use:
1. Stock Valuations, what is the value/cost of
inventory?
2. Planning, future forecasts
3. Control, actual against planned
performance
4. Decision Making, the right outcome in
terms of cost/profit for the business

Financial vs Management?
Financial

Management

The Financial Accountant

The Management
Accountant

Mostly Historic, Financial Data

Past, Present & Future

External Audience: Lenders,

Stakeholders in plcs

Internal measure of Performance,

qualitative & financial

Content Regulated by Standards

& Legislation

Flexible content, Layout &

Analysis

Annual for Shareholders

Over any time period, weeklymonthly-annual, as and when

required

Financial vs Management?
2 Branches of Profession:

Management Activities
Information & data that is collected &
analysed by a Management Accountant will
be used to assist the business in the
following areas:
1. Planning : Failing to plan, is planning to
fail!
2. Decision Making : making the Right choice
at the Right time for the Right reasons
3. Control : Making sure Actual results fall in
line with those planned corrections if
necessary

Levels of Management
Directors &
Senior Managers
1/3/5 yrs +
Middle
Managers up
to 1 Year
Junior
Managers/Team
Leaders Day to
Day focus

Str
ate
gic
Lo
ng
Ter
Tactical
m
Medium Term
Operational
Short Term

Company Structures &

Cost
Board

Production

Machining

Admin

Assembly

I.T.

Company Structures
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
ONLY
Revenue Centre: responsible for REVENUE
ONLY
Profit Centre: Accountable for REVENUE &
COSTS

Company Structures
Investment Centre: responsible for:
Costs
Revenue.&
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)

ROCE

You will need to learn this key measure:

ROCE = Profit before Interest & Tax

100%

Capital Employed

Now try Exercise 1 page 18

Cost Units & Cost Centres

Look at your class notes (page 4)
You need to be able to recognise &
describe:
1. Cost Units
2. Cost Centres (already studied)
3. Cost Objects
4. Cost Classification see the next area of
study on the following slides:

Cost Units & Objects

What are theses 2 aspects about?
Cost Units:
A unit of product or service for which costs
can be obtained
Usually measured in the currency in which
the product/service is sold in:
Litre of Petrol
Tin of Paint
Loaf of Bread

Cost Units & Objects

Cost Objects:
Often spoken about in ABC Costing
Cost Objects may be a unit of product but
could equally be a customer or supplier
You will re-visit this with P1 later in your
CIMA studies

Cost Classification
Costs fall into 3 broad categories:
1. Materials
2. Labour
3. Expenses(called Overheads)

Materials & Labour speak for themselves,

Expenses are varied, typically
Rent/Rates/Heating/Lighting/Depreciation and
so on

Direct & Indirect Costs

Direct 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
product

Consider:
A Factory Operative
A Shift Supervisor leading a team of
operatives

Direct & Indirect Costs

Costs: Which is Direct & Indirect?.

Production & Non-Production

Costs
Production: 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:
a. Distribution
b. Sales/Marketing
c. Administration

Cost Classification

I often draw out a structure for costs.

Make sure you note this down.

Exercise 1

Practice your skills with True or False

We have 5 questions to deal with, I will read

these out

True or false, which do you think is the

correct one based on the narrative given:

Cost Behaviour
Different thoughts on costs when Decision
Making, Planning & Controlling:
1. Relevant Costs
2. Avoidable Costs
3. Opportunity Costs
4. Sunk Costs
5. Controllable Costs
6. Uncontrollable Costs
. We can consider each in turn:

Cost Behaviour
Relevant Costs:
Future cash flows arising as a direct
consequence of a decision.
They are:
Future Costs
Cash Flows
Incremental Costs

Cost Behaviour
Avoidable Costs:
Costs which would not be incurred if the
activity to which they relate did not exist
Important to know if you wish to discontinue
a product/operation

Cost Behaviour
Opportunity Costs:
The value of the benefit sacrificed when one
course of action is chosen in preference to
an alternative.
Sunk Costs:
This is a past cost which is not directly
relevant in decision making
Controllable Costs:
That which can be influenced by
management decisions & actions

Cost Behaviour
Uncontrollable Costs:
This cost cannot be affected by
management within a given time span

Can you think of examples of controllable &

uncontrollable costs?

Cost Behaviour
Decision 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:
1. Fixed
2. Step
3. Variable
4. Semi-Variable

Cost Behaviour

Cost Behaviour is the way in which a cost

changes as activity levels change

Level of Activity refers to the amount or

volume of work done

It may seem easy to agree that costs

increase as the level of activity increases.
Study pages 7 to 9 in your notes.

Cost Behaviour diagrams

Make sure you learn the 4 diagrams
connected with each cost.
1. Fixed Cost
2. Step Cost
3. Variable Cost
4. Semi-Variable Cost

Consider examples of each

Fixed Costs: Graph

They tend to remain constant over time:
Examples?
Fixed Cost

spend

Fixed Cost, Total & per

Unit

Look at the graph shapes:

Step Costs: Graph

Costs step up as activity increases:

Examples?
Fixed Cost
reaches a point
at which
resources are
increased

Variable Costs: Graph

Cost increase in proportion to activity

changes: Examples?

Semi-Variable Costs
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 &
Variable
A graph helps to follow what is going on:

Semi-Variable Costs

Semi-Variable Costs
Examples:
Electric Bill
Gas Bill
Sales Reps Salary
Water Bill

Total Costs

Bring ALL the elements together:

Semi-Variable Costs
So, we know that Semi-Variable costs have
2 parts:
Fixed & Variable
However, in your exam you may be given
data, based on historical spends, for SemiVariable 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 activity

High/Low Method

The fixed & variable elements can be

predicted by this method.

Look at Exercise 2 in your notes on page 26

I will demonstrate this for you

You need to learn this
It is VITAL!

High/Low Method
Subtract 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 COST

High/Low Method
The 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 COST
We can then forecast any cost total for any
activity level now

Public Bodies
What 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.
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.
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;

End of Session Exercises

Try the 4 questions that summarise this First

session