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Lecture 6

ADM3346 Lecture 6: study notes

Course Code
ADM 3346
Tiemei L I

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Chapter 1:
Financial Accounting providing statements of financial position to EXTERNAL parties (shareholders and
stakeholders) and is based on GAAP, IFRS, ASPE (past oriented)
Management Accounting - internally focused to help managers make a decision (future oriented)
Average Cost Total average cost per all units of production
Marginal Cost Cost of one additional unit… to achieve economies of scale
- large batches : average cost = marginal cost
- small batches : average cost > marginal cost
The five-step decision making process:
1. Identify the problem and uncertainties
2. Obtain information
3. Make predictions about the future
4. Decide on one of the available alternatives
5. Implement the decision, evaluate performance, and learn
Performance report of X: compare actual to budgeted
Actual result (1)
Budgeted amount (2)
(3) Difference (A-B)
(3) / (2) = (4) Difference
as a percentage of
budgeted amount
Key management accounting guidelines:
Use a cost-benefit approach
Recognize both behavioural and technical considerations
Use different costs for different purpose
Cost-benefit approach:
The cost-benefit approach is used to make resource allocation such that the expected benefits exceed
the expected costs. / to make resource allocation decision / whether to purchase a new software
package or hire a new employee. Requires explicit comparisons of the financial costs and benefits of
different alternatives. When forecasting costs and benefits, managers should take uncertainty into
consideration when they combine the two factors of risk and return in calculating the benefits.
跌风险 downside risk / 升空间 upside potential
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Chapter 2:
Direct material costs (DM): acquisition costs of all materials that eventually become part of the
cost object (work-in-process and then finished goods). Acquisition costs of direct materials
include freight-in [贸易] 进货运费 (inward delivery) charges, sales taxes, and custom
duties 关税.
Direct manufacturing labour costs (DML): compensation of all manufacturing labour that can
be traced to the cost object in an economically feasible way. Examples include wages and fringe
benefits 工资外的〕补贴 paid to machine operators and assembly-line workers who convert
direct materials purchased into finished goods.
Indirect manufacturing costs = manufacturing overhead (MOH): all manufacturing costs that
are related to the cost object but cannot be traced to a cost object in an economically feasible
way. Depreciation / maintenance, supplies, and supervisors’ salaries in a specific plant.
The methods that use to assign these costs to cost object:
Direct cost VS Indirect cost:
Direct cost
Cost object and can be traced to it.
Direct material costs (DM):
Direct manufacturing labour costs (DML): X can also electronically trace any individua
worker’s time spent working on X through time sheets.
Non-manufacturing direct labour cost (NDML) : through MIS, X can trace sales commission
costs for the A.
Indirect cost:
The costs are necessary but cannot be traced to a specific cost object in a cost-effective
way because the benefits from use of the resources are shared among diverse cost
objects. Cost allocation is the method used to divide up an indirect cost pool unequally
and assign costs to diverse cost objects.
Indirect Manufacturing overhead/cost = Manufacturing overhead 接费用 MOH
o Indirect materials: indirect supplies -- Security labour and supplies, cleaning
supplies, fittings and fasteners
o Indirect labour: all labour fringe benefits / rework of output/ overtime/ idle time
闲时间 quality control (labour, equipment, supplies), maintenance in the plant
(labour / supplies), all statutory fringe benefits (CPP/EI), plant lease or plant
amortization, equipment lease or equipment depreciation
non-manufacturing costs:
o incurred either before production begins or after production ends.
o 游成本制造产品前发生的成本Upstream cost : costs incurred prior to
Salaries for engineers who invent and design a new product
o Downstream cost: cost incurred after production
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Sales commission
o Because a company can only be profitable if it recovers its full cost, non-
manufacturing cost must be either traced or allocated to cost objects.
Prime cost & conversion cost:
1. Prime cost = direct manufacturing cost
a. (Direct Material costs + Direct Manufacturing Labour cost)
b. Prime costs are assigned using an average cost per input used over a specific
time period
i. Average cost = unit cost calculated by dividing the total prime cost by
physical units consumed
ii. Cost assignment splits the prime cost pools between units fully
complete and those remaining in work-in-process (WIP) inventory.
2. Conversion cost: direct manufacturing labour cost + manufacturing overhead cost
a. Other than direct materials costs required to convert direct materials into
finished goods
Variable costs & Fixed Costs:
Variable costs change with the quantity of inputs purchased and used to complete outputs.
o Variable cost changes in proportion to changes in the level of activity or volume within a
relevant range because the unit cost is constant.
o Relevant range means that between a minimum and a maximum number of units the
cost per unit does not change.
Fixed costs remain constant regardless of the quantity of outputs produced within a specific
relevant range band of normal activity level in which there is a specific relationship between the
level of activity and the cost in question.
o Fixed cost is constant within a relevant range of finished outputs produced.
o If managers needed to meet demand of 150 vehicles, then fixed cost would increase
because the quantity of output exceeds the relevant range, so they would have to expand
the size of the plant, purchase additional equipment, hire more salaried staff.
o The vehicle per unit fixed cost is calculated as monthly fixed cost divided by the quantity
of vehicles produced in the month.
Cost driver of a variable cost is the level of activity whose change causes proportionate changes
in the variable cost.
o For direct cost, there is a readily measured cause and effect relationship between the
change in either the level of activity (hours of DML) or volume (kilograms of DM used)
Unit cost:
produced (1)
Variable cost
per unit (2)
Total variable
cost (3) = 1*2
Total fixed
cost (4)
Total cost
(5) = 3 + 4
Unit cost
(5) / (1) = (6)
Beginning inventory finished goods + Cost of goods manufactured (COGM) = Cost of goods
available for sale (COGAS) Ending inventory = Cost of goods sold (COGS)
Cost of goods sold (COGS) (when sales incurred)= total manufacturing cost
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