Management Accounting – Costings

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20 Aug 18

Management Accounting – Costings

Hayden Luke - Fitness Expert Hadyn Luke posted this on Monday 20th August 2018

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In our latest accountancy blog, you can read about Management Accounting: Costings. Previous blogs have included:

What is Management Accouncting: Costings

Students studying for AAT (Association of Accounting Technicians) Level 3 are required to have an understanding of the purpose and use of Management Accounting and the ability to carry out costing procedures within an accounting department of an organisation. TCostings should be provisionally covered as part of the Level 2 AAT course and then extended at Level 3. 

Candidates will acquire the skills to deal with costs, to apportion costs according to the requirements of an organisation and to analyse and review any deviations from a set budget. 

The will also learn how to gather, analyse and report costings information so that it can be used to support planning and decision making by management. As different organisations will take different approaches to management accounting, students will need to be able to provide informed and reasoned conclusions to help guide the company directors.

What areas are covered in Management Accounting – Costings?

There are several different topics within this subject heading, as follows:

  • Inventory
  • Labour
  • Overheads
  • Variance
  • Job, batch and service costing
  • Process costing
  • Marginal costing
  • Short-term decision making
  • Long-term decision making

Taking these in turn:

Inventory

Recording and calculating material costs by preparing records and analysing cost information, plus applying inventory control measures. This can include raw materials, items bought to be sold on and general items used to help run the business.

Labour

Recording, calculating and analysing an organisation’s labour costs in different ways, such as per unit of production. Developing an awareness of the difference between direct and indirect labour and preparing cost accounting journal entries.

Overheads

Calculating indirect expenses and learning how to apportion them to cost centres through an overhead absorption rate, using absorption costing principles.

Variance

Calculating variances between budgeted costs and actual costs or results, analysing why these variances have arisen, looking for possible solutions and producing reports on variances.

Job, batch and service costing

Differentiating between these three types of costing systems: job costing for an individual piece of work; batch costing for producing many identical or similar items; and service costing, for organisations that offer a service rather than or alongside a product.

Process costing

How process costing is used when goods or services are produced from a sequence of continuous or repetitive operations.

Marginal costing

Understanding the difference between absorption costing and marginal costing and what the advantages of the latter can be. The marginal cost of a product represents the total variable production cost, with fixed overheads treated as period costs.

Short-term decision making

Using short-term future income and costs to make decisions over a set period, including working out relevant costs, target profit and margins of safety, as well as looking at break-even and limiting factor analysis.

Long-term decision making

Investigating the costs and benefits of long-term investments of 12 months or more, such as product range longevity and capital investment in machinery or buildings. Considering elements such as payback, internal rate of return and cash flow.

In future blogs, we will look at each of these various costing elements in more detail.

Hayden Luke - Fitness Expert

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