CIMA C1

Fundamentals of Management Accounting

Class Slides Ian Wilson

CIMA C1
Fundamentals of Management Accounting
Introduction to Cost Accounting

Chapter 1 & 2
The following slides will cover the learning
aims covered in your Lsbf notes for
Chapters 1 & 2.
Chapter 1 Nature & purpose of
Management Accounting
Chapter 2 Cost classification & behaviour
What do you need to study?
See the next slides & the objectives:

Learning Aims (CIMA)

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)

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 & SemiVariable 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
Management accountants develop &
use
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, depends on
requirements

Annual for Shareholders

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

required

Financial vs Management?
2 Branches of Profession:

Role of Management
Accountant
Key position & role include:
1. Guiding management on the financial
implications of decisions proposed & made
2. Formulating business & financial strategy
3. Monitoring spending & financial control
4. Internal audit of business performance
5. Understanding & interpreting events in the
external business climate & environment
. Role CRITICAL to BUSINESS SUCCESS

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 17)
You need to be able to recognise &
describe:
1. Cost Units to follow
2. Cost Centres (already studied)
3. Cost Objects to follow
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

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 & Objects

Definition:
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?.

Material & Labour 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 MATERIAL
Indirect 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 MATERIAL

Material & Labour Costs

Labour 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:
1. Overtime premiums except for above.
2. Idle Time
3. Bonus & Incentive payments
4. Wages to NON-PRODUCTION Staff

Material & Labour Costs

Chapter 2 Lsbf Notes:
Page 23
Exercise 1
Johnson calculate wages that should be
treated as a DIRECT COST & INDIRECT COST
Total Pay = 485
Direct Cost = 375
Indirect Cost = 110

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 & Finance

Cost Classification

I often draw out a structure for costs.

Make sure you note this down on the next

slide.

Learn this, it is important for you.

Cost Classification
Direct Material - variable
Direct Labour - variable
Direct Expenses - variable
= Total Direct Cost or Prime Cost
Production Overheads (O.A.R.) -fixed
= Total Production Cost
Admin Overheads - fixed & variable
Selling Overheads fixed & variable
Distribution Overheads fixed & variable
= Total Cost
fixed + variable

Exercise

(BPP 33)

Practice your skills with these verbal

questions:
We have 16 questions to deal with, I will
read these out
Are the costs:
1. Production
2. Selling & Distribution
3. Administration
4. Research & Development

Cost Behaviour
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 decisions
Lets say managers want to double output.
What will happen to costs?
Will they double or not?

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 & behaviour patterns:
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 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 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 - fixed plus usage charge
Gas Bill fixed plus usage charge
Sales Reps - Salary basic plus commission
Water Bill fixed element plus usage

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
You are given 2 Total Costs for 2 Levels of
Activity
The change in cost for the 2 levels MUST be
down to VARIABLE costs alone.
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
Pages 28 to 29