CMA 512s
Lecturer’s contact details
A. Makosa
rd
Room 326, 3 Floor Office
Building. amakosa@nust.na
(061) 207 2816
Management accounting
Financial accounting
Management accounting
 Internal Reporting
 Planning – budgets
 Decision making – which product etc
 Control – deviations (price, profit)
Financial accounting
 External reporting
 Financial statements
Luke 14:28 - 30
 “Suppose one of you wants to build a tower. Will he not first
sit down and estimate the cost to see if he has enough money
to complete it?
 For if he lays the foundation and is not able to finish it,
everyone who sees it will ridicule him,
 saying, 'This fellow began to build and was not able to finish.”
Study Unit 1.1
Business accounting 1B
Study outcomes
 On completion of this study unit, you should be able to:
 Describe what managers do and why they need accounting
information
 Identify the major differences and similarities between financial
and managerial accounting
Introduction
 Financial accounting  External reporting
 Managerial accounting  Internal reporting
 Information for planning, control and decisionmaking
Introduction
Accounting
Financial
External:
-Shareholders
-Creditors
-SARS
Managerial
Internal:
-Management
-Planning
-Motivation
-Control
-Decisionmaking
The need for managerial accounting
information
 Functions of management:
 Planning
 Directing and motivating
 Control
Functions of management
Planning
Directing and
motivating
Control
Planning and control cycle
Formulate long and
short term plans
(Planning)
Compare actual
performance with
budgeted
performance
(Control)
Decision
making
Performance
measurement
(Control)
Start
Implement plans
(Directing and
motivating)
Comparison between financial and
managerial accounting
Managerial accounting
Financial accounting
a) Emphasis on the
future:
Yes, for planning
purposes
No, for past financial
transactions
b) Relevance and
flexibility of data:
Relevant information
Objective and verifiable
c) Less emphasis on
precision:
Timeliness more
important than precision
Precision more important
d) Segments of an
organisation:
Focuses more on
reporting by segments
Reporting for the
organisation as a whole
e) GAAP
Not bound by GAAP
Reporting by following
GAAP
Summary
 Managerial accounting is used for internal reporting
 Used for planning, control and decisionmaking
 Changing business environment leads to increased
competition
 Code of conduct
Study unit 1.2
Cost terms and concepts
Study outcomes
On completion of this study unit, you should be able
to:
 Distinguish between the
following and give examples
of each :
 Direct and indirect material costs
 Direct and indirect labour costs
 Period and product costs
 Fixed and variable costs
 Direct and indirect costs
 Define the following terms:
 Conversion cost
 Marketing costs
 Administrative costs
 Relevant range
 Cost object
 Differential cost
 Opportunity cost
 Sunk cost
 Differential revenue
Study outcomes
On completion of this study unit, you should be able
to:
 Calculate the following
cost:
 Differential cost
 Differential income
(revenue)
 Opportunity cost
 Sunk cost
 Classify costs in the
following:






Direct and indirect costs
Period and product costs
Fixed and variable costs
Sunk cost
Opportunity cost
Differential cost
Introdution
 Financial accounting and managerial accounting needs cost
data to perform certain tasks
 But, different uses of cost data requires different classification
Comparison between merchandising
and manufacturing sectors
Merchandising . . .
Manufacturing . . .
 Buys completed
 Buys raw-materials.
products.
 Sells completed
products.
 Manufactures and sells
MegaLoMart
completed products.
General cost categories – Manufacturing
costs
Direct
Materials
Direct
Labour
The Product
Manufacturing
Overhead
Direct Materials
The material that forms an integral part of the product
and can be conveniently traced to the finished product.
Example: A radio installed in a car
Direct labour
Labour cost that can be conveniently traced to an individual
unit of the product.
Example: Wages paid to workers that welds the car
together
Manufacturing overhead
Manufacturing costs that can not be directly traced to a specific unit of
the product.
Examples: Indirect labour and indirect material
Wages paid to workers that
are not directly involved in
the production process.
Examples:
maintenance workers,
cleaners and security
guards.
Material used to support the
production process.
Examples:
oil and cleaning materials
used in a car manufacturing
plant.
Classifications of cost
Manufacturing costs usually are classified as follows:
Direct
Materials
Direct
Labour
Prime
cost
Manufacturing
Overhead
Conversion
cost
Non-manufacturing costs
Marketing and
selling costs
Administrative
costs
Costs incurred to obtain
the order and deliver the
product.
Executive, organisational
and clerical costs.
Quick Check 
Which of the following costs will be seen as manufacturing
overhead at Boeing? (More than one answer may be
correct.)
A. Depreciation on lifter trucks used in the factory.
B. Selling commissions paid.
C. Cost of a black box in a Boeing 767.
D. Wages paid to a production supervisor.
Quick Check 
Which of the following costs will be seen as manufacturing
overhead at Boeing? (More than one answer may be
correct.)
A. Depreciation on lifter trucks used in the factory.
B. Selling commissions paid.
C. Cost of a black box in a Boeing 767.
D. Wages paid to a production supervisor.
Product cost versus period costs
Product cost includes direct
materials, direct labour and
manufacturing overheads.
Inventory
Cost of Sales
Period cost is not included in
product cost. It is written
off to the statement of
profit or loss.
Expense
Sales
Financial
position
Statement of
P or L
Statement of P or L
Quick Check 
Which of the following costs will be seen as a period cost,
rather than a product cost in a manufacturing company?
A. Depreciation on manufacturing equipment.
B. Property taxes on the corporate head office.
C. Direct material costs.
D. Electricity bill for lighting up the production plant.
Quick Check 
Which of the following costs will be seen as a period cost,
rather than a product cost in a manufacturing company?
A. Depreciation on manufacturing equipment.
B. Property taxes on the corporate head office.
C. Direct material costs.
D. Electricity bill for lighting up the production plant.
Cost classifications to predict cost
behaviour
How will costs react to
changes in the level of a
certain business activities.
 Total variable cost changes
when the level of activity
changes.
 Total fixed cost remains
unchanged when the level of
activity changes.
Total variable cost
Total call cost
Your total cell phone call cost is based on the number of
minutes talked.
Minutes talked
Variable cost per unit
Tariff per minute
The cost per unit talked stays constant. Example, 85 cents per
minute.
Minutes talked
Total fixed cost
Monthly contract tariff
Your monthly contract tariff does not change if you make more
calls.
Amount of calls
Fixed cost per unit
Monthly contract tariff
per call
The average cost per call declines as more calls are made.
Amount of calls
Cost classifications to predict cost
behaviour
Cost classification (within relevant range)
Cost
In total
Per unit
Variable
Total variable cost
changes as the activity
level changes.
Variable cost per unit
stays the same over various
levels of activities.
Fixed
Total fixed costs stays the
same, even when the level
of activity changes.
Fixed cost per unit declines
when the activity level
increases.
Quick Check 
Which of the following costs will be variable with regards
to the quantity of ice creams sold at Milky Lane? (There
may be more than one correct answer.)
A. The cost of lights in the shop.
B. The wage of the shop manager.
C. The cost of ice cream.
D. The cost of serviettes given to clients.
E. Advertising cost of Milky Lane.
Quick Check 
Which of the following costs will be variable with regards
to the quantity of ice creams sold at Milky Lane? (There
may be more than one correct answer.)
A. The cost of lights in the shop.
B. The wage of the shop manager.
C. The cost of ice cream.
D. The cost of serviettes given to clients.
E. Advertising cost of Milky Lane.
Direct cost and indirect cost
Direct cost
Indirect cost
 Costs that can
 Cost that can not be
conveniently be traced to
a unit of a product.
 Examples: direct
materials and direct
labour
conveniently traced to a unit
of a product.
 Example: manufacturing
overhead
Differential cost and income
Cost and income that differs between alternatives.
Example: You have a job in your hometown that pays
N$1 500 per month. You get an offer in a town close to
your hometown that pays N$2 000 per month. The
transport cost to that town is N$300 per month.
Differential income is:
N$2 000 – N$1 500 = N$500
Differential cost is:
N$300
Important
 Each decision consists of a choice between at least two
alternatives.
 Only the costs and benefits that differs between alternatives
(i.e., differential cost and benefits) are relevant in the
decision. All other costs and benefits should be ignored in
making the decision.
Opportunity cost
The potential benefit given up when
one alternative is chosen above another.
Example: If you did not
attend the university, you
could have earned
N$90 000 per year.
Your opportunity cost of
attending the university is
N$90 000 for one year.
Sunk cost
Sunk cost can not be changed by any decision taken. It is not
differential cost and should be ignored in taking decisions.
Example: You bought a car for N$15 000 two
years ago. The N$15 000 cost is sunk cost,
because if the motor is parked, driven, sold or
swapped, the cost of N$15 000 can not be
changed.
Summary
 Different uses of cost data have the result that costs are
classified differently.