BBMA 3103

FACULTY OF OUM BUSINESS SCHOOL

JANUARY / 2019

BBMA 3103

MANAGEMENT ACCOUNTING I

MATRICULATION NO : 850315065126002
IDENTITY CARD NO. : 850315-06-5126
TELEPHONE NO. : 012-5009369
E-MAIL : thoo.mep@gmail.com
LEARNING CENTRE : N. SEMBILAN LEARNING CENTRE

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BODY OF CONTENT:

1) INTRODUCTION OF COST CONCEPTS AND LSIT OF COSTS

1.1 Cost object

1.2 Cost driver
1.3 Direct material cost
1.4 Direct labout cost
1.5 Factory overhead cost

2) SIX CHARACTERISTICS OF THE MANAGEMENT ACCOUNTING

INFORMATION

2.1 Relevance
2.2 Comprehensible
2.3 Timeliness
2.4 Comparable
2.5 Reliable and complete
2.6 Objectivity

3) DISCUSSION ON HOW THE COST CONCEPTS AND THEIR FEATURES

ARE IMPORTANT TO THE MANAGEMENT ACCOUNTANT

3.1 Planning

3.2 Directing

3.3 Controlling

3.4 Perfomance evaluation

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4) IMPLICATION OF THE IMPORTANCE / USEFULNESS OF COST

CONCEPTS AND THEIR FEATURES TO MANAGEMENT ACCOUNTANTS
IN MAKING DECISIONS.

4.1 Pricing

4.2 Competition

4.3 Profitability

4.4 Capital budgeting

5) SUMMARY AND CONCLUSION

6) REFERENCE AND CITATION

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1) INTRODUCTION OF COST CONCEPTS AND LSIT OF COSTS

This assignment is about management accounting. Cost concepts related to business

operations and decision making can be reviewed based on business objectives. Lets us
together probe that cost concepts and list of cost in a company.

1.1 Cost object

Cost object is usually the product or department that accumulates or measures costs. For
example, a product is a direct material, a direct cost of labor and manufacturing costs. The
factory maintenance department is the cost object for maintenance personnel maintenance
and maintenance costs. Then the cost of the plant maintenance department will be given to
the product, which is also the cost of the object.

The cost object can also be a customer, a machine, a group of machines, a group of
employees.

1.2 Cost driver

A factor that can cause changes in activity costs. Activities can be attached to multiple cost
drivers.
For example, production activities may have the following associated cost drivers: machine,
machine operator, footprint occupied, electricity used, and amount and/or extraction of waste.

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1.3 Direct material cost

According accounting tools website, direct material costs are the cost of the raw materials
and components used to make the product. Materials should be easy to identify the products
they produce (otherwise they are considered shared costs). Direct material cost is one of
several cost variables involved in the production process; therefore, it is used in the
production process from the production process. Throughput is sales minus all completely
different fees.
For example, the timber used to construct a house or the steel included in an automobile etc.
(Accounting tools, 2017)

The next we wish to introduce for the company is Me-Plas (M) Sdn Bhd (hereafter referred as
MEP) set up to manufacture the advanced Polymer based Water pipe AB-3P which is
patented in Korea, Malaysia, Vietnam, Thailand, UAE, China and many others.

AB-3P is Anti-Bacteria High Impact Resistant High Tensile Strength 3 Layer Pipe based on
high quality PVC with different modifications for inner/outer Skin and Center layer. And the
direct raw material and components is AB-3P compound use to make the water pipe AB-3P.
MEP’s supplier is ABTP Marketing Sdn Bhd (hereafter referred as AMS) those who is supply
of AB-3P compound to make the water pipe. AMS need to supply every month around 200
tonnes at RM5.4/kg to MEP because MEP has high sales volume to furnish customer huge
needed and demand.

1.4 Direct labout cost

Direct labor costs are wages generated by the production of certain goods or the provision of
certain services to customers. The total direct labor cost is higher than the paid wage. It also
includes wage-related payroll taxes, plus medical insurance premiums paid by the company,

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life insurance, employee compensation insurance, pension packages, and other company
benefits.

Direct labor costs are often associated with products in a work cost environment where
production personnel should record the time they spend performing various tasks. This can be
an important task if employees use different products.
For example, direct labour for pipe manufacturer are factory workers.

MEP obtain direct labour which is factory workers is apply from Jabatan Imigresen based on
factory quota. Currently, MEP has around 100 direct factory workers to make the water AB-
3P pipe. They are come from Bangladesh, Indonesia, Myanmar, Nepar etc. And yearly renew
work permit for factory worker per person is around RM3,000 which is included yearly visa,
insurance, fomema check up. And monthly salary for direct labour cost around RM1,500
(basic salary + overtime).

1.5 Factory overhead cost

Factory overhead is the cost of the manufacturing process and does not include direct labor
and direct materials. Factory overheads are typically aggregated into a cost pool and assigned
to units generated during this period. When the result unit is subsequently completed or
deleted, a fee will be charged. Factory overhead for the resulting unit is avoided under the
direct cost approach, but the mandatory requirement is lower than the absorption cost.
Factory overhead is required when preparing financial statements under the guidance of the
main accounting framework.
For example, factory rental, electricity, water usage, buiding insurance etc.

MEP is a factory and monthly need to pay rental fees RM90,000 which is own by other party.
The land area of the subject property is 12,547 square meters (i.e. approximately 135,055
square feet ). The building isurance yealy premium around RM40,000 which is under MSIG.
Beside that, monthly electricity and water usage are around RM60,000 but also depend on
particular month production running quantity.

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2) SIX CHARACTERISTICS OF THE MANAGEMENT ACCOUNTING

INFORMATION

The purpose of management accounting is to help organize management to plan, control, and
make business decisions about organizational activities. Most of us believe that accounting
data and information are the same. However, they are not only different, but only useful if
they have certain characteristics. Therefore, the importance of accounting information lies in
the ability to help make the right decisions.
Management accounting information must conform to various characteristics.

2.1 Relevance

According MBA knowledge Base mentioned that relevant are also an important part of
planning, control, and decision making. To be useful, the information must be relevant to the
user's decision requirements. Information has relevant qualities when it affects consumers'
economic decisions by helping them assess past, current or future events or ratings prior to
recognition or correction.
Different results usually require different data. The main goal is to determine which
information is relevant to various general decision problems.
For example, an analysis of a project should not have any information about indirect costs, as
it is not related to project decisions and should include any major costs as it is the relevant
location for the decision. (MBA knowledge Base, 2019)

2.2 Comprehensible

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Comprehensible users are considered to have extensive knowledge of business and economic
activities and accounting knowledge, and are willing to learn more about reasonable
persistence. Information on complex matters related to consumer economic decision-making

requirements in financial statements cannot be excluded simply because it is difficult for a

particular user to understand.

For example, a management accountant should provide accounting information or aggregate

reports and analysis that are easily understood by decision makers to enable them to make
final decisions.

2.3 Timeliness

Timeliness is an important part of management that may need to weigh the relative merits of
timely reporting and the provision of reliable information. More accurate information can
take a long time to generate. Therefore, providing customers with timely information often
requires prior transactions to compromise all aspects of reliability.

For example, companies can test potential new product markets in certain cities. However, a
long wait for a suitable market report may delay the decision-making process of launching
new product management decisions and information at the national level. Therefore, in the
decision-making process, the management accountant determines which information is
relevant to each problem's decision, and provides accurate data and timely subjective roles,
giving appropriate balances that often conflict with each other.

2.4 Comparable

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The next feature of management accounting information is comparable. Comparability helps
to compare an entity's financial statements against time to determine trends in their financial
status and performance. In addition, it helps to compare the financial statements of different
entities to assess changes in their financial status, performance and financial situation.

Therefore, measuring and displaying financial impacts such as transactions and other events
must be performed consistently throughout the entity, and from time to time for entities, and
in a consistent manner for different entities.

For example, management accountants who provide accountant information are consistent
every year, making it easier for companies to compare past accounting information or related
entities.

2.5 Reliable and complete

Reliability is the quality of information, allowing people who use it to rely on it with
confidence. Reliability refers to the probability that the project will perform a specific
function in establishing working conditions and environment, and all set times. The best way
to determine project reliability depends on how the project works.
Here, we focus on one of the above four requests is in the "tube" and "sustainable" situations.
In the case of the interval, we care about the reliability of the task or just the reliability. This
is defined as the probability that the project will run without failure throughout the specified
time interval. For example, we will spend the next week, equipment reliability or probability
equipment will work throughout the week is our concern. However, if we are evaluating
equipment with constant demand performance.

For example, in the past two years, the focus should be on the equipment that leads the
expected average time between failure events. In this case, we can also focus on the
availability of the device, which can be defined as the time fraction of the actual operation of
the device.

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2.6 Objectivity

Objectivity is also a useful feature in planning and making decisions. Depends on the
accountant's basis for verifiable evidence, such as transport notes, invoices, orders, physical
amounts or documents in the measurement of financial results. Objectivity makes it possible
to compare different financial statements of a company and to ensure reliability and
consistency.
For example, when providing information to top managers, management accountants cannot
be changed or changed so that managers can make informed decisions without being affected.

3) DISCUSSION ON HOW THE COST CONCEPTS AND THEIR FEATURES

ARE IMPORTANT TO THE MANAGEMENT ACCOUNTANT

Successful companies use cost accounting concepts and practices better are important to the
management accountant.

Cost accounting helps measure performance, determine the cost and price of a good or
service, reduce costs, manage costs, and analyze the benefits of an activity or process.
Companies need to measure their costs and then understand the cost behavior in various
situations, such as changes in the quantity of goods or services produced.

Let discuss how the cost concepts are important to the mananement accountant by planning,
directing, controlling and performance evaluation.

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3.1 Planning

According website of PrinciplesofAccounting mentioned that businesses must plan for

success. What does design mean? This is an action to determine the desired outcome.
Planning must be done at all levels. First, it happens at the stage of a high-risk strategy. Then,
it goes into a wide range of thinking, how to create an optimal "location" to maximize the
potential of the goal. Finally, planning must wisely consider financial realities/constraints and
expected financial results (budgets).

A business organization can be made up of many people. These people must be designed to
live in harmony. It is very important that they share and understand the organization's plans.
In short, “Everyone needs to be on the same page.” Therefore, clear communication is
important.

For example, define the product to create and where and when to create it. Identify the
materials, labor, and other resources needed to achieve the desired output.

(a) Strategy - Companies should invest a lot of time and energy in developing strategies.
When staff are dealing with daily tasks, it is sometimes impossible to determine
whether strategic planning is required.
It is difficult to see the relationship between strategic business and everyday corporate
activities related to delivering goods and services to customers. However, the strategic
plan ultimately determines the organization. The designation of specific strategies can
take many forms, but often includes elements related to the definition of core values,
mission, goals and sustainability.

(b) Positioning - An important part of the planning process is to build an organization to

achieve its goals. A position is a broad concept that depends on the collection and
evaluation of accounting information.
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(c) Budgets - The necessary component of the budget is the budget. The budget outlines
the organization's financial plan. There are various types of budgets. The company's
budget process must consider ongoing operations, capital expenditure plans and
corporate finance.

3.2 Directing

There are many good plans that have never been realized. To achieve this plan, the beginning
and direction of various actions are needed. Usually, this action must be well coordinated and
adjusted. Resources must be prepared and there must be power to enable people to act
according to plan.

By analogy, imagine the composer writing a beautiful music score. In order to live, all
members of the orchestra are required, as well as conductors who can coordinate the
orchestra.

Similarly, management accountants play a key role in turning business plans into action.
Information systems must be developed to enable management to guide the organization.
Management must be aware of the availability of inventory when needed, the scheduling of
production resources (people and machines), the transportation system for providing output,
and so on.

For example, management must be prepared to demonstrate compliance with contracts and
regulations. This is a complex task without the strongest source of information provided by
management accountants.

(a) Costing - Managers must understand how to capture costs and make them available
to goods and services. This is much more complicated than most people know.
Production is a major part of the management accounting function, and many people
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refer to management accountants as “cost accountants”. However, cost accounting is
only part of the management accounting application.

(b) Production - Successfully guiding organizations requires prudent production

management. Because this is a self-development process that usually involves dealing
with authoritative business units (inventory, manufacturing, assembly, etc.), some
managers pay special attention to this area of supervision. Management accounting
provides managers with many tools to support production and logistics (delivering
goods to customers through production).

(c) Analysis - Some business decisions have repetitive themes: whether to release
production resources and/or support functions, production and pricing levels, whether
to receive special orders through custom label brands or special pricing.

3.3 Controlling

Understand the progress of the plant at the plant level and off-the-shelf level and maintain a
smooth production process.

Things are as rare as plans, and management must work together to monitor and adjust for
deviations. Management accountants are the main drivers of this control process, including
the exploration of alternative correction strategies to address adverse conditions.

In addition, recent trends are better internal controls and compulsory certification of the
accuracy of financial reporting by CEOs and CFOs. The certification is subject to perjury and
has attracted the attention of corporate executives. This has led to a focus on the control of
various internal and external reporting mechanisms.

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Most organizations are designated as guards (sometimes referred to as "auditors"). In the
largest organization, guards are an important and respected position. Company control
functions are complex and control personnel may have hundreds of support staff to assist in
managing all phases of the accounting process. As the person's title implies, the guard is
primarily responsible for controlling responsibilities; providing leadership for overall cost
and management accounting functions.

On the other hand, the chief financial officer (CFO) is usually responsible for external
reporting, financial functions, and general cash flow and financing management. In some
organizations, a person can play the dual role of a CFO and a guard. Larger organizations
may also have separate internal audit teams reviewing the work of accounting and financial
units. Because internal auditors report the validity and integrity of other units in a business
organization, they typically report directly to the highest corporate leadership.

(a) Monitor - First consider car handling (aka "driving")! Drivers, acceleration and
braking are not random; they are cautious corrective measures for continuously
monitoring many variables (such as traffic, road conditions, etc.).
Obviously, each action responds to a monitored situation and accepts a response.
Similarly, business managers must rely on system monitoring tools to protect their
knowledge of the direction of venture capital. Management accounting provides
monitoring tools and provides a logical basis for the coordination of business
operations.

3.4 Performance evaluation

Evaluating the profitability of individual products and product lines. To assess whether
decisions made by management are effective and ethical, performance is measured by
accountability. This is a two-tiered analysis of ethics that needs to be developed and
implemented, and the evaluation system should operate in an ethical manner, just as the
decision-making process itself has a little thought. In most companies, the overall
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performance of the choices made by management, not just the resulting profits, is checked to
determine if the decision is ethical or not.

When client organizations and other stakeholders are happy and in good standing corporate
assets, this is an ethical indication of customer, stakeholder and asset handling. Customer
satisfaction and stakeholder assessments should come directly from the client, for example
through surveys or other direct surveys.

Asset processing of appropriate organizational assets can be determined by looking at the

asset, or the physical condition of the loss rate and the productivity of the equipment.
Customer satisfaction and positive outcomes of using company assets often show ethical and
behavioral decisions, while negative decisions often indicate differences. If the organization
has stakeholder and satisfied customer groups, and assets work effectively in the long run, it
is often more profitable.

4) IMPLICATION OF THE IMPORTANCE / USEFULNESS OF COST

CONCEPTS AND THEIR FEATURES TO MANAGEMENT ACCOUNTANTS
IN MAKING DECISIONS.

In addition to key tools, costing systems, tools are used to support and management
accountant in making decisions. From this huge tool library, some tools will be described.
The target cost concept and the cost plus price are used for price decisions. The idea of profit
supports the decision to terminate. Finally, the tool capital budget will be explained to
determine long-term investment decisions.

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4.1 Pricing

Price decisions may be short-term and/or long-term. Pricing decisions are one of the key
decisions managers or management accountant must face. The outcome of a new product or a
response to a competitor's price is important because if the price can't afford the cost for a
long time, the company can easily be abandoned.

As mentioned above, the main goal of price is to cover all costs in the long run and generate
revenue where possible. There are other factors that influence price decisions, such as legal
requirements, competitor behavior, and customer needs. If the price decision is limited by
market influences (such as the dominant market leader), the company can be defined as a
price bearer.

Therefore, the decision depends more on whether the company can accept the price.
Companies that are market leaders and offer highly customizable or differentiated products or
services can be described as pricing. In terms of information costs, companies have a large
impact on their pricing decisions.

There are two common tools for pricing: price targets and cost plus prices. The latter plays an
important role in pricing decisions. The price increase is done by calculating the cost of the
average cost and then adding a mark (the required price difference and cost) to achieve the
return required for the investment (money, the investor gets a return on investment).

The special cost increase in the price is that there is no fixed markup because it depends on
the cost of the customer's demand and price. The highest price will be the price that attracts
customers to buy from the competition. Another guiding principle for setting prices is that it
should cover variable costs in the short term; at the same time, it should include fixed costs in
the long run.

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4.2 Competition

Competition is one of the key decisions managers or management accountant must face.
Competition is a common term used by company competitors to produce similar products or
services. Companies often use spy types (also known as benchmarks) to understand
competitors. Benchmarking is defined as “comparing yourself to the best competitors” and is
also used as a goal setting tool to become or remain competitive.

Therefore, benchmarks can also motivate factors to find competitive goals and learn new
ideas. Equally important to the company's continued progress is the effort to achieve the
organization's vision to perform well in almost every respect. The danger of benchmarking is
to become a "cat transcript," which means repeating ideas or other ways to do something.

4.3 Profitability

Always check if the final product is profitable. Otherwise, management needs to make
unprofitable decisions about termination and decision making.

Profit can be easily defined by defining profitability as positive

Profit is to be realized, so it is more effective than correct decision-making and conscious
cost management. Some other accounting tools that are close to profit are:
Gross profit, also known as gross profit margin, is defined as the sum of the sales price over
the cost of sales.

Operating profit - can be defined as "the current income surplus in the service used to earn
revenue exceeds the replacement cost". This calculation is completed before the interest and
taxes are paid.

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Working Capital - is the liquid assets of the company that repays the current debt. Depending
on the company’s responsibilities, this calculation may be positive or negative.

4.4 Capital budgeting

“Deciding to adopt new products, building new factories or launching new ones will
determine the future of the economy.”

Make an investment decision today Determine how much additional capital the organization
adds to the current capital stock, which can then be used to produce goods and services for
the community in the future. This is the budget of the capital budget, which is the process of
analyzing the potential. Capital expenditures and determine what investments the company
needs to make.

Capital budgeting is an important activity for companies. If the investment is wrong or

uneconomical, the company may lose a lot of money. Investment decisions that take time to
mature should be based on the return on investment to be made. If the investment is
In the long run, it is unprofitable, it is not wise to invest in it now, unless the project is for
social reasons only.

Some valuation methods can be used, including repayment, net present value, return on
investment and internal exchange rate. Return method. The refund method will be interpreted
as very important.

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5) SUMMARY AND CONCLUSION.

Conclusion of this assignment are cost object is usually the product or department that
accumulates or measures costs. Cost driver is a factor that can cause changes in activity costs.
Activities can be attached to multiple cost drivers. Direct material costs are the cost of the
raw materials and components used to make the product. Direct labor costs are wages
generated by the production of certain goods or the provision of certain services to customers.
Factory overhead is the cost of the manufacturing process and does not include direct labor
and direct materials. Factory overheads are typically aggregated into a cost pool and assigned
to units generated during this period.

Management accounting information must conform to various characteristics. There are

relevance, comprehensible, timeliness, comparable, reliable & complete and objectivity.
Cost accounting helps measure performance, determine the cost and price of a good or
service, reduce costs, manage costs, and analyze the benefits of an activity or process.
Companies need to measure their costs and then understand the cost behavior in various
situations, such as changes in the quantity of goods or services produced. the cost concepts
are important to the mananement accountant by planning, directing, controlling and
performance evaluation.

Finally, to key tools of costing systems, tools are used to support and management accountant
in making decisions. From this huge tool library, some tools will be described. The target cost
concept and the cost plus price are used for price decisions. The idea of profit supports the
decision to terminate.

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6) REFERENCE AND CITATION

1) Accounting tools (2017). Direct material cost. Retrieved from

https://www.accountingtools.com/articles/what-is-direct-material-cost.html

2) MBA Knowledge Base (2019). Characteristics of Good Management Accounting

Information. Retrieved from
https://www.mbaknol.com/financial-management/characteristics-of-good-
management-accounting-information/

3) PrinciplesofAccounting. Planning, Directing, And Controlling. Retrieved from

https://www.principlesofaccounting.com/chapter-17/planning/

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