Advanced Management Accounting Overview

Aug 22, 2024

Lecture Notes on Advanced Management Accounting

Overview of LMS and Resources

  • Learning Management System (LMS): Content is being updated; includes lecture materials and video sessions.
  • Students are expected to review the materials available on LMS.
  • Recap sessions will be conducted online soon.
  • Additional materials will be uploaded to Google Classroom for reference and doubts.

Subject Introduction

  • Subject Focus: Advanced Management Accounting
    • Builds upon the knowledge from Cost and Management Accounting from the second year.
    • Topics overlap significantly (approx. 80% similarity).
  • Areas to revisit include:
    • Cost accounting vs. financial accounting
    • Management accounting vs. financial accounting

Key Topics Covered

Variance Analysis

  • Understanding variances in budgeting and actual performance.

Marginal Costing and Absorption Costing

  • Differences and applications in decision-making.

Decision Making Processes

  • Utilizing contribution margin, marginal costing, and absorption costing for:
    • Accepting/rejecting orders.
    • Business expansion decisions.
    • Processing joint products and determining further processing costs.

Transfer Pricing

  • Definition: Price charged for a product/service supplied between subunits of the same organization.
  • Importance is heightened in decentralized organizations.

Organizational Structures

  1. Centralized Organizational Structure: Decision-making power is centralized to a team or individual.
  2. Decentralized Organizational Structure: Each division (e.g., cost centers, profit centers) has decision-making authority.

Transfer Pricing Examples

  • Example using Elephant House and its subsidiaries (K Supermarket, Cinnamon House):
    • Internal transfers occur at negotiated prices; benefits arise from reduced advertising costs and distribution expenses.
    • Types of Transfer Pricing:
      • Market-based Transfer Prices: Based on similar products in the market.
      • Cost-based Transfer Prices: Based on internal production costs.
      • Negotiated Transfer Prices: Agreed upon between divisions.

Practice Problems

  • Calculation of profits, transfer prices, and total costs using various pricing methods:
    • Market-based pricing example.
    • Cost-based pricing example.
    • Marginal costing.

Key Calculations in Transfer Pricing

  1. Identifying Total Revenues:
    • External and transfer revenues based on market price or cost.
  2. Calculating Profits:
    • Formula: Profit = Total Revenue - Total Costs.
    • Consideration of transfer costs mainly in inter-departmental analysis.
  3. Examples of Transfer Pricing Methods:
    • Full cost, cost plus markup, marginal cost.

Future Sessions

  • Further discussion on past paper questions in the next class.
  • Emphasis on reviewing LMS videos for comprehensive understanding.
  • Recorded sessions to be uploaded for students unable to attend.

Conclusion

  • Importance of engaging with the provided materials.
  • Encourage questions and active participation for better understanding.