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Summary Management Accounting RUG
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Summary of the online textbook MR. Mangin made. Includes all chapters (1 and 9 are excluded because this is not exam information).
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Samenvatting Management Accounting BusinessEconomics
Hoofdstuk 2 Accounting
Accounting System
A formal mechanism for gathering, organizing, and communicating information about an
organization’s activities for different users and different purposes. These users have different
requirements in terms of information content and qualities (then financial accounting).
Financial accounting
A branch of accounting producing for external decision-makers a mandatory, standardized, periodic
and synthetic financial representation of an organization’s transactions with, as well as right and
duties towards, external stakeholders. It is mandatory and public to allow external users to make
comparisons between firms and over time.
Users of financial accounting are all external decision makers
- Customer
wants to know if the goods will get delivered (no bankruptcy)
- Supplier
same as customer + liquidity
- Banks and other creditors
liquidity + solvency
- Actual and potential shareholders
liquidity + solvency + enough value to remunerate their investment.
Financial statement analyses
Used to determine whether they should invest some of their wealth or time in the company, to
select or eliminate potential partners.
Financial statements
Will determine:
- If they get funds from investors (shareholders and creditors)
- If they be able to do business (with suppliers and customers)
They should be comparable across companies and across periods. To create comparability, financial
accounting is standardized and regulated (by GAAP). To realize standardization, the information
needs to be general enough, therefore it only focuses on external transactions, expressed in
monetary terms which can be aggregated to provide a synthetic and exhaustive view of a company
as a whole. Financial accounting summarizes transactions into a efficient, simple and comprehensive
representation of the financial situation of the organization. Financial statements are audited to
ensure they are properly following the standards set.
Limitations of financial auditing
It tells what happened, but not how or why it happened. Managers need information with shorter
delays of production if they want to avoid waste and constantly improve performance. It lacks
relevance and timeliness. Management accounting fills this gap.
Page 1 of 31
,Management accounting
A branch of accounting producing for internal decision-makers the financial and non-financial
information they need about internal flows of resources when they need it to obtain resources or
make the best possible use of available resources.
Differences from financial accounting:
- Internal decision makers instead of external
- Flexible and adaptable instead of mandatory and standardized
- Produced on demand rather than at fixed intervals
- Includes non-financial information
- Focuses on internal flows of resources (internal transactions) instead of external
Management accounting identifies, measures, stores, analyses, prepares, interprets, and
communicates information for managers within the organization so that they can make strategic and
operational decisions. These decisions relate to value chain management, production management
or sales management. For each decision, management accounting helps managers in distinct phases:
1. Directing attention
2. Formulating problems
3. Designing solutions before decisions are made
4. Evaluating solutions
5. Selecting solutions
6. Organizational learning after decisions are made
7. Evaluating and rewarding performance
Management accounting direct attention by systematically showing both the expectations and
realizations. It steers managers’ efforts towards some goals and not others by communicating on
some figures and not others. It makes managers continuously question the relation between
decisions, actions and success or failure. It helps managers distinguish between different situations:
- Decisions which succeeded because they well implemented (good implementation)
- Decision which failed because they poorly implemented (bad implementation)
- Decisions which failed because they were well implemented (bad “good implementation”)
- Decisions which succeeded because they were poorly implemented (good “bad
implementation).
Management accounting suggest whether people are doing things right (single-loop learning) and
whether they are doing the right things (double-loop learning).
Management accounting stresses the absolute primacy of relevance to and timeliness for
managers, and this deeply affects all its other qualities.
Relevance means that any information helping make a decision should be taken into account, even if
it is highly subjective, approximate, unverifiable or unreliable.
Page 2 of 31
,Page 3 of 31
, Hoofdstuk 3: Costing
Cost accounting system / costing system
A set of rules, methods and techniques used to estimate the resources consumed to achieve specific
goals. Necessary to value long-term assets which are produced by the company for itself.
Cost object
The product made by the company. Anything for which decision-makers desire a separate
measurement of costs.
Purposes of costing:
- Resource allocation
- Process optimization
- Asset valuation
A given costing system can rarely serve all three purposes simultaneously because they make
different demands on the quality of accounting information.
Resource allocation
Consist in deciding for which goals limited resources should be consumed. Management accounting
cannot assess the value of specific goals. But it can estimate the value of the resources consumed
and provide half the information necessary to allocate resources to their best possible use.
True cost
What really is consumed to achieve a goal.
Process
The sequence of tasks and activities consuming resources to produce a result.
Efficiency
Refers to the quantity of resources consumed to obtain a result. The less resources are consumed to
produce the same result, the more efficient a process is. Efficiency is often computed as: output ÷
input.
Why well designed cost systems can give managers both direction and motivation for process
optimization:
- Shows bottlenecks or non-value-adding tasks
- Greater control over costs by identifying their causes (cost driver)
- Reveals best practices by comparing the resources consumed by different processes to
produce the same result and select the most efficient
- Identifying both the problem and solutions is not enough to make managers act.
Asset valuation
Consist in estimating the value of an asset.
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