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Learning Objectives
• Distinguish between management and financial accounting.
• Appreciate the importance of management and cost accounting in business.
• Identify and describe the elements involved in the planning, decision-making and
control process.
• Demonstrate an understanding of the aims of costing in an organisation.
• Distinguish between the various types of costs and cost terms.
What is Accounting?
• It is the process of identifying, measuring and communicating economic information
to permit informed judgements and decisions by users of the information.
2 Main Branches of Accounting
Management v Financial Accounting
• Financial:
o Reporting information primarily for external users, E.g., government, HMRC,
VAT, Tax Authorities, Shareholders.
o Reporting by Companies is required by law.
o Historic Orientation.
, o Conforms to statute and accounting standards.
o Highly aggregated and whole organisation.
o Financial information.
• Management:
o Information for internal use E.g., Managers.
o No statutory requirements.
o Future Orientation.
o No need to conform to accounting standards.
o Specific (E.g., Individual product, or individual shop).
o Financial and Non-Financial Information.
What is Management Accounting?
Qualities of Information for Decision-Making
• Relevant, complete and transparent.
• Trusted by users, appropriately communicated and on time.
• Accurate as far as practicable (good estimate) and its volume manageable given time
frame.
• Cost of acquiring information < Benefits generated from the information (Cost
Effective).
• Note that both financial and non-financial information are used in management
accounting.
Evolution of Management Accounting
• Developed in the late 19th century out of the financial accounting because:
o Detailed information was required for costing and decision-making primarily
in a manufacturing environment.
• Statements produced out of financial accounting were:
o Out of date by the time they become available.
o Looks at the past.
o Involves the whole organisation rather than specific departments, centres or
products.
,The Decision-Making, Planning and Control Process
• Management accountants produce information out of data for effective decision-
making. It is therefore important to have an understanding of the decision-making
process.
The Changing Business Environment
• Organisations have faced dramatic changes in their business environment.
o Move from protected markets to highly competitive global markets.
o Declining product life-cycles.
o Growth in service industry. Advances in manufacturing technology (AMT)- JIT,
Lean Manufacturing Systems, etc.
o Impact of Information Technology, e.g., e-commerce, etc.
o Environmental Issues.
• These changes have significantly altered the ways in which firms operate, which in
turn have resulted in changes in management accounting practices.
• To compete successfully in today’s environment companies are:
o Making customer satisfaction an overriding priority.
o Adopting new management approaches.
o Changing their manufacturing systems.
o Investing in AMT’s.
Focus on Customer Satisfaction and New Management Approaches
• The key success factors that organisations must concentrate on to provide customer
satisfaction are cost, quality, reliability, delivery and the choice of innovative new
products.
• In addition, firms are attempting to increase customer satisfaction by adopting a
philosophy of continuous improvement to reduce costs and improve quality,
reliability and delivery.
• Many firms are also increasingly empowering their employees and consider their
social and responsibility and ethical behaviour in their operational processes.
, Cost Classifications and Definitions
Functions of Management Accounting Systems
1. Inventory Valuation for and Profit Measurement:
• Allocate costs between products sold, and fully and partly completed
products that are unsold.
2. Provide Relevant Information to Help Managers make Better Decisions:
• Profitability Analysis.
• Product Pricing.
• Make or Buy (Outsourcing).
• Product Mix and Discontinuation.
3. Provide Information for Planning, Control and Performance Measurement and
Continuous Improvement:
• Long-term and Short-term planning (Budgeting).
• Periodic Performance Reports for Feedback Control.
• Performance Reports also Widely Used to Evaluate Managerial performance.
Costs should be assembled in different ways to meet the above three requirements.
What is Cost?
• In accounting, what is cost depends on the context of use, I.e., for what purpose do
we need to know ‘something’.
• The term ‘cost’ has multiple meanings and different types of costs are used in
different situations preceding term, E.g. relevant cost, direct cost, etc… must be
added to clarify the assumptions that underlie a measurement. A knowledge of cost
and management accounting depends on a clear understanding of the terminology it
uses.
• Costs can be classified (collected into logical groups) in many ways. The particular
classification selected will depend upon the purpose for which the resulting analysed
data will be used. Examples:
Purpose Classification
Financial Accounts By Function- Cost of Sales, Distribution
Costs, Administrative Expenses.
Cost Control By Element- Materials, Labour, Other
Expenses.
Cost Accounts By Relationship to Cost Units- Direct,
Indirect.
Budgeting, Decision Making By Behaviour- Fixed, Variable or Relevant/
Irrelevant.
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