ACC1012S
Q: WHAT IS ACCOUNTING?
—-> The American Accounting Association describes accounting as: “the process of identifying,
measuring and communicating economic information to permit informed judgements and decisions
by users of the information”.
The areas into which accounting is broadly split are Financial Accounting and Management
Accounting.
FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING
Both these areas of accounting require transactions that have an economic impact on the business
to be identi ed, measured and classi ed, in other words RECORDED.
The key di erence between Management and Financial Accounting, this di erence arises from the
REPORTING activity. Financial Accounting produces useful nancial information for EXTERNAL users
(e.g. investors, potential investors, lenders) investors
and Management Accounting for INTERNAL users (e.g. directors and many levels of management).
Management accounting refers to acquiring and using information in order for management to
achieve their objective of maximizing shareholder value by:
a) Helping their businesses become more e cient and e ective,
b) And to help them make decisions.
Management accounting is typically divided into three functions or areas that require speci c
information:
1. Costing of products;
2. Making business decisions that increase the value of the business;
3. Planning, monitoring, controlling, and evaluating future performance.
Whether a business is producing information for internal or external users, its de ning objective is
to make the owners wealthier (make a pro t), this is done by the four fundamental business
decisions:
1. Financing: to obtain funding (loan)
2. Investing: to acquire assets (machinery)
3. Operating: to use (or sell) assets (use machinery)
4. Distribution: to distribute or retain increases in wealth (further development of machinery & the
business
a. distribute- the money back to the owner
b. retain- back to the business, or into employee bonuses, or into bigger better machinery etc
(anything that helps productivity which in turn helps proud more pro t)
BUSINESS DECISIONS
Before a business starts, management needs to establish whether there is any market demand for
the product/service, and they need to identify target customers (the target market) and suppliers.
This will form part of the strategic plan which will be drawn up as part of the start-up process. The
strategic plan will require constant updating.
Strategic plan:
1. Identify where we are
2. Identify where we want to be and
3. Develop an actionable plan to get from where we
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, Cost-leadership is when a business establishes a competitive advantage by having the lowest
cost of operation in the industry. When a product costs less to produce, the business can o er the
product to customers at a lower price than competitors.
Product di erentiation is when a higher price is charged for a product relative to competitors, but
that higher price is justi ed by the quality (premium product, i.e. apple vs nooks ) of the product, or
the presence of a valuable feature.
Q: In what industries would you think a cost-leadership strategy is most popular?
—-> strategy is to have the lowest cost of operation not charge the lowest cost. If you have the
lowest cost in the industry you are able to charge the average price and make a bigger pro t than
competitors or u could charge a lower price and increase your market share. This means any
business can have a cost leadership strategy
Economies of scale!! As a business produces more units the cost per unit decreases. A company
that is looking at using a cost leadership strategy needs; to be well established, large in size and
have su cient capital that can be used to invest in technology and e cient logistics to reduce
costs and run the business more e ciently.
Q: In what industries would you think a product di erentiation strategy is most popular?
—-> Industry’s that do extensive research and have enough capital swell ad marketing and facts.
This would work in many di erent types of industries, something as simple as bread such as
brown, white, sourdough, gluten free etc.
Once the strategic plan is in place, management needs to decide on the assets to be acquired
(investment decision), this is normally done simultaneously with the nancing decision. Having
obtained the assets, management needs to implement the operating decisions (prices of products/
services to be sold, number of units to sell, extent of any advertising to be made, number of
employees required, incentives for employees and many other operational decisions). The
distribution decision determines the amount of the pro ts that should be distributed to the owners
and how much should be retained in the business (this will be in uenced by the nancing decision).
Once a business has decided its strategic plan:
1. The business needs to identify what assets it needs in order to operate and how those assets will
be funded.
2. The type of good/service to be o ered as well as volumes, categories and costs of goods/service
in uence how the assets will be used to produce those goods/services.
3. The pro ts earned during the nancial year either need to be distributed to shareholders or
retained in the business in order to grow operations.
The investment, nancing and operating decisions can be l o n g - t e r m or short-term.
A long-term investment could be related to the acquisition of property and the building of a factory
and in this instance any related nancing decision would also be long-term.
A short-term investment could be the acquisition of additional inventory which may be required to
meet an expected increase in demand for the product. This may need to be nanced by a short-term
overdraft or loan
A DEEPER LOOK AT WHAT MANAGEMENT ACCOUNTING IS
“Management accounting refers to the processes and techniques that focus on the e ective and
e cient use of organisational resources, to support managers in their tasks of enhancing both
customer value and shareholder value.”
The objective of management is to maximise shareholder value through maximising future cash
ows. When future cash ows are maximised, it can generate returns for shareholders (shareholder
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,value) in two ways:
• Through dividends and
• Through an increase in the share price
Management accounting is a discipline that aims to provide useful information to managers so that
it can be used appropriately in helping managers to achieve their objective. Often, this will be in the
form of quantitative information, but qualitative information is just as important when weighing up a
decision.
1. When deciding whether to outsource production, what should management consider?
- Current employees may need to be retrenched
- What if the service provider does not perform to their satisfaction? What if their quality is poor
or they don’t deliver on time?
- What if the service provider raises their prices?
2. When deciding whether to close a division, what should management consider?
- Current employees may need to be retrenched
- How could this impact demand for other products sold by the company?
3. When deciding whether to pay bonuses, what should management consider?
- The precedent being set. Can the business a ord to continue paying bonuses into the future?
- If not, what impact would this have on employee morale?
- If management doesn’t pay bonuses now, how will that impact employee morale?
Decision makers cannot only look at the quantitative information when making these decisions.
Looking at the qualitative information too can prevent unintended consequences and result in a
more favourable outcome.
SUMMARY OF DIFFERENCES BETWEEN MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING
Each of these tools is used when needed to perform a speci c function. The three functions below
are the key functions of management accounting.
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, A rights issue is when a company o ers shares to its shareholders in proportion to their existing
holdings. It is a form of equity-funding
FUNCTION ONE: COSTING
Costing is simply how expenditure is allocated. Managers need to plan future costs, monitor current
costs and manage costs by understanding and focusing on their underlying causes. Costing can be
used to plan for the future, to help make decisions regarding products, divisions, or services, or to
evaluate the performance of services, products, divisions, or employees. Expenditure is primarily
categorised as either assets, liabilities or equity. In Management Accounting expenditure is
identi ed as a cost, which is a resource sacri ced in order to achieve a certain objective. Costs are
allocated by category or by behaviour, depending on what we are trying to achieve. Once the
category or behaviour of the cost is identi ed, it is allocated to a cost object. So a cost object is any
activity or item for which a cost measurement is required.
A cost object doesn’t have to be inventory. The principles that follow can be applied to cost any cost
object – including a service or a division. In Business Accounting we focus on products in
manufacturing businesses, but the same principles apply to other types of businesses.
ALLOCATING COSTS BY CATEGORY
We will start with the allocation of costs by category in a manufacturing business. Costs can be
allocated in a large number of categories, so, initially, let us consider two, namely manufacturing
costs and non-manufacturing costs.
• Manufacturing – these are costs which are incurred in getting the inventory to the condition and
location for sale. In a manufacturing business these costs would include the cost of raw materials
used in the process as well as all other costs incurred getting the inventory ready and to the
location for sale.
• Non-manufacturing – these are all the other costs, besides the manufacturing costs, incurred by
the business. These could include bank charges, interest, management salaries, rental of o ce
buildings etc.
TLDR: Manufacturing vs non-manufacturing, was this cost incurred in getting the inventory to the
condition and location for sale?
Why is rent expense both a manufacturing and a non-manufacturing overhead? A portion of the space rented
is used to get the co ee to its condition and location for sale. This portion of the rental would be a
manufacturing cost. The portion of the space that is not used to get the co ee to its condition and location for
sale would be classi ed as a non-manufacturing cost.
In Financial Accounting, all manufacturing costs are capitalised to the Inventory (asset) account,
whereas all non-manufacturing costs are expensed in the period in which they are incurred. A good
question to ask when determining if a cost is a manufacturing cost is: was this cost incurred in
getting the inventory to the condition and location for sale? If it was, it is a manufacturing cost.
Costs can also be further categorised into direct and indirect costs as follows:
• Direct – these are costs which can be speci cally and exclusively identi ed within a particular cost
object
i.e. the ice cream used to make a milkshake
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