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Summary Accounting, Managerial Finance And Accounting (EBC2165)
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Summary chapters Accounting year 2 IB UM
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Summary TL 104 Learning Unit 14.1-3 PRODUCT COSTING SYSTEMS
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Summary TL 104 Learning Unit 13.1-3 NATURE, CLASSIFICATION AND ALLOCATION OF COST
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Title: Test Bank for Management and Cost Accounting 11th Edition by Mike Tayles & Colin Drury
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Chapter 1 – Introduction to management accountingAccounting is the process of identifying, measuring, and communicating economic
information to permit informed judgements and decisions by users of information
providing financial and non-financial information that will help decision makers make good
decisions. Management accounting systems have changed drastically due to global
competition, deregulation, short product life cycles, and customer priority.
Users of accounting information
Accounting is a language that communicates information to stakeholders, various parties
interested in the organisation:
-Managers want information that assists them in decision-making and control activities
-Shareholders want to know value of their investment and income
-Employees want to know if firm can meet wage demand
-Creditors require information whether firm can meet financial obligation
-Government agencies for taxations and policies on economy.
Providing information is for individuals, business, and non-profit organisation are you
reliable and what are the costs. The objective of accounting is to provide information to
meet needs of various users at lowest possible cost benefits > cost. There are 2 categories:
1. Internal users within organisation that is aimed at management accounting, concerned
with provision of information to people within organisation to help them make better
decisions and improve efficiency and effectiveness.
2. External users outside organisation make use of financial accounting, provision of
information to external parties outside the organisation.
Differences between management and financial accounting
-Legal requirements: public, limited companies have to produce annual financial accounts.
Management accounting is optional and information only provided if cost < benefits.
-Focus on individual parts or segments of business: financial reports describe whole
business, management only part of company
-GAAP: financial accounting statements must be prepared according to legal requirements
and GAAP principles to ensure uniformity and consistency easier to compare, making it
objective and verifiable. Management accounting is focused on serving managers needs, not
adhere to principles.
-Time dimension: financial reports what happened in past, management is concerned with
future and past information decisions are concerned for future events and require
estimates of future costs and revenues.
-Report frequency and less emphasis on precision: financial accounts are detailly prepared
annually, while managers require information quickly and rather have an estimate now than
something precise much later. Issued more frequently.
Decision-making, planning, and control process
Information provided by management accountants must be judged in light of its ultimate
effect on outcome of decisions. This requires understanding of the decision-making,
planning, and control process, the process of measuring and correcting actual performance
,to ensure alternatives that are chosen and the plans for implementing them are carried out.
There are 6 stages:
1. Identify objectives: specify company’s goals or organisational objectives as a guiding
direction to choose one course of action over the other. There is a controversy about this
direction. Economic theory assumes that managers should be directed by maximising
shareholders value and profits. It is a legal requirement and leads to maximisation of
economic welfare and allows you to better achieve goals with more profit. However, firms
have to address to more stakeholders and excess benefits needs to be distributed to them.
Firms have to protect the environment as they make use of it. It is to simple to say
maximising profit is the best goal, firms might establish other goals. But in accounting the
broad view is that firms seek to maximise profits. 3 reasons to focus on this are:
-It is unlikely that any other objective is as widely applicable in measuring ability of
organisation to survive in the future
-It is unlikely that maximising future profits can be realised in practice, but by establishing
the principles necessary to achieve this objective you will learn how to increase profits.
-Enables shareholders as a group in the bargaining coalition to know how much the pursuit
of other goals is costing them by indicating the amount of cash distributed among the
members of the coalition
2. Search for alternative courses of action: the search for strategies, search for a range of
possible courses of action that might enable objectives to be achieved identify potential
threats and opportunities in environment to take specific steps so you are not surprised by
future developments. Strategies to follow can be:
-Developing new products for sale in existing markets
-Developing new products for new markets
-Developing new markets for existing products
It is important to acquire information concerning future opportunities and environments
which is the most important and difficult stage.
3. Select appropriate courses of action: gather data about different alternatives and evaluate
them to see which strategy best satisfies objectives of an organisation goal of obtain
information.
4. Implementation of decisions: once course of action has been selected, it should be
implemented as part of budgeting and long-term planning process. Budget is a financial plan
for implementing decisions that management has made expressed in cash inflows and
outflows, and revenues and expenses. These budget are prepared at departmental level and
merged into a master budget, a single unifying statement as a whole that specifies
organisation’s expectations for future periods with budgeted profit’s and cash flow
statements. This is communicated to everyone in organisation so they implement it.
5. Comparing actual and planned outcomes and responding to divergencies from plan: this is
the function of control, measurement, reporting and subsequent correction of performance
in an attempt to ensure that firm’s objective and plans are achieved. Accountant produces
performance reports, reports that compare actual outcomes to planned outcomes, to
monitor performance and present them to managers responsible for implementation. It
,provides feedback and allows managers to focus limited time on the things that go wrong.
This is management by exception, managers focus their attention to areas where outcomes
do not meet targets. It requires corrective action or modification of plans. The process of
corrective action is a feedback loop and highlights that all stages are interdependent.
Impact of changing business environment on management accounting
The nature of business environment has changed, causing companies to change their
operations and thus changes in management practices.
1. Global competition: many firms operate in global market due to reduction in tariffs and
duties and improvement in IT and infrastructure and reduction of protected markets.
Competitors have gained access to domestic markets and have established global networks
of accessing resources, and provide high quality products against low price. You have to
compete against the best increased demand for information relating quality and customer
satisfaction and cost information relating to cost management and profitability analysis.
2. Changing product life cycles: period of time from initial expenditure on R&D to the time at
which support to customers is withdrawn. Intensive competition, advances in technology,
and sophisticated customer demands means companies have to speed up rate to which they
bring new products to market and constantly develop new products and services need to
be profitable. Large fraction of costs are determined at design stage so most information
needs to be provided then to reduce costs, adapt to changing customer requirements and
bring products on the market quickly.
3. Advances in manufacturing technologies: manufacturing can be a competitive weapon to
provide high quality products at low cost with premium customer service. These systems
must have the flexibility to cope with short product life cycles, discriminating customers, and
international competition. Lean manufacturing systems reduces waste by implementing
just-in-time production systems, focusing on quality, simplifying processes and investing in
advanced manufacturing technologies.
4. Impact of IT: IT, e-business, e-commerce, internet commerce and other electronic
business communication technologies have supported business activities drastically. It gives
companies a competitive advantage, saves cost, allows customers to compare products, and
source products from everywhere. IT has reduced information gathering and processing of
information no need to ask managers, management accounts can derive info from system
and do analysis. It allows them to spent time on giving advice and help others interpret
information.
5. Environmental and sustainability issues: increasing attention given to companies to make
them accountable for ethical, social, and environmental issues and sustainable management
resources limited and should be preserved. Customers expect companies to be proactive
in terms of SR, safety and environmental issues. Environmental management accounting is
more important because:
-Environmental costs can be large for industrial sectors
-Regulatory requirements involving fines for non-compliance have increased select least
costly method of compliance
, -Society is demanding that companies focus on being more environmentally friendly
improves image and opportunities of selling products.
It has companies develop systems measuring environmental costs, consumption of scarce
resources and details of hazardous materials allows you to redesign process to minimise
use of scarce resources and pollution.
6. Pressure to adapt to higher standards of ethical behaviour: profit maximisation objective
is constrained by need for firms to also have high priority to their social responsibility and
ensure employees adopt to ethical behaviour, behaviour consistent with standards of
fairness, honesty, and SR, by a code of conduct. Public distrust and protest against company
failures have resulted in calls for increased regulation and improving ethical behaviour.
Management accountants have critical part in management to behave ethically and up hold
standards with professional bodies establishing guidelines.
7. Deregulation and privatisation: Many organisation were government owned or operated
in regulated industries no pressure to improve quality and efficiency or eliminate non-
profitable products. Cost increases could be covered by increasing prices and no attention
paid to management accounting systems that measured cost and profits of a product.
Deregulation, intense competition, and expanding product ranges have called for the need
to focus on cost management and develop systems to understand cost base and determine
sources of profitability for products, customers and markets
8. Focus on value creation instead of managing and recording costs. Reducing costs remains
important to remain competitive by reducing or maintaining selling prices and increase
customer value. Managers establish value adding activities and non-value adding activities,
activities that raise cost but do not add value to product, and eliminate latter. Increasing
attention has been paid to intellectual capital, intangible benefits accessible by a firm from
its workforce and established relationships with groups such as customers, suppliers, and
competitor difference in book and market value. Challenging how to identify, measure,
and report value on intellectual capital.
9. Customer orientation: to survive, companies need to be customer driven and making
satisfaction priority identifying and achieving key factors to be competitive
Focus on customer satisfaction and new management approaches
There are a few key factors for companies to focus on to increase customer satisfaction:
1. Cost efficiency: competitive advantage if you can keep costs low and being cost efficient.
Firms develop systems to track costs for each product, monitor trends, pinpoint loss-making
activities and analyse profits for each product, customer, market, and location.
2. Quality: customers want high-quality product against low cost use of total quality
management, a situation in which all busines functions are involved in a process of
continuous quality improvement that focuses on delivering products or services of
consistently high quality in a timely fashion. Management accountants have to measure and
evaluate quality of products, services, and activities
3. Time, reliability, and delivery: increase satisfaction by providing products fast, ensure
100% delivery, and reducing time to develop and launch products. Focus is on time-based
measures, such as cycle time, length of time from start to completion of product or service:
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