This is a summary of the digital-book for the course management accounting. The course is given in the premaster of Business Administration Management Accounting and Control and is used in the third year of a business administration bachelor course of the RUG.
Management accounting
Chapter 1
An accounting system is a formal mechanism for gathering, organizing, and communicating
information about an organization activity.
Financial accounting
Is a branch of accounting that procedures for external decision-makers a mandatory,
periodic, standardized and synthetic financial representation of an organization’s
transactions with, as well as right and duties towards, other constituencies.
Key characterics
- Produced for external users who need this information to decide whether or how
they should deal with the focal organization. (potential shareholders, creditors,
suppliers, customers or governmental authorities.
Financial accounting record in great details every transaction between an organization and
external constituencies. Dit wordt samengevat, zodat organisaties vergelijkbaar gehouden
worden en het lekken van gevoelige informatie te voorkomen. Informatie is openbaar, dus
concurrenten kunnen het inzien. Door aggregatie wordt er voorkomen dat er te veel wordt
gecommuniceerd hoe een bedrijf waarde creëert. Dit zorgt ervoor dat er geen afbreuk is aan
concurrentie voordelen. Financial accounting accounts for the results of past transactions
with third parties. This retrospective approach allows it to limit the reliance on estimates
and therefore makes it relatively more accurate. Moreover, by focusing on external
transactions which are documented by all parties, financial accounting produces an
information which is objective and verifiable and therefore more reliable because more
difficult to manipulate.
Financial accounting focuses on external transactions (exchanges between the company and
external stakeholders) (it tells nothing what happened in an organization).
Management accounting
is a branch (tak) of accounting that procedures for internal decision-makers the financial and
non-financial information they need, when they need it to make the best possible use of
available resources and achieve organizational or societal objectives.
Management accounting helps managers on four occasions:
1. Attention directing → the identification of challenges or opportunities on which
managers should focus.
2. Problem solving → the design of alternative courses of actions to address these
challenges and seize their opportunities
3. Alternative evaluation → the assessment of the economic consequences of
implementing each course of action
4. Decision making → the choice of the best course of action to achieve organizational
goals (effectiveness) without wasting resources (efficiency).
, 5. Organizational learning → information that tells managers what works and does not
work.
6. Motivating, evaluating and rewarding or sanctioning performance.
Management accounting 2 key qualities:
- Being timely and prospective
- Diversity and flexibility
Financial accounting / management accounting
Financial accounting = public and increases comparability and transparency
Management accounting = private and highly strategic and sensitive information. And should
therefore not get out of the organization.
Chapter 2
A cost accounting system or costing system is a set of rules, methods and techniques used
to estimate the resources consumed to achieve specific goals.
Resource allocation (=toewijzing van middelen)
je hebt middelen nodig om een doel na te streven. resources are limited and as a
consequence, what some people consume to achieve some goals becomes unavailable to
others to achieve other goals. In such a context, two questions are a source of major
economic, ethical and political challenges: 1) is a specific goal worth the resources required
for its achievement? 2) is there no better use for the resources it takes? The simplicity of
these two questions is deceptive because answering them is extremely difficult.
Het is lastig in te schatten welke middelen verbruikt worden en de waarde hiervan (denk aan
afschrijving materiaal/apparaat, accountant, werknemers gezondheid, ecologische schade)
As these examples suggest, what is really consumed to achieve a goal, its “true cost”, can be
very difficult to assess accurately and exhaustively. But this assessment is crucial to avoid
wasting resources on less valuable endeavors and diverting them away from the most
valuable one. Costing is a set of techniques specifically designed to address this challenge.
Process optimization
A well-designed cost system also helps managers make the best possible use of resources
once they have been allocated just by providing a good representation of resource flows
within the organization.
1. Making managers aware of the resources they consume to achieve specific objectives
gives them an incentive to avoid waste.
2. Costing provides the means to compare the efficiency of different practices or
different units and thus allows benchmarking and orient sourcing decisions.
3. Well-designed cost systems also show managers how they can control costs by
managing their causes. Costing information can therefore motivate and orient efforts
to improve process efficiency.
,Asset valution (=waardering van activa)
a cost accounting system is also necessary to value the inventory in the balance sheet, the
costs of goods sold in the income statement, or long-term assets which are produced by the
company for itself (e.g. self-produced equipment or intangible assets like patents).
What are the different steps of product costing?
The first step of any costing process is to decide the cost of what you want to know, i.e. the
cost object. Cost objects can be products, services, pieces of equipment, distribution
channels, customer segments, individual customers, product divisions, etc.
Now, for inventory valuation purposes cost objects are products and in some circumstances
departments.
A cost object is anything for which decision-makers desire a separate measurement of costs.
Once the cost objects have been decided, costs must be recognized and accumulated.
- Financial accounting → classifies transaction based on the specific contractual
arrangement it creates between the organization and the third party.
- Management accounting → is less interested in what a transaction is, but more in
what the transaction was made for, the purpose, destination, or usage of this
resource.
Therefore, when either financial or management accountants receive or produce a source
document attesting of a transaction, they give it a code which does not only tell the nature of
the transaction, but also its purpose. This process is called cost accumulation.
Source document = an explicit evidence of a transaction, such as sales slips, purchase
invoices, and employee time records.
, Cost accumulation = the collection of costs in an organized way through an accounting
system. It consists in collecting costs and classifying costs based on a predefined set of
categories indicating their nature and purpose.
The whole process of costing consists then in progressively dividing the flow of accumulated
costs into various streams and channeling these streams towards the cost objects consuming
these resources. In other words, costing models of the journey of resources within the
organization until they leave it. the quality of a costing system depends on how faithfully it
manages to represent this flow of resources.
A costing system can be thought of as a system of canals or pipes channeling costs towards
cost objects consuming resources.
Process of costing for inventory valuation
1. Costs are classified based on whether they follow products in the inventory (inventor
ability)
2. Then they are classified based on whether they can unambiguously be assigned to a
specific product (traceability).
3. Costs which should follow products in the inventory and can be assigned
unambiguously (ondubbelzinning) to a specific product (direct manufacturing costs)
are traced directly to that product.
4. Costs which should follow products in the inventory but cannot be assigned
unambiguously to a specific product (indirect manufacturing costs) must be
allocated.
Cost assignment: consists in associating costs with the cost objects for which the resources
were consumed. It is the general term which encompasses both cost tracing and cost
allocation.
Cost tracing: consists in assigning direct manufacturing costs incurred unambiguously for a
specific cost object to that cost object.
Cost allocation: consists in assigning indirect manufacturing costs to cost object in
proportion to the cost object’s use of another resource.
Cost allocation is “a process in the process” and involves itself several steps. The flow of
indirect manufacturing costs is subdivided into streams which are poured in separate cost
pools where they wait for allocation. An allocation base must be chosen for each cost pool
and then allocation rates can be computed. Only then can indirect manufacturing costs be
allocated from cost pools to cost objects proportionally to their use of the allocation base.
Once direct manufacturing costs have been traced and indirect manufacturing costs
allocated to products, the units produced, and the corresponding production costs are
added to the inventory of each product. They stay there until they are sold. Then, they go
out of the inventory and expended as costs of goods sold. By contrast, all the costs which
cannot follow products in the inventory are expended in the income statement as costs of
the period in which they were incurred.
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