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Managerial Accounting Summary VUB
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Summary of Managerial Accounting for BA2 Business Economics at the VUB. Well structured summary without inessential information.
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Frédéric Kröger Managerial Accounting – SummaryManagerial Accounting – Summary
❖ Managerial Accounting, The Business Organization, and Professional Ethics (Chap 1)
o FINANCIAL ACCOUNTING vs MANAGEMENT ACCOUNTING
o Financial Accounting
➔ Branch of accounting developing information for external decision makers
(E.g. governments, stockholders, banks, suppliers, …)
▪ Composed of 4 financial statements
• Income statement
• Balance sheet
• Statement of cash flows
• Equity
▪ Differences :
• Focus and time dimension
▪ Primarily provides summaries of past financial transactions
• Rules and Restrictions
▪ Financial Accounting statements must follow Generally Accepted
Accounting Principles (GAAP)
• Scope of information
▪ Prepared primarily on company as a whole
o Management Accounting
➔ Branch of accounting developing information for managers within the org
▪ Helps managers to use financial information to make good decisions
▪ Differences :
• Focus and time dimension
▪ Planning in such important part of managers jobs, so strong future
orientation
• Rules and Restrictions
▪ Not required to follow GAAP
• Scope of information
▪ Prepared on parts of the company, often on a daily or weekly basis
o ROLES OF ACCOUNTING INFORMATION
o 2 Basic purposes of accounting information
▪ Help with decision making
▪ Help with planning and controlling
• Planning ➔ Setting objectives and defining how reach them
• Controlling ➔ Implementing plans and evaluating results
o Org. addresses 2 purposes by designing + implementing accounting systems
▪ Accounting System ➔ Formal mechanism for gathering, organizing, and
communicating info. about and org.’s activities
▪ But what types of accounting info. do managers need ?
• For decision making → Accounting info. helps answer :
▪ problem-solving questions
▪ Problem solving ➔ Analysis of possible courses of action
• For performance evaluation and control → Accounting helps answer :
▪ Scorecard questions (Ex. Is company doing well or poorly)
▪ Scorekeeping ➔ Accumulation, classification, and reporting of data
that helps user understand and evaluate performance
▪ Attention-directing questions (Ex. Which areas require more investigation)
▪ Attention directing ➔ Reporting and interpreting info. that helps
managers to focus on operating problems, imperfections,
inefficiencies, and opportunities
1
,Frédéric Kröger Managerial Accounting – Summary
o MANAGING BY EXCEPTION
▪ Accounting systems (AS) formalize plans by expressing them as budgets and
produce performance reports
• Budget ➔ Quantitative expression of a plan of action and an aid to
coordinating and implementing plans
• Performance reports ➔ Provide feedback by comparing results with plans
and by highlighting variances (deviations from plans)
o Management by exception ➔ Concentrating more on areas that deviate from the
plan and less on areas that conform with plans and are presumed to be running
smoothly
o COST-BENEFIT AND BEHAVIORAL CONSIDERATIONS OF AIS
o Managers should keep 2 important ideas in mind when designing AIS
1. Cost-benefit balance
➔ Weighing estimated costs against probable benefits, the primary
consideration in choosing among AS and methods
2. Behavioral implications
➔ System’s effect on the behavior, specifically the decisions, of managers
o PLANNING AND CONTROL FOR PRODUCT LIFE CYCLES AND THE VALUE CHAIN
o To effectively plan and control prod of GaS, accountants and managers must
consider the product’s life cycle
▪ Product life cycle ➔ Various stages through which a product passes, from
conception and development to introduction into the market to maturation
and, finally, withdrawal from the market
▪ At each stage, managers face differing costs and potential returns
o In addition to considering a product’s life cycle, managers must recognize those
activities necessary for a company to create the GaS that is sells
▪ These activities comprise the value chain
▪ Value chain ➔ Set of business functions or activities that add value to the
products or services of an org.
• Not all functions are of equal importance to the success of company
• Senior management must decide which functions enable the company to
gain and maintain a competitive edge
2
,Frédéric Kröger Managerial Accounting – Summary
o BASIC ORGANIZATIONAL STRUCTURE
▪ Line managers ➔ Directly involved with making and selling the org. GaS
▪ Staff positions ➔ Advisory, they support line managers
o ACCOUNTING’S POSITION IN THE ORGANIZATION
▪ 4 work activities of management accountants are (today spending more time
on last two) :
• Collecting and compiling information
• Preparing standardized reports
• Interpreting and analyzing information
• Being involved in decision making
o The CFO is the top executive who deals with all finance and accounting issues in org.
▪ Both the treasurer and the controller generally report to the CFO
• Controller (comptroller) ➔ Concerned mainly with operating matters,
such as aiding management decision making
• Treasurer ➔ Concerned mainly with company’s financial matters such as
raising and managing cash
o EXPANDING AND CHANGING ROLE OF MANAGEMENT ACCOUNTING
o Management Accounting has roots in industrial revolution (19th)
o 4 major business trends that are influencing management accounting today
▪ Shift from manufacturing-based to a service-based economy in the United
States
▪ Increased global competition
▪ Advances in technology
▪ Changes in business process management
o PROFESSIONAL AND BUSINESS ETHICS
o Need for accountants to maintain a high ethical conduct will never change
▪ Maintain their professional competence
▪ Preserve the confidentiality of information
▪ Act with integrity and credibility
3
, Frédéric Kröger Managerial Accounting – Summary
❖ Introduction to Cost Terms, Concepts and Classifications (Chap 2)
o GENERAL COST CLASSIFICATIONS
o Purpose of cost classification (not mutually exclusive)
▪ Preparing external financial statements
• Manufacturing costs (product costs) (inventoriable)
▪ Direct materials (DM) ➔ Raw materials converted into finished product
and whose costs are easily traced to finish product
First way of ▪ Direct labor (DL) ➔ Cost of wages and salaries of employees converting
classifying costs
raw materials into finished goods (direct cost easily traced to finished
product)
▪ Manufacturing overhead (OH) ➔ Manufacturing costs that cannot be
easily and cost-effectively traced to a finished product
▪ Includes all manufacturing costs except DM and DL
▪ Also called Factory Overhead or Indirect Manufacturing Costs
• Nonmanufacturing costs (period costs) (expensed)
▪ Selling costs
▪ Administrative costs
• Prime costs ➔ Combine direct costs of DM and DL
Second way of Primary costs in a labor-intensive manufacturing process
classifying costs • Conversion costs ➔ Combine DL with OH
Primary costs in a machine-intensive manufacturing process
▪ Making decisions
• Differential cost and revenue ➔ Differs between alternatives
• Sunk cost ➔ Past cost not affected by a decision
• Opportunity cost ➔ Forgone benefit
▪ Predicting cost behavior in response to changes in activity
• Variable cost ➔ Proportional to activity
• Fixed cost ➔ Constant in total
▪ Assigning costs to cost objects such as departments or products
• Direct cost ➔ Can be easily traced
• Indirect cost ➔ Cannot be easily traced
o 3 kind of companies
▪ Service company ➔ Company selling services (time, skills, knowledge)
▪ Merchandising company ➔ Reselling products bought from suppliers
▪ Manufacturing company ➔ Company uses labor, equipment, supplies, and
facilities to convert raw materials into other goods
o The matching principle
▪ Principle need to understand to use the Product/Period classification
➔ Costs should be recognized as expenses in the same period in which the
related revenues are recognized
o COST CLASSIFICATIONS ON FINANCIAL STATEMENTS
o Inventories on the B/S
▪ Different inventories
• Merchandising inventory ➔ Goods purchased from suppliers that are
awaiting resale to customers
• Raw material inventory ➔ Materials waiting to be processed
• Work-in-Process inventory (WOP) ➔ Partially complete products,
some material, labour or overhead has been added
• Finished goods inventory ➔ Completed products awaiting sale
▪ Different kind of companies use different inventories
• Service company → No inventory (sell their time)
acc. ➔ Number of
accounts on B/S • Merchandising company → Merchandise inventory (1 acc.)
• Manufacturing company → Raw material, WOP, finished goods (3 acc.)
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