AF1201/FR2213 Intro to Management Accounting (AF1201)
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Management Accounting
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, Topic 1
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Introduction to Management Accounting
Organisation of Businesses
A businesses main aim is to maximise shareholders’ wealth
How are businesses organised:
Owners (i.e Shareholders) muhabigganorganistere
is divided
Managers
Lenders
Suppliers
Employees
Why are large business, e.g Coca-Cola, not managed as a single unit by 1 manager?
↳ Sheer volume of activity
↳ Certain operation s may require specialised knowledge
↳ Geographic considerations
The Strategic Management Framework
Mission Statement:
Mission Statement - A statement that defines the essence or purpose of a company (what it stands for) ie what
broad products or services it intends to offer customers
' The mission statement of the company is translated into specific commitments and targets which tbs company
has. The objectives must be challenging and achievable (therefore not too easy to achieve but within reason).
, What is Management Accounting?
Management accounting - The provision of useful information to help management plan, control and make decisions
Q: Why can’t the management of a company just use the financial statements instead of producing management accounts?
Q: Imagine you work for Asda as a management accountant. The CEO has asked for a weekly report containing every customer
transaction from every store including details of items bought and the nature of payment.
- Why do you think the chief executive would want this information?
- Can you think of an easier way they could achieve this objective?
- What would you report to the chief executive if asked whether you think this report is necessary or not?
, 💟 ✅
Topic 2
Relevant Costing
Cost - the amount of resources, usually measured in monetary terms, sacrificed to achieve a particular objective.
Individuals and businesses often need to make decisions such as
• should we produce product X
• should we buy these required raw materials or make them in-house
• should I purchase this new factory
• should we expand into Asia etc.
Decision making relates to the future
To make informed decisions, one needs to calculate the relevant costs and relevant benefits arising from this decision
To be a relevant cost, a cost must meet 2 conditions: Example: George has been using his car to commute to work daily. He is
considering switching to public transport and is willing to try it out by buying
a monthly train ticket to work. George intends to keep and use his car,
regardless of whether he drives to work or not. Help George assess this decision by
considering the relevant costs and benefits of the decision.
Costs/benefits to consider: Irrelevant Costs to this decision:
• Purchase price of the car • Purchase price of the car
• annual road tax • Annual road tax
• annual insurance premium • Annual insurance premium
• cost of petrol, car maintenance costs • Parking costs, only if they have
• parking costs been committed prior to the
• monthly train ticket cost etc. decision making point (otherwise
relevant)
Relevant Benefits of taking the train:
Not having to pay the cost of petrol for the commute (opportunity benefit)
Reduction in car maintenance costs (opportunity benefit)
Not having to pay parking costs, if they have not already been committed
(opportunity benefit)
Ability to work on the train (qualitative factor)
How to If the relevant benefits >
identify relevant costs then it is
a relevant
Relevant Costs of taking the train: worth taking the train
cost
Monthly train ticket cost
Unreliability of public transport (qualitative factor)
Identifying a relevant cost depends on the scenario and the specific question asked. For example, a company will buy a new truck
① In Scenario 1, a company is going to buy a new truck and the decision lies between 2 different models. The truck will require a driver,
but a qualified driver could drive either truck equally well, for the same wage. Therefore, is the driver’s wage a relevant cost? The answer to
this question is no. The cost does relate to the future but does not vary with the decision. Regardless of the model of truck, the driver is being
paid for their labour which is not affected by the model of truck and therefore the driver’s wage is not a relevant cost.
② In Scenario 2, we assume that the decision does not concern a choice between two models of truck but rather whether to operate an
additional truck or not. Would the driver’s wage be a relevant cost? The answer to this question is yes. The purchase of an additional truck
determines whether we need to pay a drivers wage because if we don’t buy a new truck, there is no new driver to pay.
Relevant and
Irrelevant costs
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