Introduction, Pricing strategy & Cost classification
Introduction
Financial accounting focuses on providing info to shareholders, investors, creditors and
others outside an organisation.
Management accounting provides essential, accurate, timely financial and statistical info
in variety of reports, which managers analyse & interpret to make informed decisions.
• application principles accounting & financial mngmt: create, protect, preserve & value
for stakeholders for-profit & not-for-profit enterprises in public & private sectors (CIMA)
• info provided to mngmt assist them to plan, direct, motivate & control operations
→ essential for operational control, ensuring resources used effectively, & corporate
governance procedures, risk mngmt & internal controls implemented correctly
Management accounting (MA) provides info to assist with the following tasks:
• Planning – part of planning process: management considers effects of revenue &
expenditure. Management accounting info = NB in estimating effects. Budgeting also part
of planning process. Collect, analyse & summarise data for management to use in preparation of budgets.
o Planning = setting objectives of org & formulating strategies to achieve them – done at different levels:
→ Strategic/long-term planning performed by top management
→ Managerial/short-to medium-term planning done by middle management
→ Operational/short-term planning for daily operations.
• Decision making - MA collect, analyse & interpret data which is submitted to management in form of reports: enable
mngmt to make informed decisions. MA data (daily sales reports) often used in daily decision making.
o Decision making = analysing info provided & making informed decisions, usually choosing between 2+ alts.
Managers rely on accurate info to compare each alternative (alt) & assess its impact on organisation.
→ MA responsible for providing info on which these decisions based.
• Controlling & monitoring – Performance reports which compare budgeted & actual results prepared by MAs. If actual
performance < target: mngmt alerted so that appropriate control actions can be taken. This feedback to management
= one of main purposes of MA.
o Control = evaluating org’s performance by comparing actual results w targets – differences can be reported to
mngmt so they can improve the control of their operations.
o Common performance measures:
→ Variances – compare actual results against budgeted results
→ Profitability – may be measured using gross profit, net profit or gross margin percentage
→ Returns – measured by means of ratios such as return on capital
• Motivating – mobilising staff to carry out plans & run day-to- day activities, motivate & direct staff effectively to keep
org functioning efficiently. MA data (daily sales, budgets & performance reports) = measure of division’s/ org’s
performance in relation to objectives – can be used to motiv & encourage staff work smarter/more efficiently.
Financial Accounting (FA) Management Accounting (MA)
Users of info External focus: reports to those outside org Internal focus: reports to those inside org
(shareholders, lenders, tax authorities & for planning, decision making, controlling &
regulators performance evaluation
Time dimension Emphasis is on historical data Emphasis is on future decisions
Reporting frequency Objectivity of data is emphasised Relevance is emphasised
Characteristic of data Precise information is required Timely information is required
emphasised
Regulations/framework Must follow GAAP Need not follow GAAP
Focus of reports/depth Summarised data for entire org is prepared Detailed reports about different dept.’s &
functions prepared
Governed by many rules and regulations Not governed by rules and regulations
Non-financial information
Mngmt req. both financial (costs and profit) & non-financial (no. orders processed & no. complaints received) info for
decision making. MA systems capable of obtaining both financial & non-financial information.
Financial accounting (FA) – process to communicate financial info of org to various parties interested in its progress
, • One of main objectives of FA to report on org’s profitability & provide info about its financial position.
• Info FA statements used primarily to ascertain performance of org & make NB investment/divestment decisions
Cost accounting (CA) – accounting for costs & used for det org’s profitability & for decision making.
• Incl. acc for all income & expenditure, & prep of periodical statemts & reports, w aim of det. & controlling costs.
• CA helps mngmt by directing attention towards inefficient operations & assisting w day-to-day control of bus activities
• CA info used in both FA 7 MA
Management accounting (MA) – systematic approach to assist in managerial decision making
• Generates info for est plans & controls, while also providing system of setting standards & targets, & reporting
variances bet. planned & actual performances for corrective actions
• MA – process of identifying, measuring, analysing, preparing, interpreting & communicating financial info to mngmt.
This info used to plan, evaluate & control activities, enabling org to achieve its objectives.
• Consists of CA, budgetary & inventory controls, statistical measures, internal appraisals and reporting.
Environmental management accounting (EMA) – production & study both financ & non-financ info, to support internal
environmental management processes.
• Orgs under growing pressure to reduce environmental impact, NB to understand costs associated in dealing w this.
Mngmt often unaware of magnitude of environmental costs & may not able to identify opportunities for cost savings.
• EMA can be applied in assessment of environmental costs, product pricing, budgeting and investment appraisal, and
setting of quantified performance targets. Environmental costs may be incurred for no of reasons:
o may be regulatory costs/ compliance costs
o can result in expenditure to meet legal/ regulatory requirements.
• Voluntary costs, where org undertakes environmental spending on own initiative, either social/ business reasons – i.e.
environmentally friendly operations may create goodwill/ satisfy customer expectations through investing in
beneficial environmental initiatives.
• Environmental costs split into 2 categories: internal costs & external costs.
o Internal costs impact directly on profit of org. – i.e. improved systems & checks to avoid penalties, waste disposal
costs, product take-back costs & regulatory costs, such as taxes.
o External costs imposed on society at large, but not borne by org that generates costs
→ I.e. costs carbon emissions, energy & water usage, health care & social welfare.
→ Govs increasingly aware of ext costs & implementing measures to convert to intern costs by taxes & regs.
Characteristics of good information – org’s generate enormous quantities data by carrying out normal daily activities - data
consists of basic facts & figures, then processed into useful form = information.
Good info needed to make good decisions. Characteristics of good info = ACCURATE
A – Accurate – degree of accuracy varies, depending on reason for which info needed (calculating cost of unit of output,
managers may want cost to be accurate to nearest rand or cent)
C – Complete – Managers require all relevant info b4 making decisions (variance report should incl all relevant standard & actual
costs to understand variance calc)
C – Cost beneficial: Mngmt info becomes valuable when assists in decision making. Cost generating info should not > value of it.
U – Understandable – Limited use of jargon & technical language improves understandability of info. Care taken in way in which
financial info presented to non–financial managers.
R – Relevant – Only relevant info be incl. in report – info should be relevant to its purpose.
A – Authoritative – Info should be incl. from reliable source so users can have assurance in decision-making process.
T – Timely – Information be readily available to manger so they can make decisions based on that info.
E – Easy to use – Information be easy to use & accessible to person using it.
Organisations & their info needs:
Commercial Prime objective usually to max sh/h wealth.
organisations Type info req incl. costing of depts & products, profit measmt & return on capital (ROC)
(sells G/S to make profit) Sh/h interested in growth of their investment & use FS to eval org’s performance & interested in level of dvd
pmts.
Public organisations Main objective to provide services to public, in line w gov req.
Info req different from commercial orgs: public org = non-profit ent, focus on cost mngmt.
Accurate & detailed info required to assess efficiency & effectiveness of operations. Objective, evaluated by
gov & public, is public service delivery.
Societies/ non-profit Req financial info relating to their activities. Interested in impact that orgs have on local communities.
organisations Also find environmental reporting of good use to public as it measures & reports on impact that orgs have on
the environment.
Role of management accountants – changing from reporting performance to enhancing performance.
