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Management Accounting 1 for Business SUMMARY (management & cost accounting) Midterm

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Management Accounting 1

Instelling
Universiteit Van Amsterdam (UvA)

English summary for the course Management Accounting 1 For Business of the bachelor Business Administration at the UvA. It includes all the required chapters and additional lecture notes. It mostly discusses the required theory, as well as some calculations and exercises, but you obviously have to ...

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Geupload op 1 september 2019
Aantal pagina's 35
Geschreven in 2018/2019
Type Samenvatting

management accounting
9781292063553
management accounting 1 for business
management and cost accounting
management and cost accounting bhimani

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MANAGEMENT ACCOUNTING 1:
// CH1 //

Management Accounting: information intended primarily to assist managers in fulfilling the goals of
the organization.
• Reports prepared for internal use, no external regulations, may be produced frequently.
• (Non)financial & qualitative, detailed information. Also looks forward (expectations).

Financial Accounting:
• External reporting required to be prepared by authoritative guidelines, annually or quarterly.
• Overview of position and performance over a period, lacks details.
• Measures and reports business transactions.

Cost Accounting: financial and non-financial information related to acquiring or consuming resources
by an organization.
Cost Management: the actions managers undertake in short-and-long-run planning and control of
costs that increase value for customers and continuously lowers production costs.

The Growing Role of Strategy for Management Accountants:
- Increased focus on expansionist, risky and entrepreneurial strategies
- Aim to create, not preserve shareholder value in the short term
- Increased focus to external sources for opportunities
- Assist management to make balanced decisions
- Monitor and evaluate strategic and operational progress
- This has led to a realignment of skill sets by the global management accounting
institutes such as CIMA/CGMA, CMA and IMA.
- Management accounting = strategy implementation.

Purposes of The Accounting System:
1. Formulating overall strategies and long-range plans | internal non-routine reporting
2. Resource allocation decisions (like product and customer emphasis and pricing)
| internal routine reporting
3. Cost planning and cost control of operations and activities | internal routine reporting
4. Performance measurement and evaluation of people | internal non-routine reporting
5. Meeting external regulatory and legal reporting requirements where they exist
| external reporting

Internal routine reporting: information provided for decisions that occur with some regularity, →
daily/weekly/monthly/quarterly reports.
Internal non-routine reporting: information for decisions that occur irregularly or even without
precedent, → outsourcing, design of a special cost control tracking system.

External reporting: information provided to investors, government authorities and other outside
company stakeholders on the organization’s financial position, operations and related activities.

,Planning: choosing goals, predicting results under various ways of achieving those goals, and then
deciding how to attain the desired goals.
• Budget: quantitative expression of a plan of action and aim of implementation.

Control: covers the..
• Action that implements the planning decision
• Performance evaluation and the related feedback that will help future decision making.
• Performance reports: actual vs. budgeted income and variance (difference) between the
two.

Management by Exception: concentrating on areas not operating as expected (like cost overrun or
planning less attention on areas operating as expected).
• Variance between actual results and budgeted amounts.

Feedback provides managers with the opportunity to examine past performance and systematically
explore alternative ways to make better (informed) decisions in the future.
Use of feedback:
• Tracking growth
• Searching for alternative means of operating
• Changing methods for making decisions
• Making predictions
• Changing operations
• Changing the reward system

3 Functions of Management Accountants:
- Scorekeeping: accumulation of data and the reporting of reliable results to all levels of
management. → How is the business doing?
o Decision control role
- Attention-Directing: attempts to make visible both opportunities and problems on which
managers need to focus. Focus on all opportunities to add value to the organization rather
than only cost-reductive. → Which opportunities/problems should be emphasized first?
o Decision control role
- Problem-Solving: comparative analysis undertaken to identify the best alternatives in
relation to the organization’s goals (analytical review). → What is the best alternative?
o Decision making role

Management accountants often simultaneously perform two or all of the problem-solving,
scorekeeping and attention-directing roles. Management accounting systems serve multiple
purposes.

Cost–benefit approach: choice of accounting system/practices depends on how well they help to
achieve organizational goals in relation to the costs of those systems and the context in which they
operate.
- Full recognition to behavioural as well as technical considerations.
Use of different costs for different purposes.

2

,Key Themes in Management Decision Making:
1. Customer Focus
2. Value Chain analysis: sequence of business functions in which utility (usefulness) is added
to the products/services:
• Research and Development
• Design of products, services or processes
• Production
• Marketing
• Distribution
• Customer service (support activities)
Supply Chain: describes the flow of goods, services, and information from cradle to grave.
3. Key Succes Factors:
• Cost
• Quality
• Time
• Innovation
4. Continuous Improvement and Benchmarking

Enterprise structure: technological developments, outsourcing, ‘virtual firm’.
Digitization: big data, data analytics, robotics.
Intangible assets: innovation, startups, human capital, brands, knowledge management.

Professional accountants play a role as:
• Creators of value; taking leadership in strategies, measures, etc.
• Enables of value; informing and guiding decision making and implementation of strategy.
• Preserves of value; protection of a sustainable value creation strategy against risks and
regulations.
• Reporters of value; transparent communication of delivery of sustainable value to
stakeholders.

// CH2 //

Cost: resource sacrificed or forgone to achieve a specific objective.
- Usually measured as the monetary amount that must be paid to acquire goods and services.

Cost Object: anything for which a separate measurement of costs is desired (to guide managerial
decisions), e.g. a department, product or customer.
- Actual Costs: (historical) costs incurred as distinguished from budgeted or forecasted costs.

Stages of Accounting for Costs:
1. Cost Accumulation: collection of cost data in some organized way through an accounting
system; Classification of costs (materials, labour, etc).

3

, 2. Cost Assignment: assigning costs to various cost objects; (a) tracing [direct costs]
accumulated costs, and (b) allocating [indirect costs] accumulated costs to a cost object.
- Direct costs: related to particular cost object (product, department, etc.), and that can be
traced to it in an economically feasible (cost-effective) way.
o Cost-tracing: the assignment of direct costs to the particular cost object.
- Indirect costs: related to particular cost object but cannot be traced to it in an
economically feasible way → cost allocation method.
o Cost allocation: the assigning of indirect costs to the particular cost object.

The direct/indirect classification depends on the choice of the cost object.
Classification of cost (direct/indirect) factors:
- The materiality of the cost in question: higher cost > higher tracing feasibility (direct).
- Available information-gathering technology: improvements > direct.
- Design of operations: e.g. facility used exclusively for 1 product > direct.
- Contractual arrangements.

Key Areas of Cost Reduction:
- Focusing on value-added activities (customers perceive as adding value to
products/services)
- Efficiently managing the use of cost drivers inn those value-added activities.
o Cost Driver (generator or determinant): any factor that affects total costs. Change in
the level of cost driver will change the total costs.
▪ Time dimension: costs that do not vary in the short run may have a cost
driver in the long run.

Cost Management: set of actions managers take to satisfy customers while continuously reducing
and controlling costs.

Variable Cost changes in total in proportion to changes in the related level of total activity or volume.
Fixed Cost does not change in total, despite changes in the related level of total activity or volume.

Cost Assumptions & Classification:
- Are variable or fixed with respect to a specific cost object
- Specified time span
- Total costs are linear
- One cost driver only
- Variations of level of cost driver are within a relevant range
o Relevant Range: range of cost driver in which a specific relationship between cost
and the level of activity or volume is valid.
▪ If you have a phone contract of maximum 500MB, then 0 to 500 MB is the
relevant range for data use. After 500 MB, you get an additional charge for
use of data in your contract

Unit Cost (Average Cost): amount of total costs / number of units.
May be expressed in various ways: Hours worked, Packages delivered, Bicycles assembled, etc.
It is better to think of total costs than unit costs when making decisions.

4

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