Management Accounting
Chapter 1
Notes: read 16-21, know 3-16
Management accounting measures, analyses and reports financial information and non-financial
information that are intended primarily to assist managers in fulfilling the goals of the organization.
Apply the principles of accounting and financial management to create, protect, preserve and
increase value for the shareholders. Does not have principles or rules. Key questions: 1) how will this
information help managers do their jobs better; 2) do the benefits of producing this information
exceed the costs; 3) does the information recognize what is specific about the organizational
context?
Financial accounting focuses on external reporting that is directed by authoritative guidelines.
Sources of authority for accounting regulation differ across countries.
General differences: regulations, range and detail of information, reporting interval, and time period
(management might be forward -looking, financial always backward-looking). Financial always about
company as a whole, management might be about departments etc.
Cost accounting measures and reports financial and non-financial information related to the
organization’s acquisition or use of resources. Provides information for both management and
financial accounting. Is seen as the same as management accounting.
Cost management=actions managers undertake in the short-run and long-run planning and control
of costs that increase value for customers and lower the costs of products and services. Recognize
that prior management decisions often commit the organization to the subsequent incurrence of
costs.
Strategy specifies how the organization matches its own capabilities with the opportunities in the
marketplace: how an organization creates value for its customers while distinguishing itself from its
competitors.
1. Cost leadership strategy: providing quality products/service at low prices and judiciously manage
costs.
2. Product differentiation strategy: offer differentiated or unique products/services that appeal to
customers and are priced higher than the less-popular products/services of competitors.
Strategic issues:
- Who are our most important customers, and what critical capability do we have to be competitive
and deliver value to our customers?
- What is the bargaining power of our customers?
- What is the bargaining power of our suppliers?
- What substitute products exist in the marketplace, and how do they differ from our product in
terms of features, price, cost and quality?
- Will adequate cash be available to fund the strategy, or will additional funds need to be raised?
The purposes of accounting systems:
1. Formulating overall strategies and long-range plans.
2. Resource allocation decisions such as product and customer emphasis and pricing.
3. Cost planning and cost control of operations and activities.
4. Performance measurement and evaluation of people.
5. Meeting external regulatory and legal reporting requirements where they exist.
,Planning=choosing goals, predicting results under various ways of achieving those goals, and then
deciding how to attain the desired goals. Budget=the quantitative expression of a plan of action and
an aid to the coordination and implementation of the plan.
Control=the action that implements the planning decision and deciding on performance evaluation
and the related feedback that will help future decision making.
Management by exception=concentrating on areas not operating as expected and placing less
attention on areas operating as expected. Variance=difference between actual results and budgeted
amounts.
When talking about planning and control, you usually just say control.
It is difficult to foresee customers and investors reaction to increasing sustainability. Regulation might
change.
Management accountants can be considered to perform 3 important functions in their reporting:
1. Scorekeeping=the accumulation of data and the reporting of reliable results to all levels of
management.
2. Attention directing attempts to make visible both opportunities and problems on which managers
need to focus.
3. Problem solving=the comparative analysis undertaken to identify the best alternatives in relation
to the organization’s goals.
Costs, benefits and context: one criterion for choosing among alternative accounting systems is how
well they are perceived to help achieve organizational goals in relation to the costs of those systems
and the context within which they are to operate. Functioning is affected by behavioral and social
factors.
Key themes of planning and control: (value creation)
1. Customer focus.
2. Value-chain and supply-chain analysis. Value chain is the sequence of business functions in which
utility is added to the products/services of an organization.
Research and development (R&D)
Design of products, services or processes (planning)
Production
Marketing: the manner by which individuals or groups a) learn about and value the
attributes of products/services, and b) purchase those products/services.
Distribution
Customer service
Customer relationship management (CRM) initiatives use technology to coordinate all customer-
facing activities and the design and production activities necessary to get products to customers.
3. Key success factors:
Cost
Quality
Time
Innovation
Sustainability=the development and implementation of strategies to achieve long-term
financial, social, and environmental goals.
4. Continuous improvement and benchmarking. Measure quality and activities of the company
against the best-known levels of performance found in competing companies.
Chapter 2
Notes: know completely
, Cost=a resource sacrificed or forgone to achieve a specific objective.
Cost object=anything for which a separate measurement of costs is desired. Product/service/
project/customer/brand category/department/activity/programme.
A costing system accounts for costs in 2 basic stages:
1. It accumulates costs by some natural classification such as materials, labour, fuel, advertising or
shipping. Cost accumulation=the collection of cost data in some organized way through an
accounting system.
2. It assigns these costs to cost objects. Cost assignment= 1) tracing accumulated costs to a cost
object (direct costs), and 2) allocating accumulated costs to a cost object (indirect costs).
Can occur simultaneously thanks to barcoding.
Direct costs are related to the particular cost object and can be traced to it in an economically
feasible way.
Indirect costs are related to the particular cost object but cannot be traced to it in an economically
feasible way. Use the cost-allocation method.
Factors that will affect the classification of costs as (in)direct:
• The materiality of the cost in question. The higher the cost, the more likely the economic
feasibility of tracing it to a particular cost object.
• Available information-gathering technology. E.g. barcodes.
• Design of operations. Part of facility is used exclusively for a specific product.
Cost-reduction efforts identify 2 key areas:
1. Focus on value-added activities=activities that customers perceive as adding value to
products/services.
2. Efficiently manage the use of the cost drivers in those activities.
Cost driver=any factor that affects total costs. A change in the level of the cost driver will cause a
change in the level of the total cost of a related cost object.
Cost management=the set of actions managers take to satisfy customers while continuously reducing
and controlling costs. Changes in cost drivers do not automatically lead to changes in overall costs;
managers must take steps to reduce costs (e.g. fire people that are no longer needed).
Variable costs change in total proportion to changes in the related level of total activity or volume.
Fixed costs do not change in total despite changes in the related level of total activity of volume.
Costs are defined as variable/fixed with respect to a specific cost object and for a given time period.
A relevant range=the range of the cost driver in which a specific relationship between cost and the
level of activity or volume is valid.
Interpret unit costs with caution. For decision making, it is best to think in terms of total costs rather
than unit costs: if you have fixed costs, the total costs will not be affected by volume, while the unit
costs will.
Merchandising-sector companies provide tangible products they have previously purchased in the
same basic form from suppliers. Stock includes products that have not been sold=merchandise stock.
Manufacturing-sector companies provide tangible products that have been converted to a different
form from that of the products purchased from suppliers. Stock includes raw materials, WIP and
finished goods. Direct materials stock will be used in the manufacturing process.
Manufacturing costs:
• Direct materials costs=the acquisition costs of all materials that eventually became part of the cost
object and can be traced to the cost object in an economically feasible way. Includes freight-in etc.
