Management Cost Accounting
Ch 1 – The Manager and Management Accounting 2
Ch 2 – An Introduction to Cost Terms and Purposes 14
Ch 3 – Job Costing 23
Ch 4 – Process Costing 33
Ch 5 – Cost Allocation 49
Ch 6 – Cost Allocation: Joint-Cost Situations 68
Ch 7 – Income Effects of Alternative Stock-Costing Methods 79
Ch 8 – Cost-Volume-Profit Analysis 95
Ch 9 – Determining How Costs Behave 110
Ch 10 – Relevant Information for Decision Making 120
Ch 11 – Activity Based Costing 140
Ch 12 – Pricing, Target Costing and Customer Profitability Analysis 162
Ch 14 – Motivation, Budgets and Responsibility Accounting 184
Ch 15 – Flexible Budgets, Variances and Management Control I 200
Ch 17 – Measuring Yield, Mix and Quantity Effects 220
Ch 18 – Control Systems and Transfer Pricing 239
Ch 19 – Control Systems and Performance Measurement 263
Ch 20 – Strategy, the Balanced Scorecard and Quality 282
Ch 21 – Accounting, Time and Efficiency 306
Ch 22 – Emerging Issues: Digital Technologies, Governance, and Sustainability 313
,Management Cost Accounting
Ch 1 – The Manager and Management Accounting
Management Accounting, Financial Accounting and Cost Accounting
• 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 organisation.
o Supporting management in doing their job
§ By providing information to help them manage the daily operations
• Costing information, budgets, variances
§ By helping them decide on new activities
• Setting prices, accepting orders
o Helping management to account for its actions
§ Performance reports, budget outcomes
• The Chartered Institute of Management Accountants (CIMA) sees management accounting as an
integral part of management.
o It considers management accounting as combining accounting, finance and management
with leading-edge techniques that drive successful businesses.
• Individual managers often require the information in an accounting system to be presented or
reported differently.
o The database stores information in a way that allows different managers to access the
information they need.
• Professional management accountants apply the principles of accounting and financial management
to create, protect, preserve and increase value for the shareholder of for-profit and not- for-profit
enterprises in the public and private sectors.
• They might engage in the identification, generation, presentation, interpretation and use of relevant
information relevant to:
o inform strategic decisions and formulate business strategy
o plan long-, medium- and short-term operations
o determine capital structure and fund that structure
o design reward strategies for executives and shareholders
o inform operational decisions
o control operations and ensure the efficient use of resources
o measure and report financial and non-financial performance to management and other
stakeholders
o implement corporate governance procedures, risk management and internal controls
o explore the potential for managerial and organisational value creation.
• Management accounting information and reports do not have to follow set principles or rules.
o The key questions are always:
§ (1) how will this information help managers do their jobs better;
§ (2) do the benefits of producing this information exceed the costs; and
§ (3) does the information recognise what is specific about the organisational
context?
• Financial accounting focuses on external reporting that is directed by authoritative guidelines.
o Organisations are required to follow these guidelines in their financial reports to outside
parties.
• Financial accounting is guided by prescribed accounting standards.
o Principles define the set of revenue and cost measurement rules and the types of item that
are classified as assets, liabilities or owners’ equity in balance sheets which form the
standards applicable.
o Sources of authority for accounting regulation differ across countries.
• In contrast, management accounting is not restricted by accounting principles that guide financial
reporting
• While the work of management accountants and financial accountants tends to be organisation-
specific, some broad differences generally exist.
• They may be categorised as follows:
o Regulations.
§ Management accounting reports are generally prepared for internal use and no
external regulations govern their preparation.
, Management Cost Accounting
§ Conversely, financial accounting reports are generally required to be prepared
according to accounting regulations and guidelines imposed by law and the
accounting profession.
o Range and detail of information.
§ Management accounting reports may encompass financial, non-financial and
qualitative information which may be very detailed or highly aggregated.
§ Financial accounting is usually broad-based, lacking detail and intended to provide
an overview of the position and performance of an organisation over a time period.
• It tends to focus on financial information.
o Reporting interval.
§ Management accounting reports may be produced frequently – on an hourly, daily
or weekly basis, possibly to span several years.
• The interval covered by management accounting information will be
dictated by the decision-making and control needs of the information
users.
§ Conversely, financial accounting reports are produced annually.
• Some large companies also produce semi-annual and quarterly reports.
o Time period.
§ Management accounting reports may include historical and current information,
but also often provide information on expected future performance and activities.
§ Financial accounting reports provide information on the performance and position
of an organisation for the past period.
• They tend to be backward-looking.
o Note, however, that reports such as balance sheets, income statements, and statements of
cash flows are common to both management accounting and financial accounting.
Management Accounting Financial Accounting
Purpose Help managers make decisions Communicate the financial position of an organization
Primary Users Insiders: management Outsiders: investors, banks, suppliers
Time Orientation Future: what are we going to do? Past: what has happened?
Rules Anything goes Heavily regulated
Techniques Whatever is needed for the issue at hand Journal entries, T-accounts, balance sheets
So… Management accounting focuses on what you do Financial accounting focuses on what you own
(making sure you do the right thing) (reporting on how well you did)
, Management Cost Accounting
• Two uses of management accounting information
o Management accounting information is used to make decisions
§ Product and service introductions, adjusting and improving processes, pricing
decisions, outsourcing decisions and cooperation decisions
o Management accounting information is used to evaluate performance
§ How well have we done: have we met our profit targets? Who gets a bonus or a
promotion?
o But: what you measure is what you get
§ Firm objective à satisfied customers (because they will return)
§ Performance measure à sales
§ Possible employee behaviour à sell customers everything they will buy even if they
don’t need it (can get quite extreme)
• Measuring people on performance measures can lead them to act
irrationally
• Cost accounting measures and reports financial and non-financial information related to the
organisation’s acquisition or use of resources.
o It provides information for both management accounting and financial accounting.
§ For example, calculating the cost of a product is a cost accounting function that
meets both the financial accountant’s stock-valuation needs and the management
accountant’s decision-making needs (such as deciding how to price products and
choosing which products to promote).
o However, today most accounting professionals take the perspective that cost information is
part of the management accounting information collected to make management decisions.
§ Thus, the distinction between management accounting and cost accounting is not
so clear-cut.
• A central task of managers is cost management.
o We use the term cost management to describe the 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.
o An important component of cost management is the recognition that prior management
decisions often commit the organisation to the subsequent incurrence of costs.
o Cost management has a broad focus.
§ It typically includes the continuous reduction of costs and encompasses the whole
life cycle of the product from product conception to deletion.
o Cost management is often carried out as a key part of general management strategies and
their implementation.
§ Examples include enhanced customer satisfaction programmes, quality initiatives
and more efficient supplier relationships management via the Internet.
o Cost management is not only about reducing costs.
§ Cost management also includes making decisions to incur additional costs with the
goal of enhancing revenues and profits.
§ Whether or not to enter new markets, implement new organisational processes,
and change product designs are also cost management decisions.
o Information from accounting systems helps managers to manage costs, but the information
and the accounting systems themselves are not cost management.
• Ultimately, management accounting’s primary purpose is to enhance value creation within both
private and public sector organisations.
o The management accountant must make use of a sound body of knowledge, as well as abide
by ethical guidelines.
o Of particular relevance is the growing contribution which management accountants make to
strategic financial management information production and analysis and to strategic
management action itself.
Strategic Decisions and Management Accounting
• Many organisations seek to be more expansionist, entrepreneurial, risk taking and innovative as a
conscious move away from inwardly focused management techniques.
