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Management Accounting

Management accounting provides information to help managers plan, implement strategies, measure performance, and evaluate results. It involves identifying, measuring, accumulating, analyzing, preparing, interpreting, and communicating financial and non-financial information. Management accounting differs from financial accounting in that it focuses on future decisions, internal reporting, and flexibility rather than past performance, external reporting, and standards. Key concepts include cost behavior and classification, product versus period costs, relevant range and cost-volume-profit analysis, and different costing systems like job order and process costing.

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Fahad Ali
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61 views5 pages

Management Accounting

Management accounting provides information to help managers plan, implement strategies, measure performance, and evaluate results. It involves identifying, measuring, accumulating, analyzing, preparing, interpreting, and communicating financial and non-financial information. Management accounting differs from financial accounting in that it focuses on future decisions, internal reporting, and flexibility rather than past performance, external reporting, and standards. Key concepts include cost behavior and classification, product versus period costs, relevant range and cost-volume-profit analysis, and different costing systems like job order and process costing.

Uploaded by

Fahad Ali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Management Accounting

u Describe what managers do, and the role of the management accountant.

Management accounting services information needs of management by:

1. Developing plans and analysing alternatives.

2. Communicating plans to key personnel.

3. Evaluating performance.

4. Reporting the results of activities.

5. Accumulating, maintaining, and processing an organisation's financial and


non-financial information.

Managers plan, implement, measure performance (controlling) and then evaluate compared
to planned performance

u Define management accounting and distinguish between management accounting and


financial accounting.

The process of identification, measurement, accumulation, analysis, preparation,


interpretation and communication of information used by management to plan, evaluate
and control within an entity and to assure appropriate use of and accountability for its
resources.”

Financial accounting for external users, looking at past performance, emphasis on


verifiability , prepared regularly, about the whole organisation, and follows standards.
Management accounting is for managers, is looking at the future, emphasis on planning and
control, prepared ad hoc, focuses on segments, and is flexible/no standards. They share data
sources, make up part of management information systems, both quantitative.

u Identify management philosophies for continuous improvement, and provide insight into
current issues for management accounting.

Current issues: increasing size and complexity of organisations, organisations flatter and
more networked, service industries more important, rapid development of technology,
worldwide competition, regulation, more quality needed, need to meet customer needs,
global competition

u Consider the role of business ethics and the management accounting profession.

Ethics: refrain from discreditable accounting practises, communicate favourable and


unfavourable information, refuse gifts or favours, avoid activities that affect job.
u Identify various cost objectives, and illustrate how each requires a different cost
classification.

Cost classification is essentially a matter of grouping together costs which share the same
attribute(s) relative to a stated cost objective.

Cost objective is any activity for which a separate measurement of costs is required

Cost object is “anything for which cost data are desired”

u Understand the concept of traceability of costs.

Total Costs = (Direct materials, Direct Labour, MFG Overhead = Indirect Labour and Indirect
Materials)

Prime Cost = DM + DL, Conversion Cost = DL + MO

u Distinguish between product and period costs.

Product Costs = Above. Period Costs = Selling and Administrative.

Homework: Research product costs from inventory. Some starters:

Product Costs from Inventory – are either sold, and then displayed on P/L account, or
remaining inventory left on the balance sheet. Period costs always on P/L

Check Slides

u Appreciate the relevant costs to be used in decision-making.

Differential revenue/costs
Opportunity
Sunk
u 2) Define cost behaviour and explain how managers make use of this concept in the
management cycle.

Cost behaviour refers to how costs change in relation to volume or activity.

Managers use their knowledge of cost behaviour to estimate future costs and the impact of
operational changes on future profitability.

u Explain the effect of changes in activity on costs.

Variable cost changes with respect to an activity base. Relevant range: for fixed costs.
Accountant’s straight line approximation of constant unit variable cost.

Summary of Variable and Fixed Cost Behavior


Cost In Total Per Unit

Variable Total variable cost is Variable cost per unit remains


proportional to the activity the same over wide ranges
level within the relevant range. of activity.
Fixed Total fixed cost remains the Fixed cost per unit goes
same even when the activity down as activity level goes up.
level changes within the
relevant range.

Fixed costs more common now due to automation and skilled workers who are difficult to
train and replace; managers need to plan more. Fixed costs: committed (long term), eg
depreciation on buildings, equipment, and Discretionary (Advertising, R/D)

u Predict costs at a new level of activity using a cost formula.

y = a +bx

u Analyse a mixed cost.


both fixed and variable in one

u Appreciate and use the contribution approach.

u Contribution margin format emphasises cost behaviour.

Sales
minus variable
= Contribution
minus fixed
= net profit

Used primarily by management


u Distinguish between different types of product costing system

Specific Order = Job and Contract


to customers spec
many products separately identifiable
Costs attributed to individual jobs/contracts
cost records maintained for each job/contract
job usually smaller and shorter term

Continuous = Process and service costing


Where goods/services mass produced from repeated procedures

Process
output units identical/nearly
cost units not separate
costs attributed to process and averaged over units

Homework: research these

Service
heterogeneity
simultaneity
perishability
intangibility

Some Test Questions:

u Explain the cost flow in a job order costing system in a manufacturing company
Direct Labour, Direct Materials for jobs they’re performed. And overheads. First assign to
cost centres, then to products

u Understand process by which overheads are attached to products

why we use pre-determined overhead rates

u Describe: the different methods of overhead recovery

the treatment of under- or over-absorbed overheads

u Calculate: predetermined OH rates

under- and over-applied overheads

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