Accounting for

management
Chapter 1
Management and Cost accounting
• Managers usually want to know about the costs
and the profits of individual products and
services. In order to obtain this information,
details are needed for each cost, revenue, profit
and investment centre. Such information is
provided by cost accounting and management
accounting systems.
 The techniques employed in cost
Cost accounting is a system for
accounting are designed to
recording data and producing
Cost accounting involves a careful provide financial information
information about costs for the
evaluation of the resources used about the performance of the
products produced by an
within the enterprise enterprise and possibly the
organisation and/or the services
direction that future operations
it provides.
should take

The terms ‘cost accounting’ and

Management accounting has cost
‘management accounting’ are
accounting at its essential
often used to mean the same
foundation
thing
FINANCIAL ACCOUNTING
The main duties of the financial
Financial accounting involves
accountant include: maintaining the
recording the financial transactions of
bookkeeping system of the nominal
an organisation and summarising
ledger, payables control account,
them in periodic financial statements
receivables control account and so on
for external users who wish to analyse
and to prepare financial statements as
and interpret the financial position of
required by law and accounting
the organisation.
standards

Information produced by the financial

accounting system is usually
insufficient for the needs of
management for decision making.
Data and information
‘Data’ means facts. Data consists of
numbers, letters, symbols, raw facts,
events and transactions which have
been recorded but not yet processed
into a form suitable for use

Information is data which has been

processed in such a way that it is
meaningful to the person who receives
it (for making decisions)
As data is converted into information, some of the detail of the data is
eliminated and replaced by summaries which are easier to understand
The attributes of good information can be identified
by the ‘ACCURATE’ acronym as shown below:

Easy to use Accurate

Timely Complete

Authoritative Cost effective

Relevant Understandable
• Explanation:
• The Cost line (dark line) increases steadily as the number of reports increases. This suggests that each additional
report adds a certain cost. So, more reports mean higher costs.
• The Benefit curve (light curve) initially rises, meaning that the benefit of creating reports increases up to a certain
point. However, after reaching a peak, the benefit begins to decrease as the number of reports continues to rise.
• Example:
• Imagine you are running a company that conducts safety inspections. Here’s how cost and benefit could work in this
case:
1. Cost: For each safety report, you need to pay employees and use resources. So, if you do more inspections, your costs
go up steadily.
2. Benefit: Initially, doing more inspections adds a lot of value—improving safety and reducing accidents, which saves
the company money. However, after a certain point, additional reports bring less value. For example, if you’ve already
inspected everything thoroughly, doing even more inspections may not significantly improve safety, and the benefit
might actually decrease.
• In this graph, the point where the benefit is at its highest compared to the cost is where the optimal number of
reports lies. Beyond that point, even though you’re spending more on reports, you’re getting less benefit out of them.
Mission statements

Before any planning can take place the

mission of the business needs to be
established.

The mission statement is a statement in

writing that describes the overall aims of
an organization, that is, what it is trying
to accomplish. In other words, it sets out
the whole purpose of the business.
There are four key elements to a
mission statement:
• Purpose – why • Strategy – what
does the business does the business
exist and who does it provide and how is it
exist for? provided?

• Policies and culture

• Values – What are
– how does the
the core principles of
business expect its
the business?
staff to act/behave?
Mission statements will have some
or all of the following
characteristics:
• Usually a brief statement • States the business areas
• Very general statement of • States the aims of the
of no more than a page in in which the organisation
entity culture organisation
length intends to operate

• Forms a basis of
• Does not include communication to the
• Open-ended (not in
commercial terms, such as • Not time-assigned people inside the
quantifiable terms)
profit organisation and to people
outside the organisation

• Guides the direction of the

• Used to formulate goal
entity's strategy and as such
statements, objectives and
is part of management
short term targets
information.
Aims and objectives should be
SMART:
Measurable – can
Attainable/Achievable – can
Specific – are the objectives achievement of the
the objectives set be
well defined and objectives be measured so
achieved with the resources
understandable? that completion can be
and skills available?
confirmed?

Timed – are deadlines being

Relevant – are the objectives set for the objectives that
relevant for the people are achievable? Are there
involved and to the mission any stage reviews planned
of the business? to monitor progress towards
the objective?
There are three different levels of planning (known as ‘planning
horizons’). These three levels differ according to their time span
and the seniority of the manager responsible for the tasks involved.
Senior managers Tactical planning Operational
formulate long- takes the strategic planning involves
term objectives plan and breaks it making day-to-
(goals) and plans down into day decisions

Operational planning
Strategic planning

Tactical planning
(strategies) for an manageable about what to do
organisation as a chunks i.e. next and how to
whole. These shorter term deal with
objectives and plans for problems as they
plans should all individual areas of arise.
be aiming to the business to
achieving the enable the
company's strategic plan to
mission. be achieved.
A simple hierarchy of management tasks can be
presented as follows:
 In most situations, decision making
involves making a choice between two or
Decision making involves considering more alternatives. Managers need reliable
information that has been provided and information to compare the different
making an informed decision. courses of action available and
understand what the consequences might
be of choosing each of them.

The first part of the decision-making

process is planning, the second part is
control.
Information relating to the actual results of an
organisation is reported to managers.
Managers use the information relating
to actual results to take control
measures and to re-assess and amend
their original budgets or plans.

Internally-sourced information,
produced largely for control purposes,
is called feedback.
The management information system of an organisation
is likely to be able to prepare the following:

product
annual statutory budgets and
profitability cash flow reports
accounts forecasts
reports

returns to
standard cost and
investment government
variance analysis
appraisal reports departments, e.g.
reports
Sales Tax returns.
 Non-financial information

• Managers will not always be guided by the sort of

financial and other (hard) information supplied by the
management accounting system. They will also look at
qualitative, behavioural, motivational, even
environmental factors. These nonfinancial factors can
be just as important in relation to a decision as financial
information – but they are often more difficult to
estimate and quantify.
THANKS FOR YOUR
ATTENTION