Introduction To Management Accounting

- What is accounting?

o Information System.
o Geared to user’s needs.
o To assist in making informed decisions and evaluations.

- What is the difference between financial and management accounting?

o User focus – External / Internal.
o Time focus – Past / Future.
o Constraints – Regulations / Cost-benefit.
o Frequency – Periodic / As requested.
o Perspective – Total organization/segments.

- Types of accounting information?

o Financial
 Income statements
 Users; shareholders, lenders, suppliers
o Management
 Financial and non-financial information
• Budget variances, market share
• KPIs, KSFs, social, environmental and sustainability accounting.
 Users; internal management.

- Key Success Factors (KSFs)

o KSFs are measures of those aspects of the firm’s performance that are critical to its competitive advantage and therefore to its success.
o Many of these KSFs are financial but many are non-financial.
 Cost efficiency
 Quality
 Customer service
 Flexibility
 Innovation
 People
 Environmental Impact.

- Traditional objectives of Management Accounting;

o Provide information for
 Planning (budgets)
 Control (variance analysis)
 Decision-making (pricing, outsourcing)
o Evaluate managerial performance (comparison of actual vs budget)

- Expanded objectives of management accounting;

o Supports the strategies of the organization and solutions to strategic business problems.
o Supports the management control system.
o Supports organizing and coordination of operations.
o Supports motivation of employees.
o Supports motivation of employees.
o Communicates up-to-date information.
o Supports the evaluation of the efficiency and effectiveness of policies.

- The roles of management accountants;

o Problem-solving (lease or buy)
o Scorekeeping (preparation of monthly sales reports)
o Attention directing (interpreting why a department exceeded its cost budget)

- Ethics

o Ethical principles can provide a useful guide for defining how employers and employees should behave.
o Both employers and employees should consider the impact of their actions on a variety of stakeholders.
o Ethical issues do not mean legal issues.

- What do you mean by “ethics”?

o Distinguishing;
 Right from wrong
 What is good from what is bad?
 What constitutes desirable conduct in society from the undesirable?
o Examining the moral standards held by individuals or society.
o Not about religious beliefs or what we feel is right though these often inform our moral codes.

- Ethical issues in business;

o Conflicts of interest
o Fraud and theft
o Late payments
o Bribery and corruption
o Data protection
o Gifts and hospitality
o Bullying and harassment

- Ethical principles in management accounting;

o Integrity
o Objectivity
o Professional competence and due care
o Confidentiality
o Professional behaviour

- The need for cost information;

o Preparation of financial plans (budgets)
o Evaluation of performance
o Pricing decisions
o Customer focus decisions
o Make or buy decisions.
o Valuation of inventories for financial reporting and taxation.

- Cost object;

o A cost object is anything for which a measurement of costs is desired.
 Examples;
• The cost of issuing an insurance policy
• The cost of running a sales department

- Cost collection system;

o A cost collection system normally accounts for costs in two broad stages;
 Accumulates costs by classifying them into certain categories (labour, materials, and overheads)
 Assigns costs to cost objects.

- Different costs for different purposes;

o Inventory valuation
o Decision-making and planning
o Control
o Different concepts for different purposes.

- Inventory valuation;

o Product cost is comprised of
 Direct materials
 Direct labour
 Manufacturing overhead (indirect cost)
• Factory light and heat, insurance of factory buildings, supervisors' salaries, and repairs.

- Direct costs and indirect costs;

o Direct costs can be specifically identified with a particular cost object E.g. a product, a department, a service)
o Indirect costs cannot be identified specifically with a particular cost object.

- Product costs and period costs;

o Product cost; the cost necessary to complete a product (direct materials, direct labour and manufacturing overheads)
o Period costs; all non-manufacturing expenditures (e.g. selling and distribution)

- Environmental costs;

o Common environmental costs for an organisation;
 Waste and effluent disposal
 Water consumption
 Energy
 Transport and travel
 Consumables and raw materials
 Environmental taxes.

- Cost behaviour;

o Cost behaviour; how costs change with activity
o Knowledge of cost behaviour is essential for;
 Planning (budgets)
 Control (determining what costs should be at the operating level achieved)
 Decision-making (eg make or buy; pricing)

- Classification by behaviour

o Need to predict costs and revenues at different activity levels for many decisions. For example, contribution per unit \= selling price – variable cost used extensively in CVP and relevant costing
o Variable costs vary in direct proportion to the activity.
o Fixed costs remain constant over wide ranges of activity.
o Stepped or semi-fixed costs are fixed within specified activity levels, but they eventually increase or decrease by some constant amount at official activity levels.
o Semi-variable costs include both a fixed and a variable component (eg telephone charges)
o NB Time \= the classification of costs depends on the time period involved, In the short term some costs are fixed, but in the long term, all costs are variable.