Management accounting PDF

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Management accounting 

What is the job of a management accountant? The job of a management accountant is to try improve the business (by preparing budgets, controlling costs) and make the business more profitable. Management accountants are often the same as the financial accountants in smaller firms but the they are two separate jobs.

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Differences between financial and management accounting 1. Public companies are required to produce annual financial accounts but there is no legal requirement for management accounting. 2. Financial accounting reports describe the whole of the organisation whereas management accounting focuses on reporting information for different parts of the business. 3. Financial accounting reports must be prepared in accordance with generally accepted accounting principles (Statements of Standard Accounting Practice) 4. Financial accounting reports historical information whereas management accounting places greater emphasis on reporting estimated future costs and revenues. 5. Management accounting reports are produced at more frequent intervals.

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The decision making, planning and control process

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Organisation have faced dramatic changes in their business environment. 1. Move from protected markets to highly competitive global markets 2. Declining product life-cycles 3. Growth in service industry 4. Advances in manufacturing technology 5. Environmental issues To compete successfully in today’s environment companies are: 1. Making customer satisfaction an overriding priority 2. Adopting new management approaches

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3. Changing their manufacturing systems 4. Investing in Advanced Manufacturing Technologies (AMTs)  

Above changes are having a significant impact on the Management Accounting System (MAS) Focus on customer satisfaction and new management approaches, the key success factors are: 1. Cost efficiency 2. Quality 3. Time 4. Innovation 5. Feedback on customer satisfaction

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Focus on customer satisfaction and new management approaches 1. Continuous improvement 2. Employee empowerment 3. Social responsibility and corporate ethics

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Management accountings practices can be observed at the macro or micro levels 1. Macro refers to concepts and techniques (contents taught in management accounting text books) 2. Micro refers to the behavioural patterns of use (how management accounting information is used) Tendency towards globalisation at the macro level

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Drivers of converge (converge means putting together) Global competition Information technology (Enterprise Resource Planning Systems) Standardisation by transnational companies. Global consultancy Use of global textbooks At the micro level accounting information may be used in different ways due to influence of different national and local cultures

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Primary functions of cost/management accounting systems 1. Inventory valuation for internal and external profit measurement 2. Provide relevant information to help managers make better decisions 3. Provide information for planning, control and performance measurement A cost object is any activity for which a separate measurement of cost is required (cost or making a product or providing a service) A cost collection system normally accounts for costs in two broad stages : 1. Accumulates cots by classifying them into categories (e.g. labour, materials, and overheads) 2. Assigns costs to cost objectives.

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Traditional cost systems accumulate product costs as follows: Direct materials xxx

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Direct labour Prime cost Manufacturing overhead Total manufacturing cost Non-manufacturing overheads Total cost

xxx xxx xxx xxx xxx xxx

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Product costs are those that are attached to the products and included in the stock (inventory valuation)

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Period costs are not attached to the product and excluded in the inventory valuation.

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Relevant costs (avoidable) and revenues are those future costs and revenues that will be changed by a decision, whereas irrelevant (unavoidable) costs and revenues will not be changed by a decision Sunk costs: are the costs of resources already acquired and are unaffected by the choice between the various alternatives. Opportunity costs: measure the opportunity that is lost or sacrificed when the choice of one course of action requires that an alternative course of action be given up. Incremental costs and revenues are the additional costs/revenues from the production or sale of a group of additional units. Marginal cost/revenue represents the additional cost/ revenue of one additional unit of output. Job costing applies where each unit/batch of output is unique so that the cost of each unit must be calculated separately. Process costing relates to those situations where masses of identical units are produced so that it is unnecessary to assign costs to individual units of output. A database should be maintained, with costs appropriately coded and classified so that relevant information can be extracted to meet each of the above requirements. Direct costs can be specifically and exclusively identified with a given cost object. Indirect costs cannot be specifically and exclusively identified with a given cost object. 1. Indirect costs (overheads=In business, overhead or overhead expense refers to an ongoing expense of operating a business. Overheads are the expenditure which

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cannot be conveniently traced to or identified with any particular cost unit, unlike operating expenses such as raw material and lab) Cost allocations is a process of assigning costs to cost objects using cost drivers. Cost driver is the basis used to allocate cost....