‫المحاسبة االدارية‬

Managerial Accounting

LO1

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1. Define Managerial Accounting?

2. State the objectives of Managerial Accounting.

3. Write difference between Cost Accounting and Managerial Accounting.

4. Write difference between Financial Accounting and Managerial Accounting.

5. Explain Characteristics scope of Managerial Accounting.

6. State four tools and techniques of Managerial Accounting.

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 Syllabus
Fundamental of Managerial Accounting – Meaning, Definition and objectives of
Managerial Accounting. Distinction between Financial and Managerial Accounting.
Distinction between Managerial and Cost Accounting.
Analysis and Interpretation of Financial Statements-I – Analysis of Financial
Statements, Form of Income Statement & Balance Sheet and persons interested in
Financial Statements; Comparative Financial Statements, Common Size Statement.
Ratio Analysis- Meaning of ratio, importance of ratio analysis, classification of ratios
and calculation of various ratios, Du Pont Analysis.
Cost Volume Profit Analysis-I Cost Drivers, Variable & Fixed Cost Behaviour,
Difficulties in classifying Costs.
Cost Volume Profit Analysis-II Cost Volume Profit Analysis, Break Even Point,
Margin of Safety.

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 What is Managerial Accounting?

• It is the process of identifying, measuring, accumulating, analyzing, preparing, interpreting, and

communicating information that managers use to fulfill organizational objectives.

• The branch of accounting that produces information for managers within an organization is

termed as Managerial Accounting.

• The term Managerial accounting refers to accounting for the management, i.e., accounting which

provides necessary information to the management for discharging its functions. The functions of

the management are planning, organizing, directing and controlling.

• Thus, Managerial accounting provides information to management so that planning, organizing,

directing and controlling g of business operation can be done in an orderly manner.

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 Definition of Managerial Accounting

 The Institute of Chartered Accountants of England and Wales:

“Managerial Accounting is any form of accounting which enables a
business to be conducted more efficiently can be regarded as Managerial
Accounting.”
 According to Robert Anthony: Managerial Accounting is concerned with
accounting information which is useful for management.
 The Anglo-American Council : “Managerial Accounting is the presentation
of accounting information in such away as to assist management in the
creation of policy and in the day –to –day operations of an undertaking.”

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 Characteristics of Managerial
Accounting
• Selective Nature
• It does not Provide Decision
• It is concern with Future
• Managerial Accounting Studies causes & effects
• Not bounded by the sets of rules of financial accounting
• Concerned with the Problem of Choice
• Nature of various elements of costs
• It modifies, analyses and interprets data.
Managers need accounts for:

Planning
Planning Directing
Directing
and
and
Motivating
Motivating

Controlling
Controlling
 Planning

Identify
Identify
alternatives.
alternatives.

Select
Select alternative
alternative that
that
does
does
the
the best
best job
job of
of furthering
furthering
organization’s
organization’s objectives.
objectives.

Develop
Develop budgets
budgets to
to guide
guide
progress
progress toward
toward the
the
selected
selected alternative.
alternative.
 Directing and Motivating

Directing and motivating involves managing day-

to-day activities to keep the organization running
smoothly.
■ Employee work assignments.
■ Routine problem solving.
■ Conflict resolution.
■ Effective communications.
Controlling

The
The control
control function
function ensures
ensures
that
that plans
plans are
are being
being followed.
followed.

Feedback
Feedback inin the
the form
form ofof performance
performance reports
reports
that
that compare
compare actual
actual results
results with
with the
the budget
budget
are
are an
an essential
essential part
part of
of the
the control
control function.
function.
 Planning and Control Cycle

Formulating
Formulatinglong-
long-
and
andshort-term
short-termplans
plans
(Planning)
(Planning)

Comparing
Comparingactual
actual Implementing
Implementing
to
toplanned
planned Decision plans
performance plans(Directing
(Directing
performance Making and
(Controlling) andMotivating)
Motivating)
(Controlling)

Measuring
Measuring
performance
performance
(Controlling)
(Controlling)
Definition of Management Accounting:

Management accounting is the process of

measuring and reporting information about
economic activity within organizations, for use
by managers in planning, performance
evaluation, and operational control.
- Planning: For example, deciding what products to make, and
where and when to make them. Determining the materials, labor,
and other resources that are needed to achieve desired output. In
not-for-profit organizations, deciding which programs to fund.

- Performance evaluation: Evaluating the profitability of individual

products and product lines. Determining the relative contribution of
different managers and different parts of the organization. In not-for-
profit organizations, evaluating the effectiveness of managers,
departments and programs.

- Operational control: For example, knowing how much work-in-

process is on the factory floor, and at what stages of completion, to
assist the line manager in identifying bottlenecks and maintaining a
smooth flow of production.
 Objectives of Managerial
Accounting
•To help in Planning
• To help in Organizing
• To help in Controlling
• To help in communicating
• To help in decision making
• To help in coordination
• To help in solving business problems
• To help in motivating employees
• To help in interpreting financial information

Managerial accounting is thus helpful to the management in every field of activity. This is the reason why
management accountant is considered not only a service arm to management but also a part of management.
 
 Tools and Techniques of Managerial
Accounting
• Financial Planning

• Analysis of Financial Statements

• Historical Cost Accounting

• Standard Costing

• Marginal Costing

• Fund Flow Statements

• Budgetary Control

• Decision Making Accounting

• Statistical Techniques
Limitation of Managerial
Accounting
• Based on Traditional Accounting
• Knowledge of other related subjects
• Continuity and Participation
• It does not provides decision
• It is not an alternative of management
• Evolutionary stage
• Human Opinion
• Broad based scope
• Costly installation
• Lack of Coordination in operation
User of Information
Financial Information Management Information

 Investors  Managers
 Creditors  Owner
 Bankers  Employees etc
 Government authorities
Purpose: Purpose:
Help investors, creditors, and Help managers plan
others make investment, and control business
credit, and other decisions operations
 Distinction between Financial
Accounting and Managerial
Accounting
Financial Accounting:
It is systematic knowledge and the art of recording business transaction in the books
of business. It is a basic accounting which helps the persons to know financial
position of business concern.

Managerial Accounting:
It is the process of identifying, measuring, accumulating, analyzing, preparing,
interpreting, and communicating information that managers use to fulfill organizational
objectives
Differences between Financial Accounting and Managerial Accounting
Base Financial Accounting
Concept Financial accounting is the art of recording,
classifying and summarizing in a significant
manner and in terms of money transactions
The main object of financial accounting is to
prepare periodical reports to outsiders.
Functions The functions of financial accounting are to record
and collect financial data. It summarizes the
data in the form of accounts.
Address Financial accounting is generally addressed as
Traditional Accounting or General Accounting
Nature Financial Accounting is of historical nature. It
records only those transactions which have
taken place in the past.
Subject Financial accounting is concerned with assessing
Matter the result of business as a whole. It shows over
all performance in form of profit through profit
and loss a/c.
Managerial Accounting
Managerial Accounting is concerned
with accounting information which
is useful to management
The main objective of Managerial
Accounting is to help internal
management in solving various
problems and decision making.
Managerial accounting picks up
significant data out of collected data
and presents them for the use of
management.
Managerial Accounting is generally
called Accounting for Manager,
Managerial Accounting, Decision
Making accounting.
Managerial Accounting stresses the
future.
Under this system of Managerial
accounting, different units,
departments are taken for
assessment. In other work, it deals
with vital activities.
Cont…..
 Differences between Financial Accounting and Managerial Accounting
Base Financial Accounting
Accounting Principles Financial accounting is done according to
certain accounting principles and
double entry system.
User of Information External and external user both
Prescribed Format Must follow the GAAP and prescribed
format
Legal Compulsion Financial accounting has more or less
become compulsory for every business
on account of the legal provisions of
one or the other Act
Scope Financial Accounting is limited to the
preparation of accounts for use of
external parties. Public is the main
objective financial accounting
Managerial Accounting
No principles and double entry system is
followed in managerial accounting. It
emphasis on analysis and
interpretation.
Internal user only
Need not follow GAAP and prescribed
format.
a business is free to install, or not to install,
a system of Managerial accounting
Managerial accounting is very wide. It
includes Financial accounting, cost
accounting, statistics etc. It designed
for internal users.
Comparison of Financial and
Managerial Accounting
 Management Financial
Accounting Accounting

Process of identifying, Develops

measuring, information for
accumulating, external decision
analyzing, preparing, makers:
interpreting, and
communicating Stockholders,
information used by: Suppliers,

Managers Banks, Government

Authorities
 Difference Between Cost Accounting and Financial Accounting
Base Cost Accounting Managerial Accounting

Meaning Cost Accounting is a process of Managerial accounting is one which enables

ascertaining the cost management in doing its functions efficiently.

Objects Managerial accounting is aims at representation of

The primary object of Cost accounting is
cost data or accounting information for
to determine the records, cost of products management use.
and services.

Scope The scope of Cost accounting is not wide, Managerial accounting has wider scope. It includes
it is apart of Managerial accounting Financial accounting, Cost accounting an
statistics etc.

Principles Under this system of cost accounting No principles is followed under the system of
certain principles are followed. managerial accounting.

Parties Both parties, internal and external have Managerial accounting is specially designed for
interested in costing management or internal use.

Principles Cost accountancy have some established it is not so in the case of the management
and formats and set accounting principles and formats accounting
 Home Assignment

1. What is Managerial Accounting ? State its objectives of Managerial Accounting.

Hint:
• Introduction
• Meaning of Managerial Accounting
• Definitions of Managerial Accounting
• Objectives of Managerial Accounting
• Conclusion.

2. Difference between “Managerial Accounting” and “Financial Accounting”.

Hint:
• Introduction
• Definitions of Managerial Accounting
• Definitions of Financial Accounting
• Differences of Managerial And Financial Accounting.
• Conclusion.

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PURPOSES OF MANAGEMENT ACCOUNTING
CONTEMPORARY MANAGEMENT
ACCOUNTING INFORMATION SYSTEMS

 Increased accuracy in assigning and determining

costs
 Much greater emphasis on tracking nonfinancial
data and highlighting its relationship to financial
results
 Explicitly attempts to measure changes in
performance (improvement) over time
 More attuned to providing information for
employee empowerment
 Cost Concept
Costs are different from expenses.

Costs are resources sacrificed to achieve an objective.

Expenses are the costs charged against revenue in a particular

accounting period.

Hence, “cost” is an economic concept, while “expense” is a term

that falls within the domain of accounting.
 Difference between cost and expenditure
Let's say your company is in the catering business and will
cater its biggest event this evening. In the morning your
company purchased about 125% of the paper goods that you
believe will be used at the event. (You purchased the
additional 25% for future events and also to ensure you don't
run out of these items at this evening's event.) The paper
goods that were purchased had a cost of £500, and only £400
of the paper items were used at today's event. The remaining
£100 were put in your company's storeroom for use at the
events to be catered in the next few weeks. In this example,
the cost of £500 consisted of a £400 expense and a £100
asset.
 Difference between cost and expenditure
Accountants use the term expense to mean a cost that has being used
up while a company is doing its main revenue-generating activities.
(That's why only £400 of the cost of supplies was expensed in our
example.)

A cost may or may not be an expense. As we had seen above, £400 of

the cost was an expense and £100 of the cost was an asset.

Here is a more extreme example: If a company purchases land to be

used in its business, the cost of the land will be reported an asset and will
never become an expense. (The reason is that land will never be used up
and therefore never depreciated.) The land's entire cost will continue to
be reported on the balance sheet as the asset Land as long as the
company owns the land.
Manufacturing Costs

Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labour
Labour Overhead
Overhead

The Product
 Direct Materials

Raw materials that become an integral part of

the product and that can be conveniently traced
directly to it.

Example:
Example: A
A radio
radio installed
installed in
in aa car
car
 Manufacturing Overhead

Manufacturing costs that cannot be traced

directly to specific units produced.
Examples:
Examples: Indirect
Indirect materials
materials and
and indirect
indirect labour
labour

Materials used to support Wages paid to employees

the production process.
Examples: Lubricants and
cleaning supplies used in the
car assembly plant.
who are not directly
involved in production
work.
Examples: Maintenance
workers and security guards.
Classifications of Nonmanufacturing Costs

Administrative
Selling Costs
Costs

Costs necessary to get All executive,

the order and deliver organizational, and
the product. clerical costs.
 Distinguish between
product costs and period
costs and give examples
of each.
Product Costs Versus Period Costs

Product costs include Period costs are not

direct materials, direct included in product
labour, and costs. They are
manufacturing expensed on the
overhead. income statement.
Cost of
Inventory Goods Sold Expense

Sale

Balance Income Income

Sheet Statement Statement
Quick Check ✓

Which of the following costs would be

considered a period rather than a product cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
Quick Check ✓

Which of the following costs would be

considered a period rather than a product cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
Cost Classifications for Predicting Cost
Behaviour
How
How aa cost
cost will
will react
react to
to
changes
changes in
in the
the level
level of
of
business
business activity.
activity.
❖ Total
❖ Total variable
variable costs
costs
change
change when
when activity
activity
changes.
changes.
❖ Total
❖ Total fixed
fixed costs
costs remain
remain
unchanged
unchanged whenwhen activity
activity
changes.
changes.
Total Variable Cost

Your total telephone bill is based on how

many minutes you talk.
Telephone Bill
Total

Minutes Talked
 Variable Cost Per Unit

The cost per minute talked is constant. For

example, 10p per minute.

Telephone Charge
Per Minute

Minutes Talked
 Fixed Cost Per Unit

The average fixed cost per call decreases as

more local calls are made.

Monthly Basic Telephone

Bill
Number of Local Calls
Cost Classifications for Predicting Cost
Behavior
Quick Check ✓

Which of the following costs would be variable

with respect to the number of cones sold at an
ice cream shop? (There may be more than
one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
Quick Check ✓

Which of the following costs would be variable

with respect to the number of cones sold at an
ice cream? (There may be more than one
correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
 Assigning Costs to Cost Objects

Direct costs Indirect costs

■ Costs that can be ■ Costs that cannot be
easily and conveniently easily and conveniently
traced to a unit of traced to a unit of
product or other cost product or other cost
object. object.
■ Examples: Direct ■ Example: Manufacturing
material and direct overhead
labour
Define and give examples of
cost classifications used in
making decisions: differential
costs, opportunity costs, and
sunk costs.
 Cost Classifications for Decision Making

Every decision involves a choice

between at least two alternatives.
Only those costs and
benefits that differ
between alternatives
are relevant to the
decision. All other
costs and benefits can
and should be ignored.
 Differential Costs and Revenues

Costs and revenues that differ

among alternatives.
Example: You have a job paying K1,500 per week in
your Limbe. You have a job offer in Blantyre that
pays K2,000 per week. The commuting cost to the
Blantyre is K300 per month.

Differential revenue is: Differential cost is:

K2,000 – K1,500 = K500 K300

Net Differential Benefit is:

K200
 Opportunity Costs

The potential benefit that is given up

when one alternative is selected
over another.
Example: If you were
not attending college,
you could be earning
K25,000 per year.
Your opportunity cost
of attending college for
one year is K25,000.
Sunk Costs

Sunk costs cannot be changed by

any decision. They are not
differential costs and should be
ignored when making decisions.
Example: You bought a car that cost £1,000
two years ago. The £1,000 cost is sunk
because whether you drive it, park it, trade it, or
sell it, you cannot change the £1,000 cost.
Quick Check ✓
Suppose you are trying to decide whether to
drive or take a minibus to attend a conference
in Mangochi. You have ample cash to do
either, but you don’t want to waste money
needlessly. Is the cost of the bus ticket
relevant in this decision? In other words,
should the cost of the bus ticket affect the
decision of whether you drive or take the
minibus to Mangochi?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the bus ticket is not
relevant.
Quick Check ✓
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you don’t want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not
relevant.
Quick Check ✓

Suppose you are trying to decide whether to

drive or take the minibus to attend a
conference. You have ample cash to do
either, but you don’t want to waste money
needlessly. Is the annual cost of licensing your
car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
Quick Check ✓

Suppose you are trying to decide whether to

drive or take the train to Portland to attend a
concert. You have ample cash to do either,
but you don’t want to waste money
needlessly. Is the annual cost of licensing your
car relevant in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.
Quick Check ✓

Suppose that your car could be sold now for

£5000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
Quick Check ✓

Suppose that your car could be sold now for

£5000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.
Cost Accounting Systems
Definition: A cost accounting system (also called product costing
system or costing system) is a framework used by firms to
estimate the cost of their products for profitability analysis,
inventory valuation and cost control.
There are two main cost accounting systems:
•Job Order Costing
•Process Costing
In a cost accounting system, cost allocation is carried out based on
either traditional costing system or activity-based costing system.
Inventory Management
Systems
What is Inventory?
•Inventory (stock) represents a business’s stocked goods or materials,
and as such, the terms stock and inventory are often used
interchangeably. Inventory can be viewed as either used up to do a job,
inputs in a production process or products sold to customers.
What is an Inventory Management System?
•An inventory management system combines the use of desktop
software, barcode scanners, barcode printers, and mobile devices to
streamline the management of inventory (e.g. goods, consumables,
supplies, stock, etc.).
Inventory Management
Systems (cont’d)
How Inventory Control Works
•At its core, inventory control works by tracking two main
functions of your stock room or warehouse —receiving (incoming)
and shipping (outgoing). The goal of inventory control is to
accurately know current inventory levels and automatically
minimize understock and overstock situations. By efficiently
tracking quantities across stocking locations you’ll have insight
and be able to make smarter inventory decisions.
 Inventory Management
Systems
Popular (cont’d)
functions of an Inventory Management System:

• Create Purchase Orders

• Receive, relocate, adjust and dispose of inventory
• Create sales orders
• Pick, Pak and ship
• Physical inventory counts and cycle counts
• Create, run, schedule and share reports
• Print barcode labels

Benefits of an Inventory Management System:

• Improves a company’s bottom line

• Improves inventory accuracy
• Improve Company Workflow
 Job Costing System
What is a Job Costing System?
A job costing system involves the process of accumulating information about the
costs associated with a specific production or service job. This information may be
required in order to submit the cost information to a customer under a contract
where costs are reimbursed.

A job costing system needs to accumulate the following three types of information:
• Direct Materials
• Direct Labor
• Overhead costs

In practice, a job costing system may have to be tailored to the requirements of the
customer. Some customers only allow certain costs to be charged to their jobs.
 Price Optimising System
Price Optimization Systems are mathematical programs that calculate how demand varies
at different price levels, then combine that data with information on costs and inventory
levels to recommend prices that will improve profits.

How Price Optimising Systems work

A Price Optimization System should factor in three critical pricing elements:
1. Pricing strategy,
2. The value of the product to both buyer and seller, and
3. Tactics that manage all elements impacting profitability
Why do companies use Price
Optimization Systems

 Price Optimization Systems help businesses determine:

1. Initial pricing,

2. Promotional pricing, and

3. Markdown (or discount) pricing

Conclusion

 The right Management Accounting system is just as important

as selecting the right manager for any company.
 As the system is hoped to provide management with the most
accurate and reliable information, Managers have to ensure
that the right system for their business model is selected for
implementation.