Chapter 1

Introduction to Management Accounting

Madam SITI AMIROH MD ISA

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Introduction

• Costing can be considered a modern development because

costing information was used to price goods produced by
factories since in the nineteenth century.
• Management has come to rely more and more on cost
accounting to help them in their work.
• Financial accounting, cost accounting and management
accounting form an integrated accounting system.
• They used the same data but the data are being processed
and analysed to serve different purposes.
Example: Cup cake

Main ingredients:
Flour
Egg
Butter
Sugar
Vanilla Flavors

Strawberry?
Cream?
Financial Accounting

• Financial accounting is an accounting system, which reports

the result and financial position (set of balance sheet and
Comprehensive profit and loss) of the business.
• Although the financial accounts may be the interest of the
management, and to satisfy the information needs of external
users in decision making
• Accounts are prepared to comply with the companies Act, to
satisfy the requirement of the IRB and for presentation to
shareholders
• While, financial accounting will give a general indication to
management on the performance of the business, profit or
loss being the most important indicator.
Cost Accounting
• Costing is defined as the ascertainment (penentuan) of
cost.
• Meaning, costs are ascertained by applying
accounting and costing principles, methods and
techniques.
• Cost maybe ascertained after they are incurred (known
as estimates).
• Cost accounting is concerned with cost accumulation
for inventory evaluation to meet the requirements of
external reporting and internal profit measurements.
• Cost accounting includes different method of preparing
information that will be used for management
accounting as well as that information will be used to
prepare the financial accounts.
Cost Accounting

• It provides data and information to management to carry out

their function (planning, controlling and decision making)
and at the same time it helps to provide data for cost and
stock valuation for financial accounting reports.
• (Example: cost information provided may help management
decide whether to buy the component from outside or to make
the component internally.
Objective of Cost Accounting
• Determining the selling price – CA provides information
regarding the cost to make and sell product or services
• Controlling cost – by using several technique like
standard costing, EOQ and budgetary control
• Providing information for decision making – helps the
management providing information for decision making
(such make or buy)
• Ascertaining costing profit – CA helps by matching the
cost incurred with the revenue for an activity
• Facilitating preparing the financial and other statements
– CA helps to produce statements at short intervals as
the management may require whether daily, weekly or
monthly statements
Importance of Cost Accounting

• Helps to ascertain costs – helps management to ascertain cost

of product, process, job, activity and etc.
• Helps to provide relevant data to the current situation – helps in
measuring how wisely company resources are being utilized.
• Helps in cost reduction – cost will be reduced in long run by
using cost reduction programs (JIT)
• Elimination of wastage – helps to reduce the expenses as in
costing every stages of production will be monitor
• Helps to identify unprofitable activities – will help the
management to identify the unprofitable activities
• Helps in inventory control – regarding to material, work in
progress and finished goods
 Management Accounting

• Management accounting defines as “The application of

professional knowledge and skill in the preparation and
presentation of accounting information in such a way
as to assist management in the formulation of policies
and in the planning and control of operations of the
undertaking” OR

• Management accounting is an accounting system

which provide the management (internal users) with
information to aid managers in carrying out their
functions as regards to the day-to-day operation of
their business.
Cost & Management Accounting vs Financial
Accounting
Cost & Management
Users Internal - Managers of the
business, Employees
Reporting Continuous system of reporting
Nature of Help managers plan and control
Information business operations
Data It records and presents the
estimated/budgeted data(future)
Compliance Not mandatory to produce
report to external parties
Analysis of it provide the details of cost and
costs and profit of each product and
profits process
Purpose Provides information for stock
valuation, decision making,
planning and control
Financial
External - Investors, Creditors,
Government authorities
FS are prepared at the end of
each accounting year
Help investors and creditors
make investment and credit
decisions
It record historical data.
Mandatory for external report
follow Companies Act, GAAP
It shows the profit/loss of an
organization and support by
notes to the account
Provide information on the
financial position
Cost Accounting vs Financial Accounting

• Cost accounting will give a detailed indication of the business

performance by using the information from the financial
accounting system and internal operations.
• While financial accounting is concerned:
Analysis, classification and historical recording of
transaction
Ascertainment of profit or loss of the business
Position of assets and liabilities of the business
 Cost Accounting vs Financial Accounting

Financial accounting statement Cost Accounting statement

A B TOTAL
Sales 50,000 Production Cost
Material 12,000 8,000 20,000
Wages 7,000 3,000 10,000
Less: Production Cost Expenses 3,500 1,500 5,000
22,500 12,500 35,000
Material 20,000

Wages 10,000 Non-Production Cost

Admin expense 2,500 500 3,000
Expenses 5,000
Selling and distribution
1,500 500 2,000
35,000 expense
Total cost 26,500 13,500 40,000

Sales 30,000 20,000 50,000

GROSS PROFIT 15,000
Profit/Loss 3,500 6,500 10,000
Cost Accounting vs Financial Accounting

• From the table, can be said that cost statement reveals

much more information than the financial statement.
Cost are analysed by products and the performance of each
product can be seen.
• Management will then be able to decide what the actions to
take to adjust or improve the performance of the products or
the business.
Advantages of Management Accounting

Identify and manage efficient/inefficient

departments/areas/processes/ methods

Identify
Identify areas of wastage and propose profitable/unprofit
remedial action able product or
services

Analyze the
Generate detailed Facilitate
effects of
comparative production and
alternative
information stock controls
courses of action
Users of Accounting

The users of accounting information can be broadly di

vided into two categories:

External- Internal-
Financial Management
accounting accounting

Bankers,
Internal parties
shareholders,
like manager,
employees,
related
potential
departments
investors

Creditors,
customers,
government CEO, BOD
agencies, loan
provider
Roles of Management Accountants

 assist manager to plan and make decision

activities – by prepare information
 assist manager in monitoring and controlling day to
day operation
 evaluate the competitive performance of the
divisions as well as the business
 motivate the managers and workers to achieve
goals and improve better performance
 assist the managers to utilise the limited resources
of a business in an effective and efficient manner
 Assist management in implementing new policies
Management Accounting and Ethical
Conduct
- Management accounting assists managers to focus on
the profit maximization objective.
- However, firms should pursue the objective of profit
maximization only through legal and ethical practices.
- Good ethical conduct involves doing the right thing or
acting in a just and proper manner to uphold one’s
integrity
- As a rule, cost and management accountants must be
moral and ethical.
- Accountant have a duty to give honest and accurate
information to decision makers.
Management Accounting and Ethical Conduct

There are 4 ethical standards for accountants established by Insti

tute of Management Accountants (IMA):

Integrity- abstain from

Competence- maintain
appropriate level of professional engaging in or supporting any
expertise by continually activity that might discredit the
developing knowledge and skills profession

Confidentiality- refrain from

using confidential information Credibility- communicate
for unethical or illegal information fairly and objectively
advantage