Introduction To

Management Accounting
Lecture 1

Reading: Weetman, Chapter 1

Outline
 Definition & Main Purposes of Accounting;
 Users of Accounting Information;
 Differences between Management
Accounting; Financial Accounting & Cost
Accounting.
 The Decision-making, Planning & Control
Process;
 Functions of Management Accounting; and
 Focus on Customer Satisfaction.
Definition & Main
Purposes of Accounting

 Accounting is concerned with providing both

financial & non-financial
------------------------------------ information that
will help decision-makers to make good decisions.
An understanding of accounting therefore requires
an understanding of the decision making process
and an awareness of the --------- users of accounting
information.
Hence, a definition of accounting
would be as follows:

 “The process of identifying

------------- , measuring &
communicating financial and non-financial
information about an entity to permit informed
judgements and decisions
------------- by users of the
information”.
The Major Purposes of
Accounting

1. Formulating overall strategies & long-run

plans ;
-------
Resource allocations decisions such as
2. ------------
product & customer emphasis & pricing;
3. Cost planning & cost ---------
control of activities;
Performance measurement; and
4. ----------------
legal
5. Meeting external regulatory & ---------
reporting requirements.
Users of Accounting
Information

 Users of accounting information can be

divided in two categories:
1. ----------
Internal parties within the organisation,
mainly ------------
managers ; and
2. ---------- shareholders ,
External parties such as -------------------
creditors and regulatory agencies, outside
the organisation.
Branches of Accounting

 It is possible to distinguish between two branches of

accounting, that reflect the internal & external users of
accounting information.
1. Management accounting is concerned with the
-------------------
provision of information to people within the
organisation to help them make better decisions.
Financial accounting is concerned with the
2. ----------------
provision of information to external parties outside
the organisation.
Differences between Management
Accounting & Financial Accounting:

The major differences between Management

Accounting & Financial Accounting are:

1. Legal requirements;
2. Focus on individual parts or segments of the
business;
3. Generally accepted accounting principles;
4. Time dimension; and
5. Report frequency.
Management Accounting VS
Financial Accounting

1. ---------
Legal requirements:
There is a statutory
------------- requirement for public limited
companies to produce annual financial accounts
regardless of whether or not management regards this
information as useful. Management accounting, by
contrast, is entirely ------------
optional & information should be
produced only if it is considered that the benefits from the
use of the information by management exceed the cost of
collecting it.
Management Accounting VS
Financial Accounting

2. ----------
Focus on Individual parts:
Financial accounting reports describe
whole of the business whereas
the ---------
management accounting focuses on
small parts of the organisation, for
-----------------
example the cost & profitability of
products and departments.
Management Accounting VS
Financial Accounting

3. Generally Accepted Accounting

Principles
---------------:
Financial accounting statements must be prepared to
--------------
conform with the legal requirements & the
generally accepted accounting principles established
by the regulatory bodies. In contrast, management
not required to adhere to
accountants are ------------------
generally accepted accounting principles when
providing managerial information for internal
purposes.
Management Accounting VS
Financial Accounting

4. ---------
Time Dimension:
Financial accounting reports what has
past in an organisation,
happened in the -------
whereas management accounting is
future information as
concerned with ----------
well past information.
Management Accounting VS
Financial Accounting

Frequency :
5. Report ---------------
A detailed set of financial accounts is
annually & less detailed accounts
published --------------
are published semi-annually. Managers
require information quickly if it is to act on it.
Consequently management accounting reports
on various activities may be prepared at
---------
daily , weekly or monthly intervals.
Cost Accounting & Cost
Management
Cost accounting measures & reports financial
 --------
and non-financial information related to the
organisation's acquisition or consumption of
resources. It provides information for both
management accounting & financial accounting.

 A central task of mangers is cost management. Cost

management is used to describe the actions
managers undertake in the short-run & long-run
planning & control of costs.
A Contingency Theory of
Management Accounting

 Management accounting is conditioned by

(----------------------
contingent upon ) the situation.
 Management accounting methods have
developed in a variety of ways depending on
the judgements or decisions required.
 Therefore, different judgements and
decisions lead to ----------------------------
different approaches to
identifying, measuring and accounting data.
Strategic Management
Accounting
 Traditional approach to management
accounting: regard internal decision makers
as ----------------------
inward looking .

 Nowadays techniques: regard the company

managers as -----------------------
outward looking .
Meeting the Needs of
Internal Users:

judgements and
 Managers make different types of ---------------
different types of ------------
decisions .
 They may have to judge the performance of the
various products of the company as compared with
those of competitors.

 They may have to judge the performance of

different divisions within the organization.
General Consideration

 What types of informed judgements

are made by management and about
management?

 What types of decisions are made by

management?
The Decision-making, Planning & Control
Process (Elements of Management Control)

 Because information produced by

management accountants must be judged in
the light of its ultimate effect on the
outcome of decisions, a necessary precedent
to an understanding of management
accounting is an understanding of the
decision-making process as appears in the
following figure.
 objectives
1. Identify -------------

2. Search for ---------------

alternative courses of action

Planning
Process data about alternatives
3. Gather -------

4. Select alternative courses of action

Implement the decisions

5. -----------------

Control
plannedoutcomes
6. Compare actual & ------------
Process

Respond to divergences from plan

7. ---------------
A Comment on the Figure

 The first 5 stages represent the decision-making or the

planning process. Planning involves making choices
alternatives & is primarily a decision-
between -------------------
making activity.

control process,
 The final 2 stages represent the -----------
which is the process of measuring & correcting actual
performance to ensure that the alternatives that are
chosen & the plans for implementing them are carried
out.
Weetman Chapter 1 – Sara Lee Case Study

Case Study:
Weetman Chapter 1 – Sara Lee Case Study
Sara Lee has been operating a small hairdressing
business for several months. She would like to
expand by employing an assistant and by purchasing
new dryers and washing equipment. She cannot
decide whether the investment would be justified.

In the above example, what would constitute

1) Planning activities
2) Decision making activities
3) Control activities
Weetman, 2010 p 19

Slide 22 10/08/2020
Relevant Costs to decision making
Example
Decision making relies on considering only appropriate
costs to the decision.

Pluto, a pet food manufacturing company, is considering

terminating production of one of its products which has
experienced a decline in sales, it is estimated that:
• Direct labour costs could be reduced by 10%
• Raw materials already purchased for the product
cannot be used for any of the other products produced.
• Specialist machinery that is not used in the production
of other products, could be sold for a scrap value of 5%
of the original purchase cost.
Slide 23 10/08/2020
Pluto - product discontinuation
decision
Pet Food product costs and
benefits:
 10% Reduction in direct
labour
 Cost of raw materials
already purchased
 Depreciation cost for
specialist machinery
 Scrap value of specialist
machinery
Relevant to decision:
• 10% Reduction in direct
labour
• Scrap value of specialist
machinery
Irrelevant to decision:
• Cost of raw materials already
purchased
• Depreciation cost for
specialist machinery

Slide 24 10/08/2020
 Pluto - product discontinuation
decision
Only future costs and benefits that are directly relevant to the
decision should be considered
Relevant to the decision

• – This is a
future reduction in cost that is a direct result of taking the
decision to terminate production of the pet food and is
relevant to the decision.

• – This a benefit
derived as a direct result of taking the decision to terminate
production of the pet food and is relevant to the decision.
 
Slide 25 10/08/2020
Pluto - product discontinuation
decision
Irrelevant to the decision

• – The
materials have already been purchased this is an historic
cost, referred to as a sunk cost, that is not affected by the
decision in the future, the cost is irrelevant to the decision.

• – The
depreciation cost relates to the original purchase cost, this
cost is a sunk cost, that is not affected by the decision in the
future and is not relevant to the decision.
Slide 26 10/08/2020
Functions of Management
Accounting

Scorekeeping ;
1. -------------------
Attention Directing ; and
2. -----------------------
3. ---------------------
Problem Solving .
Scorekeeping

 It refers to the accumulation of data &

reporting of reliable results to all
the -------------
levels of management.
 Examples are the recording of sales,
purchases of materials, and payroll
payment.
Attention Directing

 It attempts to make visible both

opportunities & problems on which
focus
managers need to ----------.
 An example is highlighting rapidly growing
markets where the company may be under funding
its investment. Attention directing should focus on
all opportunities to add value to an organisation &
not just on cost reduction opportunities.
Problem Solving

 It refers to the comparative

--------------- analysis
undertaken to identify the best
alternatives in relation to the
organisation’s goals.
 An example is comparing the financial
advantages of leasing a fleet of vehicles
rather than owning those vehicles.
Weetman Chapter 1 – Sara Lee Case Study

Case Study:

Sara Lee has been operating a small hairdressing

business for several months. She would like to
expand by employing an assistant and by purchasing
new dryers and washing equipment. She cannot
decide whether the investment would be justified.

In helping with the planning, decision making and

control activities in the above example, what would
constitute
1) Problem solving
2) Attention directing Weetman, 2010 p 19
3) Scorekeeping
Slide 31 10/08/2020
Focus on Customer
Satisfaction

 In order to compete in today’s competitive

environment companies are having to
customer-driven
become more -------------------------- and
customer satisfaction an overriding
make ----------------------------
priority.
 The following figure illustrates this focus on
customer satisfaction.
 Key success factors
Cost efficiency;Quality
-------------; Continuous
----------------
Time
---------; Innovation improvement

Customer
satisfaction

Total -------
value Employee
chain analysis --------------------
empowerment
A Comment on the Figure

 In order to provide customer satisfaction

organisations must concentrate on those key success
factors that directly affect it. These factors are cost
efficiency, quality, time and innovation.
 In addition to concentrating on these factors
organisations are adopting new management
approaches in their quest to achieve customer
satisfaction.
 These new approaches are continuous improvement,
employee empowerment and total value chain
analysis.
Key Success Factors:
1. Cost Efficiency

 Since customers will buy the

product with the lowest price,
all other things being equal,
keeping costs low and being
cost efficient provides an
organisation with a strong
competitive advantage.
2. High Quality Products &
Services

 Customers are also demanding high quality

products & services. Most companies are
responding to this by focusing Totalon
Quality Management
---------------------------------------- (TQM).
 The goal of TQM is customer satisfaction.
 TQM is a term used to describe a situation
where all business functions are involved in
a process of continuous quality
improvement.
3. Speedy Response to Customer
Requests
 Organisations are also seeking to increase
customer satisfaction by providing a speedier
response to customer requests, ensuring that 100%
on-time delivery and reducing the time taken to
develop and bring new products to market.
 For these reasons management accounting
systems are starting to place emphasis on
-----------------
time-based measures, which are now an
important competitive variable.
4. Innovation

 To be successful companies must develop a steady

stream of innovative new products and services and have
the capability to adapt to changing customer
requirements.
Innovation measures include an assessment of
 ------------------
the key characteristics of new products relative to those
of competitors, feedback on customer satisfaction with
the new features of newly introduced products, and the
number of new products launched and their launch time.
New Management Approaches:
I. Continuous Improvement

 It is an ongoing process that involves a continuous

search to reduce costs, eliminate waste, and improve
the quality and performance of activities that
increase customer satisfaction.
Benchmarking is a technique that is increasingly
 ---------------------
being adopted as a mechanism for achieving
continuous improvement. It is a continuous process
of measuring a firm’s products, services or activities
against the other best performing organisations,
either internal or external to the firm.
II. Employee Empowerment

 By empowering employees and giving them

relevant information they will be able to respond
faster to customers and improve morale.
 Management accounting is therefore moving
from providing information to managers to
monitor the activities of employees to providing
information to employees to empower them to
focus on the continuous improvement of
activities.
Key Terms Introduced

 Management  Customer
Accounting Satisfaction
 Financial Accounting  Key Success Factors
 Cost Accounting  Continuous
 Decision Making, Improvement
Planning & Control  Employee
 Scorekeeping, Attention Empowerment
Directing & Problem
Solving
What next on Topic 1?

Textbook reading
• Weetman, Chapter 1

Test your Understanding

• Complete Pre-Lecture Assignment (online
quiz) PLA1 - worth 0.5 mark
• Have a go at Seminar Questions
• Attend Seminar and participate
• Review the solutions to the Seminar
Questions
Lecture 2: An Introduction for
Cost Terms & Concepts

Reading:
 Weetman, Chapter 2

Main points to be covered:

 Definition of a Cost Object;
 Cost Accumulation & Cost Assignment;
 Classification of Costs:
– Direct & Indirect Costs;
– Product & Period Costs;
– Variable, Fixed, Semi-Variable & Stepped Costs;