Introduction to

Management Accounting

Atiq ur Rahman
 The Functions of
Management
Planning Acting Controlling

Feedback
Distinguish between financial
accounting and management
accounting.
 Primary Users
Financial Management
Investors Internal managers
Creditors of the business
Government
authorities
(FBR, SECP,
etc.)
 Purpose of Information
Financial Management
• Help investors, • Help managers
creditors, and plan and control
others make business
investment, operations
credit, and
other decisions
Focus and Time Dimension
Financial Management
• Reliability, • Relevance
objectivity, and
focus on the
past
 Type of Report
Financial Management
• Financial • Internal reports
statements not restricted by
restricted by GAAP;
GAAP determined by
cost-benefit
analysis
 Verification
Financial Management
• Annual • No independent
independent audit
audit by CAs
 Scope of Information
Financial Management
• Summary • Detailed reports
reports primarily on parts of the
on the company company
as a whole
 Behavioral Implications
Financial Management
• Concern about • Concern about
adequacy of how reports will
disclosure affect employees
behavior
Service, Merchandising, and
Manufacturing Companies
Service Merchandising
• Provides • resells products
intangible previously bought
services, rather from suppliers
than tangible
products
Service, Merchandising, and
Manufacturing Companies
Manufacturing Company:
• uses labor, plant, and equipment to
convert raw materials into finished
products
• Materials inventory
• Work in process inventory
• Finished goods inventory
Distinguish direct costs
from indirect costs.
Cost Objects, Direct Costs,
and Indirect Costs
• Cost objects are anything for
which a separate measurement
of costs is desired.
• Cost drivers are any factors that
affect cost.
Cost Objects, Direct Costs,
and Indirect Costs
• What are examples of cost objects?
– individual products
– alternative marketing strategies
– geographic segments of the
business
– departments
 Cost Objects, Direct Costs,
and Indirect Costs
• What are direct costs?
• Direct costs are those costs that can
be specifically traced to the cost
object.
• What are indirect costs?
• Indirect costs are costs that cannot be
specifically traced to the cost object.
 Inventoriable Product Costs
Direct Direct Indirect Indirect
Other
Materials Labor Labor Materials

Manufacturing Overhead
 Inventoriable Product Costs
Direct Direct
Materials Labor

Prime Costs = Direct Materials + Direct Labor

 Inventoriable Product Costs
Direct Indirect Indirect
Other
Labor Labor Materials

Conversion Costs = Direct Labor

+ Manufacturing Overhead
 Financial Statements for
Service Companies
• There is no inventory and thus
no inventoriable costs.
• The income statement does not
include cost of goods sold.
Revenues – Expenses = Operating income
 Financial Statements for
Merchandising Companies
BALANCE SHEET INCOME STATEMENT
Inventoriable Sales Revenue
Costs
when deduct
Purchases of sales
occur Cost of
Inventory plus Inventory
Goods Sold
Freight-In
equals Gross Margin
deduct
Period Operating
Costs Expenses
equals Operating Income
 Financial Statements for
Manufacturing Companies
BALANCE SHEET INCOME STATEMENT
Inventoriable
Costs Sales Revenue
when deduct
Materials Finished sales
Inventory occur Cost of
Goods
Goods Sold
Inventory
equals Gross Margin
deduct
Work in
Period Operating
Process Costs Expenses
Inventory equals Operating Income
 The End

Atiq ur Rahman
0300-9335577
siratiq@yahoo.com