INTRODUCTION TO MANAGEMENT ACCOUNTING

ACC 320
2ND SEMESTER, 2019/2020

LECTURER
SOLABOMI O. AJIBOLADE
PhD, FIMLS, FCA, FCTI, FCFIP, CFAN
ASSOCIATE PROFESSOR,
DEPARTMENT OF ACCOUNTING,
FACULTY OF MANAGEMENT SCIENCES
UNIVERSITY OF LAGOS
 INTRODUCTION
 At earlier accounting courses you must have identified what
accounting is all about i.e
 identifying, collecting, recording, analysing financial
transactions and reporting the information to users to enable
them make informed economic decisions.
 That there are two major branches of accounting which are
financial accounting and cost accounting.
 Related to these two are other branches which include
management accounting, auditing, forensic accounting,
taxation etc
OBJECTIVES OF THIS LECTURE
 To help develop a basic understanding of
Management accounting
The distinction between Financial Accounting, Cost
and Management Accounting
The role of management accounting in organisations
The scope of management accounting
Cost concepts, Cost classifications and their uses in
Management Accounting
The Techniques used in management accounting
 1. MANAGEMENT - MEANING
In order to understand management accounting, we need to understand the two terms that make up the
concept i.e management and accounting
MANAGEMENT - Several definitions have been advanced for the term management by different
scholars, including the following:
Henry Fayol – To manage is “to forecast and plan, to organise, to command, to coordinate and to
control.”
George R. Terry - “Management is a distinct process consisting of planning, organising, actuating and
controlling performance to determine and accomplish the objectives by the use of people and
resources” –
Mary Parker Follet -  Management is getting things done through people
Stanley Vane - “Management is simply the process of decision making and control over the actions of
human beings for the express purpose of attaining predetermined goals.”
Harold Koontz - “Management is the art of getting things done through and with people in formally
organized groups”.
1. MANAGEMENT - MEANING
 From these various definitions, we can deduce
 that management is a process of co-coordinating the efforts of
people and other resources towards attaining organizational
objectives.
 That It is a process consisting of functions variously viewed
as including planning, organising, directing, leading, staffing,
decision making, performance measurement and controlling
business (or organisation’s) operations
 Although, management is primarily linked with business , it is
essential for both business and non- business organisations
such as government and non-governmental organisations.
MANAGEMENT - MEANING
 These functions of management all require
information in order to effectively perform them.
 Information needed would include quantitave
information and non quantitative information
(financial and non-financial)
 Management accounting is concerned with providing
such information.
ACCOUNTING - MEANING
 ACCOUNTING - Accounting has been defined by the A.A.A. (1966) as the process of identifying, measuring
and communicating economic information to permit informed judgements and decisions by users of the
information
 Two major branches of accounting are usually identified which are financial accounting and cost accounting
 While financial accounting is focused on provision of accounting information to external users cost accounting
is focused on provision of financial information to internal users although information from the cost
accounting system is also used for external reporting.
 Cost accounting is thus an information system for use by management.
 Cost accounting is defined as follows
 Omolehinwa (2019) : Cost accounting is the process of collecting, summarising, analysing and reporting in
monetary terms, tailor-made information to management in order to assist it in its internal managerial
functions of planning organising coordinating, controlling and decision making.
 Essentially, cost accounting aims at recording, classifying, analyzing and allocating or distributing expenditure
for the determination of product, job, activity or service cost.
MANAGEMENT ACCOUNTING - MEANING
 However, Management needs more than financial information to effectively
operate. Information needed would include financial information and non
financial information
 Management accounting is concerned with providing such information
 DEFINITIONS OF MANAGEMENT ACCOUNTING:
 CIMA – Management accounting is an integral part of management
concerned with identifying, presenting and interpreting information used for
Formulating strategy, Planning and controlling activities, Decision making,
Optimising the use of resources, making Disclosure to shareholders and external
parties to the entity and the employees and Safeguarding assets
 Sizer (1996) - The application of professional skills 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 the operations of the undertaking
MANAGEMENT ACCOUNTING - MEANING
 DEFINITIONS OF MANAGEMENT ACCOUNTING
 National Accounting Association, USA - Management accounting is
the process of identification, preparation, interpretation and
communication of financial information used by management to plan,
evaluate and control within an organisation and to ensure appropriate
use of and accountability for its resources
 In simple terms, management accounting is the process of providing
financial and nonfinancial information to management for planning,
directing, controlling and decision making.
DEFINITIONS OF MANAGEMENT ACCOUNTING
 For the reason that both cost accounting and management accounting
serve the information needs of management they are often viewed as
one and the same system often referred to as Cost and Management
Accounting system
 However, Cost accounting is a subset of Management accounting and
indeed an organisation can have only a cost accounting system without
developing a management accounting system.
DIFFERENCES BETWEEN FINANCIAL ACCOUNTING, COST
ACCOUNTING AND MANAGEMENT ACCOUNTING
Cost/
Financial
Managementacc
accounting
ounting

- Users of reports: external users e.g

- Users of reports: management in all functions
shareholders, govt.
and at all levels
- for performance reporting
- for planning control and decision making
- Emphasis on historical data
- Emphasis on generating information about the
- Emphasis on objectivity and verifyability
future
- Emphasis on precision
- Emphasis on relevance
- Emphasis on summary data concerning
- Allows approximations and estimations and
organisation as a whole
emphasis is on timeliness
- Subject to accounting conventions, principles
- Emphasis on detailed segment reporting
and standards
- Not subject to conventions/standards
- Form dictated by law
- Form not dictated by law/standards
- Mandatorily required
- Not mandatorily required
- Reports prepared at specified periods usually
- Reports prepared when needed daily, weekly,
annually, mid-year, quarterly
quarterly
DIFFERENCES BETWEEN COST ACCOUNTING AND
MANAGEMENT ACCOUNTING
Cost accounting
- Use – assists managers to ascertain costs ,
reduce and control costs, make decisions e.g
pricing
- gathering and analysing financial (or
quantitative) information
- Emphasis on determination of segments profit
or losses
- Makes use of much of historical data from the
financial accounting system
- It is a subset of management accounting
- Narrower in scope and focuses on a shorter
range
- Has its own rules and norms and not
dependent of MA
Managementacc
ounting
- Use : assists managers to formulate goals,
policies and strategies and make decisions
- Gathering and analysing financial and non
financial information
- Emphasis on evaluating and monitoring
managerial performance
- Makes much use of future information,
externally generated
- Depends on cost accounting information
- Wider in scope and provides short and long
range views
- Dependent on both cost and sometimes
financial accounting norms
THE ROLE OF MANAGEMENT ACCOUNTING IN
ORGANISATIONS
 Management accounting plays a vital role in the basic management functions.
 Management accounting provides management with information that would generally ensure
efficient running of the business
 Such information is used for the following specific activities:
 Assessing current position of the entity and its different segments
 Formulating objectives towards which business activities are geared
 Generating Possible alternative strategies and courses of action that will lead to attainment of
objectives
 Selecting the best among alternative courses of action
 Budgeting resources for activities and setting targets of performance
 Implementing decisions
 Measuring outcomes and generating performance reports on cost levels, margins and profitability
 Comparing actual outcomes with planned outcomes
 Communicating information to responsible authorities for corrective actions necessary to ensure
attainment of objectives
The scope of management accounting
Management accounting involves the generation and communication of
various kinds of reports for use mainly by management for the smooth
running of the business and also by other non-management users
including regulatory authorities, tax authorities and even shareholders.
Some of the reports focus on how well the managers and their different
units have performed
Some focus on providing frequent updates on key indicators such as
capacity utilisation, order backlogs
Analytical reports investigating specific problems e.g declining
profitabilty, declining productivity, increasing customer returns etc
Analytical reports of possible business opportunities
THE TECHNIQUES USED IN MANAGEMENT ACCOUNTING

 Techniques used in management accounting vary depending on the purpose

which the information is intended to serve. It combines accounting techniques
with appropriate techniques from other disciplines including statistics,
operations research and economics.
 Traditional techniques include:
 For planning - budgeting, marginal costing and cvp analysis, capital budgeting
 For control- budgetary control, standard costing, absorption or full costing, ratio
analysis
 For decision making – marginal costing and relevant costs, probability- based
techniques, linear programming
 Contemporary techniques include
 Strategic management accounting – life cycle costing, target costing, activity
based cost management, performance management systems e.g balanced
scorecard.
 Cost concepts, Cost classifications and their uses in
Management Accounting
 As earlier discussed, management accounting focuses on the provision of information
to management, much of this information is derived from the cost accounting system
which focuses on costs. As a result cost is used in many different ways in management
accounting. There is therefore need to be conversant with the different cost concepts
and their classfications
 Cost concepts
 Cost: May be defined as the monetary value of resources sacrificed in order to derive
some form of benefit from taking a given course of action. It may be simply described
as the amount of expenditure incurred on, or attributable to a given thing
 Cost Unit: A unit of output —product, time or service to which cost may be attributed
e.g. a ton of cement, a barrel of oil, cars, teaching hours, tables, a job or contract.
 Cost Centre: A location, person or item to which costs may be accumulated. E.g.
a department, a sales person, a machine. A cost centre may be (i) a service cost centre
that carries out activities which only support production or (ii) a production cost centre
which is responsible for the actual production activities. 
Cost concepts, Cost classifications and their uses in Management Accounting

 Cost Attribution: Cost attribution is the process of linking costs to particular objectives. It is
necessary for score keeping functions, which in turn allow the functions of attention directing and
problem solving.
 Cost Estimation: Is the process of establishing future cost levels. Since decisions and plans relate
to the future, it is not possible for management accounting to provide useful information in support
of planning, control and decision making without a significant element of cost estimation.
 Cost attribution and cost estimation are crucial procedures in the process of providing meaningful
information to management. They are made possible by the means of cost classification.
 Cost classification
 This is the process of grouping together costs which share the same attributes relative to a stated
cost objective. E.g selling price determination, performance reporting, stock valuation, budgetary
planning and control
 Cost concepts, Cost classifications and their uses in
Management Accounting
 Costs are classified in many ways including the following
 1. Classification by behaviour
 2. Classification by elements
 3. Classification by traceability
 4. Classification by relevance
 Classification by Behaviour: This is an essential to cost estimation/prediction. It
forms the basis for the marginal costing technique. Costs are classified according to
their response to changes in the activity levels.
  The following classes may be identified:
 (a) Fixed cost (b) variable cost (c) Semi variable cost
 Cost concepts, Cost classifications and their uses in
Management Accounting
 Fixed Cost: This is a cost which does not change with changes in activity level
(within a range of activity levels). They remain fixed in total but vary per unit.
 Fixed cost may however change when the relevant range of activity level is
exceeded. We might then have a stepped fixed cost
 Variable Cost: A cost which changes in direct proportion to changes in the level of
activity. Variable cost per unit is assumed to be constant.
 Semi Variable Cost: Costs which display both fixed and variable characteristics.
 The problems associated with this type of classification include the simple
assumption that the variable cost is linear. But variable cost may vary in a nonlinear
fashion or may change in a series of steps. This may be as a result of quantity
discounts, learning effect, etc. Furthermore, fixed costs may not remain fixed
beyond a limit of activity level.
 Cost concepts, Cost classifications and their uses in
Management Accounting
 Classification by Element
 The following major elements of costs may be identified; direct material costs, direct labour costs, direct
expenses and overheads.
 Direct materials costs: Refer to all costs of materials that form an integral part of the finished product
and which can be economically traced to the product. They include the purchase cost and transportation
cost.
 Direct Labour Costs: These are cost incurred in employing labour for work directly related to conversion
of materials into finished goods. They are directly traceable to a job or process.
 Overheads: These are costs incurred which are not directly traceable to a single cost objective. They may
be classified into production, administrative, research and development and selling/distribution overheads.
They include all indirect material, labour and expenses.
 The overheads are normally charged to cost units using a fair basis in order to ascertain the full cost of a
cost unit. The process of charging overheads to cost unit is known as Absorption and this forms the basis
of the Absorption costing technique.
 Cost concepts, Cost classifications and their uses in
Management Accounting
 Elements of costs may also be combined to give different cost concepts such as the
following:
 Manufacturing cost (Production Cost): This will depend on the costing
technique, which is in use. Where absorption costing technique which is normally
used for profit reporting is used, it will consist of Direct material cost, Direct labour
cost and production overheads.
 Non manufacturing costs: These include selling and distribution overheads and
administration overhead.
 Prime Cost: This is the sum of direct material cost and direct labour cost.
 Conversion Cost: This is the sum of Direct Labour cost and production overheads.
 Cost concepts, Cost classifications and their uses in
Management Accounting
  Classification by Traceability
 Costs may be classified according to the convenience of their being
identified with a particular cost centre or cost unit. Under this
classification, cost may be classified into direct and indirect cost. 
 Direct costs are those which are directly attributable to a single cost
objective. Direct materiel and Directlabour costs, Direct expenses are
Direct costs also known as Prime Costs.
 Indirect costs are those costs which are not directly traceable to a single
cost objective. They are incurred for the benefit of a number of cost
centres/units. They are also called overheads.
  
Cost concepts, Cost classifications and their uses in
Management Accounting
 Classification by Relevance: This classification is important for
decision making purpose. 
 A cost is relevant if it makes a difference between alternative decisions
and must be incurred if a particular action is to be taken.
 A cost is irrelevant if it has been incurred and it does not affect the
decision at hand (or it does not make a difference between alternative
courses of action as it will still be incurred whatever action is taken)