Management Accounting

Management Accounting
• Management accounting is that field of accounting which deals with
providing information including financial accounting information to
managers for their use in planning, decision-making, performance
evaluation, control, management of costs, and cost control.
• Management accounting provides reports to fulfil the needs of
management.
• It is concerned with data collection from internal and external
sources, analysing, processing, interpreting and communicating the
information for use within the organisation so that management can
more effectively plan, make decisions and control operations.
The activities that are part of managerial accounting are as
follows:

1 Explaining manufacturing and nonmanufacturing

costs and how they are reported in the financial
statements.
2 Computing the cost of rendering a service or
manufacturing a product.
3 Determining the behavior of costs and expenses as
activity levels change and analyzing cost-volume-
profit relationships within a company.
The activities that are part of managerial accounting are as
follows:

4 Assisting management in profit planning and

formalizing the plans in the form of budgets.
5 Providing a basis for controlling costs and
expenses by comparing actual results with
planned objectives and standard costs.
6 Accumulating and using relevant data for
management decision making.
Differences Between Financial and
Managerial Accounting
FINANCIAL MANAGERIAL
ACCOUNTING ACCOUNTING
Primary Users of Reports
External users, who are Internal users, who are officers,
stockholders, creditors, and department heads, managers,
regulatory agencies. and supervisors in the
company.
Types and Frequency of Reports
Classified financial statements. Internal reports
Issued quarterly and annually. Issued as frequently as needed.
Purpose of Reports
To provide general-purpose To provide special-purpose
information for all users. information for a particular
user for a specific decision.
Differences Between Financial and
Managerial Accounting
FINANCIAL MANAGERIAL
ACCOUNTING ACCOUNTING
Content of Reports
Pertains to entity as a whole Pertains to subunits of the
and is highly aggregated entity and may be very
(condensed). detailed.
Limited to double-entry May extend beyond double-
accounting system and cost entry accounting system to
data. any type of relevant data.
Reporting standard is generally Reporting standard is relevance
accepted accounting to the decision to be made.
principles.
Verification Process
Annual independent audit by No independent audits.
certified public accountant.
 MANAGEMENT FUNCTIONS AND
MANAGEMENT ACCOUNTING
The management of an organization performs
three broad functions:
• Planning
• Directing and motivating
• Controlling
 Management Functions: Planning
• Planning requires management to
• look ahead, and
• establish objectives.
• These objectives are usually quite diverse, but a key modern
management objective appears to be to add value to the business
under its control.
• Value is usually measured by
• the trading price of the company’s stock and
• the potential selling price of the company.
 Management Functions:
Directing and Motivating
• Directing and motivating involves coordinating diverse
activities and human resources to produce a smooth-
running operation.
• This function relates to the implementation of planned
objectives.
• Most companies prepare organization charts to show
• the interrelationship of activities, and
• the delegation of authority and responsibility within the
company.
 Management Functions: Controlling
• Controlling is the process of keeping the firm’s
activities on track.
• In controlling operations, management
determines
• whether planned goals are being met, and
• what changes are necessary when there are
deviations from targeted objectives
 Managerial Cost Concepts
To perform the three management functions effectively,
management needs information. One very important type
of information is related to costs. For example, questions
such as the following need answering:
• What costs are involved in making the product?
• If production volume is decreased, will costs decrease?
• What impact will automation have on total costs?
• How can costs best be controlled in the organization?
 DIFFERENT COST CONCEPTS AND
CLASSIFICATIONS
• 1. Traditional classification of Costs :
• Direct Material
• Direct Labour
• Direct Expense
• Factory overhead
• Selling and distribution and administrative overheads
 DIFFERENT COST CONCEPTS AND
CLASSIFICATIONS
• 2. Cost behaviour (in relation to changes in
output, activity )
• Fixed Cost
• Variable Cost
• Mixed Cost
 DIFFERENT COST CONCEPTS AND
CLASSIFICATIONS

•3. Degree of traceability to a cost

object, i.e. Product or a job –
•Direct Cost
•Indirect Cost
 DIFFERENT COST CONCEPTS AND
CLASSIFICATIONS

• 4. Timing of charges against sales revenue –

• Product Cost
• Period Cost
 Product Versus Period Costs
All Costs

Product Costs Period Costs

Manufacturing Costs
(Go to Balance Sheet before
Nonmanufacturing Costs
Income Statement) (Go straight to Income Statement)

Direct Materials Prime Selling

Costs
Expenses
Direct Labor
Conversion Administrative
Costs Expenses
Manufacturing
Overhead Illustration 1-4
 Cost of Goods Sold
Components
Merchandising Company
Beginning Ending
Merchandise + Cost of Goods - Merchandise =
Inventory Purchased Inventory

Cost of Goods
Sold
Manufacturing Company
Beginning Ending
Cost of Goods -
Finished Goods + Manufactured
Finished Goods =
Inventory Inventory

Illustration 1-5
 Indicate how cost of goods
manufactured is determined.
 Cost of Goods Manufactured Formula
The total cost of work in process for the year is equal to the sum of:
• the cost of the beginning work in process inventory and
• the total manufacturing costs for the current period.
To find the cost of goods manufactured, we subtract the cost of the ending work in
process inventory from the total cost of work in process.

Beginning Work in Total Current

Total Cost of Work
Process Inventory + Manufacturing Costs = in Process

Ending
Total Cost of Work Cost of Goods
in Process - Work in Process = Manufactured
Inventory

Illustration 1-7
 Cost Concepts: A Review
Assignment of Costs to Cost Categories

Product Costs
Cost Item Direct Direct Manufacturing Period Prime Conversion
Materials Labor Overhead Costs Costs Costs
Material cost ($10 per door) X X
Labor costs ($8 per door) X X X
Depreciation on new equipment
($25,000 per year) X X
Property taxes ($6,000 per year) X X
Advertising costs ($30,000 per
year) X
Sales commissions ($4 per door) X
Maintenance salaries ($28,000 per
year) X X
Salary of plant manager ($70,000) X X
Cost of shipping pre-hung doors
($12 per door) X
 Cost Concepts: A Review
Computation of Manufacturing Cost
Total manufacturing costs are the sum of the product costs –
direct materials, direct labor, and manufacturing overhead
costs. Northridge Company produces 10,000 pre-hung wooden
doors during the first year. The total manufacturing costs are:
Manufacturing
Cost Number and Item Cost

1. Material cost ($10 X 10,000) $ 100,000

2. Labor cost ($8 X 10,000) 80,000
3. Depreciation on new equipment 25,000
4. Property taxes 6,000
7. Maintenance salaries 28,000
8. Salary of plant manager 70,000
Total manufacturing costs $ 309,000
 Contemporary Developments in
Managerial Accounting
• Due to increased global competition from such
countries as Japan and Germany, contemporary
business managers demand different and better
information than they needed just a few years ago.
• The factors on the following slides contribute to the
expanding role of managerial accounting as we look
ahead.
 Contemporary Developments in
Managerial Accounting
• Quality — Many companies have installed a total quality control
(TQC) system to reduce defects in finished products. More emphasis
is now put on nonfinancial measures such as customer satisfaction,
number of service calls, and time to generate reports. Attention to
these measures, which employees can control, leads to increased
profitability. In addition, many companies have begun using just-in-
time inventory methods (JIT), under which goods are manufactured
or purchased just in time for use. This lowers the costs of holding and
storing inventory.
 Contemporary Developments in
Managerial Accounting
• Focus on Activities — In order to obtain more
accurate product costs, many companies are
accounting for overhead costs by the activities
used in making the product. Activities include
purchasing materials, handling raw materials,
and production order scheduling. This
development is called activity based costing
(ABC).
 Contemporary Developments in
Managerial Accounting
• Service Industry Needs — In some respects, the
challenges for managerial accounting are greater in
service enterprises than in manufacturing companies.
In some companies, it may be necessary for the
managerial accountant to develop new systems for
measuring the cost of serving individual customers
and new operating controls to improve the quality
and efficiency of specific services.
 Contemporary Developments in
Managerial Accounting
• A Final Comment — Not long ago, the managerial
accountant was primarily engaged in cost accounting
– collecting and reporting manufacturing costs to
management. Today, the managerial accountant’s
responsibilities extend beyond cost management –
providing managers with data on the efficient use of
company resources in both manufacturing and service
industries.
God Bless You!!