Summary Lectures
Accounting | MME | P4
,
,Week 1
Lecture 1: Introduction to management accounting – Cost terms and
concepts
Introduction to management accounting
Business Economics versus Accounting?
Business economics can be described as:
▪ Businesses as the unit of analysis
▪ Also called Managerial Economics or sometimes Applied Microeconomics
▪ Use of methods and techniques, less theory-oriented
▪ Data and information important, especially financial statements
Often practical → economic calculations → determine cost price feasibility investment, financing.
Business economics doesn’t exist without:
▪ Accounting (information systems)
▪ Behavioural sciences such as psychology and sociology
▪ Methodological tools (e.g. econometrics or machine learning)
Accounting: “the process of identifying, measuring and communicating economic information to
permit informed judgements and decisions by users of the information” (American Accounting
Association)
Changing business environment influences information needs
▪ Move from protected markets to highly competitive global markets
▪ Declining product life-cycles
▪ Growth in service industry
▪ Advances in technology
▪ Environmental issues
Users of accounting information
,Purpose of accounting
To identify , measure and communicate economic information to:
Decide Evaluate
Management accounting Financial accounting
In support of: External financial reporting
▪ Planning ▪ Financial report
▪ Control ▪ Fiscal report
▪ (Organization) ▪ (Social report)
▪ (Communication) ▪ (Environmental report)
▪ (Motivation)
Differences between branches and accounting
Financial accounting is
mandatory to the law.
Management accounting
is a decision for the
company to make.
→ Goals of management accounting systems:
▪ Cost allocation for inventory valuation and profit measurement
▪ Relevant information for decision makers / managers
▪ Information for planning, control and performance management
→ Goals of financial accounting systems
▪ Cost allocation for inventory valuation and profit measurement
▪ True fair view on financial position that is uniform
▪ Decision making of external stakeholders
Balance sheet for inventory valuation and profit measurement
,Income statement for inventory valuation and profit measurement
Goals of management accounting: e.g. operating risk
Which production to produce?
Product A will give a higher profit
by producing over 1000 products.
Variable cost are less than product
B.
Goals of management accounting: future revenues?
Short-term decision problem:
You will have fixed costs anyway.
- You can make a deal for
€7 euro at a variable cost of €6.
Better than have nothing.
Long run:
- You won’t agree with the
deal. Doesn’t cover costs.
,Cost measurement for different purposes
Costs: Sacrifices of assets which are unavoidable, measurable and foreseeable.
Cost price: cost per unit output
Data gathering for decision-making:
▪ Long run decisions: integral cost price, but also in relation to strategy
▪ Short run decisions: differential costs or variable costs
The decision making process
Introduction to cost terms and concepts
Cost(s) is a frequently used word
A more precise definition: a monetary measure of the resources sacrificed or forgone to achieve a
specific objective.
Large terminology of adjectives to indicate more clearly what is meant:
Purpose of management accounting:
▪ Profit measurement and inventory valuation
▪ Decision-making
▪ Planning, control of performance
A cost object is any activity for which a separate measurement of cost is required (e.g. a product, a
service, a department).
Cost collection systems accounts for costs in two broad stages:
1. Accumulates costs by classifying them into categories, such as type of expense (labour or
materials) or by cost behaviour (fixed or variable)
2. It then assigns cost to cost objects
Opportunity cost, you’ll never find in the system.
, Direct and indirect costs
▪ Direct costs can be specifically and exclusively identified with a given
cost object (direct labour costs). They are transparent, identifiable with cost objects, and
they will be affected by decision is clearly observable and measurable.
▪ Indirect costs (sometimes ‘overheads’) cannot be specifically and
exclusively identified with a given cost object (insurance).
▪ Indirect costs are assigned to cost objects on the basis of cost
allocations. (planning, administration of labour)
▪ Cost allocation is the process of assigning costs to cost objects where a
direct measure of the resources consumed by these cost objects does not exist
What about cost like: (wooden cabin)
▪ Labour
▪ Nails/screws
▪ Roofing material
▪ Machinery that needs to be replaced after 10 years
▪ Insurances
Non-manufacturing costs:
assurance, planning/administration.
Period and product costs
Valuation of completed unsold
products and partly completed
products or services is a problem for
profit measurement and inventory
valuation.
In merchandising organizations all
costs except of the costs of the
goods purchased are regarded as period costs.
→ EXAMPLE: income measurement – period and product costs
Accounting | MME | P4
,
,Week 1
Lecture 1: Introduction to management accounting – Cost terms and
concepts
Introduction to management accounting
Business Economics versus Accounting?
Business economics can be described as:
▪ Businesses as the unit of analysis
▪ Also called Managerial Economics or sometimes Applied Microeconomics
▪ Use of methods and techniques, less theory-oriented
▪ Data and information important, especially financial statements
Often practical → economic calculations → determine cost price feasibility investment, financing.
Business economics doesn’t exist without:
▪ Accounting (information systems)
▪ Behavioural sciences such as psychology and sociology
▪ Methodological tools (e.g. econometrics or machine learning)
Accounting: “the process of identifying, measuring and communicating economic information to
permit informed judgements and decisions by users of the information” (American Accounting
Association)
Changing business environment influences information needs
▪ Move from protected markets to highly competitive global markets
▪ Declining product life-cycles
▪ Growth in service industry
▪ Advances in technology
▪ Environmental issues
Users of accounting information
,Purpose of accounting
To identify , measure and communicate economic information to:
Decide Evaluate
Management accounting Financial accounting
In support of: External financial reporting
▪ Planning ▪ Financial report
▪ Control ▪ Fiscal report
▪ (Organization) ▪ (Social report)
▪ (Communication) ▪ (Environmental report)
▪ (Motivation)
Differences between branches and accounting
Financial accounting is
mandatory to the law.
Management accounting
is a decision for the
company to make.
→ Goals of management accounting systems:
▪ Cost allocation for inventory valuation and profit measurement
▪ Relevant information for decision makers / managers
▪ Information for planning, control and performance management
→ Goals of financial accounting systems
▪ Cost allocation for inventory valuation and profit measurement
▪ True fair view on financial position that is uniform
▪ Decision making of external stakeholders
Balance sheet for inventory valuation and profit measurement
,Income statement for inventory valuation and profit measurement
Goals of management accounting: e.g. operating risk
Which production to produce?
Product A will give a higher profit
by producing over 1000 products.
Variable cost are less than product
B.
Goals of management accounting: future revenues?
Short-term decision problem:
You will have fixed costs anyway.
- You can make a deal for
€7 euro at a variable cost of €6.
Better than have nothing.
Long run:
- You won’t agree with the
deal. Doesn’t cover costs.
,Cost measurement for different purposes
Costs: Sacrifices of assets which are unavoidable, measurable and foreseeable.
Cost price: cost per unit output
Data gathering for decision-making:
▪ Long run decisions: integral cost price, but also in relation to strategy
▪ Short run decisions: differential costs or variable costs
The decision making process
Introduction to cost terms and concepts
Cost(s) is a frequently used word
A more precise definition: a monetary measure of the resources sacrificed or forgone to achieve a
specific objective.
Large terminology of adjectives to indicate more clearly what is meant:
Purpose of management accounting:
▪ Profit measurement and inventory valuation
▪ Decision-making
▪ Planning, control of performance
A cost object is any activity for which a separate measurement of cost is required (e.g. a product, a
service, a department).
Cost collection systems accounts for costs in two broad stages:
1. Accumulates costs by classifying them into categories, such as type of expense (labour or
materials) or by cost behaviour (fixed or variable)
2. It then assigns cost to cost objects
Opportunity cost, you’ll never find in the system.
, Direct and indirect costs
▪ Direct costs can be specifically and exclusively identified with a given
cost object (direct labour costs). They are transparent, identifiable with cost objects, and
they will be affected by decision is clearly observable and measurable.
▪ Indirect costs (sometimes ‘overheads’) cannot be specifically and
exclusively identified with a given cost object (insurance).
▪ Indirect costs are assigned to cost objects on the basis of cost
allocations. (planning, administration of labour)
▪ Cost allocation is the process of assigning costs to cost objects where a
direct measure of the resources consumed by these cost objects does not exist
What about cost like: (wooden cabin)
▪ Labour
▪ Nails/screws
▪ Roofing material
▪ Machinery that needs to be replaced after 10 years
▪ Insurances
Non-manufacturing costs:
assurance, planning/administration.
Period and product costs
Valuation of completed unsold
products and partly completed
products or services is a problem for
profit measurement and inventory
valuation.
In merchandising organizations all
costs except of the costs of the
goods purchased are regarded as period costs.
→ EXAMPLE: income measurement – period and product costs
