Table of Contents
Chapter 1: The Manager and Management Accounting 3
Strategic Decisions and Management Accounting 5
Accounting Systems and Management Controls 6
The Major Purposes of Accounting Systems 6
Planning and Control 6
Value Creation 7
Digitalisation 8
Chapter 2: An Introduction to Cost Terms and Purposes 9
Costs in General 9
Cost Objects 9
Direct & Indirect Costs 10
Cost Tracing and Cost Allocation 10
Cost Drivers and Cost Management 10
Cost Behavior Patterns: Variable & Fixed Costs 11
Financial Statements, Business Sectors, and the Recognition of Costs 12
Classification of Costs 13
Chapter 3: Job Costing 14
Building Block Concept of Costing Systems 14
Job-Costing and Process-Costing Systems 14
Job Costing in Service Organizations using Actual Costing 15
Normal Costing 16
Explanations of Transactions 17
Chapter 4: Process Costing 20
Chapter 5: Cost Allocation 25
Cost Allocation in Organizations 25
Indirect-cost pools and cost allocation 25
Allocating costs from one department to another 26
Allocating costs of support departments 28
Support department cost-allocation methods 28
Allocating Common Costs 31
Cost-allocation bases and cost hierarchies 31
Consequences of an Inappropriate Allocation Base 32
Cost drivers and allocation bases 32
Cost assignment and cost hierarchies 33
When is the product-costing system broken? 33
Chapter 6: Cost Allocation: Joint-Cost Situations 33
, Approaches to Allocating Joint Costs 34
Irrelevance of Joint Costs for Decision Making 36
Chapter 7: Income Effects of Alternative Stock-Costing Methods 37
Stock-Costing Methods 37
Worked Example 38
Variable and Absorption Costing: Conclusion 41
Chapter 8: Cost-Volume-Profit Analysis 41
Revenues Drivers and Cost Drivers 41
Target Operating Profit 44
Effects of Revenue Mix on Profit 44
Contribution Margin and Gross Margin 45
Merchandising Sector 45
Manufacturing Sector 45
Chapter 9: Determining How Costs Behave 46
General Issues in Estimating Cost Functions 46
Basic Assumptions of Cost Functions 46
Basic Terms 46
Cause-and-Effect Criterion in Choosing Cost Drivers 47
Cost Estimation Approaches 47
Cost-Drivers and Activity-Based Costing 48
Big Data, Machine Learning and Cost Analysis 48
Non-Linearity and Cost Functions 49
Chapter 10: Relevant Information for Decision Making 49
Information and the Decision Process 49
The Concept of Relevance 50
Choosing Output Levels 50
One-Off Special Orders 51
Outsourcing and Make-or-Buy Decisions 51
,Week 1: Introduction, Job Costing, Process
Costing
Chapter 1: The Manager and Management Accounting
Management accounting: measures, analyses, and reports financial information and non-financial
information that are intended primarily to assist managers in fulfilling the goals of the organization.
● Combines accounting, finance, and management with leading-edge techniques that drive
successful businesses.
● Individual managers often require the information in an accounting system to be presented
differently.
○ A database can be created to simultaneously serve the needs of all managers.
● Professional management accountants apply the principles of accounting and financial
management to create, protect, preserve, and increase value for the shareholders.
○ Examples of tasks: identification, generation, presentation, interpretation and use of
relevant information to:
■ Inform strategic decisions & formulate business strategy
■ Plan short-, medium-, and long-term operations
■ Determine capital structure and fund that structure
■ Design reward strategies for executives and shareholders
■ Inform operational decisions
■ Control operations and ensure the efficient use of resources
■ Measure & report financial and non-financial performance to management and
other stakeholders
■ Implement corporate governance procedures, risk management, and internal
controls
■ Explore the potential for managerial and organizational value creation
Management accounting information and reports do not have to follow set principles/rules.
They answer key questions:
1. How will this information help managers do their jobs better?
2. Do the benefits of producing this information exceed the costs?
3. Does the information recognize what is specific about the organizational context?
Financial accounting: focuses on external reporting that is directed by authoritative guidelines.
● Guided by prescribed accounting standards; principles define the set of revenue and cost
measurement rules and the types of item that are classified as assets, liabilities, or owner’s equity,
and which form standards are acceptable.
Broad differences between management & financial accountants
, Management accounting Financial accounting
Regulations Prepared for internal use and no Generally required to be prepared
external regulations govern their according to accounting regulations &
preparation guidelines
Range and detail of Financial, non-financial and Broad-based, lacking detail, &
information qualitative information which may intended to provide overview of the
be very detailed/highly aggregated position & performance of an
organization over a time period
Reporting interval Produced frequently (hourly, daily, Produced annually/ semi-annually/
weekly) quarterly
Time period May include historical and current Provide information on the
information, as well as providing performance and position of an
information on expected future organization for the past period (tend
performance and activities to be backward-looking)
Financial accounting focuses on what you own, while management accounting focuses on what you
do.
, Cost accounting: measures and reports financial and non-financial information related to the
organization’s acquisition or use of resources.
● It provides information for both management and financial accounting.
Cost management: the actions managers undertake in the short- and long-run planning and control of costs
that increase value for customers and lower the costs of products & services.
● Must recognize that prior management decisions often commit the organization to the subsequent
incurrence of costs →
● Cost management has a broad focus; typically includes the continuous reductions of costs and
encompasses the whole life cycle of the product from product conception to deletion.
● Often carried out as a key part of general management strategies, and includes making decisions
to incur additional costs with the goal of enhancing profits & revenues
Management accounting’s primary purpose is to enhance value creation within both public and
private sector organizations.
● The management accountant must make use of a sound body of knowledge, as well as abide by
ethical guidelines.
Strategic Decisions and Management Accounting
A company’s strategy specifies how the organization matches its own capabilities with the opportunities in the
marketplace; a.k.a. How an organization creates value for its customers while distinguishing itself from
competitors.
Usually follow either a cost leadership or product differentiation strategy.
→ management accountants help make this decision by providing information relevant to the sources of
competitive advantage, such as:
● The company’s cost, productivity, or efficiency relative to competitors
● The premium prices a company can charge over its costs from distinctive product/service features
Management accounting information helps managers focus on strategic issues by answering questions such
as the following:
1. Who are our most important competitors, and what critical capability do we have to be
competitive and deliver value to our customers?
2. What is the bargaining power of our customers/suppliers?
3. What substitute products exist in the marketplace, and how do they differ from ours in terms of
features, price, cost, and quality?
4. Will adequate cash be available to fund the strategy, or will additional funds need to be raised?
Best chances for success:
1. Long-term value creation for shareholders
2. Look for outside opportunities to create value > internal control and value preservation
3. Not using performance-based pay
,Digital and other innovations are and will continue to be of interest to management accountants because
they link in to measuring, analyzing, and reporting of financial information and non-financial
information that are intended to assist managers in fulfilling enterprise strategies.
Accounting Systems and Management Controls
The Major Purposes of Accounting Systems
1. Formulating overall strategies and long-range plans: includes new product development and
investment in both tangible (equipment) and intangible (patents, brands, or people) assets, and
frequently involves special-purpose reports.
2. Resource allocation decisions such as product and customer emphasis and pricing: involves
reports on the profitability of products, brand categories, customers, distribution channels, etc.
3. Cost planning and cost control of operations and activities: reports on revenues, costs, assets,
and liabilities of divisions, plants, and other areas of responsibility.
4. Performance measurement and evaluation of people: comparisons of actual results with
planned results, either based on financial/non-financial measures.
5. Meeting external regulatory and legal reporting requirements where they exist: mainly helps
accountants provide shareholders with information using the prescribed methods.
Accountants combine/adjust the method & data to answer questions from particular internal/external
users.
Present-day key influences on changes in accounting information:
● Increase pace of change in the business world
● Shorter product life cycles & competitive advantage
● A requirement for more strategic action by management
● Digital transformation of companies & new business models
● The outsourcing of non-value-added but necessary services
● Increased uncertainty and the explicit recognition of risk
● Novel forms of reward structures
● Increased regulatory activity and changing financial reporting requirements
● More complex business transactions
● Increased focus on customer satisfaction
● New ethics of enterprise governance
● The need to recognize intellectual capital
● Enhancing knowledge management processes
Planning and Control
Planning: choosing goals, predicting results under various ways of achieving those goals, and then
deciding how to attain the desired goals.
,Budget: the quantitative expression of a plan of action and an aid to the coordination and implementation
of the plan.
Control: the action that implements the planning decision and deciding on performance evaluation and
the related feedback that will help future decision making.
Management by exception: the practice of concentrating on areas not operating as expected, and placing
less attention on areas operating as expected.
A well-conceived plan includes enough flexibility so that managers can seize opportunities unforeseen at
the time the plan is formulated.
Although accounting systems may be designed with similar aims in mind, users of accounting information
will perceive different possibilities and priorities to the roles accounting can play within their
organizations.
Feedback (a major key): involves managers examining past performance and systematically exploring
alternative ways to improve future performance.
Management accountants can be considered to perform three important functions in their reporting:
1. Scorekeeping: accumulation of data & the reporting of reliable results to all levels of
management.
2. Attention directing: make visible both opportunities and problems on which managers need to
focus.
a. Should focus on all opportunities to add value to an organization, not just on
cost-reduction opportunities.
3. Problem solving: comparative analysis undertaken to identify the best alternatives in relation to
the organization’s goals.
The cost-benefit-context approach is useful in analyzing accounting issues.
Value Creation
Management accounting can play a principal role in helping managers focus on key themes of planning
& control.
1. Customer focus: the challenge facing managers is to dedicate the right amount of resources to
customer satisfaction so that profitable customers are attracted & retained.
2. Value-chain and supply-chain analysis: value chain: the sequence of business functions in
which utility (usefulness) is added to the products/services of an organization. The functions are
the following:
a. Research and development:
b. Design of products, services, or processes
c. Production
d. Marketing
, e. Distribution
f. Customer service
Senior managers are responsible for deciding the organization’s overall strategy., how resources are to be
obtained and used, and how rewards are to be given.
Customer relationship management (CRM): integrating people and technology in all business
functions and deepening relationships with customers, partners, and distributors.
Cost management emphasizes integrating and coordinating activities across all companies in the supply
chain as well as across each business function in an individual company’s value chain.
3. Key success factors: customers expect ever-improving levels of performance regarding cost,
quality, time, innovation, and sustainability.
4. Continuous improvement and benchmarking: improvement by competitors forces
organizations to compare (benchmark) their own performance.
Digitalisation
The use of new technologies has made the shift from mass-market to more profitable niches possible, sold
in smaller volumes.
● The 2008 economic crisis called for more accountability & transparency in responding to
demands.
● Changes in markets, societal structures and norms and in the general business environment in
which firms operate have always been of concern to practicing management accountants.
Digitalisation: the process by which enterprises become digital businesses, where the use of digital
technologies changes the business model and provides new revenue and value-producing possibilities.
1. Digital disruption and rapid cognitive business development; i.e., robots can shape decision
making.
2. Data availability; creates opportunities and challenges in aiding data-backed decisions and
insights.
Examples of technology management accountants should be aware of: AI & robotics, blockchain, big data
& analytics and the cloud.
Chapter 1: The Manager and Management Accounting 3
Strategic Decisions and Management Accounting 5
Accounting Systems and Management Controls 6
The Major Purposes of Accounting Systems 6
Planning and Control 6
Value Creation 7
Digitalisation 8
Chapter 2: An Introduction to Cost Terms and Purposes 9
Costs in General 9
Cost Objects 9
Direct & Indirect Costs 10
Cost Tracing and Cost Allocation 10
Cost Drivers and Cost Management 10
Cost Behavior Patterns: Variable & Fixed Costs 11
Financial Statements, Business Sectors, and the Recognition of Costs 12
Classification of Costs 13
Chapter 3: Job Costing 14
Building Block Concept of Costing Systems 14
Job-Costing and Process-Costing Systems 14
Job Costing in Service Organizations using Actual Costing 15
Normal Costing 16
Explanations of Transactions 17
Chapter 4: Process Costing 20
Chapter 5: Cost Allocation 25
Cost Allocation in Organizations 25
Indirect-cost pools and cost allocation 25
Allocating costs from one department to another 26
Allocating costs of support departments 28
Support department cost-allocation methods 28
Allocating Common Costs 31
Cost-allocation bases and cost hierarchies 31
Consequences of an Inappropriate Allocation Base 32
Cost drivers and allocation bases 32
Cost assignment and cost hierarchies 33
When is the product-costing system broken? 33
Chapter 6: Cost Allocation: Joint-Cost Situations 33
, Approaches to Allocating Joint Costs 34
Irrelevance of Joint Costs for Decision Making 36
Chapter 7: Income Effects of Alternative Stock-Costing Methods 37
Stock-Costing Methods 37
Worked Example 38
Variable and Absorption Costing: Conclusion 41
Chapter 8: Cost-Volume-Profit Analysis 41
Revenues Drivers and Cost Drivers 41
Target Operating Profit 44
Effects of Revenue Mix on Profit 44
Contribution Margin and Gross Margin 45
Merchandising Sector 45
Manufacturing Sector 45
Chapter 9: Determining How Costs Behave 46
General Issues in Estimating Cost Functions 46
Basic Assumptions of Cost Functions 46
Basic Terms 46
Cause-and-Effect Criterion in Choosing Cost Drivers 47
Cost Estimation Approaches 47
Cost-Drivers and Activity-Based Costing 48
Big Data, Machine Learning and Cost Analysis 48
Non-Linearity and Cost Functions 49
Chapter 10: Relevant Information for Decision Making 49
Information and the Decision Process 49
The Concept of Relevance 50
Choosing Output Levels 50
One-Off Special Orders 51
Outsourcing and Make-or-Buy Decisions 51
,Week 1: Introduction, Job Costing, Process
Costing
Chapter 1: The Manager and Management Accounting
Management accounting: measures, analyses, and reports financial information and non-financial
information that are intended primarily to assist managers in fulfilling the goals of the organization.
● Combines accounting, finance, and management with leading-edge techniques that drive
successful businesses.
● Individual managers often require the information in an accounting system to be presented
differently.
○ A database can be created to simultaneously serve the needs of all managers.
● Professional management accountants apply the principles of accounting and financial
management to create, protect, preserve, and increase value for the shareholders.
○ Examples of tasks: identification, generation, presentation, interpretation and use of
relevant information to:
■ Inform strategic decisions & formulate business strategy
■ Plan short-, medium-, and long-term operations
■ Determine capital structure and fund that structure
■ Design reward strategies for executives and shareholders
■ Inform operational decisions
■ Control operations and ensure the efficient use of resources
■ Measure & report financial and non-financial performance to management and
other stakeholders
■ Implement corporate governance procedures, risk management, and internal
controls
■ Explore the potential for managerial and organizational value creation
Management accounting information and reports do not have to follow set principles/rules.
They answer key questions:
1. How will this information help managers do their jobs better?
2. Do the benefits of producing this information exceed the costs?
3. Does the information recognize what is specific about the organizational context?
Financial accounting: focuses on external reporting that is directed by authoritative guidelines.
● Guided by prescribed accounting standards; principles define the set of revenue and cost
measurement rules and the types of item that are classified as assets, liabilities, or owner’s equity,
and which form standards are acceptable.
Broad differences between management & financial accountants
, Management accounting Financial accounting
Regulations Prepared for internal use and no Generally required to be prepared
external regulations govern their according to accounting regulations &
preparation guidelines
Range and detail of Financial, non-financial and Broad-based, lacking detail, &
information qualitative information which may intended to provide overview of the
be very detailed/highly aggregated position & performance of an
organization over a time period
Reporting interval Produced frequently (hourly, daily, Produced annually/ semi-annually/
weekly) quarterly
Time period May include historical and current Provide information on the
information, as well as providing performance and position of an
information on expected future organization for the past period (tend
performance and activities to be backward-looking)
Financial accounting focuses on what you own, while management accounting focuses on what you
do.
, Cost accounting: measures and reports financial and non-financial information related to the
organization’s acquisition or use of resources.
● It provides information for both management and financial accounting.
Cost management: the actions managers undertake in the short- and long-run planning and control of costs
that increase value for customers and lower the costs of products & services.
● Must recognize that prior management decisions often commit the organization to the subsequent
incurrence of costs →
● Cost management has a broad focus; typically includes the continuous reductions of costs and
encompasses the whole life cycle of the product from product conception to deletion.
● Often carried out as a key part of general management strategies, and includes making decisions
to incur additional costs with the goal of enhancing profits & revenues
Management accounting’s primary purpose is to enhance value creation within both public and
private sector organizations.
● The management accountant must make use of a sound body of knowledge, as well as abide by
ethical guidelines.
Strategic Decisions and Management Accounting
A company’s strategy specifies how the organization matches its own capabilities with the opportunities in the
marketplace; a.k.a. How an organization creates value for its customers while distinguishing itself from
competitors.
Usually follow either a cost leadership or product differentiation strategy.
→ management accountants help make this decision by providing information relevant to the sources of
competitive advantage, such as:
● The company’s cost, productivity, or efficiency relative to competitors
● The premium prices a company can charge over its costs from distinctive product/service features
Management accounting information helps managers focus on strategic issues by answering questions such
as the following:
1. Who are our most important competitors, and what critical capability do we have to be
competitive and deliver value to our customers?
2. What is the bargaining power of our customers/suppliers?
3. What substitute products exist in the marketplace, and how do they differ from ours in terms of
features, price, cost, and quality?
4. Will adequate cash be available to fund the strategy, or will additional funds need to be raised?
Best chances for success:
1. Long-term value creation for shareholders
2. Look for outside opportunities to create value > internal control and value preservation
3. Not using performance-based pay
,Digital and other innovations are and will continue to be of interest to management accountants because
they link in to measuring, analyzing, and reporting of financial information and non-financial
information that are intended to assist managers in fulfilling enterprise strategies.
Accounting Systems and Management Controls
The Major Purposes of Accounting Systems
1. Formulating overall strategies and long-range plans: includes new product development and
investment in both tangible (equipment) and intangible (patents, brands, or people) assets, and
frequently involves special-purpose reports.
2. Resource allocation decisions such as product and customer emphasis and pricing: involves
reports on the profitability of products, brand categories, customers, distribution channels, etc.
3. Cost planning and cost control of operations and activities: reports on revenues, costs, assets,
and liabilities of divisions, plants, and other areas of responsibility.
4. Performance measurement and evaluation of people: comparisons of actual results with
planned results, either based on financial/non-financial measures.
5. Meeting external regulatory and legal reporting requirements where they exist: mainly helps
accountants provide shareholders with information using the prescribed methods.
Accountants combine/adjust the method & data to answer questions from particular internal/external
users.
Present-day key influences on changes in accounting information:
● Increase pace of change in the business world
● Shorter product life cycles & competitive advantage
● A requirement for more strategic action by management
● Digital transformation of companies & new business models
● The outsourcing of non-value-added but necessary services
● Increased uncertainty and the explicit recognition of risk
● Novel forms of reward structures
● Increased regulatory activity and changing financial reporting requirements
● More complex business transactions
● Increased focus on customer satisfaction
● New ethics of enterprise governance
● The need to recognize intellectual capital
● Enhancing knowledge management processes
Planning and Control
Planning: choosing goals, predicting results under various ways of achieving those goals, and then
deciding how to attain the desired goals.
,Budget: the quantitative expression of a plan of action and an aid to the coordination and implementation
of the plan.
Control: the action that implements the planning decision and deciding on performance evaluation and
the related feedback that will help future decision making.
Management by exception: the practice of concentrating on areas not operating as expected, and placing
less attention on areas operating as expected.
A well-conceived plan includes enough flexibility so that managers can seize opportunities unforeseen at
the time the plan is formulated.
Although accounting systems may be designed with similar aims in mind, users of accounting information
will perceive different possibilities and priorities to the roles accounting can play within their
organizations.
Feedback (a major key): involves managers examining past performance and systematically exploring
alternative ways to improve future performance.
Management accountants can be considered to perform three important functions in their reporting:
1. Scorekeeping: accumulation of data & the reporting of reliable results to all levels of
management.
2. Attention directing: make visible both opportunities and problems on which managers need to
focus.
a. Should focus on all opportunities to add value to an organization, not just on
cost-reduction opportunities.
3. Problem solving: comparative analysis undertaken to identify the best alternatives in relation to
the organization’s goals.
The cost-benefit-context approach is useful in analyzing accounting issues.
Value Creation
Management accounting can play a principal role in helping managers focus on key themes of planning
& control.
1. Customer focus: the challenge facing managers is to dedicate the right amount of resources to
customer satisfaction so that profitable customers are attracted & retained.
2. Value-chain and supply-chain analysis: value chain: the sequence of business functions in
which utility (usefulness) is added to the products/services of an organization. The functions are
the following:
a. Research and development:
b. Design of products, services, or processes
c. Production
d. Marketing
, e. Distribution
f. Customer service
Senior managers are responsible for deciding the organization’s overall strategy., how resources are to be
obtained and used, and how rewards are to be given.
Customer relationship management (CRM): integrating people and technology in all business
functions and deepening relationships with customers, partners, and distributors.
Cost management emphasizes integrating and coordinating activities across all companies in the supply
chain as well as across each business function in an individual company’s value chain.
3. Key success factors: customers expect ever-improving levels of performance regarding cost,
quality, time, innovation, and sustainability.
4. Continuous improvement and benchmarking: improvement by competitors forces
organizations to compare (benchmark) their own performance.
Digitalisation
The use of new technologies has made the shift from mass-market to more profitable niches possible, sold
in smaller volumes.
● The 2008 economic crisis called for more accountability & transparency in responding to
demands.
● Changes in markets, societal structures and norms and in the general business environment in
which firms operate have always been of concern to practicing management accountants.
Digitalisation: the process by which enterprises become digital businesses, where the use of digital
technologies changes the business model and provides new revenue and value-producing possibilities.
1. Digital disruption and rapid cognitive business development; i.e., robots can shape decision
making.
2. Data availability; creates opportunities and challenges in aiding data-backed decisions and
insights.
Examples of technology management accountants should be aware of: AI & robotics, blockchain, big data
& analytics and the cloud.
