Management Accounting – Lectures
Lecture 1 – week 1
Chapter 1: The accountant’s role in organisation
Management accounting: measures and reports financial and non-financial information that helps
managers make decisions to fulfil the goals of organization
Financial accounting focuses on reporting to external parties
It measures and records business transactions
It provides financial statements based on generally accepted accounting principles
Cost accounting
Provides information for both management accounting and financial accounting
Measures and reports financial and non-financial data that relates to the cost of acquiring or
consuming resources by an organisation
Cost management: describes activities of managers in short-run and long-run planning and control of
costs
Entails the continuous reduction of costs
A key part of general management strategies and their implementation
Growing role of strategy
Increased focus on expansionist, risky and entrepreneur strategies
Aim to create, not preserve shareholder value in short term
Increase focus to external sources for opportunities
All this means an increased role for management accountants
o Management accounting = strategy implementation
Strategy for management accountants
Assist management to make balanced decisions
Monitor and evaluate strategic and operational progress
This has led to a realignment of skill sets by the global management accounting institutes
such as CIMA/CGMA, CMA and IMA
Major purposes of accounting systems
1. Formulating overall strategies and long-range plans – internal non routine reporting
2. Resource allocation decisions, such as product and customer emphasis and pricing – internal
routine reporting
3. Cost planning and cost control of operations and activities – internal routine reporting
4. Performance measurement and evaluation of people – internal non-routine reporting
5. Meeting external regulatory and legal reporting requirements – external reporting
Reporting
Internal routine reporting: information provided for decisions that occur with some regularity
o Daily, weekly, monthly, quarterly reports
Internal non-routine reporting: information for decision that occur irregularly or even without
precedent
o Outsourcing, design of a special cost control tracking system
External reporting: information provided to investors, government authorities and other
outside company stakeholders on the organisation’s financial position, operations and related
activities
Planning (decision making) and control
Planning: deciding on organisation goals, predicting results under various alternative ways of
achieving those goals, and then deciding how to attain those desired goals
Control: deciding and taking actions that implement the planning decisions, and deciding on
performance evaluation and the related feedback that will help future decision making
Key tools: budgets and performance reports
Performance report
, Feedback provides managers the opportunity to examine past performance and systematically
explore alternative ways to make better (informed) decisions in the future
Scorekeeping, attention directing and problem solving
Scorekeeping: accumulating data and reporting reliable results to all levels of management
o How is the business doing?
Attention directing: help managers properly focus their attention
o Which opportunities/problems should be emphasized first?
o Focus on all opportunities to add value to an organisation, not just cost-reduction
opportunities
Problem solving: comparative analysis for decision making with an element of analytical
review
o What is the best alternative?
Management accountants
Management accountants serve each of these three roles in both planning and control
decisions
o The problem-solving role is most marked for planning decisions (decision making
role)
o The scorekeeping and attention-directing roles are most important for control
decisions (decision control role)
Management accountants often simultaneously perform two or all of the problem solving,
scorekeeping and attention-directing roles
o Management accounting systems also serve multiple purposes
Key guidelines
Cost-benefit approach: choice of accounting system/practices depends on how well they
help to achieve organizational goals in relation to the costs of those systems and the context
in which they operate
o Full recognition to behavioural as well as technical considerations
o Use of different costs for different purposes
Key themes in design of management accounting systems
1. Customer focus
2. Value-chain and supply-chain analysis
3. Success factors: time, quality, cost, innovation
4. Continuous improvement
Key themes for management accountants
Enterprise structure: technological developments, outsourcing, virtual firm
Digitization: big data, data analytics, robotics
Intangible assets: innovation, startups, human capital, brands, knowledge management
Chapter 2: Introduction to cost terms and purposes
Different cost concepts and terms are often used in accounting reports
Managers who appreciate these terms are able
o To make best use of information provided
o To avoid misuse of that information
Cost and cost terminology
Cost: a resource sacrificed or foregone to achieve a specific objective
o Usually measured as the monetary amount that must be paid to acquire goods and
services
Cost object: anything for which a separate measurement of costs is desired
o An actual cost is the cost incurred (a historical cost) as distinguished from budgeted
costs
There are two basic stages of accounting for costs
1. Cost accumulation: classification of cost (materials, labour etc)
, 2. Cost assignment: assigning costs to various cost objects
a. Cost tracing
b. Cost allocation
Direct costs
Direct costs: those that are related to a given cost object (product, department, etc) and that
can be traced to it in an economically feasible way
o Cost-tracing: assignment of direct costs to the particular cost object
Indirect costs: related to the particular cost object but cannot be traced to it in an
economically feasible way
o Cost allocation: assignment of indirect costs to the particular cost object
Several factors affect the classification of a cost as direct or indirect:
o The materiality of cost
o Available information-gathering technology
o Design of operations
o Contractual arrangements
The direct/indirect classification depends on the choice of the cost object
Cost behaviour patterns
Cost driver: any factor that affects total costs
o Time dimension: costs that do not vary in the short run may have a cost driver in the
long run
Variable costs: change in total in proportion to changes in the related level of total activity or
volume
Fixed costs: do not change in total for a given time period despite wide changes in the related
level of total activity or volume
Relationship of total cost to volume of activity
Major assumptions for classification
Costs are variable or fixed with respect to a specific cost object
Time span must be defined
Total costs are linear
There is only one cost driver
Variations in the cost driver are within a ‘relevant range’
Relevant range
Relevant range: the band of the level of activity or volume in which a specific relationship
between the level of activity or volume and the cost in question is valid
Total costs and unit costs
A unit cost (= average cost): computed by dividing some amount of cost total by some
number of units
Units may be expressed in: hours worked, packages delivered, bicycles assembled
Different types of companies require different insights
Service companies: provide services or intangible products to their customers
o Labour is the most significant cost category
, Merchandising-sector companies: purchase and then sell tangible products without
changing their basic form
Manufacturing-sector companies: purchase materials and components and convert them
into finished goods
o A manufacturing company must also develop, design, market and distribute its
products
Capitalised goods
Capitalised costs: costs of product that are regarded as an asset when they are incurred and
then become cost of goods sold when the product is sold
For manufacturing-sector companies, all manufacturing costs are capitalised costs
o Capitalised costs (direct materials, direct labour and indirect manufacturing costs) are
included in work-in-progress and finished goods stock
o Capitalised costs flow to the profit and loss account as cost of the goods sold
Revenue costs
Revenue costs: costs in the profit and loss account other than cost of goods sold
Revenue costs are recorded as expenses of the accounting period in which they are incurred
o For manufacturing companies, revenue costs include all non-manufacturing costs
(research and development, distribution, etc)
o For merchandising-sector companies, revenue costs include all costs not related to
the cost of goods purchased for resale
o For service-sector companies, all of their costs are revenue costs
Types of stock in manufacturing companies
Direct materials – direct materials in stock and awaiting use in the manufacturing process
Work-in-progress – goods partially worked on but not yet fully completed
Finished goods – goods fully completed but not sold
Classification of manufacturing costs
Direct materials costs: acquisition of costs of all materials that eventually become part of the
cost object
Direct manufacturing labour costs: the compensation of all manufacturing labour that can
be traced to the cost object in an economically feasible way
Indirect manufacturing costs: all manufacturing costs that are considered to be part of the
cost object, but that cannot be traced to that cost object in an economically feasible way
o Manufacturing overhead costs or factory overhead costs
Calculating stock position
Manufacturers usually have different types of stock
Stock positions (capitalised costs) are generally based on open and closing position
o Opening stock (from Balance Sheet)
o + Purchases (direct materials, transferred in materials/labour)
o – Closing stock (direct materials, finished goods, on BS)
o = Use of stock
Manufacturing company
Prime costs: all direct manufacturing costs
o Cellular: direct labor + direct materials
Conversion costs: all manufacturing costs other than direct materials costs
o Transform direct materials into finished goods
o Cellular: direct manufacturing labour + indirect manufacturing costs
Measuring costs requires judgement
Judgement is frequently required when measuring costs
Differences can exist in the way accounting terms are defined and used in companies
Many meanings of product cost
A product cost: sum of costs assigned to a product for a specific purpose
Lecture 1 – week 1
Chapter 1: The accountant’s role in organisation
Management accounting: measures and reports financial and non-financial information that helps
managers make decisions to fulfil the goals of organization
Financial accounting focuses on reporting to external parties
It measures and records business transactions
It provides financial statements based on generally accepted accounting principles
Cost accounting
Provides information for both management accounting and financial accounting
Measures and reports financial and non-financial data that relates to the cost of acquiring or
consuming resources by an organisation
Cost management: describes activities of managers in short-run and long-run planning and control of
costs
Entails the continuous reduction of costs
A key part of general management strategies and their implementation
Growing role of strategy
Increased focus on expansionist, risky and entrepreneur strategies
Aim to create, not preserve shareholder value in short term
Increase focus to external sources for opportunities
All this means an increased role for management accountants
o Management accounting = strategy implementation
Strategy for management accountants
Assist management to make balanced decisions
Monitor and evaluate strategic and operational progress
This has led to a realignment of skill sets by the global management accounting institutes
such as CIMA/CGMA, CMA and IMA
Major purposes of accounting systems
1. Formulating overall strategies and long-range plans – internal non routine reporting
2. Resource allocation decisions, such as product and customer emphasis and pricing – internal
routine reporting
3. Cost planning and cost control of operations and activities – internal routine reporting
4. Performance measurement and evaluation of people – internal non-routine reporting
5. Meeting external regulatory and legal reporting requirements – external reporting
Reporting
Internal routine reporting: information provided for decisions that occur with some regularity
o Daily, weekly, monthly, quarterly reports
Internal non-routine reporting: information for decision that occur irregularly or even without
precedent
o Outsourcing, design of a special cost control tracking system
External reporting: information provided to investors, government authorities and other
outside company stakeholders on the organisation’s financial position, operations and related
activities
Planning (decision making) and control
Planning: deciding on organisation goals, predicting results under various alternative ways of
achieving those goals, and then deciding how to attain those desired goals
Control: deciding and taking actions that implement the planning decisions, and deciding on
performance evaluation and the related feedback that will help future decision making
Key tools: budgets and performance reports
Performance report
, Feedback provides managers the opportunity to examine past performance and systematically
explore alternative ways to make better (informed) decisions in the future
Scorekeeping, attention directing and problem solving
Scorekeeping: accumulating data and reporting reliable results to all levels of management
o How is the business doing?
Attention directing: help managers properly focus their attention
o Which opportunities/problems should be emphasized first?
o Focus on all opportunities to add value to an organisation, not just cost-reduction
opportunities
Problem solving: comparative analysis for decision making with an element of analytical
review
o What is the best alternative?
Management accountants
Management accountants serve each of these three roles in both planning and control
decisions
o The problem-solving role is most marked for planning decisions (decision making
role)
o The scorekeeping and attention-directing roles are most important for control
decisions (decision control role)
Management accountants often simultaneously perform two or all of the problem solving,
scorekeeping and attention-directing roles
o Management accounting systems also serve multiple purposes
Key guidelines
Cost-benefit approach: choice of accounting system/practices depends on how well they
help to achieve organizational goals in relation to the costs of those systems and the context
in which they operate
o Full recognition to behavioural as well as technical considerations
o Use of different costs for different purposes
Key themes in design of management accounting systems
1. Customer focus
2. Value-chain and supply-chain analysis
3. Success factors: time, quality, cost, innovation
4. Continuous improvement
Key themes for management accountants
Enterprise structure: technological developments, outsourcing, virtual firm
Digitization: big data, data analytics, robotics
Intangible assets: innovation, startups, human capital, brands, knowledge management
Chapter 2: Introduction to cost terms and purposes
Different cost concepts and terms are often used in accounting reports
Managers who appreciate these terms are able
o To make best use of information provided
o To avoid misuse of that information
Cost and cost terminology
Cost: a resource sacrificed or foregone to achieve a specific objective
o Usually measured as the monetary amount that must be paid to acquire goods and
services
Cost object: anything for which a separate measurement of costs is desired
o An actual cost is the cost incurred (a historical cost) as distinguished from budgeted
costs
There are two basic stages of accounting for costs
1. Cost accumulation: classification of cost (materials, labour etc)
, 2. Cost assignment: assigning costs to various cost objects
a. Cost tracing
b. Cost allocation
Direct costs
Direct costs: those that are related to a given cost object (product, department, etc) and that
can be traced to it in an economically feasible way
o Cost-tracing: assignment of direct costs to the particular cost object
Indirect costs: related to the particular cost object but cannot be traced to it in an
economically feasible way
o Cost allocation: assignment of indirect costs to the particular cost object
Several factors affect the classification of a cost as direct or indirect:
o The materiality of cost
o Available information-gathering technology
o Design of operations
o Contractual arrangements
The direct/indirect classification depends on the choice of the cost object
Cost behaviour patterns
Cost driver: any factor that affects total costs
o Time dimension: costs that do not vary in the short run may have a cost driver in the
long run
Variable costs: change in total in proportion to changes in the related level of total activity or
volume
Fixed costs: do not change in total for a given time period despite wide changes in the related
level of total activity or volume
Relationship of total cost to volume of activity
Major assumptions for classification
Costs are variable or fixed with respect to a specific cost object
Time span must be defined
Total costs are linear
There is only one cost driver
Variations in the cost driver are within a ‘relevant range’
Relevant range
Relevant range: the band of the level of activity or volume in which a specific relationship
between the level of activity or volume and the cost in question is valid
Total costs and unit costs
A unit cost (= average cost): computed by dividing some amount of cost total by some
number of units
Units may be expressed in: hours worked, packages delivered, bicycles assembled
Different types of companies require different insights
Service companies: provide services or intangible products to their customers
o Labour is the most significant cost category
, Merchandising-sector companies: purchase and then sell tangible products without
changing their basic form
Manufacturing-sector companies: purchase materials and components and convert them
into finished goods
o A manufacturing company must also develop, design, market and distribute its
products
Capitalised goods
Capitalised costs: costs of product that are regarded as an asset when they are incurred and
then become cost of goods sold when the product is sold
For manufacturing-sector companies, all manufacturing costs are capitalised costs
o Capitalised costs (direct materials, direct labour and indirect manufacturing costs) are
included in work-in-progress and finished goods stock
o Capitalised costs flow to the profit and loss account as cost of the goods sold
Revenue costs
Revenue costs: costs in the profit and loss account other than cost of goods sold
Revenue costs are recorded as expenses of the accounting period in which they are incurred
o For manufacturing companies, revenue costs include all non-manufacturing costs
(research and development, distribution, etc)
o For merchandising-sector companies, revenue costs include all costs not related to
the cost of goods purchased for resale
o For service-sector companies, all of their costs are revenue costs
Types of stock in manufacturing companies
Direct materials – direct materials in stock and awaiting use in the manufacturing process
Work-in-progress – goods partially worked on but not yet fully completed
Finished goods – goods fully completed but not sold
Classification of manufacturing costs
Direct materials costs: acquisition of costs of all materials that eventually become part of the
cost object
Direct manufacturing labour costs: the compensation of all manufacturing labour that can
be traced to the cost object in an economically feasible way
Indirect manufacturing costs: all manufacturing costs that are considered to be part of the
cost object, but that cannot be traced to that cost object in an economically feasible way
o Manufacturing overhead costs or factory overhead costs
Calculating stock position
Manufacturers usually have different types of stock
Stock positions (capitalised costs) are generally based on open and closing position
o Opening stock (from Balance Sheet)
o + Purchases (direct materials, transferred in materials/labour)
o – Closing stock (direct materials, finished goods, on BS)
o = Use of stock
Manufacturing company
Prime costs: all direct manufacturing costs
o Cellular: direct labor + direct materials
Conversion costs: all manufacturing costs other than direct materials costs
o Transform direct materials into finished goods
o Cellular: direct manufacturing labour + indirect manufacturing costs
Measuring costs requires judgement
Judgement is frequently required when measuring costs
Differences can exist in the way accounting terms are defined and used in companies
Many meanings of product cost
A product cost: sum of costs assigned to a product for a specific purpose
