ACC1012S
Overview, Management Accounting and Costing – week
1
What is accounting?
The American Accounting Association describes accounting as:
“the process of identifying, measuring and communicating economic
information to permit informed judgements and decisions by users of the
information”.
Management accounting
Management accounting provides information to managers of a
business
Improves effectiveness and efficiency
Make informed decisions
“Management accounting refers to the processes and techniques
that focus on the effective and efficient use of organisational
resources, to support managers in their tasks of enhancing both
customer value and shareholder value.”
The objective of management in a for-profit company has
historically been to maximise shareholder value.
This is done by maximizing future cashflows to the business.
When future cashflows are maximised, it can generate returns for
shareholders (shareholder value) in two ways:
- Through dividends
- Through an increase in share price
The decisions that managers make have the potential to impact
the organisation and its employees, customers, the environment
, and the community in which the organisation operates (these are
all called stakeholders to the business).
Management accounting is a discipline that aims to provide
useful information to managers so that it can be used
appropriately in helping managers to achieve their objective.
- Often, this will be in the form of quantitative information, but
qualitative information is just as important when weighing up
a decision.
Information
Start-up decisions:
- Is there a market demand for my product?
- Who are my competitors? Suppliers?
- Customers?
- How should I finance my business?
Long-term strategic decisions:
- How do we increase sales?
- How do we decrease costs?
- What are the factors that affect the market for my product?
- Cost leadership vs product differentiation?
Short-term and long-term operating decisions
- How much should I sell my product for?
- How many units to produce?
- Should I close down a division in my business?
- Should I outsource my employee services?
- How much should we advertise?
- Should we provide discounts?
- How much bonus should we pay our managers?
Management accounting provides information to help managers
answer some of these operating and strategic decisions.
What about qualitative considerations
Outsourcing production
Closing a division → labour?
Discounts → setting a precedent
Paying bonuses
, - Need to consider these together with the numbers for the decision
to lead to a sustainable outcome
Management accounting vs financial reporting
MANAGEMENT ACCOUNTING FINANCIAL REPORTING
For internal users: management For external users: investors,
creditors, SARS
No legal requirement Statutory requirement in terms of
Companies Act and IFRS
Focus on business segments, Focus on whole business
operating divisions, and individual
products/services
No GAAP Governed by GAAP/IFRS
Forward-looking historical
Produced daily, weekly, or monthly Produced annually
The key difference:
- this difference arises from the REPORTING activity.
- Financial Accounting produces useful financial information for
EXTERNAL users (e.g. investors, potential investors, lenders) and
Management Accounting for INTERNAL users (e.g. directors and
many levels of management).
What is common between the 2?
- Both require transactions that have an economic impact on the
business to be identified, measured and classified, in other words
RECORDED.
Overview, Management Accounting and Costing – week
1
What is accounting?
The American Accounting Association describes accounting as:
“the process of identifying, measuring and communicating economic
information to permit informed judgements and decisions by users of the
information”.
Management accounting
Management accounting provides information to managers of a
business
Improves effectiveness and efficiency
Make informed decisions
“Management accounting refers to the processes and techniques
that focus on the effective and efficient use of organisational
resources, to support managers in their tasks of enhancing both
customer value and shareholder value.”
The objective of management in a for-profit company has
historically been to maximise shareholder value.
This is done by maximizing future cashflows to the business.
When future cashflows are maximised, it can generate returns for
shareholders (shareholder value) in two ways:
- Through dividends
- Through an increase in share price
The decisions that managers make have the potential to impact
the organisation and its employees, customers, the environment
, and the community in which the organisation operates (these are
all called stakeholders to the business).
Management accounting is a discipline that aims to provide
useful information to managers so that it can be used
appropriately in helping managers to achieve their objective.
- Often, this will be in the form of quantitative information, but
qualitative information is just as important when weighing up
a decision.
Information
Start-up decisions:
- Is there a market demand for my product?
- Who are my competitors? Suppliers?
- Customers?
- How should I finance my business?
Long-term strategic decisions:
- How do we increase sales?
- How do we decrease costs?
- What are the factors that affect the market for my product?
- Cost leadership vs product differentiation?
Short-term and long-term operating decisions
- How much should I sell my product for?
- How many units to produce?
- Should I close down a division in my business?
- Should I outsource my employee services?
- How much should we advertise?
- Should we provide discounts?
- How much bonus should we pay our managers?
Management accounting provides information to help managers
answer some of these operating and strategic decisions.
What about qualitative considerations
Outsourcing production
Closing a division → labour?
Discounts → setting a precedent
Paying bonuses
, - Need to consider these together with the numbers for the decision
to lead to a sustainable outcome
Management accounting vs financial reporting
MANAGEMENT ACCOUNTING FINANCIAL REPORTING
For internal users: management For external users: investors,
creditors, SARS
No legal requirement Statutory requirement in terms of
Companies Act and IFRS
Focus on business segments, Focus on whole business
operating divisions, and individual
products/services
No GAAP Governed by GAAP/IFRS
Forward-looking historical
Produced daily, weekly, or monthly Produced annually
The key difference:
- this difference arises from the REPORTING activity.
- Financial Accounting produces useful financial information for
EXTERNAL users (e.g. investors, potential investors, lenders) and
Management Accounting for INTERNAL users (e.g. directors and
many levels of management).
What is common between the 2?
- Both require transactions that have an economic impact on the
business to be identified, measured and classified, in other words
RECORDED.
