FIN2603 – Finance for Non-Financial Managers (2023)
Study Unit 04: Profit planning and control (PB: Chapter 4)
Profit planning and control are vital in assuring the profitability of a firm Profit planning is
usually done by means of a budget. Profit planning may be carried out by comparing actual
results with the planned results. Profit planning and control are short-term aspects of financial
management and are undertaken in most business organisations by means of budgets.
There are two basic kinds of accounting information systems:
• Financial accounting is concerned with producing information for external users. The general
objective is the preparation of external reports (financial statements) for investors, creditors,
government agencies and other external users. This information is used for investment
decisions, monitoring organisational performance and regulatory measures.
• Management accounting produces information for internal users, such as managers, executives
and employees. The management accounting system identifies, collects, measures, classifies
and reports information that is useful to internal users in planning, controlling and decision
making.
➢ Management accounting therefore has three broad objectives:
- To provide information for costing out products and services
- To provide information for planning, controlling and continuous improvement
- To provide information for decision making
Management accounting versus financial accounting
Management accounting Financial accounting
Internally focused Externally focused
No mandatory rules Must follow externally imposed rules
Emphasis on the future Historical orientated
Broad, multidisciplinary More self-contained, focused
Intended users. As mentioned, management accounting focuses on providing information for
internal users, while financial accounting focuses on providing information for external users.
Restrictions on inputs and processes. The inputs and procedures of financial accounting are
well defined and restricted. Only certain kind of economic events qualify as inputs, and
processes must follow generally accepted methods. Management accounting has no official
body that prescribes the format, content and rules for selecting inputs and procedures, and in
preparing financial reports. Management accountants therefore have the freedom to choose
whatever information they want to use - provided it can be justified on a cost -benefit basis.
Time orientation. Financial accounting has a historical orientation. It recognises records, and
reports events that have already occurred. Although management accounting also does so, it
places strong emphasis on the provision of information about future events. For example, if the
management of a company wants to know what it will cost to produce a product next year, this
information assists in planning material purchases and making pricing decisions.
Breadth/extent. Management accounting is much broader than financial accounting. It includes
aspects of managerial economics, industrial engineering and management sciences, to name
Lyana Petzer Page 1 of 13
, FIN2603 – Finance for Non-Financial Managers (2023)
but a few. A management accountant therefore has a holistic approach when evaluating the
performance of an organisation, having the knowledge, appreciation and ability to apply a wide
spread of skills in order to manage the financial wellbeing of an organisation.
1. Cost concepts:
Cost may be regarded as sacrifices made to acquire goods/services.
For the purpose of assigning costs to cost objects, costs are classified as either direct or indirect.
❖ Direct cost. This is a cost that can easily be allocated and traced towards the particular cost
object under consideration. For example, if Adidas is assigning costs to its various regional and
national sales offices, then the salary of the sales manager in its Singapore office would be a
direct cost of that office.
❖ Indirect cost. This is very difficult to allocate or trace to the particular cost object under
consideration. For example, SAB may produce a wide variety of beers. The manager's salary of
the brewery would be an indirect cost of a specific type of beer, say Windhoek, the reason
being that the manager's salary is not caused by one type of beer, but rather incurred as a
consequence of running the entire brewery.
Assignable product costs include direct materials, direct labour and all indirect costs necessary to
produce a finished product ready for sale to customers. However, for retailing and service firms the
cost of meeting their product and/or service needs to be calculated differently.
The classification of cost depends on different types of firms, as listed below:
1. Costs in a retailing firm:
• Retail firm buy and sell goods.
• Product costs include the price paid for the goods purchased, shipping costs, insurance
and import taxes.
2. Costs in a service firm:
• Similar to retail firms, except they do not normally contain inventories and costs of
goods sold.
3. Costs in a manufacturing firm:
• Consists of raw materials (direct material), work in process and finished goods. They
determine their product cost in terms of direct material, direct labour and indirect costs
(manufacturing overheads)
❖ Direct materials - cost of all materials directly traceable with a finished product.
Lyana Petzer Page 2 of 13
Study Unit 04: Profit planning and control (PB: Chapter 4)
Profit planning and control are vital in assuring the profitability of a firm Profit planning is
usually done by means of a budget. Profit planning may be carried out by comparing actual
results with the planned results. Profit planning and control are short-term aspects of financial
management and are undertaken in most business organisations by means of budgets.
There are two basic kinds of accounting information systems:
• Financial accounting is concerned with producing information for external users. The general
objective is the preparation of external reports (financial statements) for investors, creditors,
government agencies and other external users. This information is used for investment
decisions, monitoring organisational performance and regulatory measures.
• Management accounting produces information for internal users, such as managers, executives
and employees. The management accounting system identifies, collects, measures, classifies
and reports information that is useful to internal users in planning, controlling and decision
making.
➢ Management accounting therefore has three broad objectives:
- To provide information for costing out products and services
- To provide information for planning, controlling and continuous improvement
- To provide information for decision making
Management accounting versus financial accounting
Management accounting Financial accounting
Internally focused Externally focused
No mandatory rules Must follow externally imposed rules
Emphasis on the future Historical orientated
Broad, multidisciplinary More self-contained, focused
Intended users. As mentioned, management accounting focuses on providing information for
internal users, while financial accounting focuses on providing information for external users.
Restrictions on inputs and processes. The inputs and procedures of financial accounting are
well defined and restricted. Only certain kind of economic events qualify as inputs, and
processes must follow generally accepted methods. Management accounting has no official
body that prescribes the format, content and rules for selecting inputs and procedures, and in
preparing financial reports. Management accountants therefore have the freedom to choose
whatever information they want to use - provided it can be justified on a cost -benefit basis.
Time orientation. Financial accounting has a historical orientation. It recognises records, and
reports events that have already occurred. Although management accounting also does so, it
places strong emphasis on the provision of information about future events. For example, if the
management of a company wants to know what it will cost to produce a product next year, this
information assists in planning material purchases and making pricing decisions.
Breadth/extent. Management accounting is much broader than financial accounting. It includes
aspects of managerial economics, industrial engineering and management sciences, to name
Lyana Petzer Page 1 of 13
, FIN2603 – Finance for Non-Financial Managers (2023)
but a few. A management accountant therefore has a holistic approach when evaluating the
performance of an organisation, having the knowledge, appreciation and ability to apply a wide
spread of skills in order to manage the financial wellbeing of an organisation.
1. Cost concepts:
Cost may be regarded as sacrifices made to acquire goods/services.
For the purpose of assigning costs to cost objects, costs are classified as either direct or indirect.
❖ Direct cost. This is a cost that can easily be allocated and traced towards the particular cost
object under consideration. For example, if Adidas is assigning costs to its various regional and
national sales offices, then the salary of the sales manager in its Singapore office would be a
direct cost of that office.
❖ Indirect cost. This is very difficult to allocate or trace to the particular cost object under
consideration. For example, SAB may produce a wide variety of beers. The manager's salary of
the brewery would be an indirect cost of a specific type of beer, say Windhoek, the reason
being that the manager's salary is not caused by one type of beer, but rather incurred as a
consequence of running the entire brewery.
Assignable product costs include direct materials, direct labour and all indirect costs necessary to
produce a finished product ready for sale to customers. However, for retailing and service firms the
cost of meeting their product and/or service needs to be calculated differently.
The classification of cost depends on different types of firms, as listed below:
1. Costs in a retailing firm:
• Retail firm buy and sell goods.
• Product costs include the price paid for the goods purchased, shipping costs, insurance
and import taxes.
2. Costs in a service firm:
• Similar to retail firms, except they do not normally contain inventories and costs of
goods sold.
3. Costs in a manufacturing firm:
• Consists of raw materials (direct material), work in process and finished goods. They
determine their product cost in terms of direct material, direct labour and indirect costs
(manufacturing overheads)
❖ Direct materials - cost of all materials directly traceable with a finished product.
Lyana Petzer Page 2 of 13
