MANAGEMENT ACCOUNTING
CPA ERICK MOMANYI 0729224223
, MANAGEMENT ACCOUNTING
INTRODUCTION
Management Accounting: It is the process of identification, accumulation, analysis, preparation
and communication of information used by management to plan, evaluate, control and make
managerial decision.
Comparison between financial accounting and cost accounting
Similarities:
1. They are concerned with recording and representation of financial and cost data.
2. They apply the same principles of double entry when recording transaction.
3. They use the same documents i.e. the books of original entry
Differences
Financial accounting Cost accounting
1. The reports are submitted to 1. The reports are submitted to the management.
shareholders.
2. Preparation of the financial 2. Preparation of management accounting is a
accounting is a statutory voluntary exercise.
requirement.
3. Financial accounting statement are 3. Management accounting reports are
periodic. continuous.
4. The statement are prepared as per 4. The statement are prepared as per chartered
the international accounting institute of management accounts.
standards and international
financial reporting standards.
5. Financial statement are subject to 5 The managing accounting statement s are not
audit. subject audit.
6. Financial accounting is 6 Management accounting is dynamic it keeps on
conventional/static changing from one organization to another.
7. Financial accounting emphasizes on 7 Management accounting emphasizes on cost
recording of the financial control.
transactions.
CPA ERICK MOMANYI 0729224223 pg. 1
,Objectives/Advantages of Cost Accounting/management accounting
1. Cost control
It enables an organization to maintain the cost at desirable levels so as to minimize the wastage
inthe production process.
2. Decision making
The managers are required to make internal decisions which are facilitated by the availability of
the cost data.
3. Planning
Cost accountant uses the budget generated from the past experience. They are prepared to
incorporate the future costs for the purpose of implementation.
4. Cost ascertainment/determination
It is important to determine the cost of producing a commodity or provision of service so as to
assist the manager in making optimal decisions.
5. Disclosure of waste
Past experience of cost data on how to determine the future cost is normally used to improve
efficiency so as to reduce or eliminate unnecessary expenditure. This will ensure that the costs
are minimized.
6. Measure of efficiency
For performance evaluation, the standards are set in advance which will be compared with the
actual performance to ascertain the difference.
The reason for the difference is also determined.
7. Setting the selling price
To come up with a realistic selling price an organization must take into account the cost of
production plus the required profit margin.
Limitations of cost accounting/Management accounting
a) Cost accounting is not exact i.e. it involves inherent element of judgement
b) Cost accounting normally provide information for making optimal decisions in specific
circumstances. However, there is no best decisions in all circumstances.
c) It involves massive paper work i.e. cost items must be recorded separately.
d) It is expensive to maintain cost accounting department in an organization.
e) Cost accounting only capture quantitative data and ignores qualitative data.
MANAGEMENT ACCOUNTING SYSTEM.
It is a combination of procedures and records designed to provide information required by the
management in-order to conduct the operation of the organization.
Conditions for an effective cost accounting system
1. It must meet the needs of managers.
CPA ERICK MOMANYI 0729224223 pg. 2
, 2. It must be simple, economical and practical to use.
3. It must be supported by all the parties.
4. It must lead to co-operation between the managers and employees.
5. The wages and employment terms must be satisfactory.
6. Cost accounting department must be established.
7. Every cost item should have its own records.
8. The system put in place should be flexible so as to adjust for changes where necessary.
Difficulties in the installation
Lack of support from the top management.
Resistance to change by the employees especially from the accounting department.
Cost accounting installation could be expensive to an organization.
Lack of adequate expertise to run the system.
Forms or records might be inappropriate i.e. may not contain the adequate information
necessary.
Cost of classification
Costs are classified into different ways depending on the way they respond to the units of
production or any other external factors.
The following are the ways in which the costs are classified:
1. According to the behaviour
This is based on the way in which a particular cost item responds to the volume of output.
a) Variable costs
These are costs which changes with respect to the volume of production i.e. when the units
produced increase, they also increase and vice versa.
CPA ERICK MOMANYI 0729224223 pg. 3
CPA ERICK MOMANYI 0729224223
, MANAGEMENT ACCOUNTING
INTRODUCTION
Management Accounting: It is the process of identification, accumulation, analysis, preparation
and communication of information used by management to plan, evaluate, control and make
managerial decision.
Comparison between financial accounting and cost accounting
Similarities:
1. They are concerned with recording and representation of financial and cost data.
2. They apply the same principles of double entry when recording transaction.
3. They use the same documents i.e. the books of original entry
Differences
Financial accounting Cost accounting
1. The reports are submitted to 1. The reports are submitted to the management.
shareholders.
2. Preparation of the financial 2. Preparation of management accounting is a
accounting is a statutory voluntary exercise.
requirement.
3. Financial accounting statement are 3. Management accounting reports are
periodic. continuous.
4. The statement are prepared as per 4. The statement are prepared as per chartered
the international accounting institute of management accounts.
standards and international
financial reporting standards.
5. Financial statement are subject to 5 The managing accounting statement s are not
audit. subject audit.
6. Financial accounting is 6 Management accounting is dynamic it keeps on
conventional/static changing from one organization to another.
7. Financial accounting emphasizes on 7 Management accounting emphasizes on cost
recording of the financial control.
transactions.
CPA ERICK MOMANYI 0729224223 pg. 1
,Objectives/Advantages of Cost Accounting/management accounting
1. Cost control
It enables an organization to maintain the cost at desirable levels so as to minimize the wastage
inthe production process.
2. Decision making
The managers are required to make internal decisions which are facilitated by the availability of
the cost data.
3. Planning
Cost accountant uses the budget generated from the past experience. They are prepared to
incorporate the future costs for the purpose of implementation.
4. Cost ascertainment/determination
It is important to determine the cost of producing a commodity or provision of service so as to
assist the manager in making optimal decisions.
5. Disclosure of waste
Past experience of cost data on how to determine the future cost is normally used to improve
efficiency so as to reduce or eliminate unnecessary expenditure. This will ensure that the costs
are minimized.
6. Measure of efficiency
For performance evaluation, the standards are set in advance which will be compared with the
actual performance to ascertain the difference.
The reason for the difference is also determined.
7. Setting the selling price
To come up with a realistic selling price an organization must take into account the cost of
production plus the required profit margin.
Limitations of cost accounting/Management accounting
a) Cost accounting is not exact i.e. it involves inherent element of judgement
b) Cost accounting normally provide information for making optimal decisions in specific
circumstances. However, there is no best decisions in all circumstances.
c) It involves massive paper work i.e. cost items must be recorded separately.
d) It is expensive to maintain cost accounting department in an organization.
e) Cost accounting only capture quantitative data and ignores qualitative data.
MANAGEMENT ACCOUNTING SYSTEM.
It is a combination of procedures and records designed to provide information required by the
management in-order to conduct the operation of the organization.
Conditions for an effective cost accounting system
1. It must meet the needs of managers.
CPA ERICK MOMANYI 0729224223 pg. 2
, 2. It must be simple, economical and practical to use.
3. It must be supported by all the parties.
4. It must lead to co-operation between the managers and employees.
5. The wages and employment terms must be satisfactory.
6. Cost accounting department must be established.
7. Every cost item should have its own records.
8. The system put in place should be flexible so as to adjust for changes where necessary.
Difficulties in the installation
Lack of support from the top management.
Resistance to change by the employees especially from the accounting department.
Cost accounting installation could be expensive to an organization.
Lack of adequate expertise to run the system.
Forms or records might be inappropriate i.e. may not contain the adequate information
necessary.
Cost of classification
Costs are classified into different ways depending on the way they respond to the units of
production or any other external factors.
The following are the ways in which the costs are classified:
1. According to the behaviour
This is based on the way in which a particular cost item responds to the volume of output.
a) Variable costs
These are costs which changes with respect to the volume of production i.e. when the units
produced increase, they also increase and vice versa.
CPA ERICK MOMANYI 0729224223 pg. 3
