Management Accounting Summary – book & lectures
Module 1
L1: Introduction (C1, C3)
Strategy: plan that outlines the purpose & long-term direction of a firm.
Competitive strategy: (combi of both = lowest success)
- Production differentiation: focuses on offering superior or unique products/services
to foster brand loyalty and higher prices
- Cost leadership: emphasizes producing at the lowest cost to achieve lower selling
prices
- Measuring and assessing results are crucial, and management accounting plays a
strategic role by providing metrics and tools for this purpose
Cost classification
Cost allocation: direct vs. indirect costs (‘estimating products/service costs’)
- Direct costs (easily traced to cost objects) & indirect/overhead costs (can’t be
directly traced)
- Cost assignment: tracing direct costs & allocating indirect costs using a cost
driver/allocation base
- Cost object: item/entity for which the cost is being determined
Cost assignment example
1. OH rate = OH/ sum base (can be DL € or DL hours)
2. OH rate * cost driver usage each type
Cost behavior: fixed vs. variable costs (financial planning)
Variable costs: change in proportion with volume of a cost driver, such as
production/sales quantity
Fixed costs: don’t change in proportion with volume of a cost driver, at least not
within the relevant range
Fixed: depreciation, CEO compensation, assembly line labor
Variable: CEO compensation, assembly line labor, plant electricity, salesforce commissions
Piecewise Linear Variable Costs
‘Variations in the cost driver explain variations in total costs’
‘Cost behavior is approximated by a linear cost function within the relevant range’
1
,MC (x) = increase in costs from producing an additional unit of output at point x (first
derivative of function)
Cost functions: depict how costs change with changes in cost driver
Fixed costs over the long-term
- Fixed costs aren’t always fixed on the long term, since firms react on the business
activity
- Relevant range: range in which the relationship between the activity/volume level
and the respective cost is constant
- When business activity declines, firms divest to eliminate excess capacity
- When business activity increases, firms invest to increase capacity
- Over the long-term fixed costs behave like step-functions
Cost relevance: relevant vs. irrelevant costs (‘internal decision making’)
Relevant costs and revenues are those that
1. Differ between alternative courses of actions and;
2. Affect future cash flows
Irrelevant costs: sunk costs, are already incurred costs
Cost recording: product vs. period costs (for external financial reporting)
Product costs: include expenses necessary for manufacturing or purchasing and
transporting product for sale, such as DM, DL, & factory overhead.
Period costs (non-product costs): all other expenses related to managing or selling
the product, incl. selling expenses. & administrative expenses.
Flow of product and period cost
2
,Manufacturing company
Raw materials are purchased and (as soon as production starts) then moved to
material inventory.
When production begins, the raw materials are used and transferred in the WIP
inventory.
Once the products are finished, they are recorded as COGS manufactured and stored
in the finished goods inventory.
When the products are sold, they are recognized as COGS
C1: Cost Management & Strategy
Cost management – by management accounting who reports to controller- is
essential for success
Development strategy: plan to achieve competitive success
Management Accounting & Role of Cost management
- Cost management information: financial & non-financial information
- Main focus: usefulness and timeliness
Cost management: development & use of cost management information
Management accounting vs. financial accounting
MA: decision making, intern, detailed, long timespan, no rules, future
Financial Accounting: external, summarizing, many rules (GAAP, CPA/IFRS)
Value chain – in this, information is developed & utilized
Management functions – rely on cost information for effective decision-making
Strategic management (!): involves developing and implementing a competitive
position through specific goals and actions plans
Planning & Decision-making: encompass budgeting, profit planning, cash flow
management, & other business-related decisions
Management & Operational control: consists of evaluating middle-level managers
(management control) by upper level & operating-level managers (operational
control) by middle level.
Preparation of financial statements: relevant for all 3 functions
Cost management is relevant for all types of organizations:
Merchandising firms: resale firms (wholesaler & retailer).
- Cost Management information: inventory control, distribution, & customer service
Manufacturing firms: focus on converting raw materials & labor into product.
- Cost Management information: control of production costs.
3
, Service firms: provide convenience, freedom, safety, or comfort
- Cost Management information: selecting profitable services & managing service-
related expenses.
Government agencies & nonprofits: provide services without a direct correlation
between payment amount & service itself.
Public goods: geen echte/typische markt; onmogelijk consument uitsluiten van consumptie
Competitive firm
Anticipates regulatory changes
Customer driven
Recognized the cultural, social, politic, complex environment
Utilized advanced production & information technologies
Anticipates the impact of changing regulatory requirements and customer
preferences
Cost management: focuses on identifying Critical Success Factors (CSFs) (measurement).
1. Basic internal transaction reporting systems (internal)
2. External financial reporting for reliably financial reports
3. Track key activity data & development accurate and relevant cost information for
decision-making
4. Incorporating strategic cost information
- Management accountants report to the management team, aiding in strategy
implementation & identifying CSFs for competitive position
Modern management techniques
Direct focus on strategy implementation & include the following:
Balanced Scorecard (BSC): accounting report that incorporates critical success
factors such as financial performance, customer satisfaction, internal processes, and
learning & growth. It provides a more comprehensive view by considering non-
financial information.
Strategy maps: help understand how improvements in certain (crucial) measures
contribute to better business goals and financial outcomes
Value chain analysis: method for identifying specific steps in delivering a
product/service to customers. It helps fain insights into competition, cost reduction
opportunities, & potential areas for outsourcing.
Activity-based costing and management: detailed cost analysis based on specific
business activities. Activity-based accounting improves cost analysis precision, while
activity-based management focuses on enhancing product value & competitive
positioning.
Business intelligence: the use of data by management accountants to understand
and analyze business performance, incl. regression and correlation analysis for
predicting customer behavior.
Target costing: determining product costs based on desired profits and competitive
factors. It promotes competitiveness, encourages price differentiation, and may
drive product redesign.
4
Module 1
L1: Introduction (C1, C3)
Strategy: plan that outlines the purpose & long-term direction of a firm.
Competitive strategy: (combi of both = lowest success)
- Production differentiation: focuses on offering superior or unique products/services
to foster brand loyalty and higher prices
- Cost leadership: emphasizes producing at the lowest cost to achieve lower selling
prices
- Measuring and assessing results are crucial, and management accounting plays a
strategic role by providing metrics and tools for this purpose
Cost classification
Cost allocation: direct vs. indirect costs (‘estimating products/service costs’)
- Direct costs (easily traced to cost objects) & indirect/overhead costs (can’t be
directly traced)
- Cost assignment: tracing direct costs & allocating indirect costs using a cost
driver/allocation base
- Cost object: item/entity for which the cost is being determined
Cost assignment example
1. OH rate = OH/ sum base (can be DL € or DL hours)
2. OH rate * cost driver usage each type
Cost behavior: fixed vs. variable costs (financial planning)
Variable costs: change in proportion with volume of a cost driver, such as
production/sales quantity
Fixed costs: don’t change in proportion with volume of a cost driver, at least not
within the relevant range
Fixed: depreciation, CEO compensation, assembly line labor
Variable: CEO compensation, assembly line labor, plant electricity, salesforce commissions
Piecewise Linear Variable Costs
‘Variations in the cost driver explain variations in total costs’
‘Cost behavior is approximated by a linear cost function within the relevant range’
1
,MC (x) = increase in costs from producing an additional unit of output at point x (first
derivative of function)
Cost functions: depict how costs change with changes in cost driver
Fixed costs over the long-term
- Fixed costs aren’t always fixed on the long term, since firms react on the business
activity
- Relevant range: range in which the relationship between the activity/volume level
and the respective cost is constant
- When business activity declines, firms divest to eliminate excess capacity
- When business activity increases, firms invest to increase capacity
- Over the long-term fixed costs behave like step-functions
Cost relevance: relevant vs. irrelevant costs (‘internal decision making’)
Relevant costs and revenues are those that
1. Differ between alternative courses of actions and;
2. Affect future cash flows
Irrelevant costs: sunk costs, are already incurred costs
Cost recording: product vs. period costs (for external financial reporting)
Product costs: include expenses necessary for manufacturing or purchasing and
transporting product for sale, such as DM, DL, & factory overhead.
Period costs (non-product costs): all other expenses related to managing or selling
the product, incl. selling expenses. & administrative expenses.
Flow of product and period cost
2
,Manufacturing company
Raw materials are purchased and (as soon as production starts) then moved to
material inventory.
When production begins, the raw materials are used and transferred in the WIP
inventory.
Once the products are finished, they are recorded as COGS manufactured and stored
in the finished goods inventory.
When the products are sold, they are recognized as COGS
C1: Cost Management & Strategy
Cost management – by management accounting who reports to controller- is
essential for success
Development strategy: plan to achieve competitive success
Management Accounting & Role of Cost management
- Cost management information: financial & non-financial information
- Main focus: usefulness and timeliness
Cost management: development & use of cost management information
Management accounting vs. financial accounting
MA: decision making, intern, detailed, long timespan, no rules, future
Financial Accounting: external, summarizing, many rules (GAAP, CPA/IFRS)
Value chain – in this, information is developed & utilized
Management functions – rely on cost information for effective decision-making
Strategic management (!): involves developing and implementing a competitive
position through specific goals and actions plans
Planning & Decision-making: encompass budgeting, profit planning, cash flow
management, & other business-related decisions
Management & Operational control: consists of evaluating middle-level managers
(management control) by upper level & operating-level managers (operational
control) by middle level.
Preparation of financial statements: relevant for all 3 functions
Cost management is relevant for all types of organizations:
Merchandising firms: resale firms (wholesaler & retailer).
- Cost Management information: inventory control, distribution, & customer service
Manufacturing firms: focus on converting raw materials & labor into product.
- Cost Management information: control of production costs.
3
, Service firms: provide convenience, freedom, safety, or comfort
- Cost Management information: selecting profitable services & managing service-
related expenses.
Government agencies & nonprofits: provide services without a direct correlation
between payment amount & service itself.
Public goods: geen echte/typische markt; onmogelijk consument uitsluiten van consumptie
Competitive firm
Anticipates regulatory changes
Customer driven
Recognized the cultural, social, politic, complex environment
Utilized advanced production & information technologies
Anticipates the impact of changing regulatory requirements and customer
preferences
Cost management: focuses on identifying Critical Success Factors (CSFs) (measurement).
1. Basic internal transaction reporting systems (internal)
2. External financial reporting for reliably financial reports
3. Track key activity data & development accurate and relevant cost information for
decision-making
4. Incorporating strategic cost information
- Management accountants report to the management team, aiding in strategy
implementation & identifying CSFs for competitive position
Modern management techniques
Direct focus on strategy implementation & include the following:
Balanced Scorecard (BSC): accounting report that incorporates critical success
factors such as financial performance, customer satisfaction, internal processes, and
learning & growth. It provides a more comprehensive view by considering non-
financial information.
Strategy maps: help understand how improvements in certain (crucial) measures
contribute to better business goals and financial outcomes
Value chain analysis: method for identifying specific steps in delivering a
product/service to customers. It helps fain insights into competition, cost reduction
opportunities, & potential areas for outsourcing.
Activity-based costing and management: detailed cost analysis based on specific
business activities. Activity-based accounting improves cost analysis precision, while
activity-based management focuses on enhancing product value & competitive
positioning.
Business intelligence: the use of data by management accountants to understand
and analyze business performance, incl. regression and correlation analysis for
predicting customer behavior.
Target costing: determining product costs based on desired profits and competitive
factors. It promotes competitiveness, encourages price differentiation, and may
drive product redesign.
4
