1. Introduction to managerial accounting
Financial accounting is about the past. It tells us what the company has done until now. It
gives external stakeholders (investors, banks, competitors, customers…) an idea of how the
company is performing.
Managerial accounting is meant for the internal stakeholders. It reports continuously and is
future oriented. The definition is: “measuring, analysing, and reporting financial and
nonfinancial information that helps managers/employees make decisions to fulfil the goals of
an organisation.”
Areas in which management accountants provide information:
- Planning and controlling the organisation
- Cost price calculation
- Cost allocation
- Investment appraisal
- Cost-volume-profit analysis/ BEP analysis
Differences:
Financial Managerial
Users Outsiders (make decisions Insiders (make decisions for
about your company) the company)
Details Consolidated information Segmented information
(big totals…) (only for my store,
department…)
Time Past (how did we do) Present/future (what are our
plans, expectations)
Verifiability Yes No (because we are talking
about the future)
Rules Yes, GAAP You have to budget
correctly, but there are no
rules that say you must do
it.
What do managers do?
- Planning: eg: architectural plans, cost plans, how much time it is going to cost…,
where are we going?
- Directing: double checking whether you are following the planning.
- Controlling: do you need to change the plan because along the way you see the plan
is not really working. Revisiting how you are working, double checking whether you
are on track.
, 2. Cost terms and purposes
What is a cost (expense)?
In the process of generating revenues companies need to sacrifice resources. A cost is a
resource sacrificed (normally expressed as a monetary amount) to achieve a specific
objective of an organisation.
Anything we can accumulate costs for: product, service, customer, department, business unit
In managerial accounting we work with a variety of cost classifications
Fixed vs variable
Fixed costs are those costs that are not output
dependent. Fixed costs are fixed till a certain level of
Product Direct
output. Fixed cost per unit changes with output.
versus versus
Variable costs are those costs that are output-
period indirect
dependent. There is a positive correlation between the
costs costs
production output and the variable cost. Variable cist per
unit remains constant.
Fixed Budgeted
versus versus Direct vs indirect
variable actual Direct costs are expenses that directly go into producing
costs costs goods or providing services. Direct labour, direct materials,
manufacturing supplies…
Indirect costs are general business expenses that keep
you operating, like rent, utilities, general office expense.
Product (inventoriable) vs period (non-inventoriable/operating) costs.
, Cost of goods sold refers to the direct costs of producing the goods sold by a company. This
amount includes the cost of the materials and labour directly used to create the good. It
excludes indirect expenses, such as distribution costs and sales force costs.
It is an important metric on financial statements as it is subtracted from a company’s
revenues to determine its gross profit. Gross profit is a profitability measure that evaluates
how efficient a company is in managing its labour and supplies in the production process.
An operating expense is an expense that a business incurs through its normal business
operations. Often abbreviated as OpEx, operating expenses include rent, equipment,
inventory costs, marketing, payroll, insurance, step costs, and funds allocated for research
and development.
Prime costs and conversion costs are relied upon heavily in the manufacturing sector to
measure efficiency in the production of a product. Prime costs are expenditures directly
related to creating finished products, while conversion cost are expenses incurred when
turning raw materials into a product. Prime costs include direct material and direct labour
costs. Conversion costs include direct labour and overhead expenses.
Financial accounting is about the past. It tells us what the company has done until now. It
gives external stakeholders (investors, banks, competitors, customers…) an idea of how the
company is performing.
Managerial accounting is meant for the internal stakeholders. It reports continuously and is
future oriented. The definition is: “measuring, analysing, and reporting financial and
nonfinancial information that helps managers/employees make decisions to fulfil the goals of
an organisation.”
Areas in which management accountants provide information:
- Planning and controlling the organisation
- Cost price calculation
- Cost allocation
- Investment appraisal
- Cost-volume-profit analysis/ BEP analysis
Differences:
Financial Managerial
Users Outsiders (make decisions Insiders (make decisions for
about your company) the company)
Details Consolidated information Segmented information
(big totals…) (only for my store,
department…)
Time Past (how did we do) Present/future (what are our
plans, expectations)
Verifiability Yes No (because we are talking
about the future)
Rules Yes, GAAP You have to budget
correctly, but there are no
rules that say you must do
it.
What do managers do?
- Planning: eg: architectural plans, cost plans, how much time it is going to cost…,
where are we going?
- Directing: double checking whether you are following the planning.
- Controlling: do you need to change the plan because along the way you see the plan
is not really working. Revisiting how you are working, double checking whether you
are on track.
, 2. Cost terms and purposes
What is a cost (expense)?
In the process of generating revenues companies need to sacrifice resources. A cost is a
resource sacrificed (normally expressed as a monetary amount) to achieve a specific
objective of an organisation.
Anything we can accumulate costs for: product, service, customer, department, business unit
In managerial accounting we work with a variety of cost classifications
Fixed vs variable
Fixed costs are those costs that are not output
dependent. Fixed costs are fixed till a certain level of
Product Direct
output. Fixed cost per unit changes with output.
versus versus
Variable costs are those costs that are output-
period indirect
dependent. There is a positive correlation between the
costs costs
production output and the variable cost. Variable cist per
unit remains constant.
Fixed Budgeted
versus versus Direct vs indirect
variable actual Direct costs are expenses that directly go into producing
costs costs goods or providing services. Direct labour, direct materials,
manufacturing supplies…
Indirect costs are general business expenses that keep
you operating, like rent, utilities, general office expense.
Product (inventoriable) vs period (non-inventoriable/operating) costs.
, Cost of goods sold refers to the direct costs of producing the goods sold by a company. This
amount includes the cost of the materials and labour directly used to create the good. It
excludes indirect expenses, such as distribution costs and sales force costs.
It is an important metric on financial statements as it is subtracted from a company’s
revenues to determine its gross profit. Gross profit is a profitability measure that evaluates
how efficient a company is in managing its labour and supplies in the production process.
An operating expense is an expense that a business incurs through its normal business
operations. Often abbreviated as OpEx, operating expenses include rent, equipment,
inventory costs, marketing, payroll, insurance, step costs, and funds allocated for research
and development.
Prime costs and conversion costs are relied upon heavily in the manufacturing sector to
measure efficiency in the production of a product. Prime costs are expenditures directly
related to creating finished products, while conversion cost are expenses incurred when
turning raw materials into a product. Prime costs include direct material and direct labour
costs. Conversion costs include direct labour and overhead expenses.
