MFY 293 Managerial and Cost Accounting

Week 1 Notes

Introduction to Managerial and Cost Accounting

All businesses concentrate around two issues: revenue and cost. “Cost” side is the focus of cost
accounting. Cost accounting studies and analyzes “cost” by looking at it from four different
perspectives: terminology, accounting, calculation methods and decision making.

Terminology: Cost accounting has a world of its own; thus it has its own set of words. For instance,
cost can be direct or indirect, variable or fixed. These are words which may have different meanings
in the world of cost accounting. Usually the cost accounting terminology sounds easy and clear.
However, unless you know the technical meaning, you may not understand when these words are
used in a text. Terminology is the first thing that should be clarified so that we all speak the same
language.

Accounting: In the Turkish accounting system, cost accounting is treated as somewhat separate from
the financial accounting. There are special accounts for recording journal entries. In the uniform
chart of accounts, accounts which have codes starting with 7 are reserved to cost accounting. There
are two sets of systems, 7/A and 7/B. The entity uses one of these systems to record its journal
entries. We will learn how to record journal entries for the basic issues in cost accounting.

Calculation methods: The most controversial issue is to calculate the cost of a product. The questions
like what makes up the cost of a product or finding the percentage of an expense which is related to
a particular product need to be answered. There are different models concerning the calculation of
“cost” of products. There is no one model which is right for every business. Many factors like timing,
production process, market forces or management choices play a role in choosing the model. In this
section we will learn to calculate “cost” using different models and discuss the circumstances that
these models apply.

Decision making: Apart from the reasons of accounting and taxation, finding the cost of a product is
mainly used for decision making purposes. Pricing, budgeting, choosing the production volume and
many other choices of daily and strategic decision making require the knowledge of the cost of the
product. We will look into major decision making issues and discuss them from managerial
perspective.

Types of Accounting Systems

Accounting is a system. For something to be considered as a system, it has to have input, process and
output. An accounting system collects, records, categorizes, summarizes, reports and analyses mostly
financial data.

Data is recorded by journal entries. Entries are made to related accounts categorizing them. The
balances of these accounts are summaries. The financial statements, which are the reports of the
system, are formed from these summaries, i.e. from account balances. Balance sheet and income
statement are the main financial statements. Financial analysis, such as ratio and trend analysis are
performed on the financial statements.

Accounting system is made up of three systems somewhat intertwined to each other; namely
financial, managerial and cost.

Financial Accounting: Financial accounting collects, records, categorizes, summarizes, reports and
analyses only the financial data. It focuses on reporting to external parties via structuring financial
statements.

Managerial Accounting: Managerial accounting analyses and reports financial and non-financial data.
It is mainly used for decision making of the management. Therefore, its focus is on internal reporting.

Cost Accounting: Cost accounting analyses and reports financial and non-financial data. It is related
to costs or using resources. Its main focus is on planning and control of costs of the entity.