PMA1113 | Introduction To Cost And Management Accounting

Session: November 2018

CHAPTER ONE

INTRODUCTION TO COST AND MANAGEMENT

ACCOUNTING

LEARNING OUTCOMES:

Upon Completion of this chapter, students should be able to:

 Define Cost and Management Accounting

 Identify the Uses of Accounting Information
 Differentiate Between Cost and Management Accounting and Financial
Accounting
 Explain the Decision Making Process
 Identify the Functions of Cost and Management Accounting

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 PMA1113 | Introduction To Cost And Management Accounting
Session: November 2018

1.0 DEFINITION OF MANAGEMENT ACCOUNTING

A field of accounting that provides economic and financial information for managers and
other internal users. Management accounting is concerned with the provision of
information to managers who make decisions about the ways in which an organization’s
resources should be allocated. The persons who provide information pertaining to the
economic and financial are known as management accountants or financial controller.

1.1 DEFINITION OF COST ACCOUNTING

Cost accounting is concerned with calculation of product cost for stock valuation. The
person who provides cost information is called cost accountant.

1.2 DEFINITION OF FINANCIAL ACCOUNTING

Financial accounting is concerned with the provision of information to users other than
managers.

2.0 THE USES OF MANAGEMENT ACCOUNTING INFORMATION

2.1 Providing information for decision making and planning
2.2 Assisting managers in directing and controlling operational activities
2.3 Motivating managers and other employees toward the organization’s goals
2.4 Measuring the performance of activities, subunits, managers, and other
employees within the organization
2.5 Assessing the organization’s competitive position, and working with other
managers to ensure the organization’s long run competitiveness in its industry

3.0 DIFFERENCES IN MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING

Scope Financial Accounting Management Accounting

Users Financial statements are used Information presents to internal
by external users users: managers and staff

Focus A summary of past activity, Emphasis on future oriented

based on historical costs activities for planning and
decision making
Information More objective and diverse More flexible and relevant

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 PMA1113 | Introduction To Cost And Management Accounting
Session: November 2018

Nature of Only accurate (often audited) Data are presented as a whole

Information data are reported in annual or a segment of entity, e.g. a
report division, products, customers
and process

Compliance Must comply with Generally Need not comply with GAAP
Accepted Accounting
Principles (GAAP)

4.0 FUNCTIONS OF MANAGEMENT ACCOUNTING AND COST MANAGEMENT IN

BUSINESS
Managers are responsible for performing four traditional functions: planning, directing,
controlling and leading. They require a lot of information in discharging their
responsibilities. Management accountant and cost accountant are responsible for
providing accounting information for managers in discharging the following functions:

4.1 Planning
Planning is defined as the act of making decision for future actions. Managers need
a lot of information for decision making activities. Amongst others, profit
maximization is the most important decision managers make.
4.2 Directing
Directing is a process of making plans into reality. It involves coordinating a
company’s diverse activities and human resources to produce a smooth-running
operation. All activities related to recruiting, motivating and training employees are
a few parts of directing activities.
4.3 Controlling
Controlling is a process of comparing the planned activities against the actual
performance. Any discrepancies are identified, investigated and corrective
measures are taken. There are two types of discrepancies: favorable and
unfavorable. The controlling process may use an informal or formal system of
evaluations.

Figure 1 below shows good decision making is the outcome of good judgment in
planning, directing, and controlling.

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 PMA1113 | Introduction To Cost And Management Accounting
Session: November 2018

Figure 1: Planning and Control cycle

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 PMA1113 | Introduction To Cost And Management Accounting
Session: November 2018

TUTORIAL QUESTIONS

1. Define what is management accounting and financial accounting.

2. Briefly explain differences between management accounting and financial accounting.
3. State the uses of management accounting information.
4. Explain the functions of management accounting and cost management in business.