Management and Cost Accounting Fundamentals

Management and Cost accounting
Seventh Edition
Part 1
Management and cost
accounting fundamentals
Chapter 1
The manager and management
accounting
Copyright © 2019, 2015, 2012 Pearson Education, Inc. All Rights Reserved
Introduction
• Modern cost accounting provides key

information to managers for their decision-
making process.
• The study of modern cost accounting
gives an insight into both the manager’s
role and the accountant’s role in an
organisation.
Learning objectives
1 Differentiate management accounting

from financial accounting and cost
management
2 Recognise the growing role of strategy in
management accounting processes
3 Identify five broad purposes of accounting
systems
Learning objectives (Continued)
4 Understand how accounting can

influence planning, control and decision
making
5 Distinguish between the scorekeeping,
attention-directing and problem-solving
functions of management accounting
Learning objectives (Continued)
6 Recognise that economic benefits, costs

as well as contextual and organisational
process issues are relevant to accounting
systems design and operation
7 Understand how companies add value
8 Explain why digitalisation is management
accounting’s most important challenge
today
Learning objective 1
Differentiate management accounting

from financial accounting and cost
management
Management accounting
Management accounting measures and

reports financial and non-financial
information that helps managers make
decisions to fulfil the goals of an
organisation.
Financial accounting
Financial accounting focuses on reporting

to external parties.
• It measures and records business
transactions.
• It provides financial statements based on
generally accepted accounting principles.
Cost accounting
Cost accounting provides information for

both management accounting and
financial accounting.
• It measures and reports financial and non-
financial data that relates to the cost of
acquiring or consuming resources by an
organisation.
Cost management
Cost management describes the actions of

managers in short-run and long-run planning
and control of costs that increase the value for
customers and lower the costs of products and
services.
• It entails the continuous reduction of costs.
• It is a key part of general management
strategies and their implementation.
Recognise the growing role of strategy

in management accounting processes
The growing role…
• Increased focus on expansionist, risky

and entrepreneurial strategies
• Aim to create, not preserve shareholder
value in the short term
• Increase focus to external sources for
opportunities
• All this means an increased role for
management accountants.
…for management accountants
• Assist management to make balanced

decisions
• Monitor and evaluate strategic and
operational progress
• This has led to a realignment of skill sets
by the global management accounting
institutes such as CIMA, CMA and IMA.
Identify five broad purposes of

accounting systems
Major purposes of
accounting systems
1 Formulating overall strategies and long-

range plans – internal non-routine
reporting
2 Resource allocation decisions, for
example, product and customer emphasis
and pricing – internal routine reporting.
Major purposes of
accounting systems (Continued)
3 Cost planning and cost control of

operations and activities – internal routine
reporting
4 Performance measurement and evaluation
of people – internal non-routine reporting
5 Meeting external regulatory and legal
reporting requirements – external reporting.
Internal routine reporting
• This purpose covers information provided

for decisions that occur with some
regularity:
– Daily reports
– Weekly reports.
Internal non-routine reporting
• This purpose covers information for

decisions that occur irregularly or even
without precedent:
– Outsourcing
– Design of a special cost control tracking
system.
External reporting
This purpose covers information provided

to investors, government authorities and
other outside company stakeholders on the
organisation’s financial position, operations
and related activities.
Understand how accounting

can influence planning, control
and decision making
What is planning?
Planning is deciding on organisation goals,

predicting results under various alternative
ways of achieving those goals and then
deciding how to attain those desired goals.
What is control?
Control is deciding and taking actions

that implement the planning decisions
‒ deciding on performance evaluation
and the related feedback that will help
future decision making.
What is budget?
Budget is the quantitative expression of a

plan of action and an aid to the
coordination and implementation of the
plan.
Performance report
• Performance report is a report that

compares actual results with budgeted
amounts.
• The performance report of Surrey
Specialty Ltd for the month of January
shows the following.
Performance report (Continued)
Surrey Specialty Ltd, Year 1

Budget Actual
Variance
Revenues £57,000 £60,000 £3,000 F
Cost of goods sold 40,000 43,400 3,400 U
Wages 6,700
7,000 300 U General 1,300 900
400 F Fixed
costs 5,000 5,000 ------- Operating
income £4,000 £3,700 £300 U
• The performance report indicates that although

actual revenues exceeded the budgeted
amount by £3,000, operating income was £300
less than budgeted.
• The report could spur investigation and
further decisions.
• Did the purchasing department pay more than
expected for the merchandise?
• Yes, actual cost of goods sold were 72% of

revenues instead of the budgeted 70%.
Budget
Actual %
% Revenues
£57,000 100 £60,000 100
Cost of goods sold 40,000 70 43,400
72 Gross margin £17,000 30
£16,600 28
Feedback
Feedback involves managers examining

past performance and systematically
exploring alternative ways to improve
future performance.
Distinguish between the

scorekeeping, attention-directing
and problem-solving functions
of management accounting
Scorekeeping
Scorekeeping involves accumulating data

and reporting reliable results to all levels
of management.
•This role asks how is the business doing?
Attention directing
Attention directing involves helping

managers properly focus their attention.
• This role asks which opportunities and
problems should be emphasised first.
• Attention directing should focus on all
opportunities to add value to an
organisation, not just cost-reduction
opportunities.
Problem solving
Problem solving involves comparative

analysis for decision making with an
element of analytical review.
• This role asks, of the several alternatives
available, which is the best?
Management accountants
Management accountants serve each of

these three roles in both planning and
control decisions.
• The problem-solving role is most marked
for planning decisions.
• The scorekeeping and attention-directing
roles are most important for control
decisions.
Management accountants
(Continued)
• Management accountants often

simultaneously perform two or all of the
problem-solving, scorekeeping and
attention-directing roles.
• Management accountants increasingly are
viewing managers as their customers.
Recognise that economic benefits,

costs as well as contextual and
organisational process issues are
relevant to accounting systems
design and operation
Key guidelines
1 Cost–benefit approach
2 Full recognition to behavioural as well as
technical considerations
3 Use of different costs for different
purposes
Cost–benefit approach
A cost–benefit approach should be used in

order to spend resources if they promote
decision making that better achieves
organisational goals in relation to the costs
of those resources.
Behavioural and technical
considerations
A management accounting system should

have two simultaneous missions for
providing information:
1 To help managers make wise economic
decisions.
2 To help managers and other employees to
aim and strive for goals of the organisation.
Different costs for different
purposes
A cost concept used for the external

reporting purpose need not be the
appropriate concept for the purpose of
internal routine reporting to managers.
Understand how companies

add value
Customer focus
The challenge facing managers is to

continue investing sufficient (but not
excessive) resources in customer
satisfaction such that profitable customers
are attracted and retained.
Key success factors
Key success factors are operational

factors that directly affect the economic
viability of the organisation.
• Cost – organisations are under continuous
pressure to reduce costs.
• Quality – customers are expecting higher
levels of quality.
Key success factors (Continued)
• Time – organisations are under pressure

to complete activities faster and to meet
promised delivery dates more reliably.
• Innovation – there is now heightened
recognition that a continuing flow of
innovative products or services is a
prerequisite to the ongoing success of
most organisations.
Key success factors (Continued)
• Sustainability – companies are

increasingly applying the key success
factors to promote the development and
implementation of strategies to achieve
long-term financial, social and
environmental goals.
Continuous improvement and
benchmarking
Continuous improvement by competitors

creates a never-ending search for higher
levels of performance within many
organisations.
Value-chain and
supply-chain analysis
• This theme has two related aspects:

1 Treat each of the business functions in the
value chain as an essential and valued
contributor.
2 Integrate and coordinate the efforts of all
business functions in addition to developing
the capabilities of each individual
business function.
Value-chain and supply-chain
analysis (Continued)
• Supply chain – describes the flow of

goods, services and information from
cradle to grave, regardless of whether
those activities occur in the same
organisation or other organisations.
Exhibit 1.4 The value chain of
business functions
Explain why digitalisation is

management accounting’s most
important challenge today
Digitalisation
• Digital disruption and rapid cognitive

development
• Data availability
Management accountant should
be aware
• Artificial intelligence and robotics

• Blockchain – distributed ledger which
records transactions continuously such
that the transacting parties leave a
permanent record that remains verifiable.
End of Chapter 1

Management and Cost Accounting Fundamentals

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Management and Cost Accounting Fundamentals

Uploaded by

Copyright:

Available Formats

Management and Cost accounting

• Modern cost accounting provides key

1 Differentiate management accounting

4 Understand how accounting can

6 Recognise that economic benefits, costs

Differentiate management accounting

Management accounting measures and

Financial accounting focuses on reporting

Cost accounting provides information for

Cost management describes the actions of

Recognise the growing role of strategy

• Increased focus on expansionist, risky

• Assist management to make balanced

Identify five broad purposes of

1 Formulating overall strategies and long-

3 Cost planning and cost control of

• This purpose covers information provided

• This purpose covers information for

This purpose covers information provided

Understand how accounting

Planning is deciding on organisation goals,

Control is deciding and taking actions

Budget is the quantitative expression of a

• Performance report is a report that

Surrey Specialty Ltd, Year 1

• The performance report indicates that although

• Yes, actual cost of goods sold were 72% of

Feedback involves managers examining

Distinguish between the

Scorekeeping involves accumulating data

Attention directing involves helping

Problem solving involves comparative

Management accountants serve each of

• Management accountants often

Recognise that economic benefits,

A cost–benefit approach should be used in

A management accounting system should

A cost concept used for the external

Understand how companies

The challenge facing managers is to

Key success factors are operational

• Time – organisations are under pressure

• Sustainability – companies are

Continuous improvement by competitors

• This theme has two related aspects:

• Supply chain – describes the flow of

Explain why digitalisation is

• Digital disruption and rapid cognitive

• Artificial intelligence and robotics

You might also like