INTRODUCTION TO COST

AND MANAGERIAL
ACCOUNTING
CHAPTER 1
 COST ACCOUNTING

• Cost Accounting is a business practice in which we record,

examine, summarize, and study the company’s cost spent on any
process, service, product or anything else in the organization.
This helps the organization in cost controlling and making
strategic planning and decision on improving cost efficiency.
 The Need for Cost Accounting
• Cost accounting provides the detailed cost data that management
needs to control current operations and plan for the future.
• Companies must control costs in order to keep prices competitive.
• In today’s global environment, cost information is more crucial than
ever in remaining competitive.
 Types of Businesses That Use Cost
Accounting
• Manufacturers (Ford, General Motors)
• Merchandisers (WalMart, Kmart)
• Wholesalers (Beverage Distributors)
• For-profit Service Businesses (CPAs, Attorneys)
• Not-for-profit Service Agencies (United Way, Red Cross)
 Planning and Control
• Planning is the process of establishing objectives or goals for the
firm and determining the means by which the firm will attain them.
Effective planning is facilitated by the following:
• Clearly defined objectives of the manufacturing operation.
• A production plan that will assist and guide the company in reaching its
objectives.
Planning and Control (cont.)
• Control is the process of monitoring the
company’s operations and determining whether
the objectives identified in the planning process
are being accomplished. Effective control is
achieved through
1. Assigning responsibility.
2. Periodically measuring and comparing results.
3. Taking necessary corrective action.
Reporting
• Cost and production reports for a cost center reflect all cost and
production data identified with that center.
• The performance report will include only those costs and
production data that the center’s manager can control.
• A variance is the favorable or unfavorable difference between
actual costs and budgeted costs.
 Inventories
• Most manufacturers maintain a perpetual inventory system that
uses FIFO, LIFO, or moving average methods of costing.
• An inventory ledger is maintained to provide support for the
control accounts.
• Some manufacturers may use a factory ledger, which contain all
of the accounts relating to manufacturing.
 Managerial Accounting Basics

Definition of Managerial Accounting

A field of accounting that provides economic and financial information for managers and
other internal users.

Also called Management Accounting

Comparing Managerial and Financial Accounting

Similarities

Both deal with economic events of a business –

Thus, interests overlap
Both require that economic events be
quantified and communicated to
interested parties –
Determining unit cost is part of
managerial accounting,
Reporting cost of goods manufactured
is a part of financial accounting
Comparing Managerial and Financial
Accounting
Differences
 Managerial Accounting Basics

Management Functions

Management’s activities and responsibilities

can be classified into the following three
broad functions:

Planning
Directing
Controlling
 Management Functions

Planning

Look ahead and establish objectives such as –

Maximize short-term profit
Commit to environmental protection
Commit to overall long term health of organization

Key Objective: Add value to the business

Value measured by trading price of stock
and by potential selling price of the company
 Management Functions
Directing

Coordinate diverse activities and human resources

Implement planned objectives

Provide incentives to motivate employees

Hire and train employees including

executives, managers, and supervisors

Produce smooth-running operation

 Management Functions
Controlling

Keep activities on track

Determine whether goals are met

Decide changes needed to get back on track

May use an informal or formal system of evaluations

Good decision making is the outcome of good judgment in planning,

directing, and controlling.