1、Introduction to management accounting,CHAPTER 1,1.1a,Definition of accounting The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information. Users of accounting information can be divided into two categories: (i)
2、external parties outside the organization (financial accounting) (ii) internal parties within the organization (management accounting),1.1b,Major differences between financial and management accounting: Statutory requirement for public companies to produce annual financial accounts, whereas there is
3、 no legal requirement for management accounting. Financial accounting reports describe the whole of the organization, whereas management accounting focuses on reporting information for different parts of the business. Financial accounting reports must be prepared in accordance with generally accepte
4、d accounting principles (e.g. SSAPs). Financial accounting reports historical information, whereas management accounting places greater emphasis on reporting estimated future costs and revenues. Management accounting reports are produced at more frequent intervals.,1.2a,The changing business environ
5、mentOrganizations have faced dramatic changes in their business environment. Move from protected markets to highly competitive global markets Deregulation Declining product life-cycles,1.2b,To compete successfully in todays environment companies are: making customer satisfaction an overriding priori
6、ty adopting new management approaches changing their manufacturing systems investing in AMTs Above changes are having a significant impact on the MAS,1.3a,Focus on customer satisfaction and new management approaches Key success factors Cost efficiency increased emphasis on accurate product costs and
7、 cost management Quality TQM, quality measures Time reduced cycle time, focus on non-value-added activities Innovation responsiveness in meeting customer requirements Product comparisons Feedback on customer satisfaction,1.3b,Continuous improvement Static historical standards no longer appropriate B
8、enchmarkingEmployee empowerment Delegate more responsibility to people closest to operating processes and customersSocial responsibility and corporate ethics,1.4a,International convergence of management accounting Management accounting practices can be observed at the macro or micro levels: Macro re
9、fers to concepts and techniques Micro refers to the behavioural patterns of use. Tendency towards globalization at the macro level,1.4b,Drivers of convergence include: Global competition Information technology (e.g. ERP systems) Standardization by transnational companies Global consultancy Use of gl
10、obal textbooks At the micro level accounting information may be used in different ways due to influence of different national and local cultures,1.5a,Primary functions of cost/management accounting systemsInventory valuation for internal and external profit measurement Allocate costs between product
11、s sold and fully and partly completed products that are unsold. Provide relevant information to help managers make better decisions profitability analysis product pricing make or buy (outsourcing) product mix and discontinuation,1.5b,Provide information for planning, control and performance measurem
12、ent Long-term and short-term planning (budgeting) Periodic performance reports for feedback control Performance reports also widely used to evaluate managerial performance Note that costs should be assembled in different ways to meet the above three requirements.,1.6a,Inventory valuation and profit
13、measurement Consider a situation where a company has produced three products (A, B and C)during the period. The total costs for the period are 40 000.Product A has been sold for 20 000, product B has been completed but is in finished goods stock, and product C is partly completed. Costs must be trac
14、ed to products to value stocks and cost of goods sold. Sales 20 000 Production cost 40 000 Less Closing stocks (B = 18 000,C = 8 000) 26 000 Cost of goods sold (A =14 000) 14 000 Profit 6 000,1.6b,Approximate but inaccurate individual product costs may be appropriate for profit measurement for finan
15、cial accounting.Example Production expenses for the period = 10m Costs of products sold = 7m Cost of products not sold = 3m Note focus is on aggregate figures for financial accounting.,1.7a,Cost information for providing guidance for decision-making In theory cost information computed for stock valu
16、ation ought not to be used for decision-making. Example: Short-term decision A company is negotiating with a customer for the sale of XYZ. The cost recorded for stock valuation purposes is: Direct materials 200 Direct labour 150 Fixed overheads 300650,1.7b,The maximum selling price that can be negot
17、iated is 500 per unit for an order of 100 units over the next three months. Should the company accept the order?Spare capacity Additional relevant costs (100 200) 20 000 Additional sales revenue 50 000 Contribution to profits 30 000,1.8,Operational control and performance measurementThe allocation o
18、f costs to products is not particularly useful for cost control purposes.Instead,costs should be traced to responsibility/cost centres to the person who is accountable for controlling the costs.,Example Budgeted costs per unit:Product 1 Product 2 Product 3 Total Cost centre A 10 40 70 120 Cost centr
19、e B 20 50 80 150 Cost centre C 30 60 90 18060 150 240 450 Budgeted and actual production (units) 1000 1000 1000,1.9a,Operational control and performance measurementComparison of actual with budgeted costs by products Product 1 Product 2 Product 3 Total000 000 000 000 _ Budgeted cost 60 150 240 450(1
20、,000 60) Actual cost 70 170 270 510 _ Variance 10A 20A 30A 60A _The variances are not identified to responsibility (cost centres),1.9b,Comparison of actual with budgeted costs by cost centres Cost centre Cost centre Cost centreA B C Total000 000 000 000 _ Budgeted cost 120 150 180(1,000 120) Actual
21、costs 130 150 230 _ Variance 10A 50A 60A _Notes Performance reports analysed in far more detail for cost centre managers. Should not be used as a punitive device (identify areas where managers need to focus their attention). Non-financial critical success factors are also of vital importance and should be included on the performance reports.,
