Management Accounting Functions

Management Accounting

• Management accounting provides financial data and advice to a company for use in the organization and development of its business.
• It is concerned with the provision of information to people within the organization to help them make better decisions and improve the efficiency and effectiveness of existing operations.

Functions of Management Accounting

• Planning: deciding in the present about the future objectives and the courses of action for their achievement.
• Controlling: ensuring that the divisional, departmental, sectional, and individual performances are consistent with the predetermined objectives and goals.
• Decision-making: allocating resources effectively in the best possible manner to maximize returns or profit.

Cost Management

• Cost classification includes material cost, labor cost, and overhead cost.
• Cost accounting methods include traditional method (direct method, step method, reciprocal method), and activity-based costing.

Cost Terminology

• Cost: utilization of assets' resources in order to obtain another asset (usually cash).
• Prime cost: cost made up of all direct costs, including direct material cost and direct labor cost.
• Conversion costs: costs used to convert raw materials into finished goods.
• Overhead costs: costs other than raw material and direct labor used to determine the value of the product and inventories.

Cost Classification

According to Behaviour

• Fixed cost: costs that remain fixed or constant despite changes in output in a given relevant range.
• Variable cost: costs that vary according to the variation in unit of output.
• Semi-variable cost: a combination of variable costs and fixed costs.

According to Tracing and Allocation

• Direct cost: costs that can be traced to a business activity, such as direct materials cost and direct labor cost.
• Examples of direct and indirect costs: flour, water, sugar, eggs, utensils, labor, and expenses like halal certification, rent, telephone, and electricity bills.

Accounting for Materials

• Management of material involves ordering, delivering, and receiving material from suppliers; storing material in the warehouse; and withdrawing material when requested by the production department.
• Each activity needs documentation to ensure the effectiveness of internal controls in an organization.

Material Valuation

• Raw materials need to be evaluated for product costing and inventory assessment.
• Methods of material valuation include First-In-First-Out (FIFO), Weighted Average Cost Method, and Last-In-First-Out (LIFO).
• Example of material valuation: calculating the cost of MAD3 material using FIFO, Weighted Average Cost Method, and LIFO methods.

Understand the role of management accounting in providing financial data and advice to companies, and its functions in planning, decision-making, and improving operations.