Management Accounting Principles

• Management accounting is introduced by Bernard Augé.

Overview

• The principles of management accounting are introduced
• Traditional full cost methods are covered
• Cost-Volume-Profit analysis is included
• Decision-making implications are covered

The Evolution of Management Accounting

• Industrial accounting emerged in the early 19th century to measure the cost of producing individual products
• Cost accounting arose in the early 20th century applying cost analysis to services and measuring the performance of managers
• Management accounting in the 1980s uses cost analysis to inform managers for decision-making

Definitions of Management Accounting

• Management accounting identifies, measures, accumulates, analyzes, prepares, interprets, and communicates information to help management achieve organizational goals
• Management accounting sources, analyzes, communicates, and utilizes decision-relevant financial and non-financial information to generate and preserve value for organizations
• Management accounting involves partnering in management decision-making, devising planning and performance management systems
• Management accounting provides expertise in financial reporting and control to assist in the formulation and implementation of an organization's strategy
• Management accounting provides useful accounting information to management
• Management accounting identifies, presents, and interprets information for formulating strategy, planning and controlling activities, decision making, and optimizing resource use
• Management accounting ensure disclosure to shareholders and employees

The American Institute of Certified Public Accountants (AICPA)

• Strategic Management advances the role of the management accountant as a strategic partner
• Performance Management develops business decision-making and manages organizational performance
• Risk Management establishes frameworks for identifying, measuring, managing, and reporting risks

Differences Between Management and Financial Accounting

• Financial accounting communicates an organization's financial position to external parties
• Management accounting helps managers make decisions to fulfill organizational goals
• Financial statements must adhere to GAAP and be certified by external auditors
• Internal measures and reports in management accounting do not have to follow GAAP but should use cost-benefit analysis
• Financial accounting is past-oriented, while management accounting is future-oriented
• Financial accounting provides summary reports focused on the whole entity
• Management accounting gives thorough reports with details of products, and departments

Distinctions Between Management and Financial Accounting

• Financial accounting serves outside investors, government agencies, and organizational managers
• Management accounting primarily serves organizational managers at different levels
• Financial accounting uses more sharply defined fields with lighter use of related disciplines
• Management accounting uses economics, decision sciences, and behavioral sciences
• No management accounting standards exists; its tailor-made approach adapts to the company's unique situation

Objectives of Cost Analysis

• Cost analysis is useful for price fixation purposes
• Cost analysis provides data to assist in financial decisions
• Cost analysis identifies causes for profit or loss changes
• Perpetual inventory systems with continuous stock taking are essential
• Determination of departmental performance
• Cost reduction programs and value analysis techniques lead to economy
• Cost systems reveal unprofitable activities and inefficiencies like waste of manpower, materials, and resources
• Application of Standard Costing and Budgetary Control methods sets optimum efficiency levels
• Cost comparison aids cost control, and includes analysis and comparison of jobs, processes, and cost centers

Management Accounting System (MAS) Components

• People with accounting knowledge, management accountants
• Technology in use,
• Financial transaction records
• Cost accounting system basis
• Management accounting techniques for information and data analysis
• System-generated reports and accessible online
• Users of provided information

Determining Costing

• Management accounting expenses are classified based on several criteria
• The classification includes function, assignment, and variability
• Combinations of these criteria lead to cost categories which include actual cost, variable cost and standard cost

Classification by Function

• Expenses divided into categories which include supply, production, sales, and administration

Cost Traceability: Direct Costs and Indirect Costs

• Direct costs are traceable to a specific product and incurred by a single cost object
• Direct costs are materials, labor, and expenses used in creating a product
• Indirect costs, or overheads, are incurred in making a product or providing a service but are not directly traceable to it
• Indirect costs include materials, labor, and expenses shared by multiple cost objects

Cost Behavior: Variable Costs, Fixed Costs, and Semi-Variable Costs

• Variable costs are business expenses that change with production output
• Variable costs increase or fall depending on production volume
• Direct material, direct labor, energy consumption, commissions, fuel, packaging, and freight transport
• Fixed costs remain constant despite production or sales changes
• Fixed costs are expenses that must be paid regardless of a company's activity level
• Insurance, rental fees, lease payments, property tax, advertising, supervisor salaries, loan interest, and depreciation
• Semi-variable costs have fixed and variable components which are neither totally fixed nor variable
• Mobile telephone bills, energy bills, and salesman wages are examples of semi-variable costs

Cost Objects

• Output: common cost objects include a company's products plus services
• Operational: cost objects can be within a company, like a department or production line

Content

• Full Cost
• Partial Cost

Period Costing

• Historical costs are the actual costs of acquiring assets or producing goods or services
• Predetermined costs as costs computed in advance of production, also known as standard cost
• Standard costs are used to compare/analyze actual costs and determine variances