Introduction to Managerial Accounting Session 1 PDF

AC11, Managerial Accounting 1 Brigitte Dugas 2 CHALLENGE To calculate the profitability per product/service, the challenge is to calculate the cost of those products and services in order to subtract them from sales. There are several ways to calculate a cost...

AC11, Managerial Accounting 1 Brigitte Dugas 2 CHALLENGE To calculate the profitability per product/service, the challenge is to calculate the cost of those products and services in order to subtract them from sales. There are several ways to calculate a cost 3 5  Direct Costs Indirect costs A cost is indirect if it represents a resource consumed by A cost is direct if it can be unambiguously several cost objects. A part of the cost must be allocated traced to a cost object to each concerned cost object. Variable costs Fixed costs Cost that changes in total in proportion to Costs that remains unchanged for a given time period, changes in the related level of total activity despite wide changes in the related level of total activity Relevant Costs Relevant revenues Expected future cost that differ among Expected future revenues that differ among alternative alternative courses of actions being considered courses of actions being considered Sunk costs Avoidable costs Past costs that are unavoidable because they Cost that will not be incurred if an activity is suspended will be incurred no matter what action is taken 6 Accounting Systems provide information found in the Income Statement, Balance Sheet and Cash Flow statements to the various shareholders and stakeholders (external parties) But managers inside the company often need the information to be produced more often, presented differently in order to make decisions. 8 8 1. Should a company launch or not a new activity? Should it drop an activity which is not (enough) profitable? 2. What would be the minimum cost if a company accepts an additional order on top of its usual activity ? 3. What is the minimum activity to avoid losing money? 4. How do cost behave in relation to volume ? 5. Should a company carry out internally an activity (for instance logistics or manufacturing or even research and development ) or outsource, which means asking an external supplier to do it instead? 6. Should a company prefer a cost structure whose costs would vary with the level of activity or on the contrary a fixed cost structure? 7. How to share the cost of headquarters between the different products/services sold? 8. If a company decreases its price in order to gain volume, will this opportunity of having more units sold offset the price decrease? 9. When a company is constrained by a lack of production capacity or shortage of raw materials/components, how to decide which products/services it should focus on? 9 9  MANAGEMENT AND COST ACCOUNTING Management Accounting measures, analyses and reports financial and non financial information that help managers to make decisions to fulfill the strategic goals of the organization. It also provides information to Financial Accounting. 10 10  MANAGEMENT AND COST ACCOUNTING Management Accounting uses cost information in order to facilitate the decision making process. But cost are just part of the decision. Management Accounting is about margins (cost and price), lost and gained opportunities (cost benefit/analysis), variances between forecasts and achievements 11 In contrast to Financial Accounting information, Management Accounting information is: 1) forward-looking, instead of historical; 2) model based with a degree of abstraction to support decision making generically, instead of case based; 3) designed and intended for use by managers within the organization, instead of being intended for use by shareholders, creditors, and public regulators 12 In contrast to Financial Accounting information, Management Accounting information is: 4) usually confidential and used by management, instead of publicly reported; 5) computed by reference to the needs of managers, often using management information systems, instead of by reference to general financial accounting standards. 13 13  Cost Accounting Management Accounting The primary objective of management accounting is to Determination of cost and cost control are the provide necessary information to the management in the primary roles of cost accounting process of its planning, controlling, and performance evaluation, and decision- making Management accounting uses both quantitative and Cost-related data as obtained from financial qualitative data. It also uses those data that cannot be accounting is the base of cost accounting measured in terms of money. Provides future cost-related decisions based on the Provides historical and predictive information for future historical cost information decision-making. 14