C hapter 1

Introduction to M anagem ent

A ccounting
Learning Outcomes:
1. Explain the role of management
accounting
in
providing
relevant
information for management use in
planning, control and decision making.
2. Incorporate motivational, behavioral
and ethical issue in management
accounting.

M anagerialA ccounting B asics

Management Accounting is a field of accounting
that provides economic and financial information
for managers and other internal users. It
provides the following information:
Explains and reports manufacturing and non
manufacturing costs
Computing costs of rendering services or
manufacturing products
Determining the behavior of costs and
expenses as activity levels change
Analyzing cost volume profit relationships
Assisting management in profit planning

 Formalizing plans in the form of budgets

Providing a basic for controlling costs and

expenses by comparing actual with planned

results
Accumulating and using relevant data for
management decision making
Preparing ant interpreting information
regarding the companys ability to generate
cash
Analyzing financial information to evaluate
performance and financial position

O bjective of M anagem ent A ccounting

System :

To allocate cost between cost of

goods sold and inventories for

internal and external profit planning.
To provide relevant information to
help managers make better decision.
To provide information to for
planning, controlling and the
performance measurement of the
products segments, division or etc.

Com paring M anagerialand f n

i ancial
A ccounting

Similarities: Both deal with economic events of a firm

Both require the results of an entitys

economic events be quantified

Both require the results to be communicated
to interested parties

Differences:
Users

FinancialAccounting
Provides information to the
external users.

Legal
requirement

To produce a report in
To produce a report is optional and in a form
accordance with the companies suitable to a particular situation and needs.
acts and the relevant
accounting standard is a
statutory requirement.

Time
dimension

Reports on past events (use

historical data)

Analysis&
segments

Reports on activities of the

company as a whole and data
is analyzed in monetary terms.

Precision

Report

ManagerialAccounting
Provides information to the internal users for
management purposes.

Reports on past and future events to assist

in planning and control of operations.

Focuses on small segments of the company

such as products and departments and uses
both monetary & non-monetary terms (such
as std hours, volume, etc)
Information must be reasonably Estimates and approximations are more
accurate for external parties.
useful than accuracy for speedy decision
making process.
Reports are published annually Reports are prepared daily, weekly, monthly
or half yearly.
or quarterly depending on needs.

Ethical Standards for M anagerial

A ccountants
The Institute of Management Accountants (IMA) has the standards
of Ethical Conduct for Management Accountants, which divides
their responsibilities into:
1) Competence MA have a responsibility to: Maintain an appropriate level of professional competence by

ongoing development of their knowledge and skills

perform their professional duties in accordance with relevant

laws, regulations and technical standards

prepare complete and clear reports and recommendation after

appropriate analysis of relevant and reliable information

2) Confidentiality refrain from disclosing confidential information
except authorized, unless legally to do so

3) Integrity: avoid actual or apparent conflict of interest

refrain from engaging in any activity that would prejudice their

ability to carry out their duties ethically

refuse any gift, favor that would influence their action

4) Objectivity
Communicate information fairly and objectively
Disclose fully all relevant information that could affected the
users understanding of the report.

C haracteristics of
m anagem ent accounting
Relevance relevance information will give different output in a
i
nform
ation
decision being considered. Information available to managers should be

considered or can be ignored based on its relevance to the manager.

Accuracy all relevant information should be considered and evaluated
for accuracy. Management should take all steps possible to use the
most accurate information available.
Timeliness information should be as current as possible. Outdated
information will have lost its value.
Understandability the information must be understandable to the
managers or users. The presentation of the report must be in
accordance to what is required by the users.
Complete information that does not omit important aspects of the
underlying events.
Cost effectiveness the value of information must exceed its cost.
Reliable information made available to managers is reliable in that
they are free from error or biasness and accurately represents the
events of the organization.

M anagem ent Functions

Planning
Looking ahead and establishing objectives. These

objectives can be diverse as maximizing short-term

profits and market share, maintaining a commitment
to environmental protection, and contributing to
social programs. A Key objective of management is
to add value to the business under its control.
Directing and motivating
Its involve coordinating a companys diverse

activities and human resources to provide a smooth

running operation. This function relates to the
implementation of planned objectives.
Controlling
Is the process of keeping the firms activities on

track? Management determines whether planned

goals are being met and what changes are necessary

M anagerial C ost C oncepts

Manufacturing
Manufacturing consists of activities and processes that convert

raw materials into finished goods

Direct Materials
Raw materials represent the basic materials and part that are to

be used in the manufacturing process. Raw materials that can

be physically and conveniently associated with the finished
goods during the manufacturing process are called direct
materials. Indirect materials (1) do not physically became part
of the finished product or (2) cannot be traced because their
physically association with the finished product is too small in
terms of cost. Indirect materials are accounted for as part of
manufacturing overhead

Direct Labor
The work of factory employees that can be physically and

conveniently associated with converting raw materials into

finished goods is considered direct labor. In contrast, the wages
of maintenance people, timekeepers, and supervisors are
usually identified as indirect labor because their effort have no
physical association with the finished product, or it is
impractical to trace the costs to the goods produced. Indirect
labour is classified as manufacturing overhead.
Manufacturing overhead
Manufacturing overhead consists of costs that are indirectly

associated with the manufacture of the finished product. These

costs may also be defined as manufacturing coasts that cannot
be classified as either direct materials or direct labor.
Manufacturing overheads includes indirect materials, indirect
labor, depreciation on factory buildings and machinery, and
insurance, taxes and maintenance on factory facilities.

P roduct vs. period cost

Period costs are costs that are necessary and integral

part of producing the finished product. (other than

production cost such as administration cost, selling cost,
distribution cost etc)
These costs do not become expenses under the
matching principle until the finished goods inventory is
sold. The expense is cost of gold sold.
Direct materials and direct labor are often referred to as
prime costs because of their direct association with the
manufacturing of the finished product.
In addition, because direct labor and manufacturing
overhead are incurred in converting raw materials into
finished goods, these are often referred to as conversion
costs.

Relevant cost vs Irrelevant

cost
Relevantcost

Irrelevantcost

Future costs which differs between

alternatives.

Costs which does not differs

between alternatives.

*directly affected by the decision

making.

*remain the same for any decision

made.

e.g.: incremental cost, avoidable

cost & opportunity cost.
Avoidable
cost
Those cost that
may be saved
by not adopting
a given
alternative

Opportunity
cost
Cost that
measures the
opportunity that
is lost or
sacrificed when
the choice of
one course of
action requires
that alternatives
course of action
be given up.

Incremental
cost
is that cost
which arises
due to
producing
extra units
from the
previous level,

C ontem porary
developm ents in
m
anageri
al
accounti
ng
Technological change
Manufacture product untouched by human hands. E.g.

robotic equipment so it can reduce the importance of DL

cost and reduce storing cost

Quality
TQC to reduce the defect of finished goods. JIT reduce
the inventory level emphasis on non financial measure
Focus on activities
To obtain more accurate product cost, accounting for OH
cost by the activities - ABC

Changing com petitive environm ent

Competitor offered high quality product at low price
To be successful company have to compete not only

domestic competitor but also international competitors.

Have to changes in their competitive environment
Privatization of government controlled companies and
deregulation changed the competitive environment
Deregulation, intensive competition and expanding
product range created the need for service
organizations to focus on cost management and
develop management accounting information systems
that enable them to understand their cost base and
determine the sources of profitability for their product,
customers and markets.

Focus on custom er
satisfaction and new
m To
anagem
ent
approaches
compete in
todays
competitive
environment companies are having to
become more customer driven and make
customer satisfaction an overriding priority.
Customer are demanding on Improving
level of service on: Cost
Quality
Reliability
Delivery
Choice of innovative new products.

Key success factors

Continuous

Cost efficiency, quality,

time and innovation

Improvement

Customer
Satisfaction is
the top
priority

Total value
chain analysis

Employee
Empowerment