Professional Documents
Culture Documents
Economic activities
Accounting links decision makers with economic activities and with the results of their decisions.
Accounting information
Actions (decisions)
Decision makers
Information System
Cost & Revenue Determination Job costing Process costing ABC Sales Assets & Liabilities Plant and equipment Loans & equity Receivables, payables & cash Cash Flows From operations From financing From investing
Information Users Investors Creditors Managers Owners Customers Employees Regulatory agencies -SEC -IRS -EPA
Decision Support CVP analysis Performance evaluation Incremental analysis Budgeting Capital allocation Earnings per share Ratio analysis
Payment
Car
Cash Flow Prospects nvestors Creditors Return on Periodic Periodic nvestment dividends interest Sale of Repayment of ownership at a loan at a Return of future date future date nvestment
(Specific)
Information about economic resources, claims to resources, and changes in resources and claims.
Information useful in assessing amount, timing and uncertainty of future cash flows.
Financial Statements
Historical in Nature
Management Accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for nonmanagement groups such as shareholders, creditors, regulatory agencies and tax authorities.
Information about decision-making authority, for decision-making support, and for evaluating and rewarding decision-making performance.
Information useful in assessing both the past performance and future directions of the enterprise and information from external and internal sources.
Information useful to help the enterprise achieve its goal, objectives and mission.
Feedback
Accounting systems are artifacts. They are created by men to help accomplish tasks. Audited statement reduce investors risk.
Audited statements allow a company to borrow capital from someone else. Records and internal financial controls safeguard the companys assets Balance Sheets allow the comparison of Assets, Liabilities and Owners Equity. Income Statements describe the change in Owners Equity from operations.
Managerial
Cost Accounting
Product costing Activity-based costing
Management Accounting
Decision support Organizational control Cost management Profit management Investment management Individuals Partnerships and corporations Estate and trusts International taxation Special tax issues and topics
Tax Accounting
Management functions:
Planning for the future (Strategic) Planning for the future (Operational) Monitoring and controlling the present Evaluating the past
Management
Financial Accounting
Users: Characteristics:
Financial Statements
External Users and Management Objective Prepared according to GAAP Prepared periodically Business entity
Managerial Accounting
Users: Characteristics:
Management Reports
Management Objective and subjective Prepared according to management needs Prepared periodically or as needed Business entity or segment
Least Important
Limitations
Based on accounting information Lack of knowledge Intuitive decisions Not an alternative to administration Personal bias
Primary Users
Financial Investors Creditors Government authorities Management Internal managers of the business
Purpose of Information
Management Financial Help investors, Help managers plan and control creditors, and business others make operations investment, credit, and other decisions
Type of Report
Financial Financial statements restricted by GAAP Management Internal reports not restricted by GAAP; determined by cost-benefit analysis
Verification
Financial Annual independent audit Management No independent audit
Scope of Information
Management Financial Detailed reports Summary reports primarily on parts of the on the company company as a whole
Behavioral Implications
Management Financial Concern about Concern about how reports will adequacy of affect employees disclosure behavior
Customer Focus
Distribution Marketing
Production
Basic concepts:
1. Control: Elements of a control system: A detector or a sensor a device that measures what is actually happening? An assessor: a device that determines the significance of what is actually happening by comparing it with some standard or expectation
Basic concepts..
An effector: a device that alters the behaviour if the assessor indicates the need to do so. A communication network: a device that transmits the information between the detector and the assessor and between the assessor and the effector. 2. Management: 3. Systems: a prescribed and usually repetitious way of carrying out an activity or a set of activities.
Examples:
Body Temperature Detector / Sensor Assessor Effector Communication network Sensory nerves Brain Muscles and organs Nerves Automobile Driver Eyes Brain Foot Nerves
Characteristics of Control
Managerial Function Forward Looking Continuous Activity Related to planning Essence of control is action
Task control
Is the process of assuring that specified tasks are carried out efficiently and effectively. transaction oriented task control is scientific
Revenue Centers
Here output (revenue) is measured in monetary terms, but no formal attempt is made to relate it to the input (expense or cost). Marketing or Sales Departments They are measured against quotas or targets
Expense Centers
Whose inputs are measured in monetary terms, but whose outputs are not. Here there are two types: 1. Engineered Expense Center 2. Discretionary Expense Center
Profit Center
A profit center is an organization unit in which both revenues and expenses are measured in measured in monetary terms. In setting up a profit center a company devolves decision making power to those lower levels that possess relevant information for making expense/ revenue trade off. This move can increase the speed of decision-making, improve the quality of decisions, focus greater attention on profitability Business units and profit centers are not synonymous.
Measuring Profitability
Types of Profitability Measures:
Contribution Margin Direct Profit Income before Taxes Net Income
Revenues
Investment Centers
Control system applies monetary measures to both inputs and outputs and to the investment used within the responsibility centre itself. A responsibility center is an organization unit that is headed by a manager who is responsible for its activities a.nd results
Cost concepts
Cost is the value of the sacrifice made to acquire goods and services, measured in monetary terms by the acquisition of assets or incurrence of liabilities at the time of the benefits are acquired.
Cost Classification
Elements of a product / Product Cost:
Materials
Direct Materials Indirect Materials
Labour
Direct labour Indirect labour
Factory Overhead
Relationship production
Prime Costs Conversion Costs
Cost Classification..
Relationship to Volume: Variable Costs Fixed Costs Mixed Cost Semi variable costs Step cost (like FC eg: 3 supervisors for 42 workers) Ability to trace: Direct Cost Indirect Cost Department where incurred: Production Departments Service Departments
Cost Classification..
Functional Areas:
Manufacturing Costs Marketing Costs Administrative Costs Financing Costs
Cost Classification..
Relationship to planning, controlling and Decision Making:
Standard and Budgeted Costs Controllable and non-controllable costs Committed and discretionary Fixed costs Relevant and irrelevant costs Opportunity costs Shut down costs
Product Costing
Product costing is the process of tracking and studying all the various expenses that are accrued in the production and sale of a product, from raw materials purchases to expenses associated with transporting the final product to retail establishments. It is widely regarded as an extremely important component in evaluating and planning overall business strategies.