1

Chapter 1
MANAGERIAL AND COST ACCOUNTING
FUNDAMENTALS
1. Management accounting, financial accounting and cost accounting
2. Accounting system and management control
3. Themes in the design of management accounting system

1. Management accounting, financial accounting and cost accounting

Distinction between management accounting and financial accounting:
Managerial accounting (MA) measures and reports financial information as well as other types
of information that are intended primarily to assist managers in fulfilling the goals of the
organization. Additionally, a MA system is an important facet of overall organizational control.
The Chartered Institute of Management Accountants (CIMA) in UK, considers MA to be an
integral part of management. It considers MA to require the identification, generation,
interpretation and use of information relevant to:
formulating business strategy
planning and controlling activities
efficient resource usage
performance improvement and value enhancement
safeguarding tangible and intangible assets
corporate governance and internal control.
MA produces information for managers within an organization. It is the process of identifying,
measuring, accumulating, analyzing, preparing, interpreting, and communicating information
that helps managers fulfill organizational objectives.
2

Financial accounting (FA) focuses on external reporting that is directed by authoritative
guidelines. Organizations are required to follow these guidelines in their financial reports to
outside parties. FA produces information for external parties, such as stockholders, suppliers,
banks, and government regulatory agencies.

Cost accounting (CA) measures and reports financial and non-financial information related to
the organizations acquisition or consumption of resources. It provides information for both MA
and FA.
FA is guided by prescribed accounting principles. These principles define the set of revenue and
cost measurement rules and the types of item that are classified as assets, liabilities or owners
equity in balance sheet.
In contrast, MA is not restricted by those accounting principles acceptable for financial
reporting.
Cost management is use to describe the actions managers undertake in the short-run and long-
run planning and control of costs that increase value for customers and lower the costs of
products and services. Cost management has a broad focus. It includes the continuous
reduction of costs and encompasses the whole life cycle of the product from product
conception to deletion.
Managers are becoming increasingly aware of the importance of the quality and timeliness of
products and services sold to external customers. In turn, accountants are becoming
increasingly sensitive to the quality and timeliness of accounting information required by
managers.
What kind of accounting information do managers need? Good accounting information helps
an organization achieve its goals and objectives by helping to answer three types of questions:
Scorecard questions: Is the company doing well or poorly? Scorekeeping is the
accumulation and classification of data. This aspect of accounting enables both internal
and external parties to evaluate organizational performance.
Attention-directing questions: Which problems should I look into? Attention directing
means reporting and interpreting information that helps managers to focus on
operating problems, imperfections, inefficiencies, and opportunities. Attention directing
usually involves routine reports that compare actual results to before-the-fact
expectations. For example, a store may report profits of mu 120,000 when budgeted
3

profit was mu 150,000. The accounting report will include information explaining why
the store did not achieve its budget.
Problem-solving questions: Of the several alternatives being considered, which is the
best? The problem-solving aspect of accounting often involves a special study to assess
possible courses of action and recommend the best course to follow.
The major differences between MA and FA:

MA FA
Primary users Managers Outside parties
Freedom of choice No constraints Constrained by GAAP
of accounting measures
Time focus of report Future orientation: Past orientation: historical
formal use of budgets evaluation. Example: 2011
as well as historical records. actual performance versus
Example: 2013 budget versus 2010 actual performance.
2013 actual performance.
Time span of reports Flexible, varying from hourly Less flexible: usually one year or
to 10 to 15 days. one quarter.
Types of reports Detailed reports: includes Summary reports: primarly
Details about products, report on the entity as a whole.
departments, territories, etc.




2. Accounting system and management controls

An accounting system is a formal mechanism for gathering, organizing, and communicating information
about an organizations activities.

The accounting systems provide information for five broad purposes:
4

Purpose 1: Formulating overall strategies and long-range plans. This includes new
product development and investment in both tangible (equipment) and intangible
(brands, patents or people) assets, and frequently involves special-purpose reports.
Purpose 2: Resource allocation decisions such as product and customer emphasis and
pricing. This frequently involves reports on the profitability of products or services,
brand categories, customers, distribution channels, and so on.
Purpose 3: Cost planning and cost control of operations and activities. This involves
reports on revenues, costs, assets, and the liabilities of divisions, plants and other areas
of responsibility.
Purpose 4: Performance measurement and evaluation of people. This includes
comparisons of actual results with planned results. It can be based on financial or non-
financial measures.
Purpose 5: Meeting external regulatory and legal reporting requirements where they
exist. Regulations and statutes often prescribe the accounting methods to be followed.
Financial reports are provided by some organizations to shareholders who are making
decisions to buy, hold or sell company shares. These reports ordinarily attempt to
adhere to authoritatively determined guidelines and procedures which exist in many
European countries.

Planning definition: choosing goals, predicting results under various ways of achieving those
goals, and then deciding how attain the desired goals.
Planning refers to setting objectives for an organization and outlining how it will attain them.
A budget is the quantitative expression of a plan of action and an aid to the coordination and
implementation of the plan. A budget is a short-term plan.
Control covers both the action that implements the planning decision and deciding on performance
evaluation and the related feedback that will help future decision making.
Decision making: the purposeful choice from among a set of alternative courses of action
designed to achieve some objective. Decisions range from the routine (making daily production
schedules) to the nonroutine (launching a new product line).

3. Themes in the design of management accounting systems.

5

Key themes in management decision making are the following:
Customer focus
Value-chain and supply-chain analysis. The value chain is the sequence of the business
functions in which utility is added to the products or services of an organization. These
functions are: research and development, design of products, services or processes,
production, marketing, distribution, customer service. The term supply chain describes
the flow of goods, services, and information from cradle to grave, regardless of whether
those activities occur in the same organization or other organizations.
Key sources factors: cost, quality, time, innovation.
Continuous improvement and benchmarking. Continuous improvement by competitors
creates a never-ending search for higher levels of performance within many
organizations. Phrases such as the following capture this theme:
A journey with no end
We are running harder just to stand still
If you are not going forward, youre going backwards.