Session 5

Accounting - 1

Accounting – Management Accounting

Definitions
 Management Accounting is identifying, measuring and communicating
information for informed judgements and decisions by internal users of
the information.
 An activity is any physical operation that takes place in an organisation.
 An output is the product or service provided by the organisation.
 A cost is a physical quantity measurement multiplied by a price
measurement.
 Direct cost are directly traceable to an identifiable unit, sch as a product
or service or department of the business.
 Indirect cost are spread over a number of identifiable units of the
business, such as products or services or departments, for which costs
are to be determined. Also called overhead costs.
 Manufacturing overhead are manufacturing costs that cannot be traced
directly to specific units produced.
 Product costs are those costs associated with goods or services
purchased or produced, for sale to customers.
 Period costs are those costs, which are treated as expenses in the period
in which they are incurred.
 Prime cost is the cost of direct materials, direct labour and other direct
costs of production.
 Production overhead is the total of indirect materials, indirect labour
and other indirect costs of production.
 Cost centre is a unit of the organisation in respect of which a manager is
responsible for costs under his/her control
 Profit centre is a unit of the organisation in respect of which manager is
responsible for revenue as well as costs
 Investment centre is a unit of the organisation in respect of which a
manager is responsible for c apital investment decisions as well as
revenue and costs.
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Accounting - 2

Concepts
Management Function (it always starts with a question or problem)
 Planning
o What do we have to take into account for the immediate Future or
the longer Term.
o E.g. Production, capital expenditure
o Other: Sales (everything in a private company is about sales)
 Decision-making
o Do we have to change something?
o E.g. Resources, activities, financial matters, particularly cost
o Other: employees (work motivation); competitors (release
products at the same time to keep consumers  smartphones)
 Control
o Does the outcome live up to our plans and objectives?
o E.g. Timely, relevant and accurate information, cost measurement,
effective communication, organisational structure
o Other: Respon. Author.: Who holds responsibility? Don’t blame
the wrong people, clear levels of responsibility.
 Remember: Everything still can go wrong, but managers want to
minimise the risk and the costs.

Management Accounting Reports

 Attention Directing Report
o Highlight those costs which has departed from expectations
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Accounting - 3

 Fairness and timeliness

 Responsibility
 Recognise achievements
 Demonstrate accountability
o Questions to be analysed:
 Who should take action?
 Who is responsible for this failure or success?
 Keeping the score-report
o Record-keeping: Monitoring accounting records against physical
quantities and measures. To be complete and fair the costs will be
matched:
 to a time period
 to an Item of output
 against revenue of the period
o Questions to be analysed
 How much?
 How many?
 Solving problems report
o Base to understanding the problem
 Relevance
 Choices
o Questions to be analysed
 Why did that plan go well or why did it fail?
 Which of the choices is the best to take?

Classification of Costs
 Manufacturing Costs are often combined as…
o Direct Materials + Direct Labour = Prime Costs
o Direct Labour + Manufacturing Overhead = Conversion Cost
 Difference in..
o Financial Accounting
 Cost is a measure of resources used or given up to achieve a
purpose.
o Management Accounting
 Product costs are assigned to units products by the
company.
 Manufacturing Cost Flows
 Session 5
Accounting - 4