Accounting Cost and Management Accounting

Defining management accounting

The provision of financial and non-financial information to managers for cost accounting, planning and control and decision making. Management accounting can be subdivided into:
Cost accounting Management accounting for decision making

Accounting Cost and Management Accounting

Why was it necessary?

Management accounting developed in the late 19th century out of financial accounting because more detailed and timely information was needed for costing and decisions making This was a recognition of the limitations of financial accounting for decision making purposes Statements produced by financial accounting
are out of date by the time they are available are orientated towards the past involve a high level of aggregation (whole organisation rather than individual section of product)
Accounting Cost and Management Accounting

Increased relevance of management accounting

Customer orientation and the emphasis on customer satisfaction - requires greater responsiveness from business Lean production including just in time and time based competition - the importance of eliminating waste Need for a positive return - to control costs, to produce detailed forecasts, and improve the quality of decision making Globalisation - increase need to be competitive
Accounting Cost and Management Accounting

More definitions of management accounting

Accounting carried out within the a business for its own internal uses, to assist management in controlling the business and in making business decisions The provision of financial and non-financial information to management for costing, planning and control, and decision making Management accounting is an integral part of management, requiring the identification, generation, presentation, interpretation and use of information (CIMA)
Accounting Cost and Management Accounting

Key points from the definitions

Designed for internal management purposes Involves the provision of both financial and non-financial information Emphasis on:
decision making identifying and calculating costs controlling costs the future rather than the past ensuring efficient use of resources
Accounting Cost and Management Accounting

Management accounting deals with

The preparation of budgets to prepare future plans Setting and controlling budgets The comparison of results with forecasts contained in budgets Forecasting and controlling cash flow Classifying, calculating and controlling costs The determination of selling price Budgets to co-ordinate activities The making of investment decisions.
Accounting Cost and Management Accounting

Management accountants
Specialists in the provision of financial information for use within the business. They are involved in:
the formulation of strategic plans to meet objectives the formulation of short-term operational plans communication of financial and operating information corrective action to bring plans and results into line reviewing and reporting on operations

Accounting Cost and Management Accounting

Decision making
Short term Costing for the purpose of price setting Break even analysis Contribution analysis Make or buy in Product deletion Efficient management of working capital Stock control Long term Strategic accounting Objective setting SWOT analysis Balance scorecard Capital budgeting Long term finance

Accounting Cost and Management Accounting

Underpinning concepts
Accountability - identify responsibility Controllability - controllable and non-controllable Interdependency - information from a variety of internal and external sources Relevance - applicable and appropriate data Reliability - confidence in the quality of the data This in turn is dependent on its source, integrity and comprehensiveness

Accounting Cost and Management Accounting

Definitions of cost accounting

The classification, recording and appropriate allocation of expenditure in order to determine the total cost of products or services Costing is the ascertaining of the amount of expenditure incurred on a single item or group of items or activity The function of cost accounting is to collect data concerning costs
Accounting Cost and Management Accounting

Cost accounting
This involves:
the determination of actual and standard costs, budgeting and standard costing the process of identifying and summarising the costs associated with business operations.

Costing- recovering costs as the basis for pricing and stock valuation Planning and control
planning and controlling future costs using budgeting and standard costing
Accounting Cost and Management Accounting

Role of cost accountingto

Identify profitable and unprofitable activities Identify waste and inefficiency Support cost reduction programmes Analyse movements in profit Estimate and fix selling price Value stocks Develop budgets and standards to assist planning and control Evaluate the cost effects of policy decisions
Accounting Cost and Management Accounting

Financial accounting (FA)

Information is produced primarily for external stakeholders Purpose: reporting back to owners and others Covers the past - what has happened Covers the whole company - not divisions or departments Subject to accounting regulations and law Quantifies information in monetary terms and values Emphasis: objective, verifiable, consistent, accurate data The end product is the annual reporting package
Accounting Cost and Management Accounting

Management accounting (MA)

Provides information for internal decision making Internal use - management accounts are private documents Not so much concerned with recording - instead the information is used for costing, planning, control, decision making Focuses on the present and future Covers divisions, departments or units within the firm Information prepared when needed Both monetary and non-monetary information No set rules and regulations on format
Accounting Cost and Management Accounting

How MA differs from FA

Is non-mandatory - as it purely internal it is not required by statute and not subject to outside control as to method Involves a greater range data Includes the use of non-monetary data Includes the use of qualitative data Deals with forecast and plans rather than what has happened Is designed for internal use rather than reporting to stakeholders
Accounting Cost and Management Accounting

Comparison: a summary
Financial accounting Users Time focus Governed by Format Coverage Purpose External Past Regulations Standard Whole company Reporting back Management accounting Internal Present and future The needs of management Flexible The unit To aid decision making

Accounting Cost and Management Accounting