MANAGEMENT ACCOUNTING INTRODUCTION & BASIC MANAGEMENT ACCOUNTING CONCEPTS

What the MAIS? An information system that produces outputs using inputs and processes needed to satisfy specific management objectives. Three broad objectives; 1. to provide information for costing 2. to provide information for planning, controlling, evaluation and continuous improvement 3. to provide information for decision making

The management process: Planning therefore requires setting objectives and identifying methods to achieve those objectives Controlling the managerial activity of monitoring a plan’s implementation and taking corrective action as needed. Feedback is information that can be used to evaluate or correct the steps being taken to implement a plan Decision Making the process of choosing among competing alternatives

The differentiate between MA & FA Some the more important differences Management Accounting Financial Accounting Targeted user Internally focus Externally focus Restrictions on inputs and process No mandatory rules Must follow externally imposed rules Type of information Financial & Nonfinancial, subjective information possible Objective financial information Time orientation Emphasis on the future Historical orientation Degree of aggregation Internal evaluation and decision based on very detailed information Information about the firm as a whole Breadth Broad, multi diciplinary More self-contained

The role of Management Accounting The role of management accounting in an organization is one support. They assist those individuals who are responsible for carrying out an organization’s basic objectives Management accountants are responsible for identifying, collecting, measuring, analyzing, preparing, interpreting and communicating information used by management to achieve the basic objectives of the organization.

Cost Assignment Cost is the cash or cash-equivalent value sacrificed for good and services that is expected to bring a current or future benefit to the organization. Expired cost are called expenses. In each period, expenses deducted from revenues in the income statement to determine the period’s profit. Management accounting systems are structured to measure and assign costs to entities called Cost Object. A cost object is any item such as a product, customer, department, project, activity and so on, which costs are measured and assigned.

Accuracy of Assignment Assignment cost accurately to cost object is crucial. The notion of accuracy is not evaluated based on knowledge of some underlying “true” cost. Rather, it is a relative concept and has to do with the reasonableness and logic of the cost assignment methods used. Distorted cost assignments can produce erroneous decision and bad evaluation

Traceability The relationship of costs to cost object should be exploited to increase the accuracy of cost assignments. Costs direct and indirect associated with cost object. Tracing costs to costs objects can occur in one of two way: direct tracing or driver tracing Direct tracing is the process of identifying and assigning costs that are exclusively and physically associated with a cost object to that cost object. Driver tracing is the use drivers to assign to cost object. In a cost assignment context, drivers are observable causal factors that measure a cost object’s resource consumption.

Assigning Indirect Cost indirect costs are those costs that cannot be assigned to cost objects using either direct or driver tracing. This means that no causal relationship exists between the cost and the cost object or that tracing is not economically feasible. Assignment of indirect costs to cost objects is called allocation.

Cost Assignment Methods Cost of Resources Direct Tracing Driver Tracing Allocation Physical Observation Causal Relationship Assumed Relationship Cost Object

Type of Management Accounting System Functional Based Management (FBM) In an FBM accounting system, resources costs are assigned to functional units and then to products. In assigning costs, direct tracing and driver tracing are used, but in FBM system driver tracing uses only production drivers FBM’s Operational Efficiency View: providing information for planning and control is another objective of management accounting. The FBM accounting approach to control assigns cost to organizational units and then holds the organizational unit manager responsible for controlling the assigned costs. Performance is measured by comparing actual outcome with standard or budgeted outcomes

FUNCTIONAL BASED MANAGEMENT MODEL Cost view Operational View Resources Efficiency Analysis Performance Analysis Functions Products

Activity Based Management (ABM) In activity based costing (ABC) costs are traced to activities and then to product. As with FBC both direct tracing and driver tracing are used, however the role of driver tracing is significantly expanded by identifying and using drivers unrelated to the volume of product produced. Thus activity based cost assignments emphasize tracing over allocation, it could be called tracing- intensive. The use of both unit and non-unit based drivers increase the accuracy of cost assignment and the overall quality and relevant of cost information. ABM’s Operational Efficiency View: the ABM focuses on the management activities with objective of improving the value received by customer and the profit received by the providing this value.

ACTIVITY BASED MANAGEMENT MODEL Cost view Operational View Why What? How Well? Resources Driver Analysis Performance Analysis Activities Products & Customers

The difference of Cost Management System based on Functional and Activity FUNCTIONAL BASED ACTIVITY BASED 1. Unit based drivers 1. Unit and non-unit based drivers 2. Allocation intensive 2. Tracing intensive 3. Narrow and rigid product costing 3. Broad and flexible product costing 4. Focus on managing costs 4. Focus on managing activity 5. Sparse activity information 5. Detail activity information 6. Maximization of individual unit performance 6. Systemwide performance maximization 7. Use of financial measures of performance 7. Use of both financial and nonfinancial measures of performance