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Intro to MA

Management accounting is the process of identifying, measuring, and communicating information for management decision-making, including financial reporting for external parties. It encompasses strategic management, performance management, and risk management, applicable to various business types and organizations. Key concepts include product costs, period costs, and the classification of costs in financial statements.

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10 views

Intro to MA

Management accounting is the process of identifying, measuring, and communicating information for management decision-making, including financial reporting for external parties. It encompasses strategic management, performance management, and risk management, applicable to various business types and organizations. Key concepts include product costs, period costs, and the classification of costs in financial statements.

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nickchoocs
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INTRODUCTION TO

MANAGEMENT ACCOUNTING
Management Accounting
 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 non-
management groups such as shareholders,
creditors, regulatory agencies and tax
authorities" (CIMA Official Terminology).
Management Accounting
The Institute of Management
Accountants(IMA) recently updated its
definition as follows: "management
accounting is a profession that
involves partnering in management
decision making, devising planning
and performance management
systems, and providing expertise in
financial reporting and control to
assist management in the formulation
and implementation of an
organization’s strategy.“
Management Accounting
 The American Institute of Certified Public
Accountants(AICPA) states that management
accounting as practice extends to the following
three areas:
 Strategic Management—Advancing the role of the
management accountant as a strategic partner in
the organization.
 Performance Management—Developing the
practice of business decision-making and
managing the performance of the organization.
 Risk Management—Contributing to frameworks
and practices for identifying, measuring,
managing and reporting risks to the achievement
of the objectives of the organization.
Management/Managerial
Accounting Basics
 field of accounting that provides economic and
financial information for managers and other
internal users
 Applies to all types of business -
Service, Merchandising, and Manufacturing
 Applies to all forms of business organizations –
Proprietorships, Partnerships, and
Corporations
 Applies to not-for-profit as well as profit-
oriented companies
Management and Financial
Accounting
Similarities:
Both managerial and financial accounting deal
with economic events of a business
Both require that economic events be
quantified and communicated to interested
parties:
 Determining unit cost is part of managerial accounting
 Reporting cost of goods manufactured is a part of
financial accounting
Managerial
Managerial vs vs Financial
Financial
Accounting
Accounting
Differences

Weygandt et al. (2010)


What Do We Mean By a Cost?
A cost
is the measure of
resources given
up to achieve a
particular purpose.
Product Costs, Period Costs and
Expenses

Product costs are costs associated with goods for


sale until the time period during which the products
are sold, at which time the costs become expenses.

Period costs are costs that are expensed during the


time period in which they are incurred.

Expenses are the consumption of assets for the


purpose of generating revenue.

2-9
Manufacturing Costs

Direct Direct Manufacturing


Material Labor Overhead

The
Product
Direct Material

Cost of raw material that is used to


make, and can be conveniently
traced, to the finished product.
Example:
Example:
Steel
Steel used
usedto
to
manufacture
manufacture
the
theautomobile.
automobile.
Direct Labor

Cost of salaries, wages, and fringe


benefits for personnel who work
directly on manufactured products.

Example:
Example:
Wages
Wagespaid
paidto
to
factory
factoryoperators.
operators.
Manufacturing Overhead
All other manufacturing costs
Indirect Indirect Other
Material Labor Costs

Materials used to support the


production process.
Examples: lubricants and
cleaning supplies used in an
automobile assembly plant.
Manufacturing Overhead
All other manufacturing costs
Indirect Indirect Other
Material Labor Costs

Cost of personnel who


do not work directly on
the product. Examples:
maintenance workers,
janitors and security
guards.
Manufacturing Overhead
All other manufacturing costs
Indirect Indirect Other
Material Labor Costs

Examples: depreciation
on plant and equipment,
property taxes,
insurance, utilities,
overtime premium, and
unavoidable idle time.
Classifications of Costs in
Manufacturing Companies
Manufacturing costs are often
combined as follows:

Direct Direct Manufacturing


Material Labor Overhead

Prime Conversion
Cost Cost
Product
Product Versus
Versus Period
Period Costs
Costs

Weygandt et al. (2010)


Manufacturing
Manufacturing Costs
Costs in
in
Financial
Financial Statements
Statements
Income Statement
The income statement for a manufacturer is similar to that
of a merchandiser except for the cost of goods sold
section.

Weygandt et al. (2010)


Manufacturing
Manufacturing Costs
Costs in
in
Financial
Financial Statements
Statements
Cost of Goods Sold Components
Merchandiser versus Manufacturer

Weygandt et al. (2010)


Manufacturing
Manufacturing Costs
Costs in
in
Financial
Financial Statements
Statements
Cost of Goods Sold Section of the Income Statement

Weygandt et al. (2010)


Manufacturing
Manufacturing Costs
Costs in
in
Financial
Financial Statements
Statements
Determining the Cost of Goods Manufactured

Work in Process – partially completed units of product

Total Manufacturing Costs – sum of direct material


costs, direct labor costs, and manufacturing
overhead; all incurred in the current period
Weygandt et al. (2010)
Manufacturing
Manufacturing Costs
Costs in
in
Financial
Financial Statements
Statements

Weygandt et al. (2010)


Manufacturing
Manufacturing Costs
Costs in
in
Financial
Financial Statements
Statements
Balance Sheet -
Inventories
Merchandising Manufacturing Company
Company May have three
One category inventories:
of inventory: Raw Materials
Merchandise Work in Process
Inventory Finished Goods

Weygandt et al. (2010)


Manufacturing
Manufacturing Costs
Costs in
in
Financial
Financial Statements
Statements
Balance Sheet - Inventories

Weygandt et al. (2010)


Cost Classifications on Financial
Statements – Balance Sheet

Merchandiser Manufacturer
Current Assets Current Assets
◦ Cash  Cash
◦ Receivables  Receivables
◦ Prepaid Expenses  Prepaid Expenses
◦ Merchandise  Inventories
Inventory Raw Materials
Work in Process
Finished Goods
Cost Classifications
Cost behavior means how a cost will
react to changes in the level of
business activity.
◦ Total variable costs change when activity
changes.
◦ Total fixed costs remain unchanged when
activity changes.
Variable Cost
Fixed Costs
Cost Classifications

Summary of Variable and Fixed Cost Behavior


Cost In Total Per Unit

Total variable cost changes Variable cost per unit


Variable as activity level changes. remains the same over
wide ranges of activity.
Total fixed cost remains Fixed cost per unit
Fixed the same even when the goes down as activity
activity level changes. level goes up.
Direct and Indirect Costs
Direct costs Indirect costs
Costs that can be Costs that must be
easily and allocated in order
conveniently traced to be assigned to a
to a product or product or
department. department.
Example: cost of Example: cost of
paint in the paint national
department of an advertising for an
automobile airline is indirect to
assembly plant. a particular flight.

2-30
Opportunity Costs
The potential benefit that is given
up when one alternative is selected
over another.
◦ Example: If you were not attending
college,
you could be earning $40,000 per year.
Your opportunity cost of attending college
for one year is $40,000.
Sunk Costs
All costs incurred in the past that cannot
be changed by any decision made now or
in the future are sunk costs. Sunk costs
should not be considered in decisions.
◦ Example: You bought an automobile
that cost $15,000 two years ago. The
$15,000 cost is sunk because whether
you drive it, park it, trade it, or sell it,
you cannot change the $15,000 cost.

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