Dear ACCT101 Students: Summary of lecture on ch. 9 Intro.

. to Management Accounting Chapter 9 is an introductory chapter to the subject of management accounting (also known as cost accounting and managerial accounting). It gives some very interesting historical anecdotes of how management accounting developed. It also covers some basic and important definitions, which will be useful for the study of this subject. The definitions are important for the exam. and these definitions lay the foundation for chapters 10, 11 and 14.
1.

Historical development of management accounting: The stories of Du Pont Company, the Du Pont cousins, Waltham system, Albert Finks cost per ton-mile, Andrew Carnegies pre-occupation with product costing in his steel plant, etc. would be something that you will remember for a long time. The DuPont ROI formulae of exhibit 9-2 is still being used today by many companies, including DuPont Co. In fact, many management accounting techniques were developed in early 1900s by practicing accountants like Donaldson Brown of DuPont who later joined General Motors and by people like him, who were professional accountants. Traditional definitions/MA terminology: This is what you should study well, for the final exam. as well as for understanding later chapters. Since these definitions are printed in the margins of the text, I am not reproducing them, but please study the following definitions well enough to apply them in practice: Product v/s period costs in a manufacturing company. Direct material cost, direct labor cost and manufacturing overhead costs and be able to classify them as shown in E9-4 and E9-5. Product cost flow of exhibit 9-4, p.404, will be covered again in chapter 10 on cost systems and is important. Variable costs and fixed costs are very important and will be very useful when you study ch. 11, 14, etc. Direct costs v/s indirect costs are useful for chapter 14. Relevant costs = differential costs = incremental costs: You should understand this concept very well. If you know it, you will be able to take decisions faster and better in your entire lifetime. This term is very important for ch. 14 on relevant costing. Sunk costs, out-of-pocket costs and opportunity costs are important for ch. 14 again. The concept of opportunity costs is very important.

2.

I am not repeating the definitions because, as stated above, they are in the margin of the book, there are some very good transparencies on them in WebCt and I have covered each one of them in detail in the class. These definitions are the building blocks for this subject itself.
3.

Some other issues covered in this chapter: This chapter covers some other important issues as well. You should, by now, have a thorough

understanding of the differences between financial and managerial accounting and I have dealt with these differences in the first week of the classes, at the very beginning of this semester. The distinctions between manufacturing, merchandising and service organizations should be understood well, especially with respect to their degrees of complexities, inventories, etc. Management accounting is a service function, helping management to take timely decisions for planning, controlling and evaluating (plus other things, sometimes), in order to compete effectively so that they can increase the shareholders wealth. Exhibit 9-6, p. 412, has a nice diagram and please study this carefully. Simple cost computation was a great idea during Andrew Carnegies time. But in todays world, even having good cost control is not enough. Toyota Motor Companys idea of J-I-T (Just In Time) system tries to eliminate all non-value added costs/services like quality control, purchasing, cost accounting, inventory-keeping, etc. In fact, they are trying to manufacture products of the highest quality by eliminating quality control costs, they are trying to cut costs by eliminating all nonvalue-added costs and so on. Management accounting is not only concerned with costs, but also with quality, time, etc. (and who knows, what else). This chapter also talks about the management accounting profession and the need to follow ethical principles by management accountants because they know the business secrets of the company for which they work. By studying this chapter, you should be able to CLASSIFY each cost item into: product v/s period costs, product costs into DM, DL and MFG. OHD; fixed v/s variable costs; direct v/s indirect costs; identify each cost as either relevant/incremental/differential costs v/s sunk costs; and also be able to identify the opportunity costs, which may not be given to you so clearly as the other costs. Opportunity costs would not appear in the books of accounts or in any transactions. Opportunity costs would be an estimate (sometimes, a guesstimate . For instance, what is the loss of salary that you have suffered by joining HKUST ? Can you guess how much it is ? That amount is your opportunity cost for choosing higher education instead of going to work. ).