Management Accounting

An Introduction
Management Accounting Defined

 The identification, measurement,

accumulation, analysis, preparation,
interpretation and communication of the
information needed by management to
perform its functions.
 The information provided is used in
planning, implementing and controlling
an organization’s activities
Objectives of Managerial Accounting

 Providing information for planning and

decision making and proactively participating
in these processes
 Assisting managers in directing and
controlling operational activities (attention-
directing function)
 Motivating managers and other employees
toward the organization goals
Objectives of Managerial Accounting

 Measuring the performance of managers,

other employees, subunits & activities
 Assessing the organization’s competitive
position & working with other managers to
ensure the org’s long run competitiveness in
its industry
 Financial Accounting (FA)
vs.Managerial Accounting (MA)
Financial Accounting Managerial Accounting
1. Necessity Required Optional
2. Purpose Produce FS for A means of assisting
various users management
3. Users Relatively large group; Relatively small group;
mostly unknown known identity
4. Underlying One basic equation: Varies according to use
Structure A= L + OE of the information
5. Source of GAAP, PFRS Whatever is useful
Principles to management
6. Time Orientation Historical Historical & estimates
7. Reporting Overall organization Responsibility centers
Entity
 Financial vs Managerial Acctg.
FA MA
8. Information Primarily Monetary &
Content monetary nonmonetary
9. Information Fewer Approxima- Many approximations
Precision tions
10. Report Frequency Quarterly & Varies with purpose;
annually monthly & weekly
11. Report Timeliness Delay of weeks Issued promptly after
or months end of period
covered
12 Liability Potential Few lawsuits but Virtually none
threat always present
 Purposes & Uses of Management
Accounting Information
 Uses
Purposes Historical Data Future Estimates
Measurement For external reporting Pricing Decisions
Analyzing economic
performance
Cost type contract payments

Control Analyzing managerial Strategic planning

performance Budgeting
Motivating & rewarding
managers

Alternative Choices None Short run decisions

Capital Budgeting
 Major Themes That Influence
Managerial Accounting
 Information and Incentives (Decision-
facilitating and decision-influencing
functions)
 Behavioral Issues
 Costs and Benefits
 Evolution and Adaptation in Managerial
Accounting
 Service vs Manufacturing Firms
 Major Themes That Influence
Managerial Accounting
 Emergence of New Industries
 Global Competition
 Focus on the Customer
 Cross-Functional Teams
 Computer Integrated Manufacturing
 Product Life Cycles and Diversity
 Major Themes That Influence
Managerial Accounting
 Information & Communication Technology
 Time-Based Competition
 Just-in-Time Inventory Management
 Total Quality Management
 Continuous Improvement
 Environmental Accounting
 Activity Cost Management
 Strategic Cost Management & the Value
Chain
Strategic Cost Management (SCM)
& the Value Chain
 Strategic Cost Management is the
overall recognition of the
importance of cost relationships
among the activities in the value
chain, and the process of managing
those cost relationships to the
firm’s advantage.
 Value Chain
 is the set of linked, value creating
activities, ranging from securing
basic raw materials and energy to
the ultimate delivery of products
and services
Understanding the entire value chain
can help managers ask and answer
the following questions
 Should the company concentrate on
only a narrow link in the value chain
such as design and retailing?

 Should it expand its operational scope

to include securing the raw materials or
manufacturing the product?
 Are there opportunities to form beneficial
linkages with suppliers or with
customers?
 What are the factors that cause costs to
be incurred (cost drivers) in each activity
in the value chain?
 In order for a company to achieve a
sustainable competitive advantage, it
must either
 Perform one or more activities in the
value chain at the same quality level as
its competitors, but at a lower cost, or

 Perform its value chain activities at a

higher quality level than its competitors,
but at no greater cost.
 General Observations on MA
 Different numbers for different purposes
 Accounting numbers are
approximations
 Working with incomplete data
 Accounting evidence is only partial
evidence
 People, not numbers, get things done
THE BEHAVIOR OF COSTS
 Variable Costs
Costs that vary, in total, directly and
proportionately with volume
The VC per unit of volume remains constant
 Fixed Costs
Costs that do not vary with volume
FC per unit of activity decreases as
volume increases and vice versa
 Semi Variable Costs
Semifixed costs, partly variable, mixed costs
 THE BEHAVIOR OF COSTS

Variable Costs
 Costs that vary in total, directly and proportionately,
with volume.
 The VC per unit of volume remains constant

600
Variable Cost
500
Total Cost

400
300
200
Total Cost
100
0
1 2 3 4 5 6 7 8 9 10
Volume
 THE BEHAVIOR OF COSTS
Fixed Costs
 Costs that do not vary with volume
 FC per unit of activity decreases as volume
increases and vice versa

Fixed Cost

150
Total Cost

100

50 Series1

0
1 2 3 4 5 6 7 8 9 10
Volume
 Cost-Volume Diagram
600
Variable Cost
 500
Total Cost
400
300
200
Total Cost
100
0
1 2 3 4 5 6 7 8 9 10
Volume

Fixed Cost

150
Total Cost

100

50 Series1

0
1 2 3 4 5 6 7 8 9 10
Volume
 Cost – Volume Diagram
Semi Variable Costs
Semi fixed costs, partly variable, mixed costs
 Inherent Conditions of the C-V
Diagrams
 A relevant range of volume
 The length of time period
 The “stickiness” of costs
 The environment
 Linear assumption
Thank you!