ACCOUNTING 202 – Module 1- Introduction

Concept and Functions of Management:

Management - meaning
• “…… is a judicious use of means to accomplish an end (Webster)”
• “as a process of accomplishing work through and with people”
Notes:
Management involves achieving something (an end or GOAL), by using strategies (ways or means).
Applied to a business organization, it involves the attainment of certain goals by utilizing its capabilities and
resources.
To attain the goals set for the firm, the managers should carry out their functions effectively and efficiently.
Focus (managerial accounting) on the two basic management functions which affects the activities of
accountants:
1. Planning
✓ Involves setting of both immediate and long range goals
✓ Predicting future conditions that are expected to prevail
✓ Considering different means or strategies by which the goals set may be achieved
✓ Deciding which of the strategies should be used to attain such goals.
2. Controlling
✓ That operations are carried out in the best possible way that is done in accordance with the
plans made, to ensure the attainment of business objective.
✓ Involves checking the performance of activities against the plan or standards set
✓ Should their be any deviations between actual and planned performance, deciding what
corrective actions if any should be taken
It should be noted that the two basic functions have one thing in common:
• They both involve decision making.
• Which is the very essence of management – making decisions by choosing from available alternative
courses of action.

Management’s need for accounting information

Information needed by management to carry out is decision making function may either be
a) Quantitative
b) Nonquantitative
The accountant gathers relevant information, analyzes it, breaks it down, sorts it out, and organizes it, to
come up with a report that may help management and other parties make sound decisions.

Role of Accounting in Management Planning and Control

In planning activities, quantitative objectives are established to help management in setting goals; historical
accounting data are provided for use as basis in projecting future activities, and quantitative information
regarding the different possible course of action is made available.
Controlling process, accounting is instrumental in setting standards such as budgets, standard cost, ratios,
etc.. Accounting is the principal means of measuring and recording actual performance; and through
accounting reports, particularly analytical reports, actual is compared with standard to guide management
in making the necessary corrective action.
MANAGERIAL ACCOUNTING (or Management Accounting)
• Define: “ As the application of appropriate techniques and concepts in processing the historical and
projected economic data of an entity to assist management in establishing a plan for reasonable
economic objectives and in the making of rational decision with view towards achieving these
objectives.”
• Aim: to fill the information needs of managers with respect to specific problems, decisions or situations,
to enable them to make informed judgments and sound decisions to achieve the goals of the
organization.

COST ACCOUNTING DATA BASE

Refers to the process of determining the cost of some particular product or activity.
Cost accounting data are used for both:
1. INTERNAL accounting reports – production costs of specific products, or detailed cost of information in
performing specific activities
2. And EXTERNAL accounting reports- cost sales, selling costs, and others
Cost accounting data base serves as the foundation from which many external and internal accounting
reports emerge.

Scope of Managerial Accounting

It is broader in scope
It may extend beyond the boundaries of accounting and draw upon finance, economics, operation research,
statistics, mathematics, or other disciplines as necessary.

DIFFERENCE BETWEEN MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING

FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING

1. Users of reports External users Internal users
2. Unifying concept Built around the fundamental None
Equation: Assets = Liabilities + Involves three types of accounting:
Owner’s Equity Full cost accounting, Differential
accounting and Responsibility
accounting
3. Accounting Principles Information is prepared in NOT necessarily governed by
accordance with Generally GAAP. In preparing reports, the
Accepted Accounting Principles to management of a company can
ensure users of fairness and make and enforce any rules which
objectivity of financial statements. it finds most useful for its own
purposes, without worrying about
whether these conform to some
outside standard.
4. Optional Mandatory. They must be Optional. Reports are prepared as
prepared, as required by outside they are needed by management,
interested parties, particularly considering their usefulness, as
government regulatory agencies well as the comparison between
and taxing authorities. the benefit from, and the cost of
preparing such reports.
 5. Use of nonmonetary The financial statements show Aside from monetary information,
information information which is primarily management accounting also
monetary in nature. deals also with nonmonetary
information, like units of products
sold or produced, number of
workers, labor hours, quantity of
materials, etc.
6. Use of Projected data Records the financial history of an Includes CURRENT figures;
enterprise. Entries are prepared information representing
only after transactions have estimates or plans for the FUTURE;
occurred thus demonstrating a as well as information about the
great reliance on HISTORICAL data. past, particularly if such past
information can be useful in
making future estimates.
7. Emphasis on Precision Data presented are more or less Timeliness and relevance of
precise or accurate. information are more important
rather than precision.
8. Amount of detail Reports tend to be compressed More extensive and detailed – for
and simplified without sacrificing better analysis and control.
full disclosure of relevant
information.
9. Source of data Information is drawn/taken from Not only from the accounting
the company’s accounting system. system. Other disciplines are
considered as data source
(finance, economics, etc.)
10. Purpose To produce financial statements. Information is only a means to an
end, the end being the planning,
directing, and controlling
activities.
11. Focus Relates to the business as a whole. Is on segments, that is on products
or individual activities, or on
divisions, departments, branches
and other responsibility centers.
PLEASE TAKE NOTE OF THE
SIMILARITIES.
Purpose of Managerial Accounting

The purpose of both managerial accounting and financial accounting is providing useful information to
decision makers.
They do this by collecting, managing, and reporting information in demand by their users. They even
report some of the same information.
Consider the concepts and procedures used to determine the costs of products and services as well as
topics such as budgeting, break-even analysis, product costing, profit planning, and cost analysis.
Information about the costs of products and services is important for many decisions that managers
make.
More generally, much of managerial accounting involves gathering information about costs for planning
and control decisions. Planning is the process of setting goals and making plans to achieve them.
Strategic plans usually set a firm’s long-term direction by developing a road map based on opportunities
such as new products, new markets, and capital investments.

Skills and Techniques

1. Margin analysis: Even when internal and external factors are known, companies’ gross margins
will fluctuate over time.
Margin analysis helps business leaders understand what’s driving profitability and where
inefficiencies may be leading to wasted spending. This technique can also provide actionable
insights into how small changes in product pricing, production workflows and staffing can
influence a business’s overall profitability, according to Investopedia.
By analyzing the projected costs and estimated benefits of specific investments, managerial
accountants can formulate financial strategies that align with their company’s long-term goals.

2. Capital budgeting:
Before companies undertake a new investment or project, they first need to ensure that
it will deliver profitable results. Managerial accountants utilize capital budgeting to assess
the potential cash inflows and outflows of specific business decisions. For example, if a
manufacturer was planning to open a new production facility, they would first need to
determine the total cost of the project and the expected ROI.
According to Investopedia, common metrics used in capital budgeting include discounted
cash flow, net present value and internal rate of return.

3. Trend analysis:
Forecasting revenue, profits and capital expenditures is a core part of managing a
business’s financial operations, which is why managerial accountants keep a close watch
on market conditions and cost-related trends.
***As noted by the CFA Institute, the goal of this accounting technique is to track
companies’ historical performance and growth over a specific period of time to help inform
future decisions. Without a forward-looking financial management framework, businesses
would struggle to adapt to new opportunities and constraints in their market.
Managerial Cost Concepts

An organization incurs many different types of costs that are classified differently, de pending on
management needs (different costs for different purposes).
We can classify costs on the basis of their (1) behavior, (2) traceability, (3) controllability, (4) relevance,
and (5) function.

Classification by Behavior
• At a basic level, a cost can be classified as fixed or variable.
• A fixed cost does not change with changes in the volume of activity (within a range of activity known
as an activity’s relevant range). For example, straight-line depreciation on equipment is a fixed cost.
• A variable cost changes in proportion to changes in the volume of activity. Sales commissions
computed as a percent of sales revenue are variable costs.
• When cost items are combined, total cost can be fixed, variable, or mixed. Mixed refers to a
combination of fixed and variable costs.
• Classification of costs by behavior is helpful in cost-volume-profit analyses and short-term decision
making.
Classification by Traceability.
• A cost is often traced to a cost object, which is a product, process, department, or customer to
which costs are assigned. Direct costs are those traceable to a single cost object. For example, if a
product is a cost object, its material and labor costs are usually directly traceable.
• Indirect costs are those that cannot be easily and cost-beneficially traced to a single cost object. An
example of an indirect cost is a maintenance plan that benefits two or more departments.
Classification of costs by traceability is useful for cost allocation.
Classification by Controllability.
• A cost can be defined as controllable or not controllable.
• Classification of costs by controllability is especially useful for assigning responsibility to and
evaluating managers. Controls costs of investments in land, buildings, and equipment. Controls daily
expenses such as supplies, maintenance, and overtime.
Classification by Relevance.
• A cost can be classified by relevance by identifying it as either a sunk cost or an out-of-pocket cost.
• A sunk cost has already been incurred and cannot be avoided or changed. It is irrelevant to future
decisions.
• An out-of-pocket cost requires a future outlay of cash and is relevant for decision making. Future
purchases of equipment involve out-of-pocket costs.
• A discussion of relevant costs must also consider opportunity costs. An opportunity cost is the
potential benefit lost by choosing a specific action from two or more alternatives.
Classification by Function.
• Another cost classification (for manufacturers) is capitalization as inventory or to expense as
incurred.
• Costs capitalized as inventory are called product costs, which refer to expenditures necessary and
integral to finished products. They include direct materials, direct labor, and indirect manufacturing
costs called overhead costs. Product costs pertain to activities carried out to manufacture the
product.
 • Costs expensed are called period costs, which refer to expenditures identified more with a time
period than with finished products. They include selling and general administrative expenses. Period
costs pertain to activities that are not part of the manufacturing process.
• A distinction between product and period costs is important because period costs are expensed in
the income statement and product costs are assigned to inventory on the balance sheet until that
inventory is sold.

How Balance Sheet and Income Statement for manufacturing and merchandising companies differ?

Companies with manufacturing activities differ from both merchandising and service companies.
The main difference between merchandising and manufacturing companies is that merchandisers buy
goods ready for sale while manufacturers produce goods from materials and labor.
Manufacturer’s Balance Sheet Manufacturers carry several unique assets and usually have three
inventories instead of the single inventory that merchandisers carry.
The three inventories are raw materials, goods in process, and finished goods.
Raw Materials Inventory
• Raw materials inventory refers to the goods a company acquires to use in making products. It uses
raw materials in two ways: directly and indirectly. Most raw materials physically become part of a
product and are identified with specific units or batches of a product. Raw materials used directly
in a product are called direct materials. Other materials used to support production processes are
sometimes not as clearly identified with specific units or batches of product. These materials are
called indirect materials because they are not clearly identified with specific product units or
batches. Items used as indirect materials often appear on a balance sheet as factory supplies or
are included in raw materials. Some direct materials are classified as indirect materials when their
costs are low (insignificant).

Goods in Process Inventory

• also called work in process inventory. It consists of products in the process of being manufactured
but not yet complete. The amount of goods in process inventory depends on the type of
production process. If the time required to produce a unit of product is short, the goods in process
inventory is likely small; but if weeks or months are needed to produce a unit, the goods in process
inventory is usually larger.

Finished Goods Inventory

• A third inventory owned by a manufacturer is finished goods inventory, which consists of
completed products ready for sale. This inventory is similar to merchandise inventory owned by a
merchandising company.

Manufacturer’s Income Statement The main difference between the income statement of a
manufacturer and that of a merchandiser involves the items making up cost of goods sold.
• A merchandiser adds cost of goods purchased to beginning merchandise inventory and then
subtracts ending merchandise inventory to get cost of goods sold.
• A manufacturer adds cost of goods manufactured to beginning finished goods inventory and then
subtracts ending finished goods inventory to get cost of goods sold.
Trends in Managerial Accounting

The analytical tools and techniques of managerial accounting have always been useful, and their relevance
and importance continue to increase. This is so because of changes in the business environment.
Customer Orientation
• There is an increased emphasis on customers as the most important constituent of a business.
Customers expect to derive a certain value for the money they spend to buy products and services.
Specifically, they expect that their suppliers will offer them the right service (or product) at the right
time and the right price. This implies that companies accept the notion of customer orientation,
which means that employees understand the changing needs and wants of their customers and
align their management and operating practices accordingly.
Global Economy
• Our global economy expands competitive boundaries and provides customers more choices. The
global economy also produces changes in business activities. One notable case that reflects these
changes in customer demand and global competition is auto manufacturing.
E-Commerce.
✓ People have become increasingly interconnected via smartphones, text messaging, and other
electronic applications. Consumers thus expect and demand to be able to buy items electronically,
whenever and wherever they want
Service Economy
✓ Businesses that provide services, such as telecommunications and health care, constitute an ever-
growing part of our economy. Companies must be alert to these and other factors. Many companies
have responded by adopting the lean business model, whose goal is to eliminate waste while
“satisfying the customer” and “providing a positive return” to the company.
Lean Practices
• Continuous improvement rejects the notions of “good enough” or “acceptable” and challenges
employees and managers to continuously experiment with new and improved business practices.
• This has led companies to adopt practices such as total quality management (TQM) and just-in-
time (JIT) manufacturing. The philosophy underlying both practices is continuous improvement;
the difference is in the focus.
• Total quality management focuses on quality improvement and applies this standard to all aspects
of business activities. In doing so, managers and employees seek to uncover waste in business
activities including accounting activities such as payroll and disbursements.
• Just-in-time manufacturing is a system that acquires inventory and produces only when needed.
An important aspect of JIT is that companies manufacture products only after they receive an
order (a demand-pull system) and then deliver the customer’s requirements on time. This means
that processes must be aligned to eliminate any delays and inefficiencies including inferior inputs
and outputs. Companies must also establish good relations and communications with their
suppliers.
✓ On the downside, JIT is more susceptible to disruption than traditional systems.
Value Chain
✓ The value chain refers to the series of activities that add value to a company’s products or services.
Role of the Managerial Accountant

The Controller
The chief executive of an organization
Responsible for the accounting aspects of management planning and control.
Controllership – as the function of business management which combines the responsibility for accounting,
reporting, measurement, auditing, taxes, operating controls and other related areas.

Functions of the controller

1. Planning for control
2. Reporting and interpreting
3. Evaluating and consulting
4. Tax administration
5. Government reporting
6. Protection of assets
7. Economic appraisal

The controller’s role and place in the organization

His role in management control
✓ Responsible for designing and operating a system, through which control information is collected and
reported.
✓ Through preparation and issuance of performance reports, where actual performance is compared
with the plan or standards, he can point out where and what tasks or jobs require corrective actions.
✓ Responsible for analyzing figures, pointing significance and making recommendations.

He exercises staff authority

✓ Role in the whole organization is concerned, the controller does not CONTROL OPERATIONS, for he
exercises staff authority.

His place in the organization

✓ His stature and duties vary from company to company, depending on the size of the companies,
and the complexity of their organizational structure.