Mab4 01

MANAGEMENT ACCOUNTING FOR BUSINESS
FOURTH EDITION
COLIN DRURY
Use with Management Accounting for Business 4e by Colin Drury ISBN 1408017717 2009 Colin Drury
Part One: Introduction to Management and Cost Accounting Chapter One: Introduction to management accounting
1.1a
1. Definition of accounting
the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.
1. Users of accounting information can be divided into two categories:

(i) External parties outside the organization (financial accounting). (ii) Internal parties within the organization (management accounting).
1.1b 3. Major differences between financial and management accounting:

Statutory requirement for public companies to produce annual financial
accounts, whereas there is no legal requirement for management accounting.
Financial accounting reports describe the whole of the organization, whereas

management accounting focuses on reporting information for different parts of the business.
Financial accounting reports must be prepared in accordance with generally

accepted accounting principles (e.g. SSAPs).
Financial accounting reports historical information, whereas management

accounting places g eater emphasis on reporting estimated future costs and revenues.
Management accounting reports are produced at more frequent intervals.
1.2a
The changing business environment

1. Organizations have faced dramatic changes in their business environment. Move from protected markets to highly competitive global markets Deregulation Declining product life-cycles
1.2b
2. To compete successfully in todays environment companies are:

Making customer satisfaction an overriding priority. Adopting new management approaches. Changing their manufacturing systems. Investing in AMT s.
3. Above changes are having a significant impact on the MAS.
1.3
Focus on Customer Satisfaction

1.4a
Focus on customer satisfaction and new management approaches

1. Key success factors
Cost efficiency increased emphasis on accurate product costs and cost management.
Quality TQM,quality measures.
Time educed cycle time,focus on non-value-added activities.

Innovation responsiveness in meeting customer requirements. Product comparisons. Feedback on customer satisfaction.
1.4b
2. Continuous improvement Static historical standards no longer appropriate. Benchmarking. 3. Employee empowerment Delegate more responsibility to people closest to operating processes and customers. 4. Value chain analysis Suppliers,R &D,design,production,marketing, distribution,customer service,customers. Internal customer perspective. 5. Social responsibility and corporate ethics
1.5a
International convergence of management accounting

1. Management accounting practices can be observed at the macro or micro levels: Macro refers to concepts and techniques Micro refers to the behavioural patterns of use. 2. Tendency towards globalization at the macro level
1.5b 3. Drivers of convergence include:

Global competition
Information technology (e.g. ERP systems)

Standardization by transnational companies Global consultancy Use of global textbooks
4. At the micro level accounting information may be used in different ways due to influence of different national and local cultures
1.6a
Primary functions of cost/management accounting systems

1. Inventory valuation for internal and external profit measurement
Allocate costs between products sold and fully and partly completed products that are unsold.
2. Provide relevant information to help managers make better decisions Profitability analysis Product pricing Make or buy (Outsourcing) Product mix and discontinuation
1.6c
3. Provide information for planning,control and performance measurement

Long-term and short-term planning (budgeting) Periodic performance reports for feedback control Performance reports also widely used to evaluate managerial performance Note that costs should be assembled in different ways to meet the above three requirements.
1.7a
Inventory Valuation and Profit Measurement

1. Consider a situation where a company has produced three products (A,B and C)during the period.The total costs for the period are 40 000.Product A has been sold for 20 000, product B has been completed but is in finished goods stock,and product C is partly completed.Costs must be traced to products to value stocks and cost of goods sold. 20 000 40 000 26 000 14 000 6 000
Sales Production cost Less Closing stocks (B =18 000,C =8 000) Cost of goods sold (A =14 000) Profit
1.7b
2. Approximate but inaccurate individual product costs may be appropriate for profit measurement for financial accounting.
Example Production expenses for the period = Costs of products sold = Cost of products not sold = 10m 7m 3m
Note focus is on aggregate figures for financial accounting.
1.8a
Cost information for providing guidance for decision-making

In theory cost information computed for stock valuation ought not to be used for decision-making. Example:Short-term decision A company is negotiating with a customer for the sale of XYZ. The cost recorded for stock valuation purposes is: 200 150 300 650
Direct materials Direct labour Fixed overheads
1.8b
The maximum selling price that can be negotiated is 500 per unit for an order of 100 units over the next three months. Should the company accept the order?
Spare capacity Additional relevant costs (100 200) Additional sales revenue Contribution to profits 20 000 50 000 30 000
1.9a
Operational control and performance measurement

The allocation of costs to products is not particularly useful for cost control purposes.Instead,costs should be traced to responsibility/cost centres to the person who is accountable for controlling the costs.
Example Budgeted costs per unit: Product 1 10 20 30 60 Product 2 40 50 60 150 Product 3 70 80 90 240 Total 120 150 180 450
Cost centre A Cost centre B Cost centre C Budgeted and actual production (units)
1000
1000
1000
1.10a
Operational control and performance measurement

Comparison of actual with budgeted costs by products
Product 1 Product 2 Product 3 Total 000 000 000 000 ______________________________________________________________ Budgeted cost 60 150 240 450 (1,000 60) Actual cost 70 170 270 510 ______________________________________________________________ Variance 10A 20 A 30A 60A ______________________________________________________________
The variances are not identified to responsibility (cost centres)
1.10b
Comparison of actual with budgeted costs by cost centres

Cost centre Cost centre Cost centre A B C Total 000 000 000 000 _______________________________________________________ Budgeted cost 120 150 180 (1,000 120) Actual costs 130 150 230 _______________________________________________________ Variance 10A 50A 60A _______________________________________________________
Notes 1. Performance reports analysed in far more detail for cost centre managers. 2. Should not be used as a punitive device (identify areas where managers need to focus their attention). 3. Non-financial critical success factors are also of vital importance and should be included on the performance reports.

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MANAGEMENT ACCOUNTING FOR BUSINESS

1. Users of accounting information can be divided into two categories:

1.1b 3. Major differences between financial and management accounting:

Financial accounting reports describe the whole of the organization, whereas

Financial accounting reports must be prepared in accordance with generally

Financial accounting reports historical information, whereas management

Management accounting reports are produced at more frequent intervals.

The changing business environment

2. To compete successfully in todays environment companies are:

3. Above changes are having a significant impact on the MAS.

Focus on Customer Satisfaction

Focus on customer satisfaction and new management approaches

Time educed cycle time,focus on non-value-added activities.

International convergence of management accounting

1.5b 3. Drivers of convergence include:

Information technology (e.g. ERP systems)

Primary functions of cost/management accounting systems

3. Provide information for planning,control and performance measurement

Inventory Valuation and Profit Measurement

Note focus is on aggregate figures for financial accounting.

Cost information for providing guidance for decision-making

Direct materials Direct labour Fixed overheads

Operational control and performance measurement

Operational control and performance measurement

The variances are not identified to responsibility (cost centres)

Comparison of actual with budgeted costs by cost centres

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