Ch-1 (A) Introduction

Chapter – one (A)
Overviews of Cost and Management Accounting
Instructor : Getahun D. (MSc. in AcFn)

Credit hour: 3
Introduction
 Information has probably become the most valuable resource in
modern business.
 The primary purpose of accounting is to provide relevant,
credible and sufficient information used by decision makers
(individuals, entities, government and the society at large) to make
sound decisions and plays an important role in our economy and
the social system.
 Accounting information addresses three different
functions:
1. Providing information to external parties (such as; stockholders,
and creditors) for investment and credit decisions.
2. Estimating the cost of products produced and services provided
by the organization; and
3. Providing information useful to internal managers who are
responsible for planning, controlling, decision making, and 2
Cost Accounting
 Cost accounting is an accounting information system that records,
measures and reports information about cost.
 Cost accounting is, thus, concerned with recording, classifying and
summarizing costs for determination of costs of products or services,
planning, controlling and reducing costs and furnishing of
information to management for decision making.
 Cost accounting is defined as "a systematic set of procedures for
recording and reporting measurements of cost of manufacturing
goods and performing services in the aggregate and in detail.
 Cost accounting is a bridge between financial and management
accounting.
 It provides information to both management accounting and
financial accounting.
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Objectives of Cost Accounting
1. Ascertainment of the cost per unit of the different products that a
business concern manufacturers.
2. To correctly analyse the cost of both the process and operations.
3. Provide necessary data and help in fixing the price of products
manufactured or services rendered.
4. Determination of the profitability of each products and help
management in the maximization of these profits.
5. Present and interpret data for management planning, decision-
making, and control
6. Help in the preparation of budgets & implementation of budgetary
control.
7. To provide specialized services for cost audit in order to prevent errors
and frauds
8. To facilitate prompt & reliable information to management
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Management Accounting
 Management accounting is a segment of accounting that deals
specifically with how accounting data and other financial
information can be used in the management of business,
governmental or non-profit entities.
 Management accounting is “a field of accounting that provides both
economic and non-economic information that helps organization
(managers) to control their day to day operational activities and
make better decisions.”
 “Management accounting as, the process of identification,
measurement, accumulation, analysis, preparation,
interpretation, and communication of financial (and non
financial) information used by management to plan, evaluate,
and control within the organization and to assure appropriate
use and accountability for its resources”
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Objectives of Management Accounting
 The fundamental objective of management accounting is to assist the
management in carrying out its duties efficiently so that maximize
profits or minimize losses.
1. To formulate planning and policy
 Planning involves forecasting on the basis of available
information, setting goals, framing polices, determining the
alternative courses of action and deciding on the program of
activities.
 It makes available the relevant data after pruning and analyzing
them suitably for effective planning and decision-making.
2. To interpret financial documents
 Management accounting is to present financial information to the
management in such away that it is easily understood using
statistical devices like charts, diagrams, graphs, etc.
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3. To assist in decision-making process
 Management accounting makes decision-making process
more scientific with the help of various modern techniques.
4. To help in control
 Management accounting tools e.g. standard costing and
budgetary control are helpful in controlling performance.
5. To provide report
 Management accounting keeps the management fully
informed about the latest position of the concern through
reporting.
 It helps management to take proper and quick decisions.
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Financial Accounting
 Financial accounting is designed to meet external
information needs and to comply with the International
Financial Reporting Standards/IFRS/.
 Financial accounting is the process that ends in the
preparation of financial reports on the enterprise for use by
both internal and external parties.
 The users of Financial accounting information are investors,
creditors, managers, unions, and government agencies etc.
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Objectives of Financial Accounting
1. To summarize the operational result of a business entity for
a particular specified period showing a profit or loss.
2. Presenting the net change in the net assets of that enterprise
based on the operational results.
3. Reflecting the financial position of the business entity at a
specific date.
4. Presenting economic (financial) information based on
historical data to external users for decision making.
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Distinctions between the accounting disciplines
 To satisfy the needs of all interested parties, a sound
accounting system is very important (necessary).
 Financial accounting is primarily concerned with the
preparation of financial statement, which summarizes the
results of operation for selected period of time and show the
financial position of an entity at a particular date.
 A financial accountant is mainly serving external parties
 Cost accounting is primarily concerned with determination of
cost of something, which may be a product, service, a process
or an operation.
 It refers to the accounting procedures relating to recording
of expenditure and the preparation of periodical statements
and reports with the object of determining and controlling
costs. 10
 A cost accountant has an obligation to providing cost data
for whatever purposes for both external reporting and
internal reporting.
 Management accounting involves collecting, analyzing,
interpreting and presenting all accounting information, which
is useful to the management.
 It provides the information to management so that
planning, organizing, directing and controlling of
business operations can be done in an orderly manner.
 MA has a wider scope as compared to CA.
 Cost accounting primarily deals with cost data while
management accounting involves the considerations of
both cost and revenue.
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Comparison between Financial and Management accounting
Areas of Management Accounting Financial
comparison Accounting
Report format Flexible format, driven by user’s Based on IFRS
Purposes of Provide information for planning, Report on past
reports control, performance measurement performance
and decision making
Primary users Employees, Managers Owners, lenders,
customers,
government
agencies…etc.
Units of Historical or future dollars, physical Historical dollars
measurement measure in time or names of objects,
or non-monitory events
Nature of Future oriented, objective for Historical objective
information decision making, more subjective (oriented)
for planning relies on estimates
Frequency of Prepared as needed, may or may not Prepared on a regular
reports be a regular basis or a regular basis basis (minimum of
minimum of once once) a year 12
……End….
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Chapter – one (A)

Overviews of Cost and Management Accounting

Instructor : Getahun D. (MSc. in AcFn)

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