ACO24 – 2 Management

Accounting 1
• Lecture
– Input
– Workshop
• Seminar
• Textbook – Drury C (2008) Management
and Cost Accounting, Thomson, 7th Ed.
• BREO
 Assessment
• Test 40%
– Week 6; Covers Material in weeks 1 – 5
• Exam 60%
– 3 hours
– Covers all material
– Revision session week 12
 Management Accounting is…..
• the process of identification, measurement,
accumulation, analysis, preparation,
interpretation and communication of
information used by management to
plan,evaluate and control within an entity
and to assure appropriate use of and
accountability for its resources.
• CIMA definition
 Management Accounting - eg
• Consider the following profit and loss account for a company, for the
year ended 31 December 2004;
£000
Sales 250
Cost of sales 130
Gross Profit120
Expenses:
Wages 45
Stationery 12
Heat and Light26
Rent 12
95
Net Profit 25

• Will this assist the management to make decisions?

 Management Accounting e.g.
• No!
• It does not show how profits were earned – which
products, which customers.
• It does not show anything about the efficiency of
departments or parts of the business.
• It does not show anything of the future of the
business or its plans.
• The management could not make decisions based
on this statement.
 Management Needs
• Management’s task
– to ensure the viability of organisations.

• The main feature of the task

– the balancing of external and internal forces.

• To do this, information is vital, and management

accounting is the main provider of this
information.
 What do Managers do?

Planning

Control

Organising

Communicating

Motivating

Decision Making
 Management V Financial
Accounting
• Legal requirement
• Accuracy
• Actual amounts
• Timing
• Formats
 Examples of management
accounting information
• Product costs
• Process, department and branch costs
• Measures of effectiveness and efficiency
• Plans, budgets and forecasts
• Control reports - budget v actual
 Do all organisations have
management accounting?
• The more competitive your environment, the more
you need management accounting information.
• Historically, some markets are;
– Non – competitive
– Often government controlled
- selling prices
- entry to market controlled
- taxes subsidise losses
– Managers making few decisions
– Often local and not global
• Your need for management accounting will be low.
 The basics of Management
Accounting - Cost Classification
• Classification of cost is to do with organised
recording of costs, in order to ascertain cost
objectives.

• Cost objectives;
- Products
- Services
- Departments
- Sales territories
- A student!!
 Elements of costs
• Costs are frequently organised into groups for
analysis and control purposes.
• Direct costs can be attributed to the existence of a
cost object, whilst indirect costs cannot.
• Indirect costs are given to cost objects on the
basis of (judged) allocations.
• The distinction between direct and indirect
depends on the cost object.
 Manufacturing costs
• Traditional systems accumulate cost as follows;
– Direct material cost
– Direct labour cost
– Direct expense cost (very rare)
– = Prime cost
– Manufacturing overhead (Indirect)
– = Total manufacturing cost (is a product cost)
– Non manufacturing overhead (is a period cost)
– = Total cost
 Cost Behaviour
• Variable cost – change in direct proportion
to activity
• Fixed cost – do not change with activity.
• Semi variable cost
• Semi fixed (stepped) cost
 Decision making costs
• These are termed
– Relevant
– Irrelevant
– They depend on whether they will be changed
by the decision.
 Other types
• Sunk cost
– Costs of resources already acquired, and unaffected by
choices
• Opportunity costs
– Measures what your sacrifice is when you choose a
course of action (= the alternative given up)
• Incremental cost
– Additional cost associated with the production of one
more unit or group of units.