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324224 Accounting 2: Management Accounting Tilburg University

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Tilburg University

324224 Accounting 2: Management Accounting Tilburg University

Management and Cost Accounting 5th edition
Part 1: Management and Cost accounting fundamentals
Chapter 1 – The accountant’s role in the organization
Management accounting: measures and reports financial information as well as other types of
information that are intended primary to assist manager in fulfilling the goals of the organization.
Financial accounting: focuses on external reporting that is directed by authoritative guidelines
Cost accounting: measures and reports financial and non-financial information related to the
organization’s acquisition or consumption of resources.
Some broad differences between management accountants and financial accountants:
– Regulations: M. reports are generally prepared for internal use and no external regulations
govern their preparation. F generally required to be prepared according to accounting
regulations and guidelines imposed by law.
– Range and detail of information: M reports may encompass financial, non-financial and
qualitative information which may be very detailed or highly aggregated. F brad bases, lacking
detail and intended to provide an overview
– Reporting interval: M reports may be produced frequently, possibly span several years. F
produce annually
– Time period: M reports may include historical and current information but also often provide
information on expected future performance and activities. F tent to be backward looking
Accounting systems aims to provide information for five broad purposes
1. Formulating overall strategies and long-range plans
2. Resource allocation decisions such as product and customer emphasis and pricing
3. Cost planning and cost control of operations and activities
4. Performance measurement and evaluation of people
5. Meeting external regulatory and legal reporting requirements where they exist
Planning: choosing goals, predicting results under various ways of achieving those goals, and then
deciding how to attain the desired goal
Budget: the quantitative expression of a plan of action and an aid to the coordination and
implementation of the plan
Control: covers both the action that implements the planning decision and deciding on performance
evaluation and the related feedback that will help future decision making
Management accountants can be considered to perform three important functions:
1. Scorekeeping: the accumulation of data and the reporting of reliable result to all levels of
management
2. Attention directing: to make visible both opportunities and problems on which managers need
to focus
3. Problem solving: the comparative analysis undertaken to identify the best alternatives in relation
to the organization’s goals
Stephan van Leeuwen
Themes in the design of management accounting systems
1. Customer focus
2. Value-chain and Supply chain analysis
Value chain: the sequence of business functions in which utility is added to the products or
services of an organization
Supply chain: the flow of goods, services, and information from cradle to grave, regardless of
whether those activities occur in the same organization or other organization
3. Key success factors: These affect the economic viability of the organization; coast, quality, time
and innovation.
4. Continuous improvement and benchmarking
Chapter 2: An introduction to cost terms and purposes
Cost: a resource sacrificed or forgone to achieve a specific objective
Cost object: anything for which a separate measurement of costs is desired
Cost accumulation: the collection of cost data in some organized way through an accounting system
Cost assignment: a general term that encompasses both (1) tracing accumulated costs to a cost object,
and (2) allocating accumulated cost to a cost object
Actual cost: the costs incurred as distinguished from budgeted or forecasted costs
Direct cost: costs that are related to the particular cost object
and that can be traced to it in an economically feasible (cost
effective) way
Indirect cost: costs that are related to the particular cost
object but cannot be traced to it in an economically feasible
way  cost allocation method
Cost tracing: the assigning of direct costs to the chosen object
Cost allocation: the assigning of indirect costs to the chosen cost object
Several factors will affect the classification of a cost as direct or indirect
1. The materiality of the cost of question
2. Available information gathering technology
3. Design of operations
Stephan van Leeuwen
Cost reduction efforts frequently identify two key areas:
1. Focusing on value added activities (: activities that customers perceive as adding value to the
products or services they purchase).
2. Efficiently managing the use of the cost drivers in
those value added activities.
Variable cost: a cost that changes in total in proportion to
changes in the related level of total volume
Fixed cost: is a cost that does not change in total despite
changes in the related level of total volume
Relevant range: the range of the cost driver in which a
specific relationship between cost and the level of activity
or volume is valid
Unit cost (average cost):
Capitalized costs: these cost provide future benefits
Revenue costs: expenses of the accounting period when
they are incurred.
Service-sector companies: provide services or intangible products to their customers
Merchandise- sector companies: provide tangible products they have previously purchased in the same
basic form from suppliers
Manufacturing-sector companies: provide tangible products that have been converted to a different
form
Stock-related costs: associated with the purchase of goods for resale
Operation costs: all cost associated with generating revenues, other than cost of goods sold
Types of stock:
1. Direct materials: direct materials in stock and awaiting use in the manufacture process
2. Work in process: goods partially worked on but not yet fully completed
3. Finished goods: goods fully completed but not yet sold
Prime costs: all direct manufacturing costs
Conversion costs: all manufacturing costs other than direct
materials costs
Cost of goods sold: opening stock + cost of goods sold
manufactured – closing stock

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324224 Accounting 2: Management Accounting Tilburg University

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