Management Accounting

Functions of Management

1. Allocate costs between cost of goods sold and inventories for internal and external profit reporting 3. Provide relevant information to help managers make better decisions; 4. Provide information for planning, control and performance measurement.

Limitations of Financial Accounting It does not provide detailed cost information for different departments, processes, products, jobs, different services and functions. It does not set up a proper system of controlling materials, supplies. It is difficult to know the behaviour of costs in financial accounting as expenses are not classified into fixed and variable, direct and indirect costs. It does not proved cost data to determine the price of the product being manufactured or the service being rendered to the consumers. It does not provide necessary information to management in taking important decisions about expansion of business, dropping of a product line, alternative method of production, buy or make etc.

Financial Accounting Vs. Cost Accounting

A firm manufactures three products A, B and

C whose costs and revenue figures are given below: product A

Product B

Product C

Total Materials 8000 7000 8000 23000 Labour 5000 6000 4000 15000 Other Expenses 3000 4000 3000 10000 Sales 20000 21000 12000 53000

Under Financial Accounting Rs. Materials 23000 Wages 15000 Other expenes 10000 Total cost 48000 Sales 53000 Profit 5000

Under Cost Accounting product A Product B Product C Total Material 8000 7000 8000 23000 Wages 5000 6000 4000 15000 Other exp. 3000 4000 3000 10000 Total cost 16000 17000 15000 48000 Sales 20000 21000 12000 53000 Profit(loss) 4000 4000 (3000) 5000

Cost Accountancy Chartered Institute of Management Accountants, London(CIMA) defines Cost Accountancy as “ the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability as well as presentation of information for the purpose of managerial decision making” Costing may be defined as “the techniques and process of ascertaining costs” Cost may be defined as (i) the amount of expenditure (actual or notional) incurred on or attributable to a given thing; or (ii) to ascertain

Assignment -1 Lily Shultz is a junior majoring in hotel and restaurant management. She wants to work for a large hotel chain with the goal of eventually managing a hotel. She is considering the possibility of taking a course in either financial accounting or cost management. Before choosing, however she has asked your to provide her with some information about the advantages that each course offers. Required: Prepare a letter advising Lily about the differences and similarities between financial accounting and cost management. Describe the

Financial Accounting and Cost Management

 Classify each of the following actions as either being associated with the financial accounting information system(FS) or the cost management information system:  Determining the future cash flows of a public corporation  Filing a corporate income tax report  Determining the cost of a product  Issuing annual financial statements  Reducing costs by improving quality  Preparing a performance report that compares actual costs with the budgeted costs.  Preparing financial statement that conform to GAAP  Determining the cost of a customer  Using cost information to decide whether to keep of drop or product  Using future expected earnings to estimate the price of a share of common stock  Using cost information to decide whether to make or buy a

Information for planning, controlling, continuous improvement and Decision making  The cost and management accountant is responsible for generating financial information required by the firm for internal and external reporting. This involves responsibility for collecting, processing and reporting information that will help management in their : Planning Controlling Continuous improvement Decision Making

Flexibility of the cost information system

A member of the board of directors for Stillwater’s Mission of Hope a non profit shelter for the homeless, asked his accountant how to value the building used as the shelter. In other words, what did it cost? The accountant’s answer was: why do you want to know? If you need to know the value for insurance purposes– to determine how much insurance to buy—then perhaps replacement cost would be the answer. If you are trying to set a price to sell the building (and build another elsewhere), then current market value of the real estate would be the answer. If you need the cost for the balance sheet, then historical cost is