Cost and management accounting I_Ch._1[1].pptx

INTRODUCTION
4/3/2024 by Gizachew S. 1

1. INTRODUCTION
 Cost accounting is a quantitative method that accumulates,
classifies, summarizes, interprets and communicate
information for the following three major purposes:
 Operational planning and control
 Special decisions
 Product decisions
 Cost and management accounting is an accounting information
system that is concerned with recording, classifying and
summarizing costs for
 determination of costs of products or services,
 planning, controlling and reducing such costs and
 furnishing of information to management for decision
making.

Cont…
 Cost accounting is the process of determining
and accumulating the cost of product or activity.
 It is a process of accounting for the incurrence
and the control of cost.
 it is a system of accounting, which provides the
information about the ascertainment, and control
of costs of products, or services.
 It measures the operating efficiency of the
enterprise.

Cont…
 Cost accounting is the process of accounting for costs,
from the point at which its expenditure is incurred or
committed to the establishment of the ultimate
relationship with cost units.
 Cost
 A resource sacrificed or foregone to achieve a
specific objective usually measured as a monetary
amount paid

1.1. Purpose of An Accounting system
Accounting system is a formal mechanism for
gathering, organizing, and communicating
information about an organization’s activities.
The accounting system is the principal, and the
most credible, quantitative information system
in almost every organization. This system aims
to provide information for five broad purposes:

1.1. Purpose of An Accounting system…
 The accounting system is among the most significant
quantitative information systems in almost every organisation.
This system aims to provide information for five broad purposes:
 Purpose 1: Formulating overall strategies and long-range
plans. This includes:
 new product development
 investment in both tangible (equipment) and intangible
(brands, patents or people) assets, and
 involves special-purpose reports.
 Purpose 2: Resource allocation decisions such as product and
customer emphasis and pricing.
 This frequently involves reports on the profitability of products
or services, brand categories, customers, distribution channels,
and so on.

1.1. Purpose of An Accounting system…
 Purpose 3: Cost planning and cost control of
operations and activities.
 This involves reports on revenues, costs, assets, and the
liabilities of divisions, plants and other areas of
responsibility.
 Purpose 4: Performance measurement and evaluation
of people.
 comparisons of actual results with planned results.
 It can be based on financial or non-financial measures.

1.1. Purpose of An Accounting system….
 Purpose 5: Meeting external regulatory and legal
reporting requirements where they exist.
 Regulations and statutes often prescribe the accounting
methods to be followed.
 Financial reports are provided by some organizations to
shareholders who are making decisions to buy, hold or
sell company shares.
 These reports ordinarily attempt to adhere to
authoritatively determined guidelines and procedures
which exist in many countries

The role of an accountant
Four work activities of management accountants
are:
 collecting and compiling information;
 preparing standardized reports;
 interpreting and analyzing information;
 being involved in decision making

The role of an accountant…
 Management accountants are spending less time on
the first two activities and more time on the last two.
 The management accountant is becoming an
internal consultant on information-related issues –
that is, an advisor for managers about:
 what information would be useful,
 what information is available, and
 how to analyze the information and use it in
decision making.

The role of an accountant…
 Decision making is the core of the management
process.
 Decisions range from the routine (making daily
production schedules) to the non-routine (launching
a new product line), and accountants are
information specialists who aid the decision
makers.

Cont…
The value chain
 The value chain is the set of business functions
or activities that add value to the products or
services of an organization. These functions
include the following:

Cont…
Research and development:
the generation of ideas related to new products,
services or processes.
Design of products, services or processes:
the detailed design and engineering of products,
services or processes.
Production:
the coordination and assembly of resources to
produce a product or deliver a service.

Cont…
 Marketing: the manner by which individuals or
groups learn about the value and features of
products or services (for example, advertising or
selling activities).
 Distribution: the mechanism by which a
company delivers products or services to the
customer.
 Customer service: the support activities
provided to the customer

Cont…
The value chain of business functions

Cont…
 Accountants play a role in supporting all the value-chain
functions.
 Production stage - accountants facilitate cost planning
and control through the use of budgets and performance
reporting and help track the effects of continuous
improvement programs.
 Accounting can also have a great influence on the two
pre-production value-chain functions.
 For example, accountants provide estimated revenue and
cost data during the research and development stage and
during the design stage of the value chain.

Cont…
 Accountants also play a role in post-production value-
chain functions.
 For example, marketing decisions have a significant
impact on sales, but the cost of marketing programs is
also significant.
 Accountants analyze the trade-off between increased
revenues and costs.
 In addition, accounting information can influence
decisions about distributing products or services to
customers.

Cont…
Should a company sell its products directly to a chain
of retail stores, or should it sell to a wholesaler?
What transportation system should be used – trucks
or trains?
 Accountants provide important information about the
costs of each alternative.
 Finally, accountants provide cost data for customer
service activities, such as guarantee and repair costs and
the costs of goods returned.
 Managers compare these costs to the benefits generated
by better customer service.

Accounting and the management process
 Accounting information helps managers plan and
control the organization’s operations.
 In practice, planning and control are so intertwined
that it seems artificial to separate them.
 In studying management, however, we find it
useful to concentrate on either the planning phase
or the control phase to simplify our analysis

The nature of planning and control
 Planning
 setting objectives
 outlining how it will attain them.
 Provides the answers to two questions:
1. What objectives does the organization want to achieve?
2. When and how will the organization achieve these
objectives?
 Control
 implementing plans and
 using feedback to evaluate the attainment of objectives.

Cont…
 Feedback is crucial to the cycle of planning and
control.
 Planning determines action, action generates
feedback and the control phase uses this feedback
to influence further planning and actions.
 Timely, systematic reports provided by the internal
accounting system are the chief source of useful
feedback.

.
 .
Starbucks store – accounting framework for planning and control

Management by exception
 A budget is a quantitative expression of a plan of
action.
 Budgets also help to coordinate and implement
plans.
 They are the chief devices for disciplining
management planning. Without budgets, planning
may not get the front-and-centre focus that it
deserves.
 The accounting system records, measures and
classifies actions to produce performance reports.

Cont…
 Performance reports provide feedback by
comparing results with plans and by highlighting
variances, which are deviations from plans.
 Organizations use performance reports to judge
managers’ decisions and the productivity of
organizational units.
 Performance reports compare actual results to
budgets, thereby motivating managers to achieve
the objectives.

Cont…
 Managers then revise operations to conform with the
plans or revise the plans. This process is management
by exception, which means concentrating on areas that
deviate from the plan and, in the absence of other
evidence, presuming that areas that conform with plans
are running smoothly.
 Thus, the management by-exception approach frees
managers from needless/useless concern with those
phases of operations that adhere to plans.
 However, well-conceived plans incorporate enough
discretion or flexibility so that the manager feels free to
pursue any unforeseen opportunities.

1.4. Financial Accounting Cost Accounting,
and Management Accounting
 Financial accounting performs the function of
portraying a true and fair overall picture of the results
or activities carried on by an enterprise during a period
and its financial position at the end of the year.
 Also, on the basis of financial accounting, effective
control can be exercised on the property and assets of
the enterprise to ensure that they are not misused or
misappropriated.
 FA helps to assess the overall progress of a concern, its
strength and weaknesses by providing the figures
relating to several previous years.

Cont…
 Cost Accounting has been developed because of the
limitations of Financial Accounting from the point of
view of management control and internal reporting.
 Management Accounting refers to managerial
processes and technologies that are focused on adding
value to organizations by attaining the effective use of
resources, in dynamic and competitive contexts.
 MA is a distinctive form of resource management which
facilitates management's 'decision making' by producing
information for managers.

1.4. Distinction between Financial Accounting, Cost
Accounting and Management Accounting
 Management accounting - focuses on accounting
information that facilitates decision making by managers of
the organization.
 It focuses on routine and non routine accounting
reports.
 Financial accounting measures and records business
transactions and provides financial statements.
 Cost accounting provides information to facilitate both
management accounting and financial accounting.
 Its focus is measuring and reporting financial and non
financial information that is related to the cost of
acquiring or consuming resources by an organization.

Cost Accounting Vs Financial Accounting
 Both are concerned with systematic recording and
presentation of financial data .
 The two systems rest on the same principles concerning
debit and credit
 Both have the same sources of recording the transaction.
 Cost accounting is much more detailed than financial
accounting.
 This is because in financial accounting, profit and loss is
determined for the business as a whole where as in cost
accounting, detailed cost and profit data for various
parties of the business like departments, products, etc.
are shown.

Differences between cost accounting and financial accounting
Basis for
comparison
Cost Accounting Financial Accounting
Purpose
provide detailed cost
information to management,
i.e. internal users.
prepare Income statement and
Balance Sheet for reporting to
owners and shareholders and other
outside agencies etc.
Statutory
requirement
voluntary except in certain
industries where it has been
made obligatory to keep cost
records under the company’s
law.
To be prepared according to legal
requirements of companies Act
and Income Tax Act.
Analysis of
Cost and
profit
show the detailed cost and
profit data for each product
line, department. Process, etc.
reveals the profit or loss of the
business as a whole for a
particular period. It doesn’t show
the figure of cost and profit for
individual products, departments
and processes.

Cont…
Periodicity of
reporting
Cost reporting is a continuous
process and may be daily ,weekly
, monthly etc.
Financial reports are prepared
periodically, usually on an
annual basis.
Control aspects
It provides for a detailed system of
controls with the help of certain
special techniques like standard
costing
It lay emphasis on the recording
of financial transactions and
does not attach any importance
to the control aspect.
Historical and
predetermined costs
It is concerned not only with
historical costs but also with
predetermined costs.
It is concerned almost
exclusively with historical
records.
Format of
presenting
information
Cost accounting has varies forms of
presenting the cost information
which are tailored to meet the need
of management and thus lacks a
uniform format.
FA has a single uniform format
for presenting information, i.e.
Income statement and Balance
Sheet.

Cont…
Types of
transactions
recorded
Cost accounting records not only
external transactions but also
internal or interdepartmental
transactions like issue of materials
by store keeper to production
departments.
Financial accounting
records only the external
transactions like sales,
purchase, receipts and etc.
with out side parties.
Types of
statement
prepared
Cost accounting generates special
purpose statements and reports like
report on Loss of Materials, Idle time
Report ,Variance Report, etc. Cost
accounting identifies the user,
discusses this problems and needs
and provides tailored information.
Financial accounting
prepares general purpose
financial statements like
Income statement and
Balance sheet.

Relationship between Cost Accounting and
Management Accounting

 The terms "cost accounting" and "management
accounting" are used interchangeably.
 The two concepts are interrelated; one is a subset of the
other.
 The information used from cost accounts is required by
management, particularly for
 pricing decisions,
order assessment and
stock valuation, to name a few.
 Technically, the cost function supplements the
management accounting function.
 Both C.A. and M.A. facilitate the planning, controlling
and decision-making function of management.

Cont…
 The cost accounting department is responsible for
collecting cost data,
analyzing cost behavior,
attributing cost to departments/units/objects and
preparation of statements.
 Management accounting uses financial (and non-financial)
data to create information for internal users.
 Without the cost function, the control aspect of management
would be handicapped.
 The link between cost and management accounting is strong.
 Cost accounting is a function of management accounting.

Differences between cost accounting and
Management accounting
 .
Cost Accounting Management Accounting
More specific-relating to budget
creation, cost determination and
analysis of variances, for instance.
Encompasses all functions and levels of
management
Data for cost accounts can be both
financial and non-financial (for
example, idle time, clock cards).
Management account information
absorbs the information from cost
accounting departments and includes
financial and non-financial data.
Cost accounts provide the bulk of data
and information for management
accounting
Management accounts generally require
less detail than cost accounts
Cost accounting uses specific
techniques-although the application of
these techniques is variable.
Management data may include specialist
knowledge and skill

1.5. Cost benefit Philosophy and behavioral
considerations in management Accounting
System
 Managers should keep two important ideas in mind when
designing accounting systems:
1) the cost-benefit balance and
2) behavioral implications.
 The cost-benefit balance - weighing estimated costs against
probable benefits
 It is the primary consideration in choosing among accounting
systems and methods.
 Accounting systems are economic goods so that the manager
should purchase the system that provides the largest excess of
benefits over cost.

 The expected benefits from the new system come from
improved decisions or better controls, and it can be
very difficult to develop a comprehensive assessment of
these benefits .
 Management accounting reports influence the decisions
of managers.
 The system must provide accurate, timely reports in a
form useful to managers.
 If a report is too complex, too difficult to use, or arrives
too late, the manager may not use the report in making
decisions.
 A report that goes unused creates no benefits.

 Managers should also consider behavioral implications ,
that is, the system’s effect on employees’ decisions and
behavior.
 For example, consider a performance report that a
manager’s superiors use to evaluate the operations for
which the manager is responsible. If the report unfairly
attributes excessive costs to the manager’s operations,
the manager may lose confidence in the system and not
let it influence future decisions. A nutshell, think of
management accounting as a balance between costs and
benefits of accounting information coupled with an
awareness of the importance of behavioral effects.

1.7. Ethical consideration in management
Accounting
 A management accountant has ethical responsibilities in
four broad areas:
First, to maintain a high level of professional competence;
Second, to treat sensitive matters with confidentiality;
Third, to maintain personal integrity; and
Fourth, to disclose information in a credible fashion.
 Members of IMA shall behave ethically. A commitment to
ethical professional practice includes: overarching
principles that express our values and standards that guide
our conduct

Ethical consideration…
Principles
 IMA’s overarching ethical principles include:
 Honesty,
 Fairness,
 Objectivity, and
 Responsibility.
 Members shall act in accordance with these principles and
shall encourage others within their organizations to adhere
to them.

Standards
 A member’s failure to comply with the following standards
may result in disciplinary action.
I. Competence
 Each member has a responsibility to:
1. Maintain an appropriate level of professional expertise by
continually developing knowledge and skills.
2. Perform professional duties in accordance with relevant laws,
regulations, and technical standards.
3. Provide decision support information and recommendations
that are accurate, clear, concise, and timely.
4. Recognize and communicate professional limitations or other
constraints that would preclude responsible judgment or
successful performance of an activity.

II. Confidentiality
1. Keep information confidential except when
disclosure is authorized or legally required.
2. Inform all relevant parties regarding appropriate use
of confidential information. Monitor subordinates’
activities to ensure compliance.
3. Refrain from using confidential information for
unethical or illegal advantage.

III. Integrity
1. Mitigate actual conflicts of interest.
2. Regularly communicate with business associates to
avoid apparent conflicts of interest. Advise all
parties of any potential conflicts.
3. Refrain from engaging in any conduct that would
prejudice carrying out duties ethically.
4. Abstain from engaging in or supporting any activity
that might discredit the profession

IV. Credibility
1. Communicate information fairly and objectively.
2. Disclose all relevant information that could
reasonably be expected to influence an intended
user’s understanding of the reports, analyses, or
recommendations.
3. Disclose delays or deficiencies in information,
timeliness, processing, or internal controls in
conformance with organizational policy and/or
applicable law.

Resolution of Ethical Conflict
 In applying the Standards of Ethical Professional
Practice, you may encounter problems identifying
unethical behavior or resolving an ethical conflict.
 When faced with ethical issues, you should follow
your organization’s established policies on the
resolution of such conflict.
 If these policies do not resolve the ethical conflict,
you should consider the following courses of action:
1. Discuss the issue with your immediate supervisor
except when it appears that the supervisor is
involved.

Resolution of Ethical Conflict…
2. Clarify relevant ethical issues by initiating a
confidential discussion with an IMA Ethics
Counselor or other impartial advisor to obtain a
better understanding of possible courses of action.
3. Consult your own attorney as to legal obligations
and rights concerning the ethical conflict.

DISCUSSION
1. Discuss the Objectives of cost accounting.
2. Discuss the advantages of cost accounting
to:
the managements
Workers
Society
Government agency and others

.
 .

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