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Module 8ModuleModuleModule 888 An Introduction to Cost and Management AccountingManagement Accounting Omar El-Kheshen – omar@arabacademy.com 1
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Learning Objectives By the end of this module you should understand: 1. The differences between management accounting and financial accounting 2. The planning and control features of a manager’s job 3. Management accounting’s role in planning and control 4. The typical detailed internal decisions lying behind a set of published financial statements 5. The source of costs and how individual costs can be added together to determine the total cost of a product 6. That different costs and revenues are used for different management decisions; management accounting systems must be sufficiently flexible to allow managers to use the information for a variety of purposes Omar El-Kheshen – omar@arabacademy.com 2
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Agenda 8.1 What Accounting Is: A Refresher 8.2 Management Accounting Looks Forward 8.3 Where Accounting Fits into a Company 8.4 A Brief Note on what a Manager Does 8.5 The Role of Accounting Information 8.6 Management Accounting in MBA 88..77 Differences between Management Accounting and Financial AccountingDifferences between Management Accounting and Financial Accounting 8.8 Management Accounting and Cost Accounting 8.9 Where Costs Come from and an Overview of the Modules to Follow 8.10 Process Costing 8.11 Costs Relevant to Management Decisions 8.12 Other Topics in the Management Accounting Course Review Questions Case Studies Omar El-Kheshen – omar@arabacademy.com 3
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As we’ve already seen, this course is designed to cover both accounting functions – financial and managerial Financial Accounting Management (Reporting) Accounting Compiling accounting information Predicting future prices and costs of into financial statements showing the daily operations overalloverall picture of the firmpicture of the firm Important for managers and Important for mangers to plan and shareholders in taking decisions and control the day to-day activities of the assessing company’s performance business Omar El-Kheshen – omar@arabacademy.com 4
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We’ve also said: Accounting is a a series of processes and techniques that identify, measure & communicate economic information to be used in decision-making Financial Accounting: Is a Service Function Must Be Identified, then Measured Accounts are designed to portray Some economic events are easy underlying economic strengths to identify and to measure and weaknesses Others are easy to identify but It provides information to not to measure SHAREHOLDERS Deals with Economic Information & Is a Communication Device avoids the occurrence of events which cannot be quantified The ANNUAL STATEMENTS are Accounting processes information the only communication a into MONEY VALUE company has with its Corporate reporting currently shareholders in the course of a includes intangible assets such as normal year goodwill and brand names Omar El-Kheshen – omar@arabacademy.com 5
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Module 1 stressed that accounting information served a variety of users both inside and outside the organization Internal Users External Users Directors Shareholders Senior Executives Analysts Managers Creditors Employees Tax Authorities Trade Unions The Public They need accounting to base their decisions on adequate and truthful information Omar El-Kheshen – omar@arabacademy.com 6
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In the first seven modules we focused on the needs of external users represented in preparing and interpreting financial statements Module 2 Module 3 Module 4 Module 5 Profit and loss Balance Statement of Financial reporting account sheet cash flow framework Module 6 Interpreting financial StatementsStatements Since the performance of a company’s directors is largely being evaluated through the financial statements, they chose principles that which give the appearance of an upward trend in performance Module 7 Emerging and Controversial Issues in International Financial Reporting The accounting information contained in these financial accounts is historic Omar El-Kheshen – omar@arabacademy.com 7
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Agenda 8.1 What Accounting Is: A Refresher 8.2 Management Accounting Looks Forward 8.3 Where Accounting Fits into a Company 8.4 A Brief Note on what a Manager Does 8.5 The Role of Accounting Information 8.6 Management Accounting in MBA 88..77 Differences between Management Accounting and Financial AccountingDifferences between Management Accounting and Financial Accounting 8.8 Management Accounting and Cost Accounting 8.9 Where Costs Come from and an Overview of the Modules to Follow 8.10 Process Costing 8.11 Costs Relevant to Management Decisions 8.12 Other Topics in the Management Accounting Course Review Questions Case Studies Omar El-Kheshen – omar@arabacademy.com 8
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However accounting and accountants must be capable of looking forward as well as back; this forward-looking branch is called management accounting Internal Users need: Access to an information systemAccess to an information system that: CanCanCanCan predictpredictpredictpredict the path the company will takethe path the company will takethe path the company will takethe path the company will take Management Accounting Omar El-Kheshen – omar@arabacademy.com 9
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The same characteristics of the global definition apply to management accounting as to financial accounting and reporting Management Accounting: Is a Service Function Must Be Identified, then Measured The system serves managers and Some economic events are easy all other decision-makers WITHIN to identify and to measure an organization Others are easy to identify but not to measure Deals with Economic Information Is a Communication Device Do NOT necessarily translate Described as the cement which quantities into money terms holds together the disparate parts E.g.: tons of material, hours per of an organization machine, number of shifts Omar El-Kheshen – omar@arabacademy.com 10
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Although both financial and management accounting are positioned under the control of the financial director there is a difference between their functions Financial Accounting Management (Reporting) Accounting REPORTS REPORTS ON FOR Management TO Financial Director Omar El-Kheshen – omar@arabacademy.com 11
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Agenda 8.1 What Accounting Is: A Refresher 8.2 Management Accounting Looks Forward 8.3 Where Accounting Fits into a Company 8.4 A Brief Note on what a Manager Does 8.5 The Role of Accounting Information 8.6 Management Accounting in MBA 88..77 Differences between Management Accounting and Financial AccountingDifferences between Management Accounting and Financial Accounting 8.8 Management Accounting and Cost Accounting 8.9 Where Costs Come from and an Overview of the Modules to Follow 8.10 Process Costing 8.11 Costs Relevant to Management Decisions 8.12 Other Topics in the Management Accounting Course Review Questions Case Studies Omar El-Kheshen – omar@arabacademy.com 12
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A company’s objective is to maximize shareholder’s value and a manager’s prime responsibility is to ensure that things get done efficiently to meet this objective Manager’s Tasks Planning Coordination Develop broad objectives Consider ways to reach these objectives Work out costs and revenues associated Ensure that the individual managers’ plans with each alternative add together to make a realistic and Select the favored alternative & start practical proposition operations Prepare a detailed plan for the next 12 months & a rough one for the next 2 years Directing Control Allocate specific tasks to individuals Periodically track actual performance Ensure that their instructions are carried against the plan out Take remedial steps to solve the problems Omar El-Kheshen – omar@arabacademy.com 13
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These four tasks are inter-related where there is a feedback loop between the planning and control functions The planning and control loop Feedback loop 2 reflects the need for a rigorous detailed analysis to solve a problem emerging having an impact on the entire planning processprocess Feedback loop 1 reflects the need to adjust operations immediately on receipt of control information indicating that part of the operations is not running to plan Omar El-Kheshen – omar@arabacademy.com 14
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Two examples showing the two feedback loops in practice Examples Examples 1. A paint manufacturer believed he had 2. The same paint manufacturer perfected a gloss paint which would recognized after a period of several dry in one hour after application to months’ sales that the level of woodwork. His first 6 months’ complaints and returns were production figures told him that running at 5 times the normal material costs far exceeded the level. budget. A chemical analysis of the returnedA chemical analysis of the returned On investigation he discovered that the tins of paint revealed that certain special drying agent used in the paint climatic conditions caused the formula was being purchased from a special drying agent to work when French supplier rather than a local the tin was first opened, making it one. Steps were therefore put in hand impossible for the user to dip in his to re-source the supply on the expiry brush! Such results caused him to of the current contract. reassess the viability of this special agent and after further tests in the R&D laboratory, he decided to abandon the line. Omar El-Kheshen – omar@arabacademy.com 15
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Agenda 8.1 What Accounting Is: A Refresher 8.2 Management Accounting Looks Forward 8.3 Where Accounting Fits into a Company 8.4 A Brief Note on what a Manager Does 8.5 The Role of Accounting Information 8.6 Management Accounting in MBA 88..77 Differences between Management Accounting and Financial AccountingDifferences between Management Accounting and Financial Accounting 8.8 Management Accounting and Cost Accounting 8.9 Where Costs Come from and an Overview of the Modules to Follow 8.10 Process Costing 8.11 Costs Relevant to Management Decisions 8.12 Other Topics in the Management Accounting Course Review Questions Case Studies Omar El-Kheshen – omar@arabacademy.com 16
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The second part of this course is concerned with types of information that can be generated by the accounting system to help managers make correct decisions Type of Information is Different Financial Accounting Management Accounting Concerned with external sources of information: Internally Generated: Newspapers and journals, media stories, conversations, economic and From the accounting system itself technological advice Information is limited with statutory and Information is not limited, it is informal professional regulations and flexible The exact role of management accounting information in any organization is not made available publicly, as companies disclose as few information as possible Omar El-Kheshen – omar@arabacademy.com 17
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Agenda 8.1 What Accounting Is: A Refresher 8.2 Management Accounting Looks Forward 8.3 Where Accounting Fits into a Company 8.4 A Brief Note on what a Manager Does 8.5 The Role of Accounting Information 8.6 Management Accounting in MBA 88..77 Differences between Management Accounting and Financial AccountingDifferences between Management Accounting and Financial Accounting 8.8 Management Accounting and Cost Accounting 8.9 Where Costs Come from and an Overview of the Modules to Follow 8.10 Process Costing 8.11 Costs Relevant to Management Decisions 8.12 Other Topics in the Management Accounting Course Review Questions Case Studies Omar El-Kheshen – omar@arabacademy.com 18
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We can work out some of the types of accounting information used by MBA managers from a study of their published accounts 1 2 3 Omar El-Kheshen – omar@arabacademy.com 19
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We will surmise the kinds of issues lying behind the figures in MBA accounts & suggest the types of management accounting information managers use in their work 1. Revenues Breakdown by product group and geographical region is in annual report: Take the position of the sales director of MBA’s Electronic Systems in Europe: what figures will help him drive his business? 1 Market share of MBA Electronic Systems in Europe versus principal competitors 2 Change in market share quarter by quarter in 20x2 and plan for next two years 33 Above information broken down for top four (and bottom four) products in Electronic Systems divisionSystems division 4 Proposed marketing and promotional expenditure, product by product, for the next 12 months 5 Sales force requirements: head count, area switching, training needs 6 New product launch plans: timing, market penetration, cost, profit impact 7 Market opportunities in Eastern Europe Much of this information is non-accounting as it is not concerned with money amounts Omar El-Kheshen – omar@arabacademy.com 20
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