BASICS OF MANAGERIAL ACCOUNTING
Purpose of the course - familiarize you with:
Managerial accounting concepts.
Managerial accounting practices.
Use of managerial accounting information for decision making. 4.
Accounting is a branch of study concerned with the generation ( identification & measurement ) and provision (Communication) of information.
Managerial accounting is in particular accounting for the internal management of organizations.
A. Financial versus Managerial Accounting
! unifying concept: assets=equities
! no underlying unity-- many approaches
! no general principles
! mostly optional
! almost exclusively $
! many non-financial elements
! emphasis on precision, objectivity
! subjective estimates
! based on past
! many future estimates and forecasts
! overall summary of business
! very segmented
! general purpose information
! specific purpose reports
! less/mandatory frequency
! more frequent and optional
! basic data source same
! ends with financial statements
! integral part of other business aspects
B. Cost Accounting Terminology
1. Nature of Cost
Cost - A sacrifice of resources: Cost is a measurement in monetary terms of the amount of resources used for some purpose. Expense - The cost charged against revenue in a particular accounting period.
2. Purposes of Gathering Cost Information
Routine decision making: Managerial
Nonroutine decision making Cost
Cost of Goods Sold Financial Product
B. Three Aspects (Basic costs) of Managerial Accounting:
1. Decision Making (Differential Costs)
Interface with decision models from operations research, economics and finance, competitive analysis of costs and prices, cost of capital calculations and investment decisions.
Example : Dominos Pizza almost bankrupt 6' pizza making losses
2. Product Costing (Full Costs)
Associating a $ value for the resources sacrificed in obtaining a product or service.
- used for financial reporting - valuation of inventory, COGS.
- used for internal decision making - product pricing, optimal product mix.
-poor costing led Rockwell International Inc., to overcharge customers - high volume product - heavy duty truck axles - attract competitors selling at lower prices hence trouble. -automobile industry controllable costs.
-steel industry died because of high wages.
3. Planning, Control & Performance Evaluation (Responsibility Costs)
- Quantification of goals, strategies and forecasts in the form of budgets - develop pro forma financial statements.
- Measure to what extent managers and organizational subunits (responsibility centers) did achieve their goals.
a) Informal control - social psychology.
b) Formal control - performance evaluation, incentive provisions, compensation, promotions and dismissals.
Example: Reimbursement mechanisms for hospitals,
DIFFERENT COSTS FOR DIFFERENT PURPOSES IS A RECURRENT THEME IN MANAGERIAL ACCOUNTING
3. What types of costs are incurred in a Manufacturing Firm?
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