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Management Accounting: Cost Concepts for Decision Making

Updated on April 15, 2015

Management Accounting: Tool for Decision Making

Management Accounting is a field of Accountancy that provides financial information and special studies to decision makers in the organization. The information are used by managers in running the operations of the company to enhance company profitability. These would include special studies on segments of operations, that may need in-depth investigation.

On the other hand, Financial Accounting is more concerned with information that is needed by stockholders and regulatory agencies like the Bureau of Internal Revenue (BIR) and the Securities and Exchange Commission (SEC). These financial data are needed by third parties--- investors and lenders --- to help them judge on how efficient the company operations is, in terms of earnings per share.

Accounting Graduates, April 2014

among the subjects taken by Accountancy students is Management Accounting, with emphasis on cost analysis for decision making.
among the subjects taken by Accountancy students is Management Accounting, with emphasis on cost analysis for decision making. | Source

Difference between Management Accountants and Financial Accountants

Management accountants prepare reports pertaining to: performance evaluation, capacity utilization, inventory backlogs, and sales performance. These reports are needed by top management to make a decision on: whether to accept or decline a product, make and buy decisions, and investigate sudden increase in costs or a steep decline in sales. They prepare other reports as may be needed - like opportunities for a new business venture or a cutting down on some of the company’s product lines.

In comparison, Financial Accountants prepare the monthly, quarterly or annual financial reports for submission to the stockholders and the public. The reports are prepared in accordance with Generally Accepted Accounting Principles (GAAP).

Do Management Accountants have to be CPAs?

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Importance of Management Accounting Reports

Management accounting information is needed by managers who are tasked to set the directions of the company. As managers, they are responsible for maximizing the use of company resources and the control of company assets. These managers are responsible for setting the directions, control of operations, and in maximizing the use of company resources or assets. Therefore, they would need all relevant inputs financial or otherwise, for decision making.

Managerial Accounting Basics: Costs

Different Kinds of Costs in Bakeshop Operations

Direct Materials
Direct Labor
Manufacturing Overhead
Sugar
Baker
Electricity
Flour
Mixer
Water
Margarine
Cook
Rent
Chocolates
Packer
Janitorial Service

Management Accounting

  • Reports are for planning, directing and control of operations
  • Reports are for decision-making
  • Reports are timely and relevant
  • Prepares segment reports
  • Need not follow GAAP
  • Reports not mandatory

Financial Accounting

  • Reports are for public consumption - stockholders, lenders, government agencies;
  • Reports are a summary of past events;
  • Reports must be objective;
  • Reports are for the entire organization;
  • Must follow GAAP;
  • Mandatory as external reports.


A Man on the Way Up! DLSU-Alabang Finance Team

Former student, AJ Habitan, now part of the DLSU Finance Team
Former student, AJ Habitan, now part of the DLSU Finance Team | Source

Terms and Concepts Used

Management Accounting focuses on planning and control of cost. Hence, relevant information is needed to carry out these functions. As far as Management Accountants are concerned, costs can take many forms. It considers past historical data that are used for preparing financial statements; future economic events that may be used for planning purposes, and; manufacturing cost.

The three components of direct manufacturing costs are ---materials, labor, and overhead.

Direct materials are material inputs that become an integral part of the product. Direct labor, are labor cost that can be directly identified with the product. Overhead costs are all manufacturing costs that include indirect material and indirect labor costs.

Terms:

Manufacturing cost + Labor cost = Conversion cost

Direct materials + Direct labor = prime cost

Marketing Cost + Administrative cost = Non-manufacturing cost

Accounting Graduates, April 2014

One of the choices for jobs of newly minted accountants is --- as Management Accountants. This is a group of Accountancy graduates from the DFCAMCLP in Las Pinas.
One of the choices for jobs of newly minted accountants is --- as Management Accountants. This is a group of Accountancy graduates from the DFCAMCLP in Las Pinas. | Source

The Code of Conduct for Management Accountants is summed up in four broad areas:

  • Professional competence
  • Handling of confidential and sensitive information
  • Personal integrity
  • Objectivity in all disclosures

Professional Ethics

The financial scandals involving Enron, Arthur Andersen and other auditing firms have raised deep apprehension within the Accountancy profession regarding ethical standards. The incidents have hurt many companies with the culprits paying huge fines, jail terms, and financial collapse of a number of firms.

Ethical standard plays an important role in business and the integrity of the profession. This led to stiffer regulations which affected the practice of Certified Public Accountants, in all fields of endeavor..


Different Kinds of Cost

The Balance Sheet is sometimes called the Statement of Financial Position. In a manufacturing concern, the Balance Sheet items include: inventories of raw materials, in-processed, and finished goods.

The Income Statement comprises the detailed composition of cost. It shows the computation of the cost of goods manufactured and sold. It includes other cost components like administrative and selling expenses. It takes into account the total cost for a certain period of time frame, like a calendar or fiscal year. The Income Statement also takes into account Sales from operations and miscellaneous income. All costs are deducted from it to arrive at the Net Income.

Different Cost Used for Predicting Business Outcome

Oftentimes, it is necessary to make predictions on how costs will behave under given assumptions. The behavior of cost would determine the outcome, assuming there is a change in the level of activity. The types of costs under these assumption would be:

  • Variable cost – are costs that vary in direct proportion to changes in levels of activity. Example is the additional cost of flour in making bread, would increase the cost of bread.
  • Fixed – are cost that remains constant regardless of level of activity. Example is rental fees that would remain the same, whether production is at 1,000 loaves or at10,000 loaves of bread.

Classification of Cost

  • Direct cost – costs that can be directly traceable to a product. Example is flour in bread making.
  • Indirect cost – cost that cannot be directly traceable to a product. Example is a janitorial service for the factory. You cannot trace it directly to the bread.

Conclusion

Management accounting is a tool to help companies compete better in the marketplace. Being able to come up with strategies on minimizing cost can create a competitive advantage to be several steps ahead of the competition. Cost concepts need to be thoroughly studied for better decision making. These advantages could equate to more profits, better opportunities for growth, and higher corporate earnings.

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