MANAGEMENT & COST ACCOUNTING LO 1: INTRODUCTION TO MANAGEMENT ACCOUNTING

Transcription

1 MANAGEMENT & COST ACCOUNTING LO 1: INTRODUCTION TO MANAGEMENT ACCOUNTING

2 ACCOUNTING INTRODUCTION The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information. Two broad aspects of the definition: 1. Measurement : recording of past data 2. Management : Using information for decision making Accounting is a process of: Classification and recording monetary transactions, Reporting (presentation) and interpretation Future forecasting To provide economic information for decision making

3 INTRODUCTION TO MANAGEMENT ACCOUNTING The process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of an accountability of its resources. Financial statements do not have to comply strictly with rules published by statutory bodies and these are prepared according to the requirements of the managers Focuses more on internal reporting Types of management accounting systems: 1. Cost accounting 2. Job costing 3. Process costing 4. Inventory costing Types of managerial accounting reports: 1. Long term and short term planning: Budget reports, Feasibility analysis & Investment appraisal 2. Periodic performance feedback: Variance analysis, Accounts receivable aging analysis 3. Cost reports: Job costing, batch costing

4 PURPOSE OF MANAGEMENT ACCOUNTING To provide information for the decision makers (management) of the organization to make informed decisions. E.g. Material usage, Investment decisions, Labor utility efficiencies, Breakeven point, Ratio analysis To facilitate planning. E.g. Budgeting, Risk analysis, Cost management To improve organizational efficiencies. E.g. Determination of bottlenecks, Benchmarking, Inventory management, Flexible budgeting

5 THE IMPORTANCE OF INTEGRATING MANAGEMENT ACCOUNTING TO ORGANIZATIONS To facilitate the changing requirements of the business environment 1. Global competition 2. Growth in the service industry 3. Changing product life cycles 4. Advancements in manufacturing technologies 5. The impact of information technology 6. Environmental issues 7. Customer issues Rising focus on customer satisfaction and new management approaches 1. Cost efficiency 2. Quality 3. Time as a competitive weapon 4. Innovation and continuous improvement

6 HISTORY OF MANAGEMENT ACCOUNTING REFER PAGE 17

7 FINANCIAL VS. MANAGEMENT ACCOUNTING Financial Accounting Produced annually Regulatory requirements are mandatory Publicly available Exclusively measured in monitory terms Only a summary of business performance and position is reported Management Accounting Produced frequently Regulatory requirements are not mandatory Available only to management and few other parties Report financial and non-financial information together to make ease of using them in operational level Detail reporting to the internal management

8 USERS OF ACCOUNTING INFORMATION Different groups of stakeholders whom will be interested in accounting information. 1. Managers: To facilitate in decision making process and perform control activities 2. Shareholders: Value their investment and to asses the income they could derive by their shareholding 3. Employees: To evaluate the company to meet wage demands and avoid redundancies 4. Creditors and loan providers : To assess the ability of the firm to meet the financial obligations 5. Government agencies such as Inland Revenue : To compute tax and collect due tax payments

9 QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION IFRS identifies TWO levels of qualitative characteristics of useful financial information. 1. Fundamental qualitative characteristics Required information to be useful Include relevance and faithful representation 2. Enhancing qualitative characteristics Enhance usefulness of accounting information Include comparability, verifiability, understandability and timeliness

10 01. RELEVANCE To be relevant, accounting information must be capable of making a difference in a decision.

11 01. RELEVANCE Financial information has predictive value if it has value as an input to predictive processes used by investors to form their own expectations about the future.

12 01. RELEVANCE Relevant information also helps users confirm or correct prior expectations.

13 01. RELEVANCE Information is material if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information.

14 02. FAITHFUL REPRESENTATION Faithful representation means that the numbers and descriptions match what really existed or happened.

15 02. FAITHFUL REPRESENTATION Completeness means that all the information that is necessary for faithful representation is provided

16 02. FAITHFUL REPRESENTATION Neutrality means that a company cannot select information to favor one set of interested parties over another.

17 02. FAITHFUL REPRESENTATION An information item that is free from error will be a more accurate (faithful) representation of a financial item.

18 03. COMPARABILITY Information that is measured and reported in a similar manner for different companies is considered comparable.

19 04. VERIFIABILITY Verifiability occurs when independent measurers, using the same methods, obtain similar results.

20 05. TIMELINESS Timeliness means having information available to decision-makers before it loses its capacity to influence decisions.

21 06.UNDERSTANDABILITY Understandability is the quality of information that lets reasonably informed users see its significance.

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