First Lesson Flashcards
What is Management Accounting?
• Process of identitying, measuring, accumulating, analyzing, preparing, interpreting, and communicating information used by managers for taking decisions
• Support decisions
• Cost-volume-profit analysis, budgeting, variance analysis,
KPI
• Future oriented
• Flexibility in reporting and analysis and technique as it has an internal orientation
What is Financial Accounting?
• Develops financial information for external decision makers like investors, suppliers, banks, government authorities/regulatory agencies
• Financial health and performance
• Income statement, balance sheet, cash flow statements
• Historical oriented (e.g. fiscal year)
• Strict regulations: Tax law and accounting standards
What are the functions of Management accounting systems?
Management accounting systems have the following functions:
• Accounting information is used in decision making for planning and control.
• Planning set the objectives and describes how the organization will achieve its objectives.
• Control is the process of implementing plans and evaluating if objectives are achieved.
Decision making: Short term decisions
Short-term decisions include:
Determining the quantity of products to produce and sell.
Selecting the product mix to offer in the market.
Accepting a special order.
Eliminating unprofitable business segments.
Deciding whether to produce a component internally or outsource it.
Esta a sin eeling prides service customizations.
For example, a travel agency can decide whether to internally manage tour planning or purchase prepackaged packages.
“Make”: Provides greater control over customization but requires significant organizational resources.
• “Buy”: Saves time but offers less flexibility.
Decision making: Long term decisions
Long-term decisions (investments and projects) include:
The development and production of new products to introduce to the market.
The replacement of outdated plants and machinery.
Entering a new market or opening new retail locations.
For example, Starbucks recently attempted to introduce menus in its outlets that included a combination of food and beverages. However, following a specific analysis of the revenues and costs of this operation conducted by management control, the management decided not to continue down this path.
What is Planning?
Planning involves defining both long-term and short-term objectives and the resources needed to achieve them.
• In the long-term plan, these objectives pertain to the strategic goals that the company intends to pursue.
• In the annual budget, they are detailed and expressed in economic and financial terms to provide an indication of the expected results for the upcoming year (it is the quantitative expression of an action plan).
What is Control?
Control verifies whether the objectives set during the planning phase have been achieved. For example, if I planned for an income of 120K and achieved 150K, the report informs about the reasons for not reaching the goal.
• Performance reports:
- compare actual results with budgeted amounts
- provide feedback by comparing results with plans
- highlight variances, which are deviations from plans
What are Cost Drivers?
• Cost drivers are measures of activities that require the use of resources and thereby cause costs→ are output measures that generate costs.
• Activity: Production of automobile tires
• Output Measure (Cost Driver): Number of tires produced
• Cost Generated: Raw materials (e.g., rubber, steel, chemicals)
What is Cost Behavior?
•Cost behavior is how the activities of an organization
affect its costs.
Variable cost behavior
• A variable cost changes in direct proportion to changes in the cost-driver level.
• Think of variable costs on a per-unit basis.
• The per-unit variable cost remains unchanged regardless of changes in the cost-driver.
• Activity: ice cream production
• Driver: litres of ice cream produced
• Variable cost: raw materials
• The total variable cost changes directly in proportion to the number of litres of ice cream produced (the cost driver), while the unit variable cost (per litre) remains the same.
• If she produces 100 litres, the total cost of raw materials will be: 100 litres * €2 =
€200
• If Mario decides to increase production to 150 litres: If he produces 150 litres, the total cost of raw materials will be: 150 litres * €2 = €300
Fixed cost behavior
• A fixed cost is not immediately affected by changes in the cost-driver level*
• Think of fixed costs on a total-cost basis.
• Total fixed costs remain unchanged regardless of changes in the cost-driver.
• The ice cream maker pays monthly rent for the premises in which his ice cream shop is located. Rent is a fixed cost because it is not directly dependent on the number of litres of ice cream Mario produces.
• Monthly rent: Mario pays €1000 per month for the rent of the premises. This total fixed cost remains the same regardless of whether Mario produces 50, 100, or 200 litres of ice cream per month. If he produces 150 litres, the rent remains:
€1000. If he produces 50 litres, the rent remains:€1000. The fixed cost per unit changes.
