Introduction to Management Accounting

Question 1

The American Accounting Association define accounting as:

Answer 1

the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information

Question 2

The users of accounting information can be divided into two categories:

Answer 2

1. internal users within the organization (management accounting).
2. external parties outside the organization (financial accounting).
   (Drury, 2020)

Question 3

What’s the difference between Financial Accounting (3) and Management Accounting (3)?

Answer 3

1. Financial Accounting (not Finance):

• provide information to those external to the organisation. Shareholders would be a typical user of this information.
• mainly uses historical data and is essentially backward-looking.
• very heavily regulated and controlled by parties external to the organisation, such as the IASB.
• Financial accounting reports describe the whole of the business

2. Management Accounting:

• seeks to provide information which is for those internal to the organisation.
• Managers would be a typical user of this information.
• mainly concerned with future planning and is very forward-looking. (Key term: decision making)
• not regulated at all. (Although there are guidelines)
• Financial accounting reports describe the whole of the business

Question 4

The decision-making, planning and control process. (diagram)

Answer 4

(Drury, 2020)

Question 5

Functions of management accounting

A cost and management accounting system should generate information to meet the following: (3)

Answer 5

• allocate costs between products sold, and fully and partly completed products that are unsold.
• provide relevant information to help managers make better decisions.
• provide information for planning, control, performance measurement and continuous improvement

(Drury, 2020)

Question 6

Cost object (definition)

Answer 6

Any activity or output for which a separate measurement of costs is desired.

Question 7

2 Stages:

Classify costs into ___________ e.g., by type of ________ , by cost behaviour, then assign costs to cost objects.

Choosing an appropriate cost unit is _________ within a business as it is to this object that ___ _____ are ___________.

Answer 7

Classify costs into categories e.g., by type of expense, by cost behaviour, then assign costs to cost objects.

Choosing an appropriate cost unit is critical within a business as it is to this object that all costs are allocated.

Question 8

Stakeholders and the information they require

• Managers
• Shareholders
• Employees
• Creditors and the providers of loan capital
• Government agencies such as the Central Statistical Office

Answer 8

• Managers require information that will assist them in their decision-making and control activities; for example, information is needed on the estimated selling prices, costs, demand, competitive position and profitability of various products/services that are provided by the organization.
• Shareholders require information on the value of their investment and the income that is derived from their shareholding. Likewise, potential investors are interested in their potential returns.
• Employees require information on the ability of the firm to meet wage demands and avoid redundancies, their potential for continued employment.
• Creditors and the providers of loan capital require information on a firm’s ability to meet its financial obligations.
• Government agencies such as the Central Statistical Office collect accounting information and require such information as the details of sales activity, profits, investments, stocks (i.e. inventories), dividends paid, the proportion of profits absorbed by taxation and so on. In addition, government taxation authorities require information on the amount of profits that are subject to taxation. All this information is important for determining policies to manage the economy.