Chapter48
An introduction to management
accounting
What is management accounting?
 Management means decision making.
 Accounting means The systematic recording, reporting, and
analysis of financial transactions
of a business.
Management accounting is used within a business
to provide them with the basis to make informed business
decisions that will allow them to be better in their management
and control functions.
Management accounting
The cost recording component is called cost
accounting.
Cost accounting is needed for a company management
in measuring financial performance.
There are many types of costs!!!! =()=‘’
Management accounting
 Historical cost
 A measure of value used in accounting in which the price
of an asset on the balance sheet is based on its nominal or
original cost when acquired by the company.
Examples
 100 units of an item were purchased one month back for
$10 per unit. The price today is $11 per unit. The inventory
shall appear on balance sheet at $1,000 and not at $1,100.
Management accounting
 Product costs
 Costs that become part of the cost of goods
manufactured
 Product costs are further classified into direct
material, direct labor and factory overhead.
 E.g. raw material, labor, factory depreciation, fuel and
packaging costs.
 Period costs
 Period costs are expenses in the period in which they
are incurred.e.g advertising, sales commissions, office
supplies, office depreciation, legal and research and
development costs.
Management accounting
 Cost control
Costs are collected form cost centre for individual cost
units (unit of product or service)
Management accounting
 Costing approaches!
 These are a number of ways costs can be added and
recorded.
 The two most commonly used are
 1. Absorption costing
 2. Marginal costing
 1. Absorption costing
 Absorption costing uses the total variable costs and fixedcosts
associated with manufacturing a product as the cost base.
Unsoldunits
x Pr oduction cos tofgoodscompleted
Totalunitsproduced
Marginal costing Where costing is used which takes account of only
the variable cost of products rather than the full production cost.
e.g.
Calculate the variable production cost
€ Direct materials 8.00
Direct labour 5.00
Variable production o/h’s 3.00
Variable production cost 16.00
Management accounting
 Costing systems
 There are two main types of costing system
 Job costing
When production consists of separate jobs
eg. a Rolls-Royce is made to each customer’s
specification. An average cost per unit of product is
then calculated for each job.
 Process costing.
When the production is continuous flow. In industries
such as oil, textiles, food processing etc.
Management accounting
 Budgeting and budgetary control
 · A control technique whereby actual results are
 compared with budgets.
 · Any differences (variances) are made the
responsibility of key individuals who can either
exercise control action or revise the original budgets.
 What is management accounting?
 is used within a business
to provide them with the basis to make informed
business decisions
 State 3 types of cost.
 Historical cost
 Product costs
 Period costs
 3. How Absorption costing is different from Marginal
costing?
 Absorption costing includes both the total variable
costs and fixed costs.
 Marginal costing only the variable cost of product is
included.