Duha Shaikh 26623
Chapter 1
Accounting is often described as the language of business, involving tasks like recording,
estimating, organizing, and summarizing financial information. There are two main types:
financial accounting and management accounting, each serving specific purposes. Financial
accounting is all about external reporting to stakeholders, like owners and tax authorities,
focusing on past financial activities with objectivity and precision, following GAAP/IFRS, and
being required for external reports.
On the flip side, management accounting is for internal management needs, helping with
planning, controlling, and decision-making. Planning involves setting goals and figure out how
to achieve them. Plans are often accompanied by a budget. A budget is a detailed quantitative
plan for the future based on expected future costs and revenues. For example, if I plan to start a
bakery, I would need to know how much money will be spent and how it will be sourced, etc.
Secondly, Controlling entails receiving feedback to guarantee effective implementation of plans
amidst changing circumstances. This could involve utilizing a performance report that assesses
applied data against actual data. The goal is to recognize and draw insights from commendable
performance while pinpointing and eliminating sources of unsatisfactory results. On a large scale
example, companies like Nike can analyze their sales to figure whether the targeted sales were
achieved as a result of a new marketing campaign. Similarly, the bakery can evaluate whether it
sold as much brownies during their opening sale or not, etc. Decision making is all about making
smart decisions like What should we be selling? Who should we be serving? How should we
execute? This decision making is pivotal in all managerial decisions and management accounting
is pivotal to quality decision making. For example, using numerical data, the bakery can decide
which items are most profitable, which area has the most sales hence the most demand and
whether they should expand their operations or discontinue some products.
However, being a good manager requires more than just accounting skills. Strategic
management, risk management, process management, measurement, and leadership are also
important. Ethics in business is another vital aspect. If businesses don't follow ethical rules, it
can lead to problems like lower quality of life, poor product quality, limited choices, higher
prices, or unfair control by a single big company.
Additionally, we touched upon Corporate Social Responsibility (CSR), which emphasizes
that companies should do things that make everyone happy – not just owners, but also customers
and employees. So, accounting is not just about numbers; it's about making wise decisions,
following ethical standards, and contributing positively to society.
Chapter 2
In this chapter, we dive into the world of accounting and explore how managers use the term
"cost" in various aspects of their work. This term is like a versatile tool, used for financial
reporting, budgeting, and decision-making. The way managers categorize and handle costs
depends on what they're aiming to achieve.
When creating financial reports for external stakeholders, such as investors, managers sort costs
into product costs and period costs. These can be found on the income statement which is
presented in annual reports that shareholders and stakeholders like the government can refer to.
Product costs are linked to making items for sale, like the cost of ingredients in a dish at a local
restaurant. Period costs, on the other hand, are everyday expenses such as rent or electricity in
the restaurant. Another way managers classify costs is based on how they change with business
scale or units of activity. Some costs, like raw materials, go up and down with production
(variable costs), while others, like rent, stay the same (fixed costs). Think about a bakery – the
cost of flour might go up when they bake more cakes (variable cost), but the rent remains the
same. When managers assign costs to things like products or customers, they call them cost
objects. Some costs can be easily matched with these objects (direct costs), like the cost of
materials to make a product. Others can't be directly linked (indirect costs), like overall business
operating costs. Consider the department of "imtiaz" that specializes in selling clothing. When
assigning costs to specific products, such as a stylish shirt, direct costs are those directly
associated with its production. For instance, the cost of fabric, buttons, and thread for a particular
shirt would be considered direct costs. These expenses are intricately tied to the creation of the
shirt, meaning as the company produces more shirts, the usage of fabric, buttons, and thread also
increases. On the other hand, indirect costs, such as warehouse rent, administrative staff salaries,
and utilities, are vital for the overall functioning of the merchandising company but are not
directly attributable to a specific shirt. Warehouse rent, for example, remains constant regardless
of whether the company sells 100 or 200 shirts, making it an indirect cost. By discerning
between direct and indirect costs and associating them with specific products, Fashion Finds can
effectively analyze the true cost of producing each clothing item, make informed pricing
decisions, and evaluate the overall profitability of their merchandise.
When making decisions, managers weigh the costs and benefits of different alternatives. For
example, they analyze differential costs, considering the price differences between suppliers.
Opportunity costs, representing the benefits sacrificed by choosing one option over another, also
play a crucial role in this decision-making process. For example, if a shop is choosing between
two suppliers, they'll look at the price difference (differential cost). The benefit they give up by
choosing one supplier over the other is the opportunity cost. Sunk costs, which are costs that
happened in the past and can't be changed, aren't considered when making decisions. For
example, money spent on a feasibility study for a new product. Now regardless of whether the
product gets launched, there's no getting it back. Managers focus on current and future costs.
Understanding costs helps managers set prices for products, figure out which customers are most
profitable, and make smart choices for the business's future. It's like speaking the language of
business fluently, guiding managers to make informed decisions and keep the business on the
path to success.