Chapter 1:
Introduction to Cost
and Management
Accounting
Specific outcome
After studying this chapter, the learner should be able to achieve the
following specific outcome:
Define the nature and purposes of Cost Accounting,
Management Accounting and Financial Accounting.
Assessment criteria
Learners will demonstrate that they have achieved the specific
outcome when they can do the following:
• State the differences between Cost Accounting, Management
Accounting and Financial Accounting.
• Explain the meaning and purpose of Cost Accounting.
• Describe recent developments in Management Accounting
• Explain and apply ethical conduct for professional accountants
WHAT DO YOU:
- SEE?
- THINK?
- WONDER?
INTRODUCTION
Management Accounting vs. Financial Accounting
Figure 1.1 Management Accounting compared with Financial Accounting
INTRODUCTION
Management Accounting vs. Financial Accounting
Table 1.1 Users of management accounting versus financial accounting information
1.2 RELATIONSHIP OF FINANCIAL AND
MANAGEMENT ACCOUNTING TO
COST ACCOUNTING
RELATIONSHIP OF FINANCIAL AND MANAGEMENT ACCOUNTING TO COST ACCOUNTING
Cost Accounting
Definition:
A technique or method for establishing the cost of a project, process,
or cost object.
Cost Accounting falls within the Management Accounting domain. It
creates an overlap between Financial Accounting and Management
Accounting and forms a network of information by providing product
costing information for financial statement purposes (valuing
inventory), and quantitative cost based information to managers to
perform their tasks.
RELATIONSHIP OF FINANCIAL AND MANAGEMENT ACCOUNTING TO COST ACCOUNTING
Functions of Cost Accounting
• providing information to external parties (stockholders, creditors,
various regulatory bodies) for investment and credit decisions;
• estimating the cost of products produced and services provided;
and
• providing useful information to internal managers responsible for
planning, decision making, controlling and evaluating
performance.
RELATIONSHIP OF FINANCIAL AND MANAGEMENT ACCOUNTING TO COST ACCOUNTING
Planning, control, and decision making
Planning
Planning describes how a firm’s objectives can be achieved.
Control
To exercise control is to compare actual outcomes with planned
outcomes and to take corrective steps if necessary.
Decision making
A decision is a choice made between two alternatives.
RELATIONSHIP OF FINANCIAL AND MANAGEMENT ACCOUNTING TO COST ACCOUNTING
The decision making process
A decision is a choice made between two alternatives.
The decision making process involves the following:
• Planning
• Control
RELATIONSHIP OF FINANCIAL AND MANAGEMENT ACCOUNTING TO COST ACCOUNTING
The decision making process
Planning
Planning describes how a firm’s objectives can be achieved.
• Identify objectives
• Search for alternative courses of action
• Gather data about alternatives
• Select alternative courses of action
• Implement the decision
RELATIONSHIP OF FINANCIAL AND MANAGEMENT ACCOUNTING TO COST ACCOUNTING
The decision making process
Control
To exercise control is to compare actual outcomes with planned
outcomes and to take corrective steps if necessary.
• Compare actual and planned outcomes
• Respond to deviations from the original plan.
RELATIONSHIP OF FINANCIAL AND MANAGEMENT ACCOUNTING TO COST ACCOUNTING
The decision making process
Figure 1.2 Planning and control cycle
RELATIONSHIP OF FINANCIAL AND MANAGEMENT ACCOUNTING TO COST ACCOUNTING
The decision making process
Figure 1.3 Organisation chart
1.3 RECENT DEVELOPMENTS IN
MANAGEMENT ACCOUNTING
1.4 ETHICS
ETHICS
Code of Ethics
• Integrity
• Pursuit of excellence
• Accountability
• Respect
• Confidentiality
• Collaboration
• Impartiality
• Loyalty
• Accepting responsibility
• Promise keeping
• Fairness
• Responsible citizenship
ETHICS
Chartered Institute of Management Accountants (CIMA)
code of ethics for chartered management accountants
1.5 POINTS TO NOTE
Figure 1.4 Costs flowing from production into financial statements (the company
manufactures and sells chairs)
POINTS TO NOTE
Figure 1.4 Costs flowing from production into financial statements
(the company manufactures and sells chairs) continued