Homework 1 management accounting by Dr. ZackZakiDocument Transcript
Question one: Definition of management accounting from three (3)
Answer question one: Definition management accounting from three
Author one (Ray H. Garrison, Eric W. Noreen and Peter C. Brewer):
Definition management accounting from Ray H. Garrison, Eric W. Noreen,
and Peter C. Brewer, Managerial Accounting book, eleventh edition,
McGraw-Hill Irwin (2006):
“Managerial Accounting is concerned with
providing information to managers – that is, people inside an organization
who direct and control its operations. In contrast, financial accounting is
concerned with providing information to stockholders, creditors, and others
who are outside an organization. Managerial accounting provides the
essential data that are use used by outsiders to judge a company’s past
financial performance. Managerial accountants prepare a variety of
reports. Some reports focus on how well managers or business units have
performed – comparing actual results to plans and to benchmarks. Some
report provide timely, frequent updates on key indicators such as orders
received, order backlog, capacity utilization, and sales. Other analytical
reports are prepared as needed to investigate specific problems such a
decline in the profitability of a product line. And yet other reports analyze a
developing business situation or opportunity. In contrast, financial
accounting is oriented toward producing a limited set of specific prescribed
annual and quarterly financial statements in accordance with generally
accepted accounting principles (GAAP). Because it is manager oriented,
any study of managerial accounting must be preceded by some
understanding of what mangers do, the information managers need, and
the general business environment. Every organization – large and small –
has managers. Someone must be responsible for making plans,
organizing resources, directing personnel, and controlling operations”.
Author two (Nor Aziah Abu Kasim, Rozita Amiruddin, Rozainun Haji
Abdul Aziz and Che Hamidah Che Puteh):
“Definition management accounting from Nor Aziah Abu Kasim, Rozita
Amiruddin, Rozainun Haji Abdul Aziz and Che Hamidah Che Puteh,
Management Accounting book, first published, Oxford Fajar Sdn. Bhd.,
(2011): Definition from Chartered Institute of Management Accountants
(CIMA) United Kingdom (UK), Management Accounting is “the process of
interpretation and communication of information used by management to
plan, evaluate and control within an entity and to assure appropriate use
of accountability for resource (economics). Management accounting also
comprises the preparation of financial report for non-management group
such as shareholders creditors, regulatory agencies and tax authorities”.
Definition from Institute of Management Accountants (IMA) United States
American (USA) 2008, Management Accounting is “is a profession that
involves partnering management decision-making, devising planning and
performance management system, and providing expertise in financial
reporting and control assist management in the formulation and
implementation of an organization’s strategy”. Definition from American
Institute of Certified Public Accountants (AICPA) states that management
accounting as a practice, extends to the following three areas: strategic
management (Advancing the role of the management accountant as a
strategic partner in organization), performance management (Developing
the practice of business decision-making and managing the performance
of the organization, risk management (Contributing to frameworks and
practices for identifying, measuring, managing and reporting risks to
facilities the achievement of the objectives of the organization”.
Author three (Dan R. Ward and Suzanne P. Ward):
Definition management accounting from Dan R. Ward and Suzanne P.
Ward, Accounting Principles book, eight edition, University of Louisiana at
Lafayette, (2008): “Managerial accounting is a field of accounting that
provides economic and financial information for managers and other
internal users and also called management accounting. Managerial
activities are assist management in profit planning and formalizing these
plans in the form of budgets. Help to control cost costs by comparing
actual results with planned objectives and standard costs. Accumulate and
present data for making decisions.
Question two: Different between Financial Accounting (FA) and
Management Accounting (MA)
Answers question two: Financial Accounting (FA) and Management
Financial accounting and managerial accounting both rely on the same
basic accounting database, although managerial accountants often
accumulate and use additional data. However, important differences exist
between the two disciplines: Financial Accounting: Is concerned with
reports made to those outside the organization. Summarizes the financial
consequences of past activities. Emphasizes precision and verifiability.
Summarizes data for the entire organization. Must follow GAAP since the
reports are made to outsiders and are audited. Is required for publicly-held
companies and by lenders. Managerial Accounting: Is concerned with
information for the internal use of management. Emphasizes the future.
Emphasizes relevance and flexibility of data. Places more emphasis on
non-monetary data and timeliness and less emphasis on precision.
Emphasizes the segments of an organization rather than the organization
as a whole. Is not governed by GAAP. Is not required by external
regulatory bodies or by lenders.
Have seven (7) differences: First, users: Financial accounting reports are
prepared for external parties, whereas managerial accounting reports are
prepared for internal users.
Second, emphasis on the future: Financial accounting summarizes past
transactions. Managerial accounting has a strong future orientation.
Third, Relevance of data: Financial accounting data are expected to be
objective and verifiable. Managerial accountants focus on providing
relevant data even if it is not completely objective or verifiable. “In
Business Insights” Management accounting systems should be flexible
enough to provide whatever data are relevant for a particular decision.
“Why Do You Ask?” (refer textbook page 8): Caterpillar has long been on
the forefront of management accounting practice. When asked by a
manager for the cost of something, accountants at Caterpillar have been
trained to ask “What are you going to use the cost for?” One management
accountant at Caterpillar explains: “We want to make sure the information
is formatted and the right elements are included. Do you need a variable
cost, do you need a fully burdened cost, do you need overhead applied,
and are you just talking about discretionary cost? The cost that they really
need depends on the decision they are making.”
Fourth, less emphasis on precision: Financial accounting focuses on
precision when reporting to external parties. Managerial accounting aids
decision makers by providing good estimates as soon as possible rather
than waiting for precise data later.
Fifth, Segments of an organization: Financial accounting is concerned with
reporting for the company as a whole. Managerial accounting focuses
more on the segments of the company. Examples of segments include:
Product lines, sales territories, divisions, departments, etc.
Sixth, Generally Accepted Accounting Principles (GAAP): Financial
accounting conforms to GAAP. Managerial accounting is not bound by
Lastly, Managerial accounting – not mandatory: Financial accounting is
mandatory because various outside parties require periodic financial
statements. Managerial accounting is not mandatory.
Table question two: Different between Financial Accounting (FA) and
Management Accounting (MA).
Question three: List types of cost?
Answer question three: List types of cost:
Cost classifications for predicting cost behavior: Cost behavior refers to
how a cost will react to changes in the level of activity within the relevant
The most commonly used classifications of cost behavior are
variable and fixed costs:
Variable cost a cost that varies, in total, in direct proportion to changes
in the level of activity. However, variable cost per unit is constant. The
Cost which varies directly and proportionately with the increase or
decrease in the volume of output or production, I known as a variables
cost. An increase or decrease in the production activity or volume brings a
proportional increase or decrease in total variable costs. In other word
variable cost are costs that change in direct proportion to change in
production volume. If the activity level or volume increases by 10 %, then
the monetary amount the total variable costs also increase 10 %. Since,
the total variables cost varies directly and proportionately, the variable
cost per unit is constant. For variable cost, the variable cost per unit is
constant but the total variable cost varies in direct proportions to the
volume. In a manufacturing organization, direct material costs and direct
labor costs which increase proportionately with the increase in the number
of units manufactured are examples of variable costs.
Fixed cost A cost that remains constant, in total, regardless of changes
in the level of the activity. However, if expressed on a per unit basis, the
average fixed cost per unit varies inversely with changes in activity. It is
helpful to think about variable and fixed cost behavior in a 2x2 matrix.
Helpful Hint: To illustrate fixed costs, ask students for the cost of a large
pizza. Then ask: What would be the cost per student if two students buy a
pizza? What if four students buy a pizza?
This makes it clear why
average fixed costs change on a per unit basis. To illustrate variable
costs, add that a beverage costs $1 and each student eating the pizza has
one beverage. So, if two people were eating the pizza, the total beverage
bill would come to $2; if four people, $4. The cost per beverage remains
the same, but the total cost depends on the number of people ordering a
beverage. Quick Check – variable vs. fixed costs. Fixed Cost is cost that
does not vary in short term with the volume or activity or production. The
amount for these costs remains constant or does not change irrespective
of change in activity level or production volume. In the other word, the
decrease or increase in production volume will not affect the amount of
fixed costs. Some examples of fixed costs are insurance executive salary
depreciation and rental costs which are expected to remain fixed
irrespective of the level of activity or volume of production. Although the
total fixed costs remain constant irrespective of the change in volume, the
average fixed cost per unit decreases as the number of increase. Fixed
cost per unit decreases with the increases in the number of units
produced. On the other hand, if fewer units are produced, fixed cost per
unit will increase. Hence, the amount of fixed cost per unit reduces as the
level of activity or volume of production increases. However, the total fixed
costs remain fixed at the same level or amount for changes in activity only
within the relevant range. Relevant range is the normal range of activity or
production volume within which an organization expects to operate. In the
long term, a business may expand its capacity and operate outside this
relevant range. When the business invests in a bigger space or more
equipment to increase capacity, its production will be beyond the relevant
range. Beyond this range, the fixed cost will change due to increase in the
costs of expanded facilities, better equipment, etc. The linearity
relationships are linear. Thus, the total variable costs increase in direct
proportion to the number of units produced (or activity units used). The
total fixed costs remain constant for all the activities within the relevant
range. There are two components in the linear cost function because the
amount of total costs is the sum of total fixed costs and variable costs.
Total Variable Cost
Total Fixed Cost
Graph question three: A graphic view of cost behavior
(List types of cost).
Garrison, R.H, Noreen, E.E & Brewer, P.C (2011), Managerial Accounting,
13th Edition, McGraw Hill.
Nor Aziah Abu Kasim, Rozita Amiruddin, Rozainun Haji Abdul Aziz & Che
Hamidah Che Puteh (2011), Management Accounting, 1st Edition, Oxford