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Homework 1 management accounting by Dr. ZackZaki


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Homework 1 management accounting by Dr. ZackZaki

  1. 1. Homework One: Question one: Definition of management accounting from three (3) authors: Answer question one: Definition management accounting from three (3) authors: i. 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”. 1
  2. 2. ii. 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 identification, measurement, accumulation, analysis, preparation, 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”. 2
  3. 3. iii. 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. 3
  4. 4. Question two: Different between Financial Accounting (FA) and Management Accounting (MA) Answers question two: Financial Accounting (FA) and Management Accounting (MA): 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. 4
  5. 5. 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 GAAP. Lastly, Managerial accounting – not mandatory: Financial accounting is mandatory because various outside parties require periodic financial statements. Managerial accounting is not mandatory. 5
  6. 6. Table question two: Different between Financial Accounting (FA) and Management Accounting (MA). 6
  7. 7. 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 range. 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. 7
  8. 8. 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 8
  9. 9. 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 assumption assumes that throughout the relevant range, cost 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. $6,000 Total Variable Cost Total Fixed Cost $9,000 $3,000 0 0 100 200 Microwaves produced 100 200 Microwaves produced Graph question three: A graphic view of cost behavior (List types of cost). 9
  10. 10. References: 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 University Press. _financial_accounting Accounting rison_of_financial_and_managerial_accounting.html 10
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