Basic Management Accounting

Concepts

By: Kartika Aji Lukitasari

(135020201111085)
 Management Accounting as One
Type of Information
 Accounting is one type of information. The total
amount of information available to a manager
include both monetary, but includes related
nonmonetary data.
 Most accounting information, in terms of quantity of
data, is operating information. The mass of
operating data flowing through an organization
consist of streams of information about production,
purchasing and materials, payroll, plant and
equipment, sales and accounts receivable, and
finance. Data in these streams provide the raw
materials for financial statements. These
 Management accounting is the process within an
organization that provides information used by an
organization’s managers in planning, coordinating,
and controlling the organization’s activities.
 Management accounting information is summary
information. In order to understand it, one needs
to know something about the source of raw data
used for summaries, but only enough to be able to
understand the result summaries.
 Types of Management Accounting
Information and Their Uses
Cost, Revenue, Uses
or Asset Historical Data Future Estimates
Construction
1. Full External financial Programming
reporting (especially Normal pricing
inventory and cost of decisions
sales)
Analyzing economic
performance cost-type
contracts
2. Differential None Alternative choice
decisions (including
contribution pricing)
3. Responsibility Analyzing managers’ Budgeting
performance
 Contrast between Management
Accounting and Financial Reporting
Dimension Management Financial Reporting
Accounting
1. Necessity Optional Required
2. Purpose A means to the end Produce statements
of assisting for outside users
management
3. Users Relatively small Relatively large
group; known group; mostly
identity unknown
4. Structure Varies according to One basic
use of the equation:
information Assets = Equities
5. Principles Whatever is useful GAAP
 Dimension Management Financial
Accounting Reporting
7. Information Monetary and Primarily monetary
nonmonetary
8. Precision Many Fewer
approximation approximation
9. Frequency Varies with Quarterly and
purpose; annually
Monthly and
weekly common
10. Timeliness Reports issued Delay of weeks, or
promptly after even months
period covered
ends
11. Entity Responsibility Overall
 Similarities between Management
Accounting and Financial Reporting
 The same considerations that make GAAP
sensible for purposes of financial accounting
are likely to be relevant for purpose of
management accounting.
 Operating information is used both in preparing
the financial statements and in management
accounting.
 Source Diciplines on Management
Accounting
 Economics  which deals with the principles
governing decisions on the use of scarce
resource.
 Social psychology  which deals with the
principles governing human behavior in
organizations.
Some economists and some social psychologists
criticize management accounting. Much of this
criticism arises because each group has the
mistaken belief that management accounting
relates solely to their discipline. One of the
significant problems in the real world is give the
Uses of Management
Accounting

1. Measurement of revenues, costs, and

assets.
2. Control.
3. To aid in choosing among alternative
courses of action.
Measurement
 Full cost accounting measures the resources
used in performing some activity.
 Full cost of producing goods or providing
services = direct costs + indirect costs.
 Direct costs = costs directly traced to the
goods or services.
 Indirect costs = a fair share of costs incurred
jointly in producing goods or services.
Control
Costs (also, revenues and assets) are
identified to and measured by responsibility
center.
 A manager heads each responsibility center.
 Corrective action can only be taken by
individuals.
 To help identify problems (and opportunities)
actual costs are measured and compared to
a benchmark (budget, last year, industry
average).
Alternative Choice Decisions
 Differential costs of alternative possible actions
are developed.
 Some General Observations
 Different numbers for different purposes:
Many different types of costs: historical,
standard, overhead, variable, fixed, differential,
marginal, opportunity, direct, estimated, full, etc.
 Clarify which type you are talking about.
 Accounting numbers are approximations
 Working with incomplete data
 Accounting evidence is only partial evidence
 People, not numbers, get things done. How you
use the numbers is as important as how the
numbers are produced.
 Different numbers for different
purposes
 Each of the several purposes previously described requires a
different accounting approach. Since these different numbers may
superficially resemble one another, a person not familiar with them
may easily get confused. One of the most common sources of
confusion is the word cost. Cost could be defined as "... Everything
a manager does, as well as many of the things he does not do."
Cost is a synonym of sacrifice and as such, controlling it and
reducing it is a great concern for managers. In management
accounting, there are historical costs, standard costs, overhead
costs, variable costs, fixed costs, differential costs, marginal costs,
opportunity costs, direct costs, estimated costs, full costs, among
others. Some of these are synonyms; others are not quite
synonyms; still others, although not synonyms at all, are used by
some people as if they were. Accounting numbers should always
be interpreted within the context of the specific problem they are
 Accounting numbers are
approximations
 Users of accounting information must acquire an
understanding of the degree of approximation
present in the data. Some accounting numbers
(such as the amount of cash in the bank account)
may be accurate within very narrow limits,
whereas others are only rough approximations.
The degree of approximation is especially high in
the case of numbers used for planning purposes,
because they are always estimates of what will
happen in the future.
 Working with incomplete data
 In a management problem, we almost never have
exactly the information we would like to have. The
person struggling with the problem usually can
think of additional information that, if available,
would be helpful. There are many decision-making
situations in which pages of numbers are available
but only a small portion of them is truly relevant to
the problem at hand and perhaps none of them is
quite what one needs in order to solve it. The
problem must be solved, it is a fact of life.
 Management decisions must be made and often
cannot be delayed until all pertinent information is
available. We do the best we can with what we
have and then move on to the next problem. On
the other hand, a decision should not be made if a
vital, obtainable piece of evidence is missing.
Deciding whether or not to act on the available
evidence is one of the most difficult parts of
managerial decision processes. "The art of
business is the art of making irrevocable decisions
on the basis of inadequate information" Wallace B.
Donham.
 Accounting evidence is only
partial evidence
 Few, if any, management problems can be solved solely by
collecting and analyzing numbers. Usually, there are important
factors that cannot be, or have not been, reduced to
quantitative terms. Some people act as if most problems could
be solved by means of a numerical analysis. At the other
extreme are those who believe that intuition is the sure guide
to a sound decision and therefore pay no attention to
numbers. Although the correct attitude is clearly somewhere
between those extremes, there is no way to describe precisely
where it is. "The real trouble with this world of ours is not that
it is an unreasonable world, nor even that is a reasonable one.
The commonest kind of trouble is that it is nearly reasonable,
but not quite. Life is nor an illogicality; yet it is a trap for
logicians. It looks just a little more mathematical and regular
 People, not numbers, get
things done
 An obvious statement about organizations is that
they consist of human beings. Anything that an
organization accomplishes is the result of human
actions. Although numbers can assist the people in
an organization in various ways, the numbers by
themselves accomplish nothing. But numbers do not
talk back; they give the appearance of being
definitive and precise. It is a comforting illusion to
imagine that the construction of a set of numbers is
the same as acting on a real problem. A
management accounting system may be well
designed and carefully operated, but it will be of no
 For instance three companies may use exactly the
same system with entirely different results. - In the
first company, the system may be useless because
management never acts based on the information
collected and the organization has become aware if
this fact. - In the second company the system may
be helpful because management uses the
information as a general guide for planning,
implementation and, control and has educated the
organization to use it in the same spirit. - In the
third company, the system may be even worse than
useless. It may be damaging because management