Management Accounting for IB custom book all chapters

Includes all relevant chapters for the custom made book for Management Accounting for IB, chapters 1-7

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Management accounting, Theory 1, summary

Accounting system: -> formal mechanism for gathering, organizing, and communicating info
about an organizations activity

Financial accounting: -> branch of accounting that produces external decision makers a
mandatory, periodic, standardized and synthetic financial representation of an
organization’s transactions with, rights and duties, other constituencies
à produced for external users who need this info to decide whether or how to deal with
the focal organization (= potential stakeholders, creditors, suppliers, etc.)
à these use financial accounting to determine whether the company creates value or can
reimburse debts (solvability), can pay what it must in the short term (liquidity), and is likely
to be a partner

Management accounting info crucial to help all these external decision makers to identify
financially sustainable organizations to allocate efficiently their resources among them to
max. value creation

Management accounting info:
- Al ows external user to make comparison between firms (= comparable when all
companies use the similar concept or measurement) -> all should fol ow the same
rules
- Ensures that FA is general enough to describe a very wide variety of organizations
that belong to different industries, run different operations and are categorized by
different business models

FA records everything in details about the transactions a company makes -> but only
presents a comprehensive and synthetic info to the organization -> prevents how much is
communicated about value creation -> no advantages for the rival firm

Retrospective approach: -> allows to limit the reliance on estimates and makes is accurate
à FA produces an info that is objective and verifiable and more reliable

Limitations of FA:
- Does not inform about transactions within the organizations -> only external ->
transactions are becoming out of sight when the company gets larger
- Lacks flexibility and local adaption -> it needs more than only financial and generic
info in order to be successful as a business -> managers need info with adequate
detail of the operations they manage
- Lacks in timeliness and future orientation -> only provides info from past
transactions (verifiable and audible) -> mostly published every year
à does not serve the external stakeholders -> and if so, it makes it inadequate to serve
managers within the organization Management accounting: -> branch of accounting that produces for internal decision
makers the financial and non-financial info they need, when they need it to achieve
organizational goals and objectives
à identifies, measures, accumulates, analyses, and compares info that helps managers
within the organization to make strategic and operational decisions
à mostly about value chain management, production management, or sales management

Help on 4. Occasions:
1. Problem identification; direction of managerial attention, identification of
opportunities
2. Problem solving; design of alternatives
3. Alternative evaluation; assessment of economic consequences
4. Decision making; choice of best course of action

Assesses relation between decision and their consequences
à info to the progress within the firm
à what are we doing right, what are we doing wrong? -> has important behavioural
implications and shapes political struggles within an organization Management control: -> purpose to shape behaviours in a desirable way

Management accounting assesses the absolute primacy of relevance of the information
à any info that does no help decision making -> ignore -> relies heavily on estimations

Two key qualities of estimations:
- Timely
- Prospective

à prepares report before hand
à primacy of diversity and flexibility -> take any info and evaluate it
à MA is private and provides the info that is strategic and sensitive -> should not get out

FA legally required -> MA voluntarily

Costing: -> set of principles and methods useful to value the inventory and the cost of goods
sold for financial reporting -> determine whether something is profitable in the long run or
not

Cost estimation: -> set of techniques to model cost behaviour and make predictions -> to
assess management actions and their impact

Cost volume profit analysis: -> to model profit and assess the operating risk of a company
which result from its cost structure -> determines how sensitive the profit is to the volume if
activity or other decisions

Budgeting: -> set of techniques to build pro firm financial statements or to forecast cash
flows related to investment -> backbone to control cycle (= plan-do-check-act)
Variance analysis: -> consists in analysing the causes for discrepancies between the
budgeted profit and the actual profit -> to identify potential issues managers need to
address

Differential analysis: -> interested in future consequences of short-term decisions rather
than past discrepancies between expectations and performance

Scorecards: -> useful to organize and make sense of a wide variety of information ->
discusses strengths and weaknesses of different kinds of performance indicators and how
they complement each other

Management accounting, theory 2, summary

Cost accounting system or costing system: -> set of rules, methods, and techniques used to
estimate the resources consumed to achieve specific goals
à report numbers that indicate the manner in which particular goods or services use the
resources of an organization
à provide info guiding resource allocation and process optimization, used for asset
evaluation
à assessment of true cost is necessary to avoid wasting resources on less valuable
endeavours and diverting them away from the most valuable ones

Process optimization:
1. Making managers aware of the resources they consume to achieve specific
objectives -> gives them an incentive to avoid waste
2. Costing provides the means to compare the efficiency of different practices or
different units and allows benchmarking and orient sourcing decisions
3. Show managers how they control costs by managing their causes
à costing info can motivate and orient effort to improve process efficiency
à also, necessary to value inventory in the balance sheet, COGS in the income statement,
long-term assets which are produced by the company itself
à are dictated by financial reporting requirements

Cost object: -> anything for which decision makers desire a separate measurement of costs

Cost accumulation: -> when getting a source document -> give it a code which labels the
nature of transaction, but also the purpose

Costing process:
1. Decide the costs of what you want to know -> cost object (= products, services,
pieces of equipment, distribution channels, etc.)
2. Costs must be recognized and accumulated -> purpose
3. Assets evaluation in separating costs fol owing the products in the inventory and the
costs expended right away in the income statement

Source document: -> explicit evidence of a transaction, such as sales slips, purchase
invoices, and employee time records

Cost accumulation: -> col ection of costs in an organized way through an accounting system
-> consists in col ecting costs and classifying costs based on a predefined set of categories
indicating the nature and the purpose
à quality of the costing system depends on how faithful y it manages to represent this flow
of resources

Process of costing for inventory valuation involves fol owing steps:
1. Costs are classified based on whether they fol ow products in the inventory (inventor
ability)
Cost assignment: -> consists in associating costs with the objects for which the
resources were consumed -> encompasses both cost tracing and cost allocation
Cost tracing: -> consists in assigning direct manufacturing costs incurred for a specific
costs object to that cost object
Cost allocation: -> consists in assigning indirect manufacturing costs to cost object in
proportion to the cost objects use of another source
Costs is the value of a resource transformed, destroyed, sacrificed or forgone to achieve a
specific objective

FA: cost of consumption resulting in a destruction of wealth are recorded in the income
statement
à simple financial accounting question:
Ask yourself whether it changes the value of the assets in the current period and wil
eventually impact equity through the income statement
à timing of consumption matters -> of payment NOT
à in MA: when the resources are consumed, which should be recognized, and not when the
cash flow actually happens

à MA: values inventory of raw materials as historical costs and not the current market
value
à allowing two numbers (financial and estimation) to circulate can cause confusion

Negative externality: -> costs that is suffered by a third party as a consequence of the
actions of the economic agent -> destruction of resources caused by the company but of
which someone else bears the cost

Environmental costs: -> costs imposed by the organization on the environment

Manufacturing costs: -> incurred to physically make products and which are assigned to
these products and fol ow them first in the inventory and then when the product is sold, in
the COGS

Period costs: -> incurred for purposes other than physically making products and which
cannot fol ow them in the inventory, expended during the accounting period

Physically make products: -> refers to manufacturing or production
à product costs: materials, productive labour, manufacturing overhead