Management Accounting

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MANAGEMENT ACCOUNTING SYSTEM DESIGN

TYPES OF ACCOUNTING INFORMATION

1. FINANCIAL ACCOUNTING INFORMATION

• prepared in accordance with generally accepted accounting principles (GAAP) and reported to shareholders and other interested outside parties.

• it is built around the single basic equation Assets=Liabilities+Owners’ Equity.

2. MANAGEMENT accounting-information' class='brand-secondary'>ACCOUNTING INFORMATION

• has three principal purposes, each of which requires a different cost construct.

THREE PURPOSES OF MANAGEMENT ACCOUNTING:

1. MEASUREMENT

• Cost is a measurement, in monetary terms, of the amount of resources used for some purpose, called a cost object.

• The system collects the full cost of cost objects. The full cost of a cost object is the sum of its direct costs and a fair share of applicable indirect costs.

• The most pervasive cost objects in the company are the goods and services it produces and sells, and companies operate cost accounting systems to collect these product costs.

Uses of full cost principle:

• To measure the full cost of any activity (example, the organization’s training programs) not just product costs

• Used in financial reporting to measure inventories and the related cost of sales

• Used in management accounting to arrive at normal prices and regulated rates and to analyze the economic performance of business segments and the profitability of the products these segments produce and sell

2. CONTROL

• the management accounting system is structured to collect costs by responsibility centers, which are organization units headed by managers who are held accountable for the units’ performance. This part of the system is used for control.

• For this purpose the system has data on planned inputs and outputs and also on actual inputs and outputs. In the management control process, managers compare these planned and actual amounts, identify the source of the significant variances, investigate their causes, and take appropriate actions.

3. AID IN THE SOLUTION OF ALTERNATIVE CHOICE PROBLEMS

• Data used for this purpose are not found directly in the management accounting system because the relevant data vary with the nature of the specific alternative choice problem being analyzed.

• In finding the preferable alternative in an alternative choice problem, the analyst considers costs that are different under one set of conditions than they would be under another. These amounts are differential costs.

EIGHT WAYS OF CATEGORIZING COSTS:

1. Accounting Treatment – When a cost is incurred, it is treated either as a reduction in retained earnings where a cost has been expensed or as an asset where cost has been capitalized.

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