Management Accounting


Module 6 Introduction to Management Accounting

The second half of the course explores a different aspect of accounting: management accounting. The features of managerial accounting are different from financial accounting in several ways, as we will see below.
Importantly, an understanding of management accounting will help you answer a few critical questions with respect to a business organization.
For example, one might ask: How do we know if a company is profitable? Another question may be regarding the cost of each unit, for example the cost of a “Big Mac” at McDonalds, or a grande size cup of coffee at Starbucks. One may also wonder how the changes in the number of units produced will have a change/impact on the costs and profit (i.e. relationships to consider between revenue cost and profit). What happens if there is a need to discontinue a product line or take on a special order? When thinking about the future, how does planning take place and how do budgets help with this? And the last question to consider is what happens if there are 2 projects to consider? Which one is the best to take from a quantitative and qualitative perspective?
This is where management accounting comes into play – management accounting helps users identify the information needs of management. It also provides them with a framework for how to meet management needs, such as planning, budgeting, cost and revenue management, and performance measurement.
Content
Learning Outcomes
By the end of this module, you should be able to:
• differentiate between management accounting and financial accounting from a human resources perspective
• identify the key cost components (direct materials, direct labour, manufacturing overhead)
• use various methods to estimate costs
• Identify the major components of a cost-volume-profit analysis
• Explain cost behaviour, and the relationship between costs and profits
• Compute break-even analysis and apply to sound business practices
Differences between Management Accounting and Financial Accounting
The objective of managerial accounting is to identify, calculate, analyze, and communicate financial information to managers so they can make decision about the organization’s future.
There are several key differences between financial and management accounting that are worth mentioning. In financial accounting, the users of reports are external. They include shareholders, regulators, and even banks. In contrast, the users of reports for Managerial Accounting are internal, such as managers and the Board of Directors.
Unlike financial accounting, which generates financial statements on an annual and quarterly basis, management accounting produces internal reports at the behest of the user. Financial statements can be verified by auditors; whereas management accounting reports do not require an independent audit to be performed.
Furthermore, financial statements follow the generally accepted accounting principles (GAAP). These statements and reports are comprehensive and contain all of the financial data of a company. In managerial accounting, however, the reports target various sub-functions of an organization and go beyond accrual accounting.
For a more comprehensive look at the differences between managerial accounting and financial accounting, watch the videos listed below.
• What is the Difference Between Financial and Managerial Accounting?(hyperlink opens in a new tab) (1 page)
• From: Accounting Foundations: Managerial Accounting by Jim Stice and Earl Kay Stice
o Introduction to managerial accounting (3:26 min)
o The purpose of managerial accounting (2:57 min)
To access these videos:

  1. Go to the McMaster LinkedIn Learning page
  2. Click the “How to Get It” LINKEDIN LEARNING button
  3. Click “Sign In”
  4. Enter your McMaster Email and follow the prompts to log in.
  5. Search for the title of the video in the search bar at the top of the page
  6. Click the link to the video from the list of search results.
    The 3 Basic Cost Elements
    As mentioned above, management accounting helps to provide information on cost and revenue management. In order to do this, it’s first important to understand the 3 basic cost elements:
  7. Direct Materials
    o These are the raw materials that are used in the manufacturing process of goods. If we take baking as an example, the flour that is used to bake a cake is considered a direct material.
    o There are also “indirect materials.” These materials are used in the production process but are not directly related to the product itself. They might include the tools used to produce the final product.
  8. Direct Labour
    o This term is related to the labour of employees who work directly on a manufacturer’s product. The costs include the wages and benefits of the employee and the costs of temporary labourers who work on the product.
    o “Indirect labour” is considered work that supports the production of manufactured good, but which is not directly involved in transforming raw materials into final products.
  9. Manufacturing Overhead
    o Costs categorized as manufacturing overhead are costs that are not directly associated with manufacturing that final product. They include workplace supplies, electricity, factory equipment etc.
    To familiarize yourself with the kinds of costs relevant to managerial accounting, please read the following:
    • 1.3 Costs and Expenses(hyperlink opens in a new tab) (7 pages)
    From: Managerial Accounting
    Cost Behaviour Analysis
    Cost behaviour analysis refers to management’s efforts to assess operating costs and how they react to change depending on an organization’s level of activity. These costs typically include materials, overhead, and labour. For instance, let’s imagine the process of baking. If one were to bake a cake at a bakery, they would need flour; this would be considered the direct materials. The work of the baker who puts the cake together would be considered direct labour. And last but not least, there is manufacturing overhead – these are costs that are indirectly associated with manufacturing the finished product.
    In order to perform a cost behaviour analysis, management needs to determine if costs are “variable,” “fixed,” or “mixed.” The first reading provides a clear explanation of these terms. The second reading examines in more detail how to perform a cost behaviour analysis once the manager has determined if the cost is variable, fixed, or mixed.
    • Cost Behaviour (hyperlink opens in a new tab)(8 pages)
    From: Principles of Accounting by Larry Walther
    • Cost Behaviour Analysis(hyperlink opens in a new tab) (8 pages)
    From: Principles of Accounting by Larry Walther
    Cost-Volume Profit (CVP) Analysis
    Analyzing cost-volume-profit provides insight into a business’ profitability and growth. A CVP analysis helps determine how shifts in costs and in volume impact an organization’s operating income and net income. The analysis can help managers make short-term economic decisions for the company.
    When reviewing the content, make sure that you keep the terms variable and fixed costs in the back of your mind. Recall that a “variable cost” is a cost that changes based on activity levels (this change is direct and proportional.) A fixed cost stays the same even if there are changes in the activity level. An example of a fixed cost is rent, or depreciation on buildings and equipment. The two terms are important because they help determine the “contribution margin.” This is the amount of revenue that is left over after deducing the company’s variable costs.
    • Cost-volume-profit analysis (CVP) (3:32 min)
    • Opening a Thai restaurant (2:00 min)
    • Contribution Margin (3:56 min)
    • The CVP Equation (2:00 min)
    • The breakeven point (3:00 min)
    From: Accounting Foundations: Managerial Accounting by Jim Stice and Earl Kay Stice
    To access these videos:
  10. Go to the McMaster LinkedIn Learning page
  11. Click the “How to Get It” LINKEDIN LEARNING button
  12. Click “Sign In”
  13. Enter your McMaster Email and follow the prompts to log in.
  14. Search for the title of the video in the search bar at the top of the page
  15. Click the link to the video from the list of search results.
    Learning Activity
    There are two learning activities for this module.
  16. Practice Exercises
    These activities are not graded, but essential to prepare you for evaluations in this course.
    a. Go to Principles of Accounting – Chapter 17(hyperlink opens in a new tab)
    b. Work at your own pace through these exercises from the source:
     Multiple Choice quiz – #1,2,5,8
     Fill in the blanks – # 1-5, 8
    c. Go to Principles of Accounting – Chapter 18(hyperlink opens in a new tab)
     Multiple Choice quiz – # 1, 2, 6-10
    d. Once completed, check your solutions using the answer key provided.
  17. This is a graded activity.
    This activity provides you with an opportunity to discuss your role as an HR professional and the importance of management accounting in an HR context.
    To complete this learning activity, access the discussion:
    Discussion 2: Introduction to Management Accounting
    To learn how to access and use the discussion forums, see Discussions under the Evaluations module.

References
Bragg, Steven. (2018, December). “What is the Difference Between Financial and Managerial Accounting?” Retrieved from https://www.accountingtools.com/articles/what-is-the-difference-between-financial-and-managerial-acco.html
E.R. Services. (n.d.) Managerial Accounting. Retrieved from https://courses.lumenlearning.com/suny-managacct/chapter/costs-and-expenses/
Stice J., & Stice, E. K. (2015, September 8). Accounting Foundations: Managerial Accounting [Video file]. Retrieved from https://www.lynda.com/Finance-Accounting-tutorials/Accounting-Foundations-Managerial-Accounting/368916-2.html
Stice J., & Stice, E. K. (2015, September 8). Accounting Foundations: Managerial Accounting [Video file]. Retrieved from
Walther, Larry. (n.d). Principles of Accounting. Retrieved from https://www.principlesofaccounting.com/chapter-18/cost-behavior/



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