Management Accoun-ng – Summary
1. Cost recogni-on and accumula-on
2. Cost classifica-on (inventoriability and traceability)
3. Computa-on of alloca-on rates
4. Cost assignment (tracing and alloca-on)
5. Asset valua-on and repor-ng
Lecture 1: What is product cos2ng?
1.1 Financial Accoun-ng: informs about all external transac2ons which occurred between
organiza2on and its stakeholders; records and reports about flows of resources
- Focus on external transac2ons
- Informa2on useful for external decision makers
- Past transac2ons, not futuris2c ones
Characteris2cs of financial accoun2ng
- Main users: external decision makers (creditors, suppliers) ! public
o Do decide whether they should do business with a company
▪ Invest their money in business
- Regula2on: mandatory (allow external users to make comparisons between firms),
standardized (to make fair comparisons), and audited (avoid false, unreal
transac2ons; can be compared with partner company)
- Timing and nature of informa2on produced: periodic financial synthesis and
- Content of informa2on: transac2ons with, rights and du2es towards, external
stakeholders
- Suppliers etc. focus on whole organiza2on, not specific departments
Limita2ons of financial accoun2ng
- Unuseful for managers; doesn’t give informa2on about how and why stgh happened
(relevance)
- Long period, managers need con2nuous informa2on to improve (-meliness)
- Damage of externali-es (nature, CO2 etc.) will not be men2oned in income
statement
o MA ability to go beyond everything that is accounted in FA
2.1 Management accoun2ng
- Financial accoun2ng does not inform about flows of resources within organiza2on +
does not facilitate forecasts (only necessary if company grows: diverse porLolio)
- Distrac2on vs. crea2on of wealth; everything that influences retained earnings
Management accoun-ng: branch of accoun2ng producing for internal decision-makers l
informa2on needed to obtain resources/make best possible use of available resources
- Designed to complement FA and overcomes its limita2ons
- Serves internal decision makers
o Customized to fit specific needs of organiza2on
▪ Each management accoun2ng system: unique
o Avoid as many waste as possible; ensure best possible use of resources
- Flexible and adaptable instead of mandatory and standardized (future-oriented)
- Detailed and specific
- Produced on demand rather than periodically and included non-financial informa2on
, o Relevant (only necessary informa2on) and 2mely informa2on produc2on
(management accoun2ng)
- Focuses on internal flows of resources (internal transac2ons) (within organiza-on)
instead of transac2ons with external stakeholders
- Oriented towards future; prospec-ve
- Should remain private and not be communicated out of organiza2on
- Voluntary (implies addi2onal costs)
Usage of management accoun2ng
- Direc2ng aYen2on
o Signaling opportuni2es and threats managers should address
- Formula2ng problems
o Iden2fying stakes and formalizing goals/constraints
- Designing solu2ons
o Showing manager levers on which they can act to achieve their goals
- Evalua2ng and selec2ng solu2ons
o An2cipa2ng and assessing poten2al financial and non-financial consequences
of alterna2ve courses of ac2on
- Organiza2onal learning
o Linking decisions made to actual and unexpected financial and non-financial
consequences
- Evalua2ng and rewarding performance
o Making managers accountable for financial and non-financial consequences of
decisions they make
- Four happen before decisions are made
- Last two happen a[er decisions are made
How does management accoun2ng help managers before decision making?
- Shows gap between expecta2ons and realiza2on
- Shapes course of ac2on
- Assesses expected impact on implemen2ng each course of ac2on
o Managers can priori2ze best ac2ons
How does management accoun2ng help managers aRer decision making?
- Ques2ons the rela2on between decisions, ac2ons and success or failure
o Learning from experience
o Evalua2ng and rewarding performance
Lecture 2: Product cos2ng
- Principles/methods/techniques used to value inventory and COGS (to assess
profitability)
- Asset valua2on (inventory, self-produced equipment, intangibles)
Purposes of cos2ng
- Cost accoun2ng system: set of rules, methods, and techniques used to es2mate the
resources consumed to produce an output or achieve a goal
- Cost objects (products made by company): any output/goal for which resources were
consumers and for which decision-makers desire a separate es-ma-on (instead of
accurate measurement?) of costs
- Es-ma-ng value of resources consumes (purpose of cos2ng)
o Goal: products, services, customer segments, pieces of equipment etc.
,Purposes for es2ma2ng the consump2on of resources
- Resource alloca-on
o Consists in deciding for which goals limited resources should be consumed
o 1. Is a Is a specific goal worth sacrificing the resources consumed for its
achievement?
o 2. Is there a beYer use for these resources?
▪ By comparing the cost of achieving different goals, we should use
smallest possible cost of achieving the goal (fair comparison)
• Ques2on of process op2miza2on
- Process op-miza-on:
o Process: sequence of tasks and ac2vi2es consuming resources (materials,
labor, equipment) to produce an output (product/service)
▪ Complex, many steps with different kinds of resources
▪ Resources shared by different processes
• Difficult to determine who consumed what to do what
o BoYlenecks (limita2on of resources): steps in process which constraint total
produc2on and force other steps to remain idle for some period of 2me
o Efficiency: quan2ty of resources consumed to obtain a result
▪ Less resources = the more efficient (output:input)
o Op2miza2on be become more efficient either by alloca2ng addi2onal
resources or by realloca2ng them on tasks crea2ng more value
- Well-designed cost system (revealing for what goals resources are consumes) can give
direc2on and mo2va2on for process op2miza2on:
o Shows inefficient uses of resources (boYlenecks, spillage, etc)
o Gives greater control over costs by iden2fying causes
o Reveals best prac2ces by comparing resources consumes by different
processes to produce same result
- Asset valua-on
o Consists in es2ma2ng value (monetary equivalent) of asset
o Economic value (u2lity, discounted cash flows)
o Market value (price, opportunity costs)
o Book value (historical costs)
▪ Alterna2ve ways of valuing don’t result in same number
Example:
1. Add produc2on costs to the inventory in the balance sheet. (asset valua-on)
2. Compare the produc2on costs of different factories making the same product in
similar quan22es. (process op-miza-on)
3. Compute the costs of goods sold in the income statement. (asset valua-on)
4. Compare the cost of making a product to its market price. (process op-miza-on or
resource alloca-on)
5. Benchmark the resources consumed by different departments for the same kind and
level of services. (process op-miza-on or resource alloca-on)
, What is a cost for financial repor-ng?
- Financial accoun2ng perspec2ve: whether a cost changes the value of an asset in
current period and will impact equity through income statement (-ming of resource
consump-on not payment)
o Deferred expense: cash flow happens before cost/expense is recognized
o Accrued expense: cash flow happens a[er cost/expense is recognized
• Service is consumed, not yet paid
▪ Changes in wealth are accounted for when they happen
- Are not costs over the period
o Payments in advance for services
o Late payments for services (debts)
o Purchases and investments (do not reduce wealth)
o Reimbursements and dividend (cash did not belong to it anyway)
o Nega2ve externali2es
▪ Poten2al gain (not a cost)
▪ Poten2al loss (a cost)
- Labor costs: total wages paid – wages paid in current period for labor used in prior
period + accrued wages due (not paid yet)
What is a cost for management accoun-ng?
- Scope of cost it recognizes (composi2on)
- Monetary value given to the cost it recognizes (valua2on)
- Nega2ve externality: cost suffered by a third party as consequence of ac2on of
company (destruc2on of resources by company, but of which someone else bears
costs)
o FA does not include those (limita2ons) + no poten2al gains
▪ Result in disconnect between book value and economics value
Are to parallel accoun2ng systems worth their costs?
- Addi2onal administra2ve costs
- Two different sets of numbers (external repor2ng vs internal management)
- Introduces lot of subjec2vity in valua2on
Lecture 2: How do you classify costs in product cos2ng?
2. Cost classifica2on
- Source document: explicit evidence of a transac2on (sales slips, purchase invoices,
employee 2me records)
o Informa2on about purpose to evaluate urgency
- Classifica2on based on inventoriability (absorp-on cos-ng)
o Manufacturing costs (inventoriability): follow products in inventory
(manufacture products)
▪ Deprecia2ons of produc2ve equipment
▪ Rent of produc2on factory
o Period costs: cannot go in inventory (prepare, sell products)
▪ Deprecia2on of salespeople’s cars
▪ Cost of produc2on chain redesign
▪ Consump2on of administra2ve supplies
- Classifica2on based on inventoriability (variable cos-ng)
1. Cost recogni-on and accumula-on
2. Cost classifica-on (inventoriability and traceability)
3. Computa-on of alloca-on rates
4. Cost assignment (tracing and alloca-on)
5. Asset valua-on and repor-ng
Lecture 1: What is product cos2ng?
1.1 Financial Accoun-ng: informs about all external transac2ons which occurred between
organiza2on and its stakeholders; records and reports about flows of resources
- Focus on external transac2ons
- Informa2on useful for external decision makers
- Past transac2ons, not futuris2c ones
Characteris2cs of financial accoun2ng
- Main users: external decision makers (creditors, suppliers) ! public
o Do decide whether they should do business with a company
▪ Invest their money in business
- Regula2on: mandatory (allow external users to make comparisons between firms),
standardized (to make fair comparisons), and audited (avoid false, unreal
transac2ons; can be compared with partner company)
- Timing and nature of informa2on produced: periodic financial synthesis and
- Content of informa2on: transac2ons with, rights and du2es towards, external
stakeholders
- Suppliers etc. focus on whole organiza2on, not specific departments
Limita2ons of financial accoun2ng
- Unuseful for managers; doesn’t give informa2on about how and why stgh happened
(relevance)
- Long period, managers need con2nuous informa2on to improve (-meliness)
- Damage of externali-es (nature, CO2 etc.) will not be men2oned in income
statement
o MA ability to go beyond everything that is accounted in FA
2.1 Management accoun2ng
- Financial accoun2ng does not inform about flows of resources within organiza2on +
does not facilitate forecasts (only necessary if company grows: diverse porLolio)
- Distrac2on vs. crea2on of wealth; everything that influences retained earnings
Management accoun-ng: branch of accoun2ng producing for internal decision-makers l
informa2on needed to obtain resources/make best possible use of available resources
- Designed to complement FA and overcomes its limita2ons
- Serves internal decision makers
o Customized to fit specific needs of organiza2on
▪ Each management accoun2ng system: unique
o Avoid as many waste as possible; ensure best possible use of resources
- Flexible and adaptable instead of mandatory and standardized (future-oriented)
- Detailed and specific
- Produced on demand rather than periodically and included non-financial informa2on
, o Relevant (only necessary informa2on) and 2mely informa2on produc2on
(management accoun2ng)
- Focuses on internal flows of resources (internal transac2ons) (within organiza-on)
instead of transac2ons with external stakeholders
- Oriented towards future; prospec-ve
- Should remain private and not be communicated out of organiza2on
- Voluntary (implies addi2onal costs)
Usage of management accoun2ng
- Direc2ng aYen2on
o Signaling opportuni2es and threats managers should address
- Formula2ng problems
o Iden2fying stakes and formalizing goals/constraints
- Designing solu2ons
o Showing manager levers on which they can act to achieve their goals
- Evalua2ng and selec2ng solu2ons
o An2cipa2ng and assessing poten2al financial and non-financial consequences
of alterna2ve courses of ac2on
- Organiza2onal learning
o Linking decisions made to actual and unexpected financial and non-financial
consequences
- Evalua2ng and rewarding performance
o Making managers accountable for financial and non-financial consequences of
decisions they make
- Four happen before decisions are made
- Last two happen a[er decisions are made
How does management accoun2ng help managers before decision making?
- Shows gap between expecta2ons and realiza2on
- Shapes course of ac2on
- Assesses expected impact on implemen2ng each course of ac2on
o Managers can priori2ze best ac2ons
How does management accoun2ng help managers aRer decision making?
- Ques2ons the rela2on between decisions, ac2ons and success or failure
o Learning from experience
o Evalua2ng and rewarding performance
Lecture 2: Product cos2ng
- Principles/methods/techniques used to value inventory and COGS (to assess
profitability)
- Asset valua2on (inventory, self-produced equipment, intangibles)
Purposes of cos2ng
- Cost accoun2ng system: set of rules, methods, and techniques used to es2mate the
resources consumed to produce an output or achieve a goal
- Cost objects (products made by company): any output/goal for which resources were
consumers and for which decision-makers desire a separate es-ma-on (instead of
accurate measurement?) of costs
- Es-ma-ng value of resources consumes (purpose of cos2ng)
o Goal: products, services, customer segments, pieces of equipment etc.
,Purposes for es2ma2ng the consump2on of resources
- Resource alloca-on
o Consists in deciding for which goals limited resources should be consumed
o 1. Is a Is a specific goal worth sacrificing the resources consumed for its
achievement?
o 2. Is there a beYer use for these resources?
▪ By comparing the cost of achieving different goals, we should use
smallest possible cost of achieving the goal (fair comparison)
• Ques2on of process op2miza2on
- Process op-miza-on:
o Process: sequence of tasks and ac2vi2es consuming resources (materials,
labor, equipment) to produce an output (product/service)
▪ Complex, many steps with different kinds of resources
▪ Resources shared by different processes
• Difficult to determine who consumed what to do what
o BoYlenecks (limita2on of resources): steps in process which constraint total
produc2on and force other steps to remain idle for some period of 2me
o Efficiency: quan2ty of resources consumed to obtain a result
▪ Less resources = the more efficient (output:input)
o Op2miza2on be become more efficient either by alloca2ng addi2onal
resources or by realloca2ng them on tasks crea2ng more value
- Well-designed cost system (revealing for what goals resources are consumes) can give
direc2on and mo2va2on for process op2miza2on:
o Shows inefficient uses of resources (boYlenecks, spillage, etc)
o Gives greater control over costs by iden2fying causes
o Reveals best prac2ces by comparing resources consumes by different
processes to produce same result
- Asset valua-on
o Consists in es2ma2ng value (monetary equivalent) of asset
o Economic value (u2lity, discounted cash flows)
o Market value (price, opportunity costs)
o Book value (historical costs)
▪ Alterna2ve ways of valuing don’t result in same number
Example:
1. Add produc2on costs to the inventory in the balance sheet. (asset valua-on)
2. Compare the produc2on costs of different factories making the same product in
similar quan22es. (process op-miza-on)
3. Compute the costs of goods sold in the income statement. (asset valua-on)
4. Compare the cost of making a product to its market price. (process op-miza-on or
resource alloca-on)
5. Benchmark the resources consumed by different departments for the same kind and
level of services. (process op-miza-on or resource alloca-on)
, What is a cost for financial repor-ng?
- Financial accoun2ng perspec2ve: whether a cost changes the value of an asset in
current period and will impact equity through income statement (-ming of resource
consump-on not payment)
o Deferred expense: cash flow happens before cost/expense is recognized
o Accrued expense: cash flow happens a[er cost/expense is recognized
• Service is consumed, not yet paid
▪ Changes in wealth are accounted for when they happen
- Are not costs over the period
o Payments in advance for services
o Late payments for services (debts)
o Purchases and investments (do not reduce wealth)
o Reimbursements and dividend (cash did not belong to it anyway)
o Nega2ve externali2es
▪ Poten2al gain (not a cost)
▪ Poten2al loss (a cost)
- Labor costs: total wages paid – wages paid in current period for labor used in prior
period + accrued wages due (not paid yet)
What is a cost for management accoun-ng?
- Scope of cost it recognizes (composi2on)
- Monetary value given to the cost it recognizes (valua2on)
- Nega2ve externality: cost suffered by a third party as consequence of ac2on of
company (destruc2on of resources by company, but of which someone else bears
costs)
o FA does not include those (limita2ons) + no poten2al gains
▪ Result in disconnect between book value and economics value
Are to parallel accoun2ng systems worth their costs?
- Addi2onal administra2ve costs
- Two different sets of numbers (external repor2ng vs internal management)
- Introduces lot of subjec2vity in valua2on
Lecture 2: How do you classify costs in product cos2ng?
2. Cost classifica2on
- Source document: explicit evidence of a transac2on (sales slips, purchase invoices,
employee 2me records)
o Informa2on about purpose to evaluate urgency
- Classifica2on based on inventoriability (absorp-on cos-ng)
o Manufacturing costs (inventoriability): follow products in inventory
(manufacture products)
▪ Deprecia2ons of produc2ve equipment
▪ Rent of produc2on factory
o Period costs: cannot go in inventory (prepare, sell products)
▪ Deprecia2on of salespeople’s cars
▪ Cost of produc2on chain redesign
▪ Consump2on of administra2ve supplies
- Classifica2on based on inventoriability (variable cos-ng)
