Managerial Accounting

General Firm’s Structure: CEO

Board of

Directors

Marketing and Human

R & D Purchase ICT Quality CFO*

Manufacturing Selling Resources Financial Managerial Corporate

Accounting Accounting Finance

Controller

The person in chief of the Manager Control System, that coordinates and organizes it, is situated in the

CFO*(Administration, Finance and Control Area), it is called the controller and it is chief of the

Management Accounting Process.

So, the controller has the duty to control goals and their achievement, examine results and the differences

between them and the original goals, identifying variances.

Control means monitoring, to deal with management accounting and financial accounting.

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The Technical and Accounting Tools used in Managerial Control:

There are several accounting techniques:

• General Accounting and Financial Statement Analysis: they are very useful also in managerial

accounting, in fact through these techniques we are able to collect financial information about the

past between the company and third parties (i.e. actual costs, actual revenues, actual credits etc…)

Very useful to know the actual trend of the company, but not sufficient for the aims of

management accounting, because this requires also more analytical information about the

company and the units in which the company can be articulated.

• Cost Accounting: this is an analytical tool, because trough this technique the manager can know

the analytical cost of something that stays into the company (i.e. how much does a single pizza

cost) during both the preventive phase, as a target cost, and in the current and consumptive

phases, as the actual cost achieved. These data are not implied in the general income statement

(by nature) where costs are classified under some aggregations.

• Budgeting System: is an accounting tool, we will arrive to build a budgeted income statement and a

budgeted balance sheet for instance. It has been developed to plan goals, actions and use of

resources for the financial year, in the preventive control phase. The budget is a quantitative

expression of a proposed plan of action by management for a specific period and is an aid to

coordinating what needs to be done to implement that plan.

• Managerial Reporting: is another tool, that support managers during above the second and third

phase in the managerial control process, where variations between goals and results are evaluated,

with respect of every year but also every month.

• Non-economic Information: the most recent report includes on one side the financial information

(short-run oriented) and on the other side the non-economic information (long-run oriented)

Cost Budgeting

Accounting System Non-

General economic

Accounting information

Managerial

Reporting

So, the Managerial Reporting bring us to a Balance Scorecard: kind of reporting in which finance indicators

balanced perfectly with the non-financial indicator (so short-run is integrated with the long-run prospective

and his strategic goals). 5

Cost and Cost classification:

A cost is a monetary amount that the firm has to burden itself in order to achieve a product or a service in

order to be able to generate revenues or to achieve a specific goal.

We should distinguish between Actual Cost and Budgeted Cost.

Budgeted Cost: so, cost we should spend in order to be efficient in the future.

Actual Cost: cost already registered, spent.

Cost Objects: objects in which the company is interested in determining the cost; for instance, determining

the cost of a product could help in deciding whether continuing to produce it or not. Some examples are

finished products, various departments, plants, customers, processes, geographical area where the

company sell. In fact, only knowing the costs of certain objects is easy to make decisions.

Cost Accounting: it is a system that allows managers to determine all various costs, its aim is to assign to an

object costs classified by nature in general accounting; it is divided into two phases: cost accumulation and

cost assignment.

1. COST ACCUMULATION is the gathering of all the costs day by day, collecting everyday cost

information.

2. COST ASSIGNMENT consists in to the assignment all the accumulated costs to a specific product. I

have to distinguish costs to the different cost objects; for some of them it is very easy, for others, it

is more difficult, because we are not able to establish theirs physical and objective cost:

a. DIRECT COST: can be traced to the cost object in an objective and economically feasible

way; I exactly know the quantity of that product and I exactly know the purchasing price for



that cost tracing

i.e. raw materials, direct labour costs, leasing of one equipment that produces just one

product of the company.

b. INDIRECT COST: cannot be traced to the cost object in an objective way or in an

economically feasible way (maybe it is too much expensive to measure even if there is an



objective way) cost allocating

i.e. light expense, compensation of the CEO, depreciation of equipment that produce every

product, rent of a building in which different products are manufactured, some indirect

material.

Operating Costs:

Costs strictly linked to the characteristic activity of the company, to its core business that is the production

and distribution of products, direct manufacturing labour costs (the amount of manpower involved in the

production process) and manufacturing overhead costs (depreciation, salaries of indirect workers such as

supervisor).

So, they consist in resources consumed in the operating area during the transformation process of input in

output.

Pay attention, the wage of the employees involved in the production is an operating cost.

Manufacturing Costs:

Are those directly involved in manufacturing of products and services:

• Direct material costs Prime cost

• Direct man labour costs Conversion cost

• Manufacturing overhead costs 6

Non-Manufacturing Costs:

Are those not incurred in manufacturing of products and services:

• Marketing and selling costs

• Administrative costs

• Innovation costs

Non-Operating Costs:

They are typically linked to the administration and finance area, so resources consumed in the non-

operating areas (fiscal, participations and financial costs).

Direct material costs Prime

costs

Direct manufacturing labour costs Conversion

Manufacturing costs Manufacturing overhead costs costs Indirect

COSTS costs

OPERATING Marketing and selling costs

Non-manufacturing costs Administrative costs

Innovation costs

Atypical costs

COSTS Financial costs

NON-OPERATING Fiscal costs

Extraordinary costs

Period costs: costs not assigned to a product and related to a specific period, which are included in the

income statement (i.e. advertisement costs).

Product costs: are assign to the finished products of the company in order to determine the value of the

inventory and of this product, usually they are variable + fixed manufacturing costs (i.e. depreciation).

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Another classification of costs, probably the most important one, is based on the costs’ behaviour in

comparison with volume of units produced by the firm.

Variable Costs:

Variable costs increase proportionally with the number of goods; therefore, their graph is represented by a

straight line starting from the axes’ origin with angular coefficient equal to the unitary variable costs*; raw

materials are a typical example of variable costs. Direct manufacturing labour is a variable cost too, even

though this is true in the case of increasing production volume, as law doesn’t allow to fire easily

employees.