Managerial Accounting

Managerial Accounting

Professor Francesca Culasso

Università degli Studi di Torino

Business and Management – 2nd year

Contents

Lecture N. Topics page

Lecture 1 Introduction and Cost Classification: 2

➢ The managerial control system

➢ Strategic planning and managerial control

➢ The managerial control mechanism

➢ General firm’s structure

➢ The technical and accounting tools used in managerial control

➢ Cost and Cost Classification

➢ Operating Costs

➢ Manufacturing Costs

➢ Non-manufacturing Costs

➢ Non-Operating Costs

➢ Variable Costs

➢ Fixed Costs

➢ Mixed Costs

➢ Income Statement

Lecture 2 Cost-Volume-Profit Analysis: 11

➢ BEP analysis

Lecture 3 BEP in multi-production firms: 12

➢ Operating Leverage

Lecture 4 Operating Decisions and Economic Convenience: 13

Lecture 5 Budgeting: 14

➢ Commercial Budget

➢ Production Budget

➢ Staff Budget

Lecture 6 Budgeted Funds Flow Statement: 17

➢ Budgeted Balance Sheet 1

Lecture 1 – Introduction and Cost Classification

Chapter 1 and chapter 2, slides 1 -2

Management accounting is a system that support managers in the decision-making process. It is not

compulsory, but can be useful in every kind of company, also in non-profit ones and public administration.

It was born in the early 19th Century in the American railways companies and was initially mainly focused

on financial information, even though nowadays it comprehends a wider set of tools. Therefore, we could

talk about managerial control in general.

While Financial Accounting was referred to financial institution external to the company, to the owners and

other shareholders (which were interested in past results, already achieved), Managerial Accounting it is

addressed to managers, so to the internal part of the company (internal prospective).

The Managerial Control System:

It’s a system used by managers at various levels to assess that the management is carried out efficiently and

effectively, enabling the company to reach the established goals, defined during the strategic planning

process.

The scope is to provide managers relevant information of the company, to evaluate the efficiency of the

Value Chain (a value chain is a set of activities that a firm operating in a specific industry performs in order

to deliver a valuable product or service for the market).

Nowadays Managerial Accounting is not only accounting, not only financial information, because there is

some not financial information which are very important:

• 

competition shares of the market;

• 

customer satisfaction qualitative survey;

• 

attitude to innovate number of projects

N.B. they are quantitative information, so numbers, but not referred to financial information.

Since it includes also this non-financial information, we can call it Managerial Control instead of Accounting.

Managers which use this information are General managers, production managers and also managers that

are at the lower level of the hierarchical structure of the company.

As we have said in the definition, this system tries to improve the efficiency (the attitude of the company to

save resources) and the effectiveness (the attitude to reach the established goals concerning output in

quantity and quality).

Usually the efficiency can be measured by financial indicators: COSTS, more precisely full cost which can be

compared with the full cost of my competitors (financial indicators).

From what concern effectiveness, it can be expressed by the number of product that can be sold in the

market in comparison with the market demand, so QUANTITY, but also related to the QUALITY of them,

measured by the customers’ feedback or number of damaged products for instance. Quality can consist

also in flexibility, the attitude of changing things, my product, in order to satisfy the change in orders (non-

financial indicators).

Someone has said there is a financial indicator for the effectiveness, which is revenue, but it is a short-run

information, because revenue reflects past actions, while it is important to know how’s the company now,

in order to understand the possible revenues in the future.

Moreover, profit is the perfect synthesis of efficiency and effectiveness but just in the short-run.

2

Strategic Planning and Managerial Control:

The strategic planning activity concerns long-term decisions and it is characterized by a long-term view, so

for instance, which product the company will sell in the future and with which technology? More precisely,

it consists in selecting organization goals, predicting results under various alternative ways of achieving

these goals, and then deciding how to attain the desired goals. It is usually made by the CEO, together with

the board of directors.

On the other hand, the managerial control deals with monitoring the management variables over a short

period (one-year cycle). It plans the activity of the manager for one year and with the achieved result, the

company should be able to reach the goals in the strategic plan. It verifies the current goals and also the

strategic goals of the future. It works coherently with the long term goals defined by the CEO in the

strategic planning activity.

The Managerial Control Mechanism:

The managerial control mechanism is a feedback system:

1. Managers of the company agree about the target, they define the goals for each managerial area

(usually to be achieved within one-year, annual goals) through budgeting.

2. There is the moment in which actions are carried out, managers make decision and do actions.

During this period, the managers control works, it measures the progresses, the results and

calculates variances between the previous goals and the actual results achieved; so, in this way it is

possible to understand the causes of this variances and where to act in order to improve the

results.

3. Determine necessary correction and to apply them on goals or on action.

SEPT N - 1 This process starts before the beginning of the financial year (usually in September) in the so-

called “Preventive Control Phase” or “Planning Phase”; here the goals are established before the starting

of the year.

GEN N Then there is the “Current Control Phase”, providing managers with information about the results

st

they are progressively achieving to improve decision and results, till the 31 of December.

st

END OF N There is the “Consumptive Control Phase” after the 31 of December, to make the evaluation

and rewarding of the managers, we can say if managers have done a good job. This information is given to

the Human Resources Area in order to support it to make evaluation on managers.

3

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.

4

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.