Cost Management Basic Theory

Process of management involves formulating strategy, planning, control, decision making, and directing operational activities. Manager can perform these functions efectively with managerial accounting information. One of the most important information focuses on  cost incurred by an organization.

Basically, cost is defined as the sacrifice made to achieve a particular purpose. It is measured by the resource given up to reach the purpose. The definition may grow depend on the context in which it is used.

Cost data that recorded in one particular way for one purpose may be inappropriate for another use. Therefore, different cost concepts and classification are used for different purposes. By understanding this concepts and classification, we can use managerial accounting to provide appropriate cost data to the stakeholder who need it.

An important issue in managerial and financial accounting is the timing which costs of acquiring asset or services are recognized as expenses. Expense is defined as the cost inccured when an asset is used up or sold for purpose of generating revenue.

Terms of product cost and period cost are used to describe the timing with which various expenses are recognized. Product cost is a cost assigned to goods that were purchased or manufactured for resale. Product cost is used to value inventory of manufactured goods or merchandise until the goods are sold. In period of sales, product costs are recognized as an expense called cost of goods sold.

All costs that are not product cost are called period costs. These cost are identified with period of time in which they are inccured rather than with units of purchased and produced goods. Period cost are recognized as expenses during time period in which they are inccured. Some examples are research and development, selling, and administrative costs are treated as period costs.

In services industry, there is no inventoried product costs. Therefore, services industry generally reffer to the costs of producing services as operating expenses. Operating expenses are treated as period costs.

To assist managers in planning, decision making, and cost management, managerial accountants classify costs by the functional area of organization to which cost relate. Some of them are manufacturing, marketing, administration, and R&D.

Manufacturing costs are futher classified : direct material, direct labor and manufacturing overhead. Direct material is raw material that is consumed by manufacturing process. The cost of salaries, wages, fringe benefits for personal costs who work directly on the manufactured products is lassified as direct-labor cost. All of other costs of manufacturing are classified as manufacturing overhead, which includes three type : indirect material, indirect labor, and other manufacturing costs.

Other functional area of organization will also have other classification. Marketing, administration, and R&D cost classification will be disscussed further in next articles.

 

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What is Managerial Accounting?

Managerial accounting (management accounting) is the process of identifying, measuring, analyzing, interpreting, and communicating information in pursuit of an organization’s goals. It is an integral part of the of the management process. Managerial accountants are important strategic partners in an organization’s management team.

Role of managerial accounting was previously operated in a strictly staff capacity, usually physically separated from managers for whom they provided reports and information. Nowadays, managerial accountants serve as internal business consultants, working side-by-side in cross-functional teams with managers from all areas of organization.

An organization’s management team, on which managerial accountants play an integral role, seeks to create value for the organization by managing resources, activities, and people to achieve the organization’s goals effectively. The work of management team comprises four activities, which are decision making, planning, directing operational activities, and controlling. Managerial accountants will support all these activities with particular information needed.

Managerial accountants add values to an organization by pursuing five major objectives. First objective is providing information for decision making and planning, and proactively participating as part of the management team in the decision-making and planning process. Second objective is assisting managers in directing and controlling operational activities. Third objective is motivating managers and other employees toward organization’s goal. Fourth objective is measuring performance of activities, subunits, managers, and other employees toward the organization’s goal. Last objective is assessing organization’s competitive position and working with other to ensure long-run competitive in its industry.

There are some differences between managerial accounting and financial accounting. From user of information perspective, financial accounting is the use of accounting information for report parties outside the organization, including current and prospective share holders, lenders, investment analyst, and government agencies. Managerial accounting is the use of accounting information for members within the organization. Therefore, financial accounting is required to obey the regulation, such as GAAP (Generally Accepted Accounting Principles) while managerial accounting is not required to do this since it is intended only for managers.

Financial accounting draws almost exclusively data sources from organization basic accounting system which accumulates financial information. Managerial accounting draws broader data beside organization basic accounting system, such as rates of defective product manufactured, physical quantities of materal and labor used in production, or maybe average delays in particular airline. Financial accounting focuses on the global perspective of enterprise entirely, while managerial accounting reports more detail within organization, such as per departments, per divisions.

Managerial accounting continually evolves and adapts as the business environment changes. The growth of international competition and dramatic changes in technologhy are placing ever-greater moved away from a historical costaccounting perspective and toward a proacrive const management perpective. Under this approach, the managerial accountant is part of a cross-functional management team that seeks to create value for the organization by managing resources, activities, and people to achieve the organization’s goals.

 

Source : Hilton, R., 2010,  “Managerial Accounting, 8th Edition”. McGraw-Hill.

Finance vs Accounting

Finance and accounting are difficult to differentiate for common people. They sound similar, that both of them are talking about money and business. In many offices too, finance and accounting are handled by same manager or person. Usually, there is F&A manager position in many companies who handles finance and accounting at the same times.

Actually, finance and accounting are very different subjects to each other. In formal education, accounting is a subject in economy, while finance is a part management studies. As a specialization, accounting can be divided  into financial accounting, management accounting, audit accounting, tax accounting, even forensic accounting which focused in detecting fraud. In management studies, beside finance, there is also some specialization, such as operation management, marketing management, HR management, and so on.

In practice, accounting is mainly about recording historical events that happened in company. These events could be transactions or other kind of events that need to be recorded. So, accounting has more focus on past times. In contrary, finance is mainly about future prediction and decisions of a company in response of its limited resources, such as money.

As a mindset, accounting emphasizes in margin or bottom line based on accrual basis, which happened because of the nature of recording historical events. Accrual basis means that revenue is recognized on the delivery of products or service to customer and at the same times, expense is matched with revenue. The recording is not only done in events of cash payment received in revenue or bill paid in expense. Accrual basis will make better picture of historical events as a basis for future decision. On the other hand, in finance, cash is king. This means every prediction and decision in finance is based on cash. We call this as cash basis.

In the job description, accounting, especially financial accounting, the job starts from transaction documents and ends in financial statements as its main product. Finance job will use accounting products as basis for forecast and decision. Asset allocation and how to finance business are decided by finance. In asset allocation, finance needs to decide what the ratio between current assets and non-current assets is or how much cash needed in financing company operations, etc. In how to finance business, finance needs to decide whether using owners’ equity of or find debts to do the business.

So, as a summary, we can see the differences between accounting and finance in many aspecs, such as in formal education, in practice, from their different mindsets, and in their job description.

 

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