SECTION C

Management Accounting

So far, we have looked at financial accounting. Financial accounting is much more publicly visible than management accounting. Management accounting takes place within businesses and is essential to the running of a business. It can be usefully divided into (1) cost accounting, which includes costing (Chapter 16), and planning, control and performance (Chapters 17 and 18), and (2) decision making (Chapters 19–22).

This section investigates some major issues involved in management accounting. In Chapter 15, a brief introduction into the nature of management accounting is provided. Much of the terminology is introduced and an overview of the rest of the book is provided. Chapters 16, 17 and 18 look at cost accounting, one of the two main streams of management accounting. In Chapter 16, the role of costing in inventory valuation and pricing is investigated. The cost allocation process is then outlined together with the use of different costing methods in different industries. Both traditional absorption costing and the more modern activity-based costing are discussed. Chapters 17 and 18 look at planning, control and performance. Chapter 17 sets out the cost control technique of budgeting. The different types of budget are also briefly discussed. Responsibility accounting is also discussed. Then in Chapter 18 standard costing is explored. The individual variances are explained and a worked example is shown.

Chapters 19–22 look at the decision-making aspects of management accounting. Chapter 19 investigates the managerial techniques (such as break-even analysis and contribution analysis) used for short-term operational decision making. Then Chapter 20 looks at the relatively new management accounting topic of strategic management accounting. This shows how management accounting influences strategic business decisions. In Chapter 21, we investigate capital budgeting. This chapter investigates the different techniques (such as payback and discounted cash flow) used to evaluate long-term investment decisions. Finally, Chapter 22 investigates two aspects of both internal and external sources of finance: short-term financing via the efficient management of working capital and long-term financing such as share capital and loan capital.

With the growth in the use and importance of the International Accounting Standards Board we now use the terminology of the International Financial Reporting Standards for ease of understanding and consistency.