Introduction Summary

Identify and describe the functions of a cost and management accounting system

A cost and management accounting system should generate information to meet the following requirements: (a) allocate costs between cost of goods sold and inventories for internal and external profit reporting and inventory valuation; (b) provide relevant information to help managers make better decisions; and (c) provide information for planning, control and performance measurement.

Describe the three purposes for which cost information is required

A cost and management accounting system should generate information to meet the following requirements: (a) to allocate costs between cost of goods sold and inventories for internal and external profit reporting and inventory valuation; (b) to provide relevant information to help managers make better decisions; (c) to provide information for planning, control and performance measurement. A database should be maintained with costs appropriately coded or classified, so that relevant information can be extracted for meeting each of the above requirements.

Define and illustrate a cost object

A cost object is any activity for which a separate measurement of cost is required. In other words, managers often want to know the cost of something and the 'thing' that they want to know the cost of is a cost object. Examples of cost objects include a new product, operating a sales outlet, operating a specific machine and providing a service for a client.

Explain why in the short term some costs and revenues are not relevant for decision-making

In the short term, some costs and revenues may remain unchanged for all alternatives under consideration. For example, if you wish to determine the costs of driving to work in your own car or using public transport, the cost of the car tax, road fund licence and insurance will remain the same for both alternatives, assuming that you intend to keep your car for leisure purposes. Therefore, the costs of these items are not relevant for assisting you in your decision to travel to work by public transport or in your own car. Costs that remain unchanged for all alternatives under consideration are not relevant for decision-making.

Distinguish between management accounting and financial accounting

Management accounting differs from financial accounting in several ways. Management accounting is concerned with the provision of information to internal users to help them make better decisions and improve the efficiency and effectiveness of operations. Financial accounting is concerned with the provision of information to external parties outside the organization. Unlike financial accounting there is no statutory requirement for management accounting to produce financial statements or to follow externally imposed rules. Furthermore, management accounting provides information relating to different parts of the business whereas financial accounting reports focus on the whole business. Management accounting also tends to be more future oriented and reports are often published on a daily basis whereas financial accounting reports are published semi-annually.

Identify and describe the elements involved in the decision-making, planning and control process

The following elements are involved in the decision-making, planning and control process: (a) identify the objectives that will guide the business; (b) search for a range of possible courses of action that might enable the objectives to be achieved; (c) select appropriate alternative courses of action that will enable the objectives to be achieved; (d) implement the decisions as part of the planning and budgeting process; (e) compare actual and planned outcomes; and (f) respond to divergencies from plan by taking corrective action so that actual outcomes conform to planned outcomes, or modify the plans if the comparisons indicate that the plans are no longer attainable.

Explain the important changes that have taken place in the business environment that have influenced management accounting practice

The important changes are: (a) globalization of world trade; (b) deregulation in various industries; (c) changing product life cycles; (d) advances in manufacturing and information technologies; (e) focus on environmental and ethical issues; (f) a greater emphasis on value creation; and (g) the need to become more customer driven.

Outline and describe the key success factors that directly affect customer satisfaction

The key success factors are: cost efficiency, quality, time, and innovation and continuous improvement. Keeping costs low and being cost efficient provides an organization with a strong competitive advantage. Customers also demand high-quality products and services and this has resulted in companies making quality a key competitive variable. Organizations are also seeking to increase customer satisfaction by providing a speedier response to customer requests, ensuring 100 per cent on-time delivery and reducing the time taken to bring new products to the market. To be successful, companies must be innovative and develop a steady stream of new products and services and have the capability to rapidly adapt to changing customer requirements.

Justify the view that a major objective of commercial organizations is to broadly seek to maximize future profits

The reasons for identifying maximizing future profits as a major objective are: (a) it is unlikely that any other objective is as widely applicable in measuring the ability of the organization to survive in the future; (b) although it is unlikely that maximizing future profits can be realized in practice, it is still important to establish the principles necessary to achieve this objective; and (c) it enables shareholders as a group in the bargaining coalition to know how much the pursuit of other goals is costing them by indicating the amount of cash distributed among the members of the coalition.

Explain why it is necessary to understand the meaning of different cost terms

The term 'cost' has multiple meanings and different types of cost are used in different situations. Therefore, a preceding term must be added to clarify the assumptions that underlie the measurement. A knowledge of cost and management accounting depends on a clear understanding of the terminology it uses.