Cost & Management Accounting

Cost and Management accounting plays a wide but significant role in many organisations, from small to large; manufacturing to service; private sector to not for profit organisations.
Management accountants provide information that addresses a number of key questions, including:

  • What is the project profit/loss for the next period for the whole organisation?
  • What is the profitability of individual product lines?
  • What price should we charge for a product/service?
  • What does it cost to make one unit of product or deliver one unit of service?
  • How did actual performance compare with budget and what were the reasons for any divergence?
  • What are the consequences of discontinuing/introducing a product line?
  • The value of inventories of raw materials, work in progress and finished goods;
  • Preparation of budgets, forecasts and other control data;
  • The creation of a reporting system that enables managers to take corrective action where necessary to control costs

This is just a very small sample of areas that management accountants can become involved in. Their role is not simply as passive providers of information but as managers that are actively involved in making key decisions for both the short and long-term operation of a business.

Management accountants are often involved in setting up and maintaining key business systems, including:

  • Budget setting, implementation, monitoring and controlling
  • Systems for costing and pricing products and services
  • Performance monitoring systems
  • Internal management information systems and reporting systems
  • External (environmental) management information systems

Financial accounts tends to show the aggregate position for an organisation and the audience for that information consists mainly of external stakeholders, traditionally consisting of investors, analysts, funders, lenders of finance, regulatory bodies and tax authorities.

However, financial accounting information which is made up of the income statement, position statement and the cash flow statement are of limited practical use for management to be able to discharge their numerous responsibilities of control, planning and decision making.

For example, some of the more common issues that managers need to understand are what costs are by product and service, what generates costs, how costs/revenue/profit change if activity changes, the profitability of different products and services, how to control costs and the pricing of differing products and services.

From a management accounting perspective, a number of organisations are broken up into smaller sub-units for management and reporting purposes, these areas are known as responsibility centres. Understanding the different types of costs, its classification and behaviour is important for a number of reasons, which includes:

Cost Centres

Cost centres are units of an organisation to which costs can be attributed and allocated. These are often set up on functional or product lines e.g. purchasing, production, finishing, dispatch and sales.

Cost centre managers are responsible (and accountable) for controlling costs, but they will not be responsible for revenue, profit or investment generation or control.

Profit Centres

As the name suggests a profit centre is a unit of an organisation to which both costs and revenues can be attributed or allocated. Profit centre managers are responsible for costs and revenue control and generation.

Investment Centres

Investment Centres are a logical development of profit centres. Investment centre managers not only have responsibility for profit but also for the control and generation of profits in relation to the capital that has been invested.

There are no hard and fast rules for how cost, profit and investment centres are structured. The only guiding rule is that these centres should be structured in a way that gives maximum value to the management team. It is also not unusual to have different structures within an organisation, corresponding to different levels of management.

Cost accounting is an integral part of the management information system of a business, and though we can trace its origins to manufacturing and industrialisation, its techniques and applications are no longer the sole preserve of manufacturing. Retailers, service industries, central and local government, the charitable and voluntary sectors, to name but a few all make effective and ‘profitable’ use of cost accounting information. Furthermore, it is not restricted purely to manufacturing and operating costs, but also to administration, selling and distribution and research and development.

Understanding what the cost of producing an item and/or providing a service is important for a number of management functions, which include calculation of profits, planning, control and decision making. Direct costs by their nature are easy to trace and attribute to a product or service, indirect costs are not.