4.3. Systems of managerial accounting

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Из курса от партнера Moscow Institute of Physics and Technology

Core Concepts of Accounting – Numbers and People

7 оценки

Moscow Institute of Physics and Technology

Core Concepts of Accounting – Numbers and People

7 оценки

Курс 3 из 5 — Specialization Understanding Modern Finance

Whenever the word “accounting” is pronounced, it is immediately associated with the need to memorize endless boring numbers. However, it is the common financial statements that contain important information that provides inputs for valuation of investment projects. The only challenge is how to properly extract them. Accounting and finance are indeed intertwined. Sometimes people that are not experienced in the area even mix them up. But most often emphasis in accounting is on numbers. Still, the deep understanding of key accounting concepts helps reveal the interests and actions of people behind these numbers. And the human dimension of accounting adds invaluable insight in the potential of successful project implementation. This Course discusses core ideas and concepts of both financial and managerial accounting. It by no means pretends to be comprehensive to any extent. But, being rather an accounting overview, it focuses on the issues that are most relevant and important for effective valuation of investment projects. The learners will gain insight into the essence of accounting. They will be able to use the obtained knowledge and skills to successfully advance in their career at a financial institution, as well as in the area of financial management at non-financial businesses. To pursue a career in accounting, a more detailed study is strongly recommended.

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Managerial Accounting – Core Ideas. Cost Behavior. Direct and Indirect Costs. Indirect Cost Allocation

Weeks 4 through 6 of the Course are devoted to the issues of managerial accounting. First, we introduce the key ideas of managerial accounting, and compare it to the financial accounting. We focus on the much closer link of managerial accounting to people. Then the core idea of managerial accounting – cost – is introduced and discussed. You will learn why it is so important to identify the total cost of any product, project, or division. We will study cost behavior, fixed and variable costs, and break-even point. The last part of Week 3 discusses cost tracing and allocation as a major task of any in-depth cost analysis. We study an example and come up with the tracing and allocation roadmap.

4.1. What is managerial accounting? Key ideas11:42

4.2. Managerial vs. financial accounting – a comparison11:21

4.3. Systems of managerial accounting13:42

4.4. Introduction to costs – major terms12:49

4.5. Cost behavior12:02

4.6. Total cost – concept and information12:55

4.7. Direct and indirect costs14:08

4.8. Indirect cost allocation11:04

4.9. Cost allocation example (1) – initial cost allocation13:30

4.10. Cost allocation example (2) – cost re-allocation11:17

4.11. Cost allocation example (3) – cost allocation rates10:50

4.12. The tracing and allocation roadmap9:49

Познакомьтесь с преподавателями

Konstantin Kontor
Director and Professor of Finance and Strategy
American Institute of Business and Economics (AIBEc)

In the only introductory parts to this week,

we talked about the most general questions about managerial accounting.

We said what it is,

and how it differs from financial accounting.

Now I'd like to move ahead and talk about some ideas

about how managerial accounting is structured.

And in this episode,

we'll talk about systems of managerial accounting,

and some other very important ideas.

So let's start with systems of managerial accounting.

Well, basically these systems,

they will pinpoint the ideas behind them.

And those include, total cost accounting.

So I will put the exclamation mark here.

That's one of the key topics in all approaches that we

will be studying from now on in this course.

Now another thing is a relevant cost accounting.

Well, we've talked about that the long before,

and the idea here is that for people who study valuation of this part,

maybe even more important than that part because that allows you to

concentrate on what really contributes to the proper valuation,

and what actually prevents the right approach.

And finally, this is responsibility accounting.

And this part deals with numbers of people more directly.

And we talk about that,

but only to the extent that contributes to our main goal.

So this is more or less a managerial problem.

So the core idea here,

is how we can efficiently manage projects and companies.

So we talk about that but not in some greater detail.

So the important point here is that,

pops up for the first time but will stay with us,

that in managerial accounting,

unlike in financial accounting,

certain ideas, things, concepts,

terms whatever, they are not easily transferable

between these systems and between goals and objectives.

We can say that the information is not easily transferable.

That creates a challenge.

And again, for me it's important to point this out,

and I'm not fishing for problems here,

I'm just saying that unless we give ourselves account that this is important,

then we might under certain circumstances fall in a trap.

Now let's proceed from here.

There we go.

The next part here is nature and use of managerial accounting.

Again it's better to say comments on nature and use.

So we are again emphasizing certain things that we must keep in

mind when applying the approaches of managerial accounting to our goals and valuation.

Well, first of all,

terms and concepts sort of depend on objective.

I'll give you an example,

the statement that this costs $100 strictly speaking is meaningless,

unless we specified what this is,

and in accordance with what procedure or what approach it is being used.

That makes the application of managerial accounting,

not only the application but also the development of business is quite challenging.

Now the next thing which is also the one that might produce significant problem is that,

all data is approximate.

Everything is approximate, nothing secure.

And although that seems to be sort of a search for an easy way out.

But this is gloomy reality in managerial accounting,

because oftentimes it's not only the question of dealing with the future,

even sometimes in the past or at present time,

that also is a challenge.

And that shows another point here.

So we have to keep in mind these ranges

and they should be recognized.

I'll put must be recognized. So without that,

we might easily make a mistake.

Now also we know,

here in blue that we deal here with future and uncertainty.

Again, you might say well, you'e been,

really it's redundant because you've been telling that many a time.

But this is the key story.

Key story in managerial accounting per se,

and the key story for us as users of that.

And therefore, another very important point here is that the inputs are never,

and I'll point this out, complete and/or comprehensive.

And that means that,

let's say we have collected someone information and then we have the choice,

either we make a decision based on this information,

or we keep collecting information.

Remember when we talked about valuation in corporate finance,

we said that we may wait for some time to be able

to collect more important information with respect to the project,

but the eternal future will still be ahead.

And oftentimes,

excluding the option-like situations when something very important happens,

and that drastically changes the overall development of the project,

we must make this choice.

So here I will put,

we keep collecting information

or we make the decision now.

So that also must be kept in line.

Now then beside this challenge,

there is something that,

let's say for the first time,

openly discusses a subtitle to this course and I will openly put

here numbers versus people.

And again, I'm putting them as versus and will

point out certain areas in which that is not only important,

but is instrumental in contributing to a potential success or a potential failure.

All right, well, first of all,

this is just an observation,

that few problems maybe resolved on the basis of numbers only.

Well, that's kind of clear because we may have a nice forecast,

we may pick everything up,

but unfortunately we cannot quantify some of

the important contributions like human behavior,

well, we can do in extent, but not fully.

So here that's sort of an absolutely trivial statement.

But then, we can say what do people do?

So people,

they contribute significantly to success or failure.

Now, we can't talk about that forever.

We can give examples why it sometimes does depend on the one crucial person,

or the overall culture in the organization, whatever.

But that is clear,

and for us, we will see that this is an issue in managerial accounting.

Because remember we talked about total costs,

we talked about relevant costs,

and we talked about responsibility accounting.

And all these openly deal with people and how they contribute.

Now this contribution of people,

so I will point out some of the ideas here that may be like intuition versus logic,

then freedom versus control.

I'm not saying that these things are absolutely opposite,

but they don't go.

Now the issue of feedback,

because remember in the managerial accounting we deal with planning,

so we did something, we controlled that,

we collected some new information and then we used feedback to fit into our plans,

or maybe revamp them completely.

Now here also, there is such a thing that's conflict of interest.

And this conflict of interest maybe both inside the company.

Let's say someone is charged with this cost and these people say,

well we have nothing to do with this cost,

so why is the charge on us,

on our a department,

on our division, on our product?

This is unfair. And here also we can say that sometimes,

I'll put it in the red, here maybe even external users involved.

Sometimes you can, by fine tuning your systems,

you can in indirect way influence the benefits of these external users.

I'm not saying that we're lying to them,

but some information may and sometimes does create this conflict of interest.

So basically, what we can say here is that in dealing with numbers and people,

ideally we would like to see that the systems that we use,

systems and approaches.

There are at least two ideas,

one is that they have to motivate rather than demotivate,

and another thing is also they must be cost effective.

And by cost effective,

I mean a very simple thing.

Let's say, we've created a really advanced system of managerial accounting,

but this creation would cost us so much that the benefits of this system,

they will be much less than the cost that was spent.

Imagine for example that you are using the system of

your personal accounting on your computer or your phone.

And again, let's say that you spend five hours a

day to work with the system to see exactly that if you paid for coffee here,

how that affects your behavior and so on and so forth.

That doesn't seem to be very efficient does it?

You might use this time for something more important.

By the same token in the company,

it's nice to have the good system that really does all the things in the right way.

But if the system is too costly both in developing and then in using,

then the question arises, do we have to use this?

This wraps up the overview of that and then what follows,

we will come closer to the idea of costs.

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