A2

Contents

1. Describe the purpose and role of cost and management accounting within an organisation’s management
information system
2. Compare and contrast financial accounting with cost and management accounting
A2.2: The Nature And Purpose Of Cost And Management Accounting © GTG

1. Describe the purpose and role of cost and management accounting within an organisation’s
management information system

Management information system: a system that provides data and information to the managers in the form of

Reports, including exception reports on matters requiring action,

Analysis and

Other information
to support the functions of planning, decision-making and control and its various aspects such as analysis and
modelling

Cost accounting is - the establishment of

budgets,

standard costs (benchmark for comparison with actual) and

actual costs
of operations, processes, activities or products; and the analysis of variances, profitability or the social use of
funds.
CIMA official terminology

The main objective of cost accounting is the creation of underlying data for use in management accounting.
This may include recording of the following costs:

Cost of goods produced or services rendered

Cost of combinations of activities grouped as a cost centre

Accumulation of revenues

Actual cost versus budgeted cost for budgetary control

.Diagram 1: Cost accounting process

Diagram 2: Importance of cost and management accounting

© GTG Cost And Management Accounting Versus Financial Accounting: A2.3

The purpose and role of cost and management accounting within an organisation’s management
information system (MIS)
The purpose
a) Allocation of costs
b) Collation of such costs into meaningful groups
c) Application of these costs to inventory, products and services.

Question 1
Identify examples of

Allocation of costs

Collation of costs into meaningful groups

Application of these costs to inventory,

products and services

The role
a) Accurate ascertainment of the costs of goods and services, cost of a responsibility centre of the
organisation, revenue of the organisation, profitability etc.
b) Analysis of actual versus budgeted (expected or planned) costs.
c) Any other information management feels it needs in its decision-making process.

Question 2
Identify examples of the above three roles of cost and management accounting. In what ways is cost and
management accounting helpful in

The accurate ascertainment of various costs

such as

Costs of goods or services

Ascertainment of revenue

Profitability
The analysis of actual versus budgeted
(expected or planned) costs

Certain other information that management

might need in the decision-making process.

Test Yourself

1. Which of the following involves determining the cost of a product and interpreting cost information?
(a) Financial accounting
(b) Cost accounting
(c) Management accounting
A2.4: The Nature And Purpose Of Cost And Management Accounting © GTG

2. Compare and contrast financial accounting with cost and management accounting

Financial accounting:

collecting

classifying

recording and summarising
the financial transactions for business.
It is the preparation of financial statements for use mainly by persons or organisations external to the
organisation. E.g. stakeholders, customers, suppliers etc.
Distinction between financial accounting and cost & management

Financial accounts Cost and management accounts

Time span
Defined period – income statement - usually 1 year Period appropriate for purpose
Specific date - balance sheet as at last day e.g. E.g. sales data relating to two quarters
31.12.07
Statutory
Legal requirement Management choice but cost records are
recommended at times
Format
Declared by law and Financial Reporting Standards According to management’s choice and purpose of
information
E.g. the production and storage capacities operated
by the organisation for the past three months.
Detailed
All numbers are in aggregate and for the Numbers are broken up into meaningful chunks to
organisation as a whole. Financial accounts are aid decision-making. E.g. cost per production run or
consolidated for the entire organisation cost per batch produced
Type of information
Mainly contains monetary value Management records incorporate non-monetary
measures also such as machine hours, tonnes, and
man-hours. Cost records however contain mainly
monetary values
Use
Ensures all business assets and liabilities are Aids decision-making
accounted for. Internal measure of achievement and control, hence
Helps comparison with other organisations. orientation is
Financial accounts are historical, specifying the - Historic
transactions which happened in the past - Present and
- Future

Test Yourself

2. Which of the following could be true with regard to a management information system (MIS)? An MIS
is
(1) A database system.
(2) Used for planning, directing and controlling activities.
(3) A hierarchy of information within an organisation.

(a) (1) and (2) only

(b) (1) and (3) only
(c) (2) and (3) only
(d) (1), (2) and (3)
© GTG Cost And Management Accounting Versus Financial Accounting: A2.5

Answers to Questions

1.
Allocation of costs The total overheads incurred in a brick-manufacturing unit
are $65,000. These need to be allocated to three
departments: baking, hardening and finishing. Cost
accounting helps to allocate these costs within the
departments on a suitable basis.
Collation of costs into meaningful groups The costs allocated to departments as above are collated
into production overheads (the ones allocated to service
departments), service overheads (the ones allocated to
service departments) etc.
Application of these costs to inventory, The costs grouped as above are ultimately charged to the
products and services units produced using suitable bases for absorption. E.g. the
production overheads incurred in the baking, hardening
and finishing departments are absorbed on the basis of
the labour hours consumed per brick..

2.
The accurate ascertainment of various costs
such as

Costs of goods or services

Ascertainment of revenue

Profitability
The analysis of actual versus budgeted
(expected or planned) costs
Certain other information that management
might need in the decision making process.
Examples in the context of a company manufacturing
computer chips. Cost and management accounting can
help calculate the following costs:
Cost of goods:
Cost of one computer chip made.
Ascertainment of revenue:
the revenue generated by selling 150,000 computer chips
in the quarter with a selling price of $1,500 per chip
Profitability:
the profit earned from the sale of 150,000 computer chips
when the selling price is $1,500/chip and the cost of
making one chip is $945 (profit = $1,500 - $945 = $555).
The actual cost of production of 1,500 computer chips can
be compared to the planned costs by studying the cost
and management records. If the planned costs are
$800,000 and the actual costs total to $832,500 then an
investigation can be carried out to find out the reason for
the extra costs incurred.
The records of the sales made by the company for the last
five years that show the amount of chips sold that will help
decide the future production schedule.

Answers to Test Yourself

1. (b) Cost accounting involves determining the cost of a product and interpreting cost information.
Management accounting is the analysis of the cost as well as non-financial factors. Financial accounting is
recording of historical data.

2. (d) A management information system is an integrated system providing assistance at all levels of the
managerial functions of planning, decision-making and control. In this context, statements (1), (2) and (3)
are all correct. It is a database containing all the relevant information that can be used for planning,
controlling and directing and is therefore a hierarchy of information within an organisation.
A2.6: The Nature And Purpose Of Cost And Management Accounting © GTG