And here we go again. It seems LBS arms you with so much knowledge and then quickly reminds you to stay in your lane lest you start feeling smug. I am convinced this was by design. I have been inundated with so much knowledge in the corporate financial accounting class that I started having the confidence to challenge my finance managers. Why would I not? After all, we were told LBS students are not ‘mere mortals.’ I have no intention to disappoint the faculties. I received a mail, for the umpteenth time: ‘Course Activity Reminder: Cost and Management Accounting Pre-module Assignment’, a harsh reminder that ‘immortality’ has a price. I wonder when I will eventually have the guts to mark LBS emails as spam. I mean, I feel like doing that sometimes…
So I ventured into researching Cost and Management Accounting, wondering what component of business language this is. Only this time, there was no tutor; it was a pre-module assignment.
Here are some of my findings:
Management accounting is the provision of the relevant information required for decision-making, planning, cost control, and performance evaluation. To help with decision-making, management accounting tries to understand the causes of profit or loss and researches the variables that affect efficiency. So, a key component of management accounting is cause and effect. The main activities of management accounting are reporting to management, decision-making, policy formulation, performance assessment, and internal coordination and collaboration among different departments.
Cost accounting deals with the assessment and tools used to determine the costs and expenses incurred in the purchase or production of a product. It is an element of management accounting with the primary purpose of helping organizations in making competitive business decisions. The main activities are budgeting, breakdown of cost for internal profit determination and reporting purposes, pricing, and forecasting.
Unlike financial accounting, which provides financial information to parties outside the company, cost accounting is not constrained by predetermined standards and can be tailored to the specific requirements of management. Cost accounting is therefore not compliant with Generally Accepted Accounting Principles (GAAP) and cannot be utilized for official financial reporting. It considers both variable and fixed costs for all production-related inputs.
Fixed costs are costs that do not change with variations in the volume of manufacturing. For instance, monthly lease or mortgage payments on a piece of equipment or a structure that is depreciating at a certain rate will not change whether production levels rise or fall.
An expense that fluctuates in production output or sales is referred to as a variable cost. Variable costs rise in response to increasing production or sales and fall in response to falling output or sales.
Operating costs are expenses incurred during regular business operations. Depending on the circumstance, these expenses may be either constant or variable.
A cost that may be directly connected to the production of goods or services is known as a direct cost. A service, a product, or a department might be the cost object and be the source of a direct cost. Direct costs are frequently variable expenses e.g. inventory.
The cost that is unassociated with creating a product or service is known as an indirect cost. It is difficult to directly link an indirect cost to a project, department, activity, or product. For instance, all the products produced in a plant require electricity, which is thought of as an indirect cost. The power bill cannot be linked to a specific item.
The journey continues really but at this rate, I will soon challenge the Ministry of Finance to a public debate. Until the next LBS email hits me to remind me to stay in my lane.