Introduction to Cost and Management Accounting - Lecture 2024 by Dr. Davy Wadula Zulu - University of Zambia - Health Policy and Management

Financial Management for Health Care Introduction to Cost and Management Accounting Dr. Davy Wadula Zulu Objectives Introduce cost and managerial accounting Compare cost and managerial accounting History and international protocols governing practice in health service organizations, functions of management accounting Differentiate between management and financial accounting, Differentiate manufacturing and health services costing, Outline key concepts and approaches to health services costing Describe management accounting information systems (data sources and possible uses). Introduction to cost accounting Cost classification, Cost allocation techniques Cost behavior in health services organizations Cost analysis techniques for healthcare decision making Introduction • Accounting – Accounting is a wider term and includes recording, classifying and summarizing of business transactions in terms of money, preparation of financial reports and analysis and interpretation of these reports for the information and guidance of management. – The business accounting system consists of three parts: Financial Accounting Cost Accounting Management Accounting Financial Accounting Financial accounting may be defined as the science and art of systematically recording, classifying and summarizing business transactions of financial character and finally interpreting the results for determining the financial profit or loss at the end of an accounting year. It also shows the financial position of the firm, and thus, records and reports financial statements – Balance sheet, income statement and statement of cash flows. Cost Accounting Cost accounting is that branch of the accounting information system, which records, measures and reports information about costs. The primary purpose of cost accounting is cost ascertainment and its use in decision making and performance evaluation. COST ACCOUNTING Cost accounting is concerned with recording, classifying, and appropriate allocation of expenditure for the determination of the costs of products or services, and for the suitably arranged data for purposes of control and guidance of information to management for decision making. Cost means “the price paid for something” Cost ascertainment is the computation of actual costs incurred Cost estimation is a process of predetermining the costs of goods and services. FUNCTIONS OF COST ACCOUNTING Estimation of costs Ascertainment of costs Cost control Cost reduction Determining selling price Facilitating preparation of financial and other statement Providing basis for operating policy Management Accounting Managerial (management) accounting The field of accounting that focuses on all levels of an organization and is used internally for managerial decision-making It is the process of identifying, measuring, analysing, interpreting, and communicating information How does managerial accounting add value to the organization? Definition Management Accounting is “the application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives and in the making of rational decisions with a view towards these objectives” [American Accounting Association] What organization managers do! Perspectives to Management Accounting Cost vs Managerial accounting Cost accounting and managerial accounting are related, but different, types of accounting. Cost vs Managerial accounting Example Manufacturing companies often face the decision of whether to make certain components or purchase the components from an outside supplier. Cost accounting would calculate the cost of each alternative. Let’s say the cost accountants determine that a company would save $0.50 per component if the units were purchased from an outside supplier rather than being produced by the company. Managerial accounting would use that cost and supplement the cost with nonfinancial information to arrive at a decision. Managers would use the $0.50 per piece savings as well as nonfinancial considerations, such as the impact on the morale of current employees and the supplier’s ability to produce a quality product, to decide whether or not to purchase the component from the outside supplier. In summary, It may be helpful to think of cost accounting as a subset of managerial accounting. And that the result of cost accounting is a number, whereas the result of managerial accounting is a decision Functions of management accounting Helpful in Planning & policy formation:-forecasting, setting goals, framing policies based on available information. Help in decision-making:-makes decisions on cost, price, profit & savings. Helpful in controlling: management accounting devices like standard costing & budgetary control help control performance Motivating to employees: delegation increases the job satisfaction of employees & encourages them to look forward Provides accounting information to management Similarities between …