In this week, we will introduce a new topic that is management accounting. It can be defined as the process of identifying, classifying, and recording information in order to support internal decision-making, in contraposition to the external decision-making, and the core component of management accounting is represented by the cost. So our focus for the entire week will be the cost. How can we define costs? The cost can be defined as the value of the resources expressed in monetary terms, which is used in order to realize a certain objective, where this objective is defined as cost object. It can be either a product or a service. Let's see this with an example. Assuming that our final cost object is represented by this table and we want to define the cost for the table, what's the cost? The cost is represented by the value of the resources which are used in order to realize it. So we will have as resources the wood, and so this represents the resource which is used for realizing the table. But then we have, of course, other resources. For example, we can have the employee, and then we have the employee that is going to use tools and equipments that are useful in order to deal with the wood itself, and basically, both the employee which is in charge of managing the woods together with all of the equipment and tools can be defined again, as resources that are useful in order to realize the table itself. So basically the value in expressing monetary terms of both of these resources of the wood, the employees, and then the tools and equipment can be defined as the cost of our final cost object that in this case is represented by the table. The same happens instead if we have a service rather than having the table. For example, assuming that we are rendering a service, a dinner service at a restaurant and we want to define the costs for rendering this service. In this case, our resources will be represented by the food, drink, the waitress we will have delighting the eating or the rent of the restaurant, for example. So it's exactly the same, either we have a product or we have the service, the cost is the sum of the resources used in order to realize this final cost object. Let's try to understand why do we need to deal with costs? Basically we need to understand which are the objectives, and we can identify three main objectives related to management accounting and so the reason why we need to deal with the cost. The first one is that we need costs in order to define the value of the inventory. Assuming that at the end of the period, we have some products that were not sold. In this case, we need to define the value of the inventories within the balance sheet. So basically the value of these inventories should be defined by dealing with the cost management. The second objective is represented by the so-called short-term decision-making. Basically, we need data about costs of product or services in order to make decisions, like for example, is it convenient to realize these product? Is it better to realize the product inside or outside? Which would be the best price in order to obtain a profit? Or for example, which is the best production mix? Basically all of the decisions which are related to the operating activities can be defined as short-term decisions and can be dealt with by using data about the cost. The third objective of dealing with costs is represented by devaluation of the so-called responsibility centers. Responsibility centers can be defined as the organizational units that we have inside the enterprise and basically we can use data about cost in order to define the performances, to measure and evaluate the performance of these organizational units, and basically we can say that management accounting deals with data about costs in order to support these three different activities.
