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Management Accounting
LECTURE: One |
INTRODUCTION TO MANAGEMENT ACCOUNTING
1. DEFINITION of Management Accounting
2. THE Major Purpose Of Accounting Systems
3. THE Work of Management and the Need for Managerial Accounting
Information
4. COMPARISON of Financial and Management Accounting
5. COMPARISON of Cost and Management Accounting
6. MANAGEMENT Accounting in service and Non-profit organization
7. THE Management Process and Accounting
8. STANDARDS of Ethical conduct for Management Accountants
1. Definition of
Management Accounting:
Management
accounting refers to accounting information developed for managers within
an organization. In other words, management accounting is the process of
identifying, measuring, accumulating, analyzing, preparing, interpreting, and
communicating information that helps managers fulfill organizational
objectives. This is the phase of accounting concerned with providing
information to managers for use in planning and controlling operations and in
decision making.
Managerial accounting is concerned with providing information to
managers-that is people inside an organization who direct and control its
operations.
In contrast, financial accounting is concerned with providing
information to stockholders, creditors, and others who are outside an
organization.
Managerial accounting provides the essential data
with which organizations are actually run. Financial accounting provides the
scorecard by which a company’s past performance is judged.Because it is manager
oriented, any study of managerial accounting must be preceded by some
understanding of what managers do, the information managers need, and the
general business environment.
2.The Major Purpose Of Accounting Systems:
The accounting
system is the principal –and the most credible-quantitative information system
in almost every organization. This
system should provide information for five broad purposes:
1. Formulating
overall strategies and long range plans: This includes new product
development and investment in both tangible (equipment) and intangible (brands,
patents, or people) assets, and frequently involves special purpose reports.
2. Resource
allocation decisions such as product and customer emphasis and pricing: This frequently
involves reports on the profitability of products or services, brand
categories, customers, distribution channels, and so on.
3. Cost
planning and cost control of operations and activities: This involves reports on revenues, costs,
assets, and the liabilities of divisions, plants, and other areas of
responsibilities.
4. Performance
measurement and evaluation of people: This includes comparison of
actual results with planned results. It can be based on financial or
non-financial measures.
5. Meeting external
regulatory and legal reporting requirements: Regulations and
statutes typically prescribe the accounting methods to be followed here.
Consider financial reports that are provided to the shareholders who are making
decisions to buy, hold, or sell shares in the company. These reports must
follow generally accepted accounting principles, as heavily influenced by
regulatory bodies.
3. The Work of Management and
the Need for Managerial Accounting Information:
Managers in
every organization carry out three major activities-
·
Planning
·
Directing
and motivating and
·
Controlling
1.
Planning involves
selecting a course of action and specifying how the action will be implemented.
2.
Directing and motivating involves
mobilizing people to carry out plans and run routine operations.
3.
Controlling involves
ensuring that the plan is actually carried out and is appropriately modified as
circumstances change. In carrying out the control function, managers seek to
ensure that the plan is being followed. Feedback, which signals whether operations
are on track, is the key to effective control.
Management
accounting information plays a vital role in these basic management
activities-but most particularly in the planning and control functions.
The planning and
Control Cycle:
The work of management
can be summarized in a model such as the following model-
The model, which depicts the Planning
and Controlling Cycle, illustrates the smooth flow of management activities
from planning through directing and motivating, controlling, and then back to
planning again.
4.Comparison of Financial
and Management Accounting:
Accounting
 |
Management
Accounting
5.Management Accounting and
cost Accounting
Management Accounting
The
accounting service, through which management is assisted, at all levels,
in respect of policy making, planning, controlling the execution of plans and
appraising of performance, is known as Management Accounting.
It
is a recent development, but is gaining importance rapidly in various concerns.
Management accounting utilizes the information of both financial accounting and
cost accounting in the best interest of the business.
It
is primarily concerned with supply of information to the management so that the
management can manage the business efficiently in order to maximize profit.
Management accounting employees many techniques such as budgetary control,
marginal analysis, uniform costing, standard costing, ratio accounting, project
accounting, internal audit, fund flow analysis etc.
Cost accounting
Cost
accounting also supplies information to the management and it utilizes most of
the above techniques also. So the principal objective of both management
accounting and cost accounting is similar.
Thus, Accounting
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Management
Accounting
6. MANAGEMENT Accounting in Service and Non-profit organization:
The
basic ideas of management accounting were developed in manufacturing organizations.
These ideas, however, have evolved so that they apply to all types of
organizations including service organizations.
Service
organizations, for our purposes, are all organizations other than
manufacturers, wholesalers, and retailers. That is, they are organizations that
did not make or sell tangible goods. Public accounting firms, law firms,
management consultants, real estate firms, transportation companies, bank,
insurance companies, and hotels, are profit seeking service organizations.
Almost
all nonprofit organizations, such as hospitals, schools, libraries, museums,
and government agencies, are also service organizations. Managers and
accountants in nonprofit organizations have much in common with their
counterparts in profit seeking organizations. There is money to be raised and
spent. There are budgets to be prepared and control systems to be designed and
implemented. There is an obligation to use resources wisely.
The
characteristics of both profit seeking and nonprofit service
organizations include the following:
1.
Labor is intensive: The highest
proportion of expenses in schools and law firms are wages, salaries, and
payroll –related costs, not the cost relating to the use of machinery,
equipment, and other physical facilities.
2.
Output is usually difficult to define:
The output of a university may be defined as the number of degrees granted, but
many critics would maintain that the real output is “what is contained in the student’s
brains”. Therefore, measuring output is often considered impossible.
3.
Major inputs and outputs cannot be stored: An empty
airline seat cannot be saved for a later flight, and a hotel’s available labor
force and rooms are either used or unused as each day occurs.
Simplicity
is the watchword for installation of systems in service industries and non
–profit organizations. In fact, many professionals such as physicians,
professors, or government officials resist even filling out a time card. In
fact, simplicity is a fine watchword for the design of any accounting system.
Complicity tends to generate costs of gathering and interpreting data that
often exceed prospective benefits.
Cost
benefit and behavioral considerations:
In
addition to simplicity, managers should keep two other ideas in mind when
designing accounting systems:
1. Cost benefit balances
2. Behavioral implications
The
cost benefit balance
weighing estimated costs against probable benefits-is the primary consideration
in choosing among accounting systems and methods.
In
addition to the costs and benefits `of an accounting system, the buyer of such
a system should also consider behavioral implications, that is the
system’s effect on the behavior (decisions) of managers. The system must
provide accurate, timely budgets and performance reports in a form useful to
the managers. If managers do not use accounting reports, the reports create no
benefits.
Management
accounting reports affect employee’s feelings and behavior. Consider a
performance report that is used to evaluate the operations under responsibility
of a particular manager. If the report unfairly attributes excessive costs to
the operation, the manager may lose confidence in the system and not let it
influence future decisions. In contrast, a system that managers trust and
believe in can be a major influence on their decisions and actions.
7.The Management Process and
Accounting:
Regardless of the type of organization, manager’s benefit when
accounting provides information that helps them plan and control the
organization’s operations.
The Nature of Planning and Controlling
The management process is a series of activities in a cycle of planning
and control. Decision-making –the purposeful choice among a set of
alternative courses of action designed to achieve some objectives-is the core
of the management process. Decisions range from routine (making daily
production schedules) to the nonroutine (launching a new product line)
Decisions within an organization are often divided into two types:
(1) Planning decisions and
(2) Control decisions.
In practice, planning and control are so intertwined that it seems
artificial to separate them. In studying management, however, it is useful to
concentrate on either the planning phase or the control phase to simplify the
analysis.
The
Management process
`
The
left side of the above model demonstrates the planning and control cycle of the
current operations. Planning refers to setting objectives and outlining how
they will be attained. Thus planning provides the answers to two questions:
What
is desired? When and how it will be
accomplished?
In
contrast, controlling (the two boxes labeled “Action” and “Evaluation”) refers
to implementing plans and using feedback to attain objectives. Feedback is
crucial to the cycle of planning and control. Planning determines action;
action generates feedback, and feedback influences further planning. Timely,
systematic reports provided by the internal accounting system are the chief
source of useful feedback. None of this cycle would be possible without
accounting.
Management
by Exception:
The
right side of the above model shows that accounting formalizes plans by
expressing them as budgets. A Budget is a quantitative expression of a pan of
action. It is also and aid to coordinating and implementing the plan.
Accounting formalizes control as performance reports (the last box), which
provide feedback by comparing results with plans and by highlighting variances,
which are deviations from plans. The accounting system records, measures, and
classifies actions in order to produce performance reports.
Performance
reports spur investigation of exceptions-items for which actual amounts differ
significantly from budgeted amounts. Operations are then made to conform to the
plans, or the plans are revised.
This
is often called management by exception, which means
concentrating on areas that deviate from the plan and ignoring areas that are
presumed to be running smoothly.
Thus
the management by exception approach frees managers from needles concern with
those phases of operations that are adhering to plans.
8.Standards of Ethical conduct for Management Accountants
Management accountants have an obligation to the organizations they
serve, their profession, the public, and themselves to maintain the highest
standards of ethical conduct. In recognition of this obligation the governing
body of worldwide accounting has developed adopted the following standards of
ethical conduct for management accountants.
Adherence to theses standards is integral to achieving the objectives
of management accounting. Management accountants shall not commit acts contrary
to these standards nor shall they condone the commission of such acts by others
within their organization.
COMPETENCE
Management accountants have a responsibility to
v Maintain an appropriate level of professional
competence by ongoing development of their knowledge and skills
v Perform their professional duties in accordance with
relevant laws, regulations, and technical standards
v Prepare complete and clear reports and recommendations
after appropriate analysis of relevant and reliable information
v CONFIDENTIALITY
Management accountants have a responsibility to
v Refrain from disclosing confidential information
acquired in the course of their work except when authorized, unless legally
obligated to do so
v Inform subordinates as appropriate regarding the
confidentiality of information acquired in the course of their work and monitor
their activities to assure the maintenance of that confidentiality
v Refrain from using or appearing to use confidential
information acquired in the course of their work for unethical or illegal
advantage either personally or through third parties
INTEGRITY
Management accountants have a
responsibility to
v Avoid actual or apparent conflicts of interest
and advise all appropriate parties of any potential conflict
v Refrain from engaging in any activity that would
prejudice their ability to carry out their duties ethically
v Refuse any gift, favor, or hospitability that would
influence or would appear to influence their actions
v Refrain from either actively or passively subverting
the attainment of the organization’s legitimate and ethical objectives
v Recognize and communicate professional limitations or
other constraints that would preclude responsible judgment or successful
performance of an activity
v Communicate unfavorable as well as favorable
information and professional judgments or opinions
v Refrain from engaging in or supporting any activity
that would discredit the profession
OBJECTIVITY
Management
accountants have a responsibility to
v Communicate information fairly and objectively
v Disclose fully all relevant information that could
reasonably be expected to influence an intended user’s understanding of the
reports, comments, and recommendations
QUESTIONS:
1.
What is management accounting?
2.
What are the major activities of a
manager?
3.
Describe the steps in the planning and
control cycle.
4.
What are the major differences between
managerial and financial accounting?
5.
What are the major differences between
managerial and cost accounting?
6.
Why is adherence to ethical standards important for the smooth
functioning of an advanced market economy?
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