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Management Accounting
By Ghanendra Fago
[MBA, M Phil]
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(C) 2011 Ghanendra Fago (M .Phil, MBA)
April 24, 2011
Ghanendra Fago
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Introduction to Accounting
Process of identifying, measurement, classifying, recording, summarizing and
interpretation of the transactions in terms of money to ascertain the result and
financial position of business activities of particular period.
An art of recording, classifying, summarizing the transactions in financial terms to
reflect financial position of whole transactions.
Accounting information is helpful in making decisions
Useful to managers, creditors, government, suppliers, customers
Increased scope of accounting with increase in the competition and business
complexities.
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(C) 2011 Ghanendra Fago (M .Phil, MBA)
April 24, 2011
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Users of Accounting
Ultimately, all accounting information is accumulated to help someone make
decisions. That someone may be a company president, a production manager, a
hospital or school administrator, a sales manager, a shareholder, a smallbusiness owner, a politician–the list is almost infinite.
Almost all managers in every organization are better equipped to perform
their duties when they have a reasonable grasp of accounting data.
For example, a knowledge of accounting is crucial for decisions by government
agencies regarding research contracts, defense contracts, and loan guarantees.
In fact, a survey of managers ranked accounting as the most important business
course for future managers.
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April 24, 2011
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Users of Accounting Information
External users
Creditors
Government
Suppliers
Customers
Shareholders
Investors
Workers and Unions
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Internal users
BODS
Chairman
Managers
Employees
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Branch of Accounting
Cost Accounting
Financial Accounting
Management Accounting
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April 24, 2011
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Cost Accounting
Costs are the volume of resources sacrificed to produce goods and services.
Cost accounting is the system, which accumulates, classifies and interprets costs to
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use in performance evaluation and decision-making
Deals primarily with the accumulating cost data needed by the management to
control the current operations and plan for future.
Provides accurate and timely information needed to help the business and control
costs.
Generally, both financial accounting and management accounting use costs
accumulated and classified by the cost accounting for external and internal
purposes.
Traditionally, focused in manufacturing cost only but at present it is also used in
non-manufacturing concerns for cost control.
(C) 2011 Ghanendra Fago (M .Phil, MBA)
April 24, 2011
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Objectives of Cost Accounting
To ascertain cost per unit of different types of products
To ascertain the element of costs
To disclose sources of wastages and prepare report for control
To provide requisite data for fixation of price
To exercise effective control of inventory
To provide useful data for financial decision
To organize cost reduction programme
To advise management for future policies and projects
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MBA)
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Financial Accounting
Financial accounting concerns with the preparation of financial
statements and reports like income statement and balance sheets of
specific periods for external users to show the financial position of the
company.
It is a summarized form of the overall financial position of company. It
provides information for external users like shareholders, creditors,
suppliers, government etc.
The branch of account, which develops information for external decision
makers like shareholders, creditors, government, suppliers etc.
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(C) 2011 Ghanendra Fago (M .Phil, MBA)
April 24, 2011
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Objectives of Financial Accounting
To keep systematic records of financial transactions
To ascertain the results of operations
To reveal the overall financial positions of organization
To report past performance and future prospects
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(C) 2011 Ghanendra Fago (M .Phil, MBA)
April 24, 2011
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Management Accounting
Management accounting is the branch of accounting, which is concerned with
supplying relevant information to managers at appropriate time to enable them to
take decisions in organization.
It is the process of accounting, which generates accounting information from both
financial accounting and cost accounting and provides essential accounting
information to all departments concerned.
Management accounting is the process of identifying, measuring, analyzing,
interpreting and communicating accounting information to department concerns to
meet organizational goals and objectives.
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(C) 2011 Ghanendra Fago (M .Phil, MBA)
April 24, 2011
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Definitions of Management Accounting
‘Management accounting is concerned with the accounting information that is useful to management.’
– Robert Anthony
‘information used for formulation of strategy, planning and controlling activities, decision making, optimizing
the use of resources, disclosure to shareholders and others external to entity, disclosure to employees and
safeguarding assets.'"
- CIMA
"… the process of identifying, measurement, accumulation, analysis, preparation and communication of
financial information used by management to plan, evaluate and control within the organization and assure
appropriate use and accountability for its resources."
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National Association of Accountants (USA)
“Traditionally management accounting systems have focused mainly on reporting financial measures. However,
in response to the changing environment management accounting system have began to place greater emphasis
on collecting and reporting non-financial quantitative and non-qualitative information necessary in formation of
strategy.”
Colin Drury
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(C) 2011 Ghanendra Fago (M .Phil, MBA)
April 24, 2011
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Objectives of Management Accounting
Providing information to the managers the for decision making and planning in revenue
and cost projection of organization
Assisting managers in interpretation of financial data that are not understand by internal
users
Management accountants are crucial in the most of the case that they become an integral
part of management team in the overall management providing necessary information.
Assisting managers in directing and controlling operations through its attention in their
function
Motivating managers toward the achievement of organization's goals
Measuring the performance of managers, subunits and employees within organization
Assessing the organizations competitive position, and working with the other managers to
ensure organization's long term competitiveness
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(C) 2011 Ghanendra Fago (M .Phil, MBA)
April 24, 2011
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Role of Managerial Accounting
In pursuing its goals, an organization acquires resources, hires
people, and then engages in an organized set of activities.
It is up to the management team to make the best use of the
organization's resources, activities, and people in achieving
the organization's goals.
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Planning
Directing operational activities
Controlling
Decision Making
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Differences Between Management And Cost Accounting
Basis
Management accounting
Cost Accounting
Objectives
Its objective is to assist managers
providing accounting information for
decision-making.
Its objective is to determine and record the
cost of production of goods and services.
Scope
It has broad scope, and includes
financial and cost accounting.
Its scope is limited in cost determination
and record.
Sources of
data
It uses both quantitative and
qualitative data
It uses the quantitative data only.
Accounting
principles
No specific principles like accounting
and cost accounting.
Certain principles and procedures are
followed in cost determination and
allocation.
Nature
It uses past and present data in the
projection of future.
It uses both past and present data and
figure.
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Fago (M .Phil, MBA)
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Management Accounting Vs. Financial Accounting
Basis
Management accounting
Objectives
Assist managers at all levels i.e. internal Make periodical report Outsiders like
users by providing necessary accounting shareholders,
government,
customers,
information.
suppliers, managers
Sources of
data
It uses data, which are subjective, It uses data, which are historical, subjective,
descriptive and related with future.
and related with past.
Accounting
principles
No such principles for preparation and Governed by GAAPs. Therefore, all
presentation of reports. Therefore, reports organizations prepare the financial reports in
differ from one organization to another.
the same manner.
Reporting
Reports are prepared in certain time interval Financial reports are generally prepared at the
according to need of management.
end of the fiscal year to report stakeholders.
Legal
compulsion
It is voluntary. It is applied to increase
It is compulsory
management efficiency for attaining organization.
organizational objectives.
Performance It measures the efficiency and performance
measuremen of various departments and divisions.
ts
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Financial Accounting
in
every
business
It measures the overall efficiency and
performance of organization.
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MBA)
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Secrecy
Secrecy of report is compulsory
because it is prepared for internal
decision making for managers.
Therefore, they are highly confidential.
Generally, financial reports are published to the
knowledge of the outsiders. Therefore, they are
not secretly maintained as management
accounting reports.
Behavioral
implications
Measurement and reports are
influenced by the behaviour of
managers' daily behaviour. Therefore,
behavioral considerations in primary in
management accounting.
Financial reports are prepared to measure and
communicate the financial phenomena to the
concerned parties. Therefore, behavioral
implications are secondary. However, reports are
influenced by the behaviour of executive
managers.
Span of Time
It varies from one hour to many years.
It is generally prepared on monthly, quarterly, half
yearly and yearly basis.
Scope/field
Scope and field of management Scope is more clearly defined. Therefore, they use
accounting are defined less sharply. economics and other disciplines very low.
Therefore, it uses economics,
behavioral science and decision
science.
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MBA)
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Accounting's Position in the Organization
Line authority is authority exerted downward over subordinates. All subunits
of the organization that are directly responsible for conducting these basic
activities are called line departments.
Staff authority is authority to advise but not command. It may be exerted
downward, laterally, or upward. Their principal task is to support or service
the line departments. Staff activities are indirectly related to the basic
activities of the organization.
The top accounting officer of an organization is often called the controller or,
especially in a government organization, a comptroller. This executive, like
virtually everyone in an accounting function, fills a staff role that the
accounting department does not exercise direct authority over line
departments.
Rather, the accounting department provides other managers with specialized
services including advice and help in budgeting, analyzing variances, pricing
and making special decisions.
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(C) 2011 Ghanendra Fago (M .Phil, MBA)
April 24, 2011
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President
Sales Vicepresident
Engineering
Vice-President
Manufacturing
Vice-President
Personnel
Vice-President
Financial
Vice-President
Chief Designer
Employment
Treasurer
Research
Job Evaluation
Controller
Factory-Service Departments (staff function)
Receiving and
Storeroom
Inspection
Tool Room
Purchasing
Production
Control
Maintenance
Production
Superintendent
Production Departments (line function)
Product A
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Product B
(C) 2011 Ghanendra Fago (M .Phil, MBA)
Product C
Product D
Product E
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Distinctions between Controller and Treasurer
Many people confuse the offices of controller and treasurer. The Financial Executives Institute, an association
of corporate treasurers and controllers, distinguishes their functions as follows:
Controllership
Planning for control
2. Reporting and interpreting
3. Evaluating and consulting
4. Tax administration
5. Government reporting
6. Protection of assets
7. Economic appraisal
1.
Treasurership
Provision of capital
2. Investor relations
3. Short-term financing
4. Banking and custody
5. Credits and collections
6. Investments
7. Risk management (insurance)
1.
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(C) 2011 Ghanendra Fago (M .Phil, MBA)
April 24, 2011
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Contd.
Management accounting is the primary means of implementing the first
three functions of controllership.
The treasurer is concerned mainly with the company's financial matters,
the controller with operating matters. The exact division of
accounting and financial duties varies from company to company.
In a small organization, the same person might be both treasurer and
controller.
The controller has been compared with a ship's navigator. The navigator
uses specialized training to assist the captain. Without the navigator, the
ship may founder on reefs or miss its destination entirely. The navigator
guides and informs the captain as to how well the ship is being steered,
but the captain exerts the right to command. This navigator role is
especially evidence in the first three functions listed for controllership.
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(C) 2011 Ghanendra Fago (M .Phil, MBA)
April 24, 2011
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Scope of Management Accounting
Financial accounting
Cost accounting
Budgeting and forecasting
Economics, management, finance
Inventory control
Statistical tools
Interpretation of data
Reporting to management
Behavioural issues
Decision analysis and information system
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(C) 2011 Ghanendra Fago (M .Phil, MBA)
April 24, 2011
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Advantages of Management Accounting
Efficiency
Planning and controls
Performance measurements
Maximize profitability
Customers focus
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(C) 2011 Ghanendra Fago (M .Phil, MBA)
April 24, 2011
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Disadvantages of Management Accounting
Authenticity of information
Requires knowledge of different subjects
Decision by intuition
Not an alternative to administration
Costly
No specific procedures
Possibility of resentment/dislike
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(C) 2011 Ghanendra Fago (M .Phil, MBA)
April 24, 2011
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Professional Certifications
ACCA/CA -The responsibility of these professional bodies is to
provide assurance concerning the reliability of financial statements.
CIMA-One of the main purposes of the CIMA was to establish
management accounting as a recognized, professional discipline,
separate from the profession of public accounting.
ICWA
CMA
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(C) 2011 Ghanendra Fago (M .Phil, MBA)
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Historical Evolution of Management Accounting
1880 - 1925 Most of the product-costing and internal accounting
procedures used in this century were
developed.
1925-1950s Emphasis of inventory costing for external reporting.
1950s/60s Effort to improve the management usefulness of
traditional cost systems.
1980s/90s Significant efforts have been made to radically
change
the nature and practice of management
accounting.
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Today’s Economic Environment
Global Competition
Growth of the Service Industry
Advances in Information Technology
Advances in the Manufacturing Environment
Theory of Constraints
Just-in-Time Manufacturing
Computer-Integrated Manufacturing
Customer Orientation
Total Quality Management
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Global Competition
Vastly improved transportation and communications have led to a global market for
many manufacturing and service firms.
Growth of the Service Industry
As the traditional smokestack industries have declined in importance, the service
sector of the economy has increased in importance.
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Advances in Information Technology
Two significant advances relate to information technology.
Computer-integrated manufacturing
The availability of personal computers, spreadsheet software, and graphics
packages
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Advances in the Manufacturing Environment
The theory of constraints is a method used to continuously improve
manufacturing activities and nonmanufacturing activities.
Just-in-time manufacturing is a demand-pull system that strives to
produce a product only when it is needed and only in the
quantities demanded by customers.
Computer-integrated manufacturing is the automation of the
manufacturing environment.
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Customer Orientation
Firms are concentrating on the delivery of value to the customer.
Accountants and managers refer to the value chain as the set of
activities required to design, develop, produce, market, and
deliver products and services to customers.
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Total Quality Management
Continual improvement and elimination of waste are the two
foundation principles that govern a state of manufacturing excellence.
A philosophy of total quality management, in which managers strive to
create an environment that will enable workers to manufacture perfect
(zero-defect) products, has replaced the acceptable quality attitudes of
the past.
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Professional Ethics/Code Of Conduct of Management Accountant
As professionals, managerial accountants have an obligation to
themselves, their colleagues, and their organizations to adhere to high
standards of ethical conduct.
In recognition of this obligation, the National Association of Accountants
has developed the following ethical standards for managerial
accountants.
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Competence
Managerial accountants have a responsibility to:
Maintain an appropriate level of professional competence by ongoing
development of their knowledge and skills.
Perform their professional duties in accordance with relevant laws, regulations,
and technical standards.
Prepare complete and clear reports and recommendations after appropriate
analysis of relevant and reliable information.
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Confidentiality
Managerial accountants have a responsibility to:
Refrain from disclosing confidential information acquired in the course of their work
except when authorized, unless legally obligated to do so.
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.
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.
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Integrity
Managerial accountants have a responsibility to:
Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential
conflict.
Refrain from engaging in any activity that would prejudice their ability to carry out their duties
ethically.
Refuse any gift, favor, or hospitality that would influence or appear to influence their actions.
Refrain from either actively or passively subverting the attainment of the organization's legitimate and
ethical objectives.
Recognize and communicate professional limitations or other constraints that would preclude
responsible judgment or successful performance of an activity.
Communicate unfavorable as well as favorable information and professional judgments or opinions.
Refrain from engaging in or supporting any activity that would discredit the profession.
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Objectivity
Managerial accountants have a responsibility to:
Communicate information fairly and objectively.
Disclose fully all relevant information that could reasonably be expected to
influence an intended user’s understanding of reports, comments, and
recommendations presented.
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Comprehensive Questions
Q.1 What are the major differences between financial and managerial accounting? In what
ways are the two fields of study similar?
Q.2 “Management accounting helps create value of the firm through profit planning, decision
making and control of the activities of the organization” With the light of this statement
explain how management accounting creates value of the firm. The objectives of
management accounting are to provide data and information to assist the different level
of management, in planning, decision making and controlling operations. Discuss.
Q3."Managerial accounting provides economic information to facilitate the management
process of planning, decision-making and control". Explain and illustrate this statement.
Q4. Discuss management accounting and its role in planning controlling and decision making
process.
Q5. Discuss the role of management accounting in overall management process of a business.
Q.6 Discuss the major current trends that are causing role of management accounting
today.
Q.7 Discuss treasurership and controllership functions of chief executive officer (CFO).
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(C) 2011 Ghanendra Fago (M .Phil, MBA)
April 24, 2011
Ghanendra Fago
Assignment -1
Term Paper- Reviews of the Chapter
Due in Next Class
and
??????????? Quiz- I -Next Class
Thank You !
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(C) 2011 Ghanendra Fago (M .Phil, MBA)
April 24, 2011
Ghanendra Fago
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