(C) 2009 by Ghanendra Fago (M. Phil., MBA) 1

Management Accounting By Ghanendra Fago

For Ace Institute of Management

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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.

• increased scope of accounting with increase in the competition and business complexities.

• Accounting information is helpful in making decisions

• Useful to managers, creditors, government, suppliers, customers

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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 small-business 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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Users of Accounting Information

External users – Creditors– Government– Suppliers– Customers– Shareholders – Investors

Internal users ManagersEmployeesWorkers and Unions

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Branch of Accounting

• Cost Accounting • Financial Accounting• Management Accounting

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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 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.

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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 programmes

• To advise management for future policies and projects

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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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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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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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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."- 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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Objectives of Management Accounting

1. Providing information to the managers the for decision making and planning in revenue and cost projection of organization

2. Assisting managers in interpretation of financial data that are not understand by internal users

3. 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.

4. Assisting managers in directing and controlling operations through its attention in their function

5. Motivating managers toward the achievement of organization's goals6. Measuring the performance of managers, subunits and employees within

organization7. Assessing the organizations competitive position, and working with the other

managers to ensure organization's long term competitiveness

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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. – 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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Difference Between Management Accounting And Financial Accounting

Basis Management accounting Financial Accounting

Objectives It is to assist managers at all levels i.e. internal users by providing necessary accounting information.

It is to make periodical report Outsiders like shareholders, government, customers, suppliers etc as well as organizational managers

Sources of data

It uses data, which are subjective, descriptive and related with future.

It uses data, which are historical, subjective, and related with past.

Accounting principles

It has no such principles for preparation and presentation of reports. Therefore, reports differ from one organization to another.

It is governed by GAAPs. Therefore, all organizations prepare the financial reports in the same manner.

Reporting Reports are prepared in certain time interval according to need of management.

Financial reports are generally prepared at the end of the fiscal year to report stakeholders.

Legal compulsion

It is voluntary. It is applied to increase management efficiency for attaining organizational objectives.

It is compulsory in every business organization.

Performance measurements

It measures the efficiency and performance

of various departments and divisions.

It measures the overall efficiency and performance of organization.

(C) 2009 by Ghanendra Fago (M. Phil., MBA) 16

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 accounting are defined less sharply. Therefore, it uses economics, behavioral science and decision science.

Scope is more clearly defined. Therefore, they use economics and other disciplines very low.

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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, whereas sales and production executives and their subordinates fill line roles. 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.

(C) 2009 by Ghanendra Fago (M. Phil., MBA) 18

President

Sales Vice-president

Engineering Vice-President

Manufacturing Vice-President

Chief Designer

Research

Personnel Vice-President

Employment

Job Evaluation

Financial Vice-President

Receiving and Storeroom

Inspection Tool Room Purchasing Production Control

Maintenance

Production Superintendent

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Factory-Service Departments (staff function)

Production Departments (line function)

Treasurer

Controller

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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:

Controllership1. Planning for control2. Reporting and interpreting 3. Evaluating and consulting4. Tax administration5. Government reporting6. Protection of assets7. Economic appraisalTreasurership1. Provision of capital2. Investor relations3. Short-term financing4. Banking and custody5. Credits and collections6. Investments7. Risk management (insurance)

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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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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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Advantages of Management Accounting

• Efficiency• Planning and controls• Performance measurements• Maximize profitability• Customers focus

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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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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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• 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

Professional Certifications

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QuestionsQ.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.

Or

"Managerial accounting provides economic information to facilitate the management process of planning, decision-making and control". Explain and illustrate this statement.

Or

Discuss management accounting and its role in planning controlling and decision making process.

Or

Discuss the role of management accounting in overall management process of a business.

Q.3 Discuss the major current trends that are causing role of management accounting today.

Q.4 Discuss treasurership and controllership functions of chief executive officer (CFO).

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Quiz I

1 . ........................ accounting provides information for managers of organization who directs and controls the operations.

a. Financial b. Management c. Cost 2. Which of the following is true?

a. Financial account is geared towards the internal usersb. Management accounting need not to follow any accounting principles (GAAPs)c.Management accounting uses historical data only

3. Financial accounting deals with record keeping process of financial transaction for determining profitability of company for external reporting.

a. True b. False4. Which of the following objectives are not the objectives of management accounting?a.Providing information to the managersb.Motivating managers toward the achievement of organization's goalsc.Measuring the performance of managers, subunits and employees within

organizationd.Preparation financial report for creditors, suppliers and government5. Both management and financial accounting uses cost accounting data for preparing

reports.a. True b. False