Managerial Accounting Chapter - II

MANAGERIAL ACCOUNTING

CHAPTER – II

INTRODUCTION TO MANAGERIAL ACCOUNTING

Introduction Meaning Relationship of Financial & Managerial accounting Comparing managerial accounting with financial accounting Ethical standards for Managerial accountants Role of managerial accounting

Introduction

Accounting is the “language of financial decisions”. The better you understand, the better you can manage your business.

Accounting is the system that measures business activities, processes that information into reports and communicates these findings to decision makers.

Financial Statements are the documents that report on an individual’s or an organization’s business in monetary amounts.

Financial Accounting is the process of preparing Financial Statements and data for outsiders to study the status of the business.

Management Accounting is the process of identifying, measuring, accumulating, analyzing, preparing, interpreting, and communicating of financial information used by management to plan, evaluate, and control within an organization and to assure appropriate use of an accountability of resources.

Cost Accounting is the process of accumulation and determination of the cost of a project, process or activity.

Accounting is the information system used by external parties and internal management to report on and control profit-oriented and nonprofit organizations alike.

External reporting is referred to as Financial Accounting. Internal reporting is referred to as Management Accounting.

Decisions such as: Entering a new market, Whether to make or buy a product Raising or

lowering prices, How to finance an investment, are usually made based on management

accounting precepts.

The decision makers inside the company are called the managers and the accounting designed

to meet their information needs is called Management Accounting.

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Managerial Accounting Chapter - IIManagerial Accounting, also called Management Accounting, is a field of accounting that provides economic and financial information for managers and other internal users those who are directing and controlling its operations.

Managerial accounting applies to all types of business – service, merchandize and manufactured and to all forms of business organizations – proprietorship, partnership and corporations. Moreover Managerial Accounting is needed in non-profit entities as well as in profit oriented enterprises.

Meaning :

Managerial Accounting : The Phase of accounting that is concerned with providing information to managers for use in planning and controlling operations and for use in decision making

Managerial accounting is “the process of identifying, measuring, analyzing, interpreting, and communicating information for the pursuit of an organization's goals.”

The owners, directors or trustees of an organization set its goals often with the help of management.

RELATIONSHIP OF FINANCIAL & MANAGERIAL ACCOUNTING

There are many similarities between Managerial accounting information and Financial accounting information because they both draw upon data from an organization’s basic accounting system. One part of the overall accounting system is the “Cost Accounting system”, which accumulates cost data for use in both managerial and financial accounting.

Ex: Production cost data typically are used in helping managers set prices which is managerial accounting use. However, the production cost data also are used to value inventory on manufacturer’s balance sheet, which is a financial accounting use.

Cost Accounting focuses on determining the cost of making products or performing services and creates a over lap between Financial Accounting & Managerial Accounting. It integrates with Financial Accounting by providing product cost valuation for inventories and cost of goods on the financial statements. Cost Accounting also integrates with Managerial Accounting by providing some of the quantity, cost based information managers need to plan and control operations, prepare budgets and make decisions about product profitability.

COMPARING MANAGERIAL ACCOUNTING WITH FINANCIAL ACCOUNTING

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Managerial Accounting Chapter - II

MANAGERIAL AND FINANCIAL ACCOUNTING CONTRASTED

ETHICAL STANDARDS FOR MANAGERIAL ACCOUNTANTS

IMA : Institute of Management Accountants

Managerial Accountants recognize that they have an Ethical obligation to their companies and the public.

IMA has developed a code of Ethical standards entitled “Standards of Ethical Conduct for Management Accountants”

This code divides the Managerial Accountants responsibility in four areas:

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Managerial Accounting Chapter - IICOMPETENCE

• Maintain professional expertise.

• Follow laws, regulations, and standards.

• Provide information and recommendations that are accurate, clear, concise, and timely.

• Recognize and communicate professional limitations.

CONFIDENTIALITY• Don’t disclose confidential information except when authorized or legally required.

• Ensure that subordinates do not disclose confidential information.

• Do not use confidential information for unethical or illegal advantage.

INTEGRITY• Communicate unfavorable as we well as favorable information and professional judgments

or opinion.

• Refuse any gift, favor or hospitality that would influence or would appear to influence their actions.

OBJECTIVITY• Communicate information fairly and objectively.

• Disclose all information that could be expected to influence a user’s understanding.

• Disclose delays or deficiencies in information, processing, or internal controls.

ROLE OF MANAGERIAL ACCOUNTING

The Managerial Accounting Activity has five major objectives, which may be characterized as follows:

1. Providing Information for decision making and planning, and proactively participating as part of the Management team in the decision making and planning processes.

- For virtually all major decisions, the management team would rely largely on managerial accounting information.

2. Assisting Managers in directing and controlling operational activities

- Directing and controlling day to day operations requires an available of data about process of providing services. Managerial accounting information often assists management through its attention the directing function.

3. Motivating Managers and other employers towards the organization’s goals.

- Organizations for goals. However organizations are comprised of people who have goals of their own. “The key purpose of managerial accounting is to motivate manager and other employees to direct their efforts toward achieving the organization’s goals. One means of achieving this purpose is their budgeting.

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Managerial Accounting Chapter - II4. Measuring the performance of activities, subunits, managers and other employees

within the organization.

- One means of motivating people towards organization’s goals is to measure through performance in achieving those goals. Such measurements then can be used as the basis for rewarding performance through positive feedback, promotions, and pay raises.

For example, most large corporations compensate their executives, in part on the basis of the profit achieved by the subunits they manage.

5. Assessing the organization’s competitive position, and working with other Managers to ensure the organization’s long run competitiveness in its industry.

- Now-a-days the business environment is changing very rapidly. These changes are reflected in Global competition, rapidly advancing technology and improved communication systems, such as Internet. These activities may that make an enterprise successful today may no longer be sufficient next year. A crucial role of managerial accounting is to continually assess how an organization stacks up against the competition, with an eye toward continuously improving.

How do managers use accounting information? Managers determine the company’s goals and

then plan and control its operations to reach those goals. They set long-range targets by asking

questions such as: What will be the total assents in 5 years? By how much can the business

increase its sales over the next 10 years?

The role of the managerial accountant is to support management by analyzing, interpreting, and

communicating accounting information to answer the long range goals and also the day to day

operations of the firm.

Managerial Accounting uses two themes. The cost-benefit criterion and Behavioral Implication.

The cost benefit criterion is a means for choosing among alternative accounting systems or

methods, how well they help to achieve management goals in relations to their costs. The

behavioral implications of a course of action are also critical, as to the effect of the action on

employee’s behavior. In fact, without an understanding of the behavioral implications of

managerial accounting, it is difficult to define and use managerial accounting concepts.

The managerial accountant makes decision about what, how, when, where, to whom and why

accounting information is presented using a technique called information evaluation in which

costs and benefits of alternatives are estimated and evaluated.

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