Last Updated 10 Aug 2020

Introduction to Management Accounting

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A. Definition, purpose, concepts and scope of Managerial Accounting

Definition
Managerial Accounting or Management Accounting is the systems and processes used to gather data, process data, and provide useful quantitative information to management. It also refers to reports designed to meet the needs of internal users, particularly the managers.

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According to the AAA Committee on Management Accounting, it is the application of appropriate techniques and concepts in processing the historical and projected economic data of an entity to assist management in establishing a plan for reasonable economic objectives and in the making of rational decisions with a view towards achieving these objectives.

Purpose
Management Accounting supplies the information needs of management. This information should be more detailed, forward looking, and presented and analyzed differently to suit the unique informational needs of management. To meet these requirements, management accounting should have the following purposes:

1. Profit Measurement
Business performances should be measured. In the short-run, business performance is normally expressed in terms of profitability.

2. Guide for planning
Managers plan to ensure that organizational resources and systems fit with what is needed in the future to deliver profitability and sustained growth.

3. Standards for controlling
Actions are to be made in accordance with the plan. Errors should be prevented from the very start. Deviations or planning gap that are encountered while things are put into action should be immediately remedied or corrected to execute plans as intended.

4. Basis for decision making
The primary tool of management in getting its job done is decision making. A decision that is based on inadequate information may lead to inferior or even damaging results. A rational decision based on quality information would most likely lead to increased shareholder’s value.

Concepts
1. Accountability
Management accounting presents information measuring the achievement of the objectives of an organization and appraising the conduct of its internal affairs in that process. In order that further action can be taken, based on this information, it is necessary at all times to identify the responsibilities and key result areas of the individuals within the organization.

2. Controllability
Management accounting identifies the elements of activities which management can or cannot influence, and seeks to assess risk and sensitivity factors. This facilitates the proper monitoring, analysis, comparison and interpretation of information which can be used constructively in the control, evaluation and corrective functions of management.

3. Reliability
Management accounting information must be of such quality that confidence can be placed in it. Its reliability to the user is dependent on its source, integrity and comprehensiveness.

4. Interdependency
Management accounting, in recognition of the increasing complexity of business, must access both external and internal information sources from interactive functions such as marketing, production, personnel, procurement, finance, etc. This assists in ensuring that the information is adequately balanced.

5. Relevancy
Management accounting must ensure that flexibility is maintained in assembling and interpreting information. This facilitates the exploration and presentation, in a clear, understandable and timely manner, of as many alternatives as are necessary for impartial and confident decisions to be taken. The process is essentially forward looking and dynamic. Therefore, the information must satisfy the criteria of being applicable and appropriate.

Scope
Management accounting is concerned with presentation of accounting information in the most useful way for the management. Its scope is, therefore, quite vast and includes within its fold almost all aspects of business operations such as:

1. Financial Accounting
Management accounting is mainly concerned with the rearrangement of the information provided by financial accounting. Hence, management cannot obtain full control and coordination of operations without a properly designed financial accounting system.

2. Cost Accounting
Standard costing, marginal costing, opportunity cost analysis, differential costing and other cost techniques play a useful role in operation and control of the business undertaking.

3. Revaluation Accounting
This is concerned with ensuring that capital is maintained intact in real terms and profit is calculated with this fact in mind.

4. Budgetary Control
This includes framing of budgets, comparison of actual performance with the budgeted performance, computation of variances, finding of their causes, etc.

5. Inventory Control
It includes control over inventory from the time it is acquired till its final disposal.

But Management Accounting covers a much broader scope and it goes beyond the boundaries of accounting. It may also extend its scope and draw upon Finance, Economics, Operations Research, Statistics, Mathematics or other discipline as necessary.

B. Recent Developments in Management Accounting
Today rapidly changing business environment stipulates the need of companies’ shareholders and managers making decisions as fast as possible following the local/global changes of science, business, technologies, politics and society as well as internal company’s situation. Studies disclosed the significance of Management Accounting as a stimulus for organizational change, progress and substantiated the benefit of performance measurement process not only for financial results (improving financial indicators, increasing market value) but also for ongoing performance improvement, communication and control processes.

The main factors which probably had the strongest influence on the development of Management Accounting were: Different dominating theories of management
Different views to management accounting
Changing situation in the global economy such as globalization, financial crisis, etc. Expectations of shareholders, managers, society, scientists, etc.

Such factors brought development in Management Accounting as follows: Different sets of Management Accounting tools are used in different types of organizations There were some changes of Management Accounting depending on the financial results and expectations/objectives of shareholders and management External factors such as situation in the global economy, competition, changes of science, business, technologies, politics, society and financial results of organizations became closely related to Management
Accounting. Read also "

motivation theory identifies which three needs"

C. Ethical Conducts of Management Accountants
Following is the Standards for Ethical Conduct for Practitioners of Management Accounting and Financial Management published in 1997 by the Institute of Management Accountants, previously National Association of Accountants.

Competence
Practitioners of management accounting and financial management 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.

Confidentiality
Practitioners of management accounting and financial management have a responsibility to: Refrain from disclosing confidential information acquired in the course of their work, except when authorized, and 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.

Integrity
Practitioners of management accounting and financial management have a responsibility to: Avoid actual or apparent conflict interests 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 would appear to influence their actions. Refrain from actively or passively subverting the attainment of the organization’s legitimate and ethical
objectives. Recognize and communicate professional limitations or other constraints that would prejudice responsible judgment or successful performance of an activity. Communicate unfavorable as well as favorable information and professional judgment or opinion. Refrain from engaging in or supporting any activity that would discredit the profession.

Objectivity
Practitioners of management accounting and financial management 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 the reports, comments and recommendations presented.

Resolution of Ethical Conflict
In applying the standards of ethical conduct, practitioners of management accounting and financial management may encounter problems in identifying unethical behavior or in resolving an ethical conduct. When faced with significant ethical issues, practitioners of management accounting and financial accounting should follow the established policies of the organization bearing on the resolution of such conflict. If these policies do not resolve the ethical conduct, such practitioner should consider the following actions: Discuss such problem with the immediate superior except when it appears that the superior is involved, in which case the problem should be presented initially to the next higher managerial level. If a satisfactory resolution cannot be achieved when the problem is initially presented, submit the issues to the next higher managerial level. If the immediate superior is the Chief Executive Officer, or equivalent, the acceptable reviewing authority may be a group, such as the audit committee, executive committee, board of directors, or owners. Contact with levels above the immediate superior should be initiated only with the superior’s knowledge, assuming the superior is not involved. Except when legally prescribed, communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate. Clarify relevant ethical issues by confidential discussion wi an objective advisor (e.g., IMA Ethic Counseling Services) to obtain a better
understanding of possible courses of action. Consult your own attorney as to legal obligations and rights concerning the ethical conduct. If ethical conflict still exists after extinguishing all levels of internal review, there may be no other recourse on significant matters than to resign from the organization and to submit an informative memorandum to an appropriate representative of the organization. After resignation, depending on the nature of the ethical conflict, it may also be appropriate to notify other parties.

D. Distinction between Financial Accounting and Management Accounting
Management Accounting is significantly different from Financial Accounting. Their distinction relates to their orientation, emphasis, customer served, and body of knowledge applied. Below are the basic differences between the two.

FINANCIAL ACCOUNTING
MANAGEMENT ACCOUNTING
Historical in nature
Uses GAAP
Reports are wholistic
Reports are for general purpose
With unifying equation, A = L + C
Focuses on accounting and finance
Focuses on the process of preparing the financial statements Precision
Deals about the future
Does not use GAAP
Reports are segmentized
Reports are for management use only
No unifying equation
Multi-disciplinar, also deals with other areas of knowledgeand disciplines. Concerns with the usefulness of financial statements
Timeliness
E. Standards for internal accounting information
Internal decision makers employed by the enterprise, often referred to as management, create and use internal accounting information not only for
exclusive use inside the organization but also to share with external decision makers. The accounting information created and used by management is intended primarily for planning and control decisions. The following identifies internal accounting information standard

1. Importance of Timeliness
In order to plan for and control ongoing business processes, accounting information needs to be timely. The competitive environment faced by many enterprises demands immediate access to information.

2. Identity of Decision Maker
Information that is produced to monitor and control processes needs to be provided to those who have decision-making authority to correct problems.

3. Oriented toward the Future
Although some accounting information, like financial accounting information, is historical in nature, the purpose in creating and generating it is to affect the future. The objective is to motivate management to make future decisions that are in the best interest of the enterprise, consistent with its goals, objectives, and mission.

4. Measures of Efficiency and Effectiveness
Accounting information measures the efficiency and effectiveness of resource usage. An assessment can be made on how effective management is in achieving the organization’s mission.

F. Applicability of the basic concepts of Financial Accounting to Managerial Accounting
Financial management has its roots in accounting, although it may also be regarded as a branch of applied economics. It is broadly defined as the management of all the processes associated with the efficient acquisition and deployment of both short- and long-term financial resources. Financial management assists an organization’s operations management to reach its financial objectives.

The management of an organization generally involves the three overlapping and interlinking roles of strategic management, risk management and operations management. Financial management supports these roles to enable management to achieve the financial objectives of the shareholders. Financial management assists in the reporting of financial results to the users of financial information, for example shareholders, lenders and employees.

Some of the important functions in which financial accounting may be involved in management accounting include: Forecasting revenues and costs
Planning activities
Managing costs
Identifying alternative sources and costs of funding
Measurement and control of performance
Costing compliance with social, environmental and sustainability requirements.

G. Management uses of accounting in organizing, planning, directing and controlling
Managers make decision in all phases of their managerial functions. The functions are illustrated as follows:

The diagram below depicts the relationship of planning and controlling and its relevance to management:

H. Controllership
Controllership may be defined as the function of business management which combines the responsibility for accounting, reporting, measurement, auditing, taxes, operating controls and other related areas. The seven basic functions of a controller are (i.e., PREGPET)

Planning and controlling
This means to establish, coordinate, and administer, as an integral part of management, an adequate plan for the control of operations. Reporting and interpreting
The task is to compare performance with operating plans and standards and to
report and interpret the results of operations to all levels of management and to owners of the business.

Evaluating and consulting
This includes consulting with al segments of management responsible for policy or action concerning any phase of the operation of the business. Government Relations
This includes supervising or coordinating the preparation of report of government agencies. Protection of assets
This is assuring protection for the assets of business through internal control, internal auditing and assuring proper insurance coverage. Economic appraisal
This includes continuously appraising economic and social forces and government influences, and interpreting their effect upon the business. Tax administration
This includes establishing and administering tax policies and procedures.

I. Responsibility Accounting
Responsibility Accounting identifies the investment, revenues and expenses assigned and controlled by a manager in a segment to monitor and asses the performance of each part of an organization. If a manager is to be held answerable or accountable on the performance of the segment, then he should be given the right information to make decisions accordingly. The content of the information should be correlated with the level of details and frequency of report to be provided within the overriding principle of cost-benefit analysis.

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Introduction to Management Accounting. (2018, May 18). Retrieved from https://phdessay.com/introduction-to-management-accounting/

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