Introduction to Management Accounting

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Management Accounting

• Definition of Accounting ?

• Definition of Financial Accounting ?

• Definition of Management Accounting ?

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Definition of accounting

….the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.

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Management versus Financial Accounting

Accounting SystemAccounting System(accumulates financial and(accumulates financial and

managerial accounting data)managerial accounting data)

Accounting SystemAccounting System(accumulates financial and(accumulates financial and

managerial accounting data)managerial accounting data)

Managerial AccountingManagerial AccountingInformation for decisionInformation for decision

making, and controlmaking, and controlof an organization’sof an organization’s

operations.operations.

Managerial AccountingManagerial AccountingInformation for decisionInformation for decision

making, and controlmaking, and controlof an organization’sof an organization’s

operations.operations.

Financial AccountingFinancial AccountingPublished financialPublished financial

statements and otherstatements and otherfinancial reports.financial reports.

Financial AccountingFinancial AccountingPublished financialPublished financial

statements and otherstatements and otherfinancial reports.financial reports.

InternalInternalUsersUsers

ExternalExternalUsersUsers

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Comparison of Financial and Managerial Accounting

#1 Financial Accounting Management Accounting

Users External persons who make financial decisions

Managers who plan for and control an organisation

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Comparison of Financial and Managerial Accounting

#2 Financial Accounting Management Accounting

Time focus

Historical perspective Future emphasis

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Comparison of Financial and Managerial Accounting

#3 Financial Accounting

Management Accounting

Verifiability vs. Relevance

Emphasis on verifiability

Emphasis on relevance for planning & control

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Comparison of Financial and Managerial Accounting

#4 Financial Accounting

Management Accounting

Precision vs. Timeliness

Emphasis on precision

Emphasis on timeliness

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Comparison of Financial and Managerial Accounting

#5 Financial Accounting Management Accounting

Subject Primary focus is in the whole organisation

Focuses on segments of an organisation

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Comparison of Financial and Managerial Accounting

#6 Financial Accounting Management Accounting

GAAP Must follow GAAP and prescribed formats

Need not follow GAAP or any prescribed format

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Comparison of Financial and Managerial Accounting

#7 Financial Accounting

Management Accounting

Requirement Mandatory for external reports

Not mandatory

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Do you know when accounting for

managerial decision making began?

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MANAGERIAL ACCOUNTING HISTORY

• Beginnings between 1880 and 1925– Pre-1915, management accounting focused on

product costing, that is, what products provided best profit

• 1925 to 1950, emphasis on inventory costing systems– Improvements to inventory costing in 1950s and

1960s– 1980s recognized need for improvements in

management accounting

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Do you know what the current focus for

managerial accounting is?

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CURRENT FOCUS: The changing business environment

• Organizations have faced dramatic changes in their business environment.

– Move from protected markets to highly competitive global markets

– Deregulation

– Declining product life-cycles

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CURRENT FOCUS: The changing business environment

• To compete successfully in today’s environment companies are:– Making customer satisfaction an overriding priority.

– Adopting new management approaches.

– Changing their manufacturing systems.

– Investing in AMT ’s.

• Above changes are having a significant impact on the MAS.

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Focus on Customer Satisfaction

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Key success factors

• Cost efficiency –increased emphasis on accurate product costs and cost management.

• Quality –TQM, quality measures. • Time – reduced cycle time, reduced focus on non-

value-added activities. • Innovation – responsiveness in meeting customer

requirements. Product comparisons. Feedback on customer satisfaction.

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Continuous improvement

• Static historical standards no longer appropriate.

• Benchmarking

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Employee empowerment

• Delegate more responsibility to people closest to operating processes and customers.

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Value chain analysis

• The term “value chain” refers to the sequence of business functions in which usefulness is added to the products or services of an organization.

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Value chain

R & D Design Production

Marketing Distribution Service

Management Accounting

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What are management accounting roles?

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Management Accounting Roles

• Problem Solver

• Scorekeeper

• Attention Director

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Problem Solving

This involves comparative analysisfor decision making.

This role asks: Of the several alternativesavailable, which is the best?

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Scorekeeping

This involves accumulating data andreporting reliable results toall levels of management.

This role asks: How is the business doing?

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Attention Directing

This involves helping managersproperly focus their attention.

This role asks: Which opportunities andproblems should be emphasized first.

Attention directing should focus on allopportunities to add value to an organization,

not just cost-reduction opportunities.

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MANAGEMENT ACCOUNTING:Designed for Profit Maximization

“The objective of profit maximization should be

constrained by the requirement that profits be achieved through

legal and ethical means.”1

1Hansen & Mowen, 2007, p. 17

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Code of Conduct forManagement Accountants

The Institute of Management Accountant’s (IMA) Standards of Ethical Conduct for Practitioners

of Management Accounting and Financial Management have two major parts offering

guidelines for:

Ethical behavior.

Resolution for an ethical conflict.

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IMA Guidelines for Ethical Behavior

CompetenceCompetence

Follow applicable laws, regulations and

standards.

Follow applicable laws, regulations and

standards.

Maintain professional competence.

Maintain professional competence.

Prepare complete and clear reports after appropriate

analysis.

Prepare complete and clear reports after appropriate

analysis.

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IMA Guidelines for Ethical Behavior

ConfidentialityConfidentiality

Do not disclose confidential information unless legally

obligated to do so.

Do not disclose confidential information unless legally

obligated to do so.

Ensure that subordinates do not disclose confidential

information.

Ensure that subordinates do not disclose confidential

information.

Do not use confidential

information for personal

advantage.

Do not use confidential

information for personal

advantage.

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IMA Guidelines for Ethical Behavior

Avoid conflicts of interest and advise others of potential conflicts.

Avoid conflicts of interest and advise others of potential conflicts.

Recognize and communicate personal and

professional limitations.

Recognize and communicate personal and

professional limitations.

Do not subvert organization’s

legitimate objectives.

Do not subvert organization’s

legitimate objectives.

IntegrityIntegrity

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IMA Guidelines for Ethical Behavior

Avoid activities that could affect your ability to

perform duties.

Avoid activities that could affect your ability to

perform duties.

Communicate unfavorable as well as favorable information.

Communicate unfavorable as well as favorable information.

Refrain from activities that could

discredit the profession.

Refrain from activities that could

discredit the profession.

Refuse gifts or favors

that might influence behavior.

Refuse gifts or favors

that might influence behavior.

IntegrityIntegrity

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IMA Guidelines for Ethical Behavior

Communicate information fairly and objectively.

Communicate information fairly and objectively.

Disclose all information that might be useful to

management.

Disclose all information that might be useful to

management.

ObjectivityObjectivity

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THE ENDTHE END

ADVISE & REMINDER: Now, your reading time….it’s your responsibility to read Chapter 1 in the main text and related chapters in the additional recommended references !