managenent acctg
Transcript of managenent acctg
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Management accounting
Management accounting is concerned with the provisions
and use ofaccounting information to managers within
organizations, to provide them with the basis to make informed
business decisions that will allow them to be better equipped in
their management and control functions.
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contrast to financial accountancy information,management accounting information is:
usually confidential and used by management, instead ofpublicly reported;
forward-looking, instead of historical;
pragmatically computed using extensive managementinformation systems and internal controls, instead ofcomplying with accounting standards.
This is because of the different emphasis: management
accounting information is used within an organization,typically for decision-making.
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Definition
According to the Chartered Institute of ManagementAccountants (CIMA), Management Accounting is "theprocess of identification, measurement, accumulation,analysis, preparation, interpretation and communication of
information used by management to plan, evaluate andcontrol within an entity and to assure appropriate use of andaccountability for its Resource (economics) resources.Management accounting also comprises the preparation offinancial reports for non-management groups such as
shareholders, creditors, regulatory agencies and taxauthorities" (CIMA Official Terminology).
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The American Institute of Certified PublicAccountants (AICPA) states that managementaccounting as practice extends to the followingthree areas:
Strategic ManagementAdvancing the role of themanagement accountant as a strategic partner in theorganization.
Performance ManagementDeveloping the practice ofbusiness decision-making and managing the performance ofthe organization.
Risk ManagementContributing to frameworks and practicesfor identifying, measuring, managing and reporting risks tothe achievement of the objectives of the organization.
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The Institute of Certified Management Accountants
(ICMA), states "A management accountant applies his or her
professional knowledge and skill in the preparation and
presentation of financial and other decision orientedinformation in such a way as to assist management in the
formulation of policies and in the planning and control of the
operation of the undertaking. Management Accountants
therefore are seen as the "value-creators" amongst the
accountants. They are much more interested in forward
looking and taking decisions that will affect the future of the
organization, than in the historical recording and compliance
(scorekeeping) aspects of the profession. Management
accounting knowledge and experience can therefore beobtained from varied fields and functions within an
organization, such as information management, treasury,
efficiency auditing, marketing, valuation, pricing, logistics,
etc.
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Aims
1. Formulating strategy|strategies
2. Planning and constructing business activities
3. Helps in making decision
4. Optimal use of Resource (economics)
5. Supporting financial reports preparation
6. Safeguarding asset
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Traditional vs. innovative management accountingpractices In the late 1980s, accounting practitioners and educators
were heavily criticized on the grounds that managementaccounting practices (and, even more so, the curriculumtaught to accounting students) had changed little over thepreceding 60 years, despite radical changes in the businessenvironment. Professional accounting institutes, perhapsfearing that management accountants would increasingly be
seen as superfluous in business organizations, subsequentlydevoted considerable resources to the development of a moreinnovative skills set for management accountants.
The distinction between traditional and innovativemanagement accounting practices can be illustrated byreference to cost control techniques. Cost accounting is a
central method in management accounting, and traditionally,management accountants principal technique was varianceanalysis, which is a systematic approach to the comparison ofthe actual and budgeted costs of the raw materials and laborused during a production period.
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While some form of variance analysis is still used by mostmanufacturing firms, it nowadays tends to be used inconjunction with innovative techniques such as life cycle costanalysisand activity-based costing, which are designed withspecific aspects of the modern business environment in mind.Lifecycle costingrecognizes that managers ability toinfluence the cost of manufacturing a product is at its greatestwhen the product is still at the design stage of its productlifecycle (i.e., before the design has been finalised and
production commenced), since small changes to the productdesign may lead to significant savings in the cost ofmanufacturing the product. Activity-based costing(ABC)recognizes that, in modern factories, most manufacturingcosts are determined by the amount of activities (e.g., the
number of production runs per month, and the amount ofproduction equipment idle time) and that the key to effectivecost control is therefore optimizing the efficiency of theseactivities. Activity-based accounting is also known as Causeand Effect accounting.
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Both lifecycle costing and activity-based costing recognize that,
in the typical modern factory, the avoidance of disruptive
events (such as machine breakdowns and quality control
failures) is of far greater importance than (for example)reducing the costs of raw materials. Activity-based costing
also deemphasizes direct labor as a cost driver and
concentrates instead on activities that drive costs, such as the
provision of a service or the production of a product
component.
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Role of Management Accountants within the Corporation
Consistent with other roles in today's corporation, managementaccountants have a dual reporting relationship. As a strategic partner
and provider of decision based financial and operational information,management accountants are responsible for managing the businessteam and at the same time having to report relationships andresponsibilities to the corporation's finance organization.
The activities management accountants provide inclusive offorecasting and planning, performing variance analysis, reviewing andmonitoring costs inherent in the business are ones that have dual
accountability to both finance and the business team. Examples oftasks where accountability may be more meaningful to the businessmanagement team vs. the corporate finance department are thedevelopment of new product costing, operations research, businessdriver metrics, sales management scorecarding, and client profitabilityanalysis. Conversely, the preparation of certain financial reports,reconciliations of the financial data to source systems, risk and
regulatory reporting will be more useful to the corporate finance teamas they are charged with aggregating certain financial information fromall segments of the corporation. One widely held view of theprogression of the accounting and finance career path is that financialaccounting is a stepping stone to management accounting. Consistentwith the notion of value creation, management accountants help drivethe success of the business while strict financial accounting is more of a
compliance and historical endeavor.
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An alternative view of management accounting
A very rarely expressed alternative view ofmanagement accounting is that it is neither a neutral or
benign influence in organizations, rather a mechanism
for management control through surveillance. This
view locates management accounting specifically inthe context of management control theory.
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Specific ConceptsGrenzplankostenrechnung (GPK)
Grenzplankostenrechnung (GPK) is a German costing
methodology, developed in the late 1940s and 1950s,
designed to provide a consistent and accurate application of
how managerial costs are calculated and assigned to a
product or service. The term Grenzplankostenrechnung,
often referred to as GPK, has best been translated as either
Marginal Planned Cost Accounting orFlexible Analytic CostPlanning and Accounting.
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The origins of GPK are credited to Hans
George Plaut, an automotive engineer and
Wolfgang Kilger, an academic, working towardsthe mutual goal of identifying and delivering a
sustained methodology designed to correct and
enhance cost accounting information. GPK is
published in cost accounting textbooks, notablyFlexible Plankostenrechnung undDeckungsbeitragsrechnung[3] and taught atGerman-speaking universities today.
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Lean Accounting (accounting for leanenterprise)
In the mid to late 1990s several books werewritten about accounting in the lean enterprise(companies implementing elements of the ToyotaProduction System). The term lean accountingwas coined during that period. These bookscontest that traditional accounting methods arebetter suited for mass production and do notsupport or measure good business practices in
just in time manufacturing and services. Themovement reached a tipping point during the2005 Lean Accounting Summit in Dearborn, MI.320 individuals attended and discussed the meritsof a new approach to accounting in the lean
enterprise. 520 individuals attended the 2ndannual conference in 2006.
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Resource Consumption Accounting (RCA)
Resource Consumption Accounting is formally defined as adynamic, fully integrated, principle-based, and comprehensivemanagement accounting approach that provides managers withdecision support information for enterprise optimization. RCA
emerged as a management accounting approach around 2000and was subsequently developed at CAM-I the Consortium forAdvanced ManufacturingInternational, in a Cost ManagementSection RCA interest groupin December 2001. After spendingthe next seven years carefully refining and validating theapproach through practical case studies and other research, a
group of interested academics and practitioners established theRCA Institute to introduce RCA to the marketplace and raise thestandard of management accounting knowledge by encouragingdisciplined practices.
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Throughput Accounting
The most significant, recent direction in managerial accountingis throughput accounting; which recognizes theinterdependencies of modern production processes. For anygiven product, customer or supplier, it is a tool to measure
the contribution per unit of constrained resource . (For adetailed description of Throughput Accounting, see costaccounting).
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Transfer Pricing
Management accounting is an applied discipline used in variousindustries. The specific functions and principles followed can vary based onthe industry. Management accounting principles in banking are specializedbut do have some common fundamental concepts used whether theindustry is manufacturing based or service oriented. For example, transferpricing is a concept used in manufacturing but is also applied in banking. Itis a fundamental principle used in assigning value and revenue attributionto the various business units. Essentially, transfer pricing in banking is themethod of assigning the interest rate risk of the bank to the various fundingsources and uses of the enterprise. Thus, the bank's corporate treasurydepartment will assign funding charges to the business units for their use ofthe bank's resources when they make loans to clients. The treasurydepartment will also assign funding credit to business units who bring in
deposits (resources) to the bank. Although the funds transfer pricingprocess is primarily applicable to the loans and deposits of the variousbanking units, this proactive is applied to all assets and liabilities of thebusiness segment. Once transfer pricing is applied and any othermanagement accounting entries or adjustments are posted to the ledger(which are usually memo accounts and are not included in the legal entityresults), the business units are able to produce segment financial results
which are used by both internal and external users to evaluateperformance.
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Resources and Continuous LearningThere are a variety of ways to keep current and continue
to build one's knowledge base in the field of managementaccounting. Certified Management Accountants (CMA's) arerequired to achieve continuing education hours every year,similar to a Certified Public Accountant. A company may alsohave research and training materials available for use in acorporate owned library. This is more common in "Fortune500" companies who have the resources to fund this type oftraining medium.
There are also numerous journals, on-line articles andblogs available. Cost Management and the Institute ofManagement Accounting (IMA) site are sources whichincludes Management Accounting Quarterly and StrategicFinance publications. Indeed, management accounting isneeded in an organization.
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Management Accounting Tasks/ ServicesProvided
Listed below are the primary tasks/ services
performed by management accountants. Thedegree of complexity relative to these activities aredependent on the experience level and abilities ofany one individual.
Variance Analysis
Rate & Volume Analysis
Business Metrics Development
Price Modeling Product Profitability
Geographic vs. Industry or Client SegmentReporting
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Sales Management Scorecards
Cost Analysis
Cost Benefit Analysis
Cost-Volume-Profit Analysis
Life cycle cost analysis
Client Profitability Analysis
Capital Budgeting
Buy vs. Lease Analysis
Strategic Planning
Strategic Management Advise
Internal Financial Presentation and Communication Sales and Financial Forecasting
Annual Budgeting
Cost Allocation
Resource Allocation and Utilization
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Related QualificationsThere are several related professional qualifications and certifications
in the field of accountancy including:
Management Accountancy Qualifications
o CIMA
o ICMA
o CMA
o Institute of Cost and Works Accountants of India
Other Professional Accountancy Qualifications
o Chartered Certified Accountant, (ACCA)
o Chartered Accountant, (CA)
o Certified Public Accountant, (CPA) American Institute of Certified Public Accountants
o Certified Practicing Accountant (CPA Australia)
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Methods
Activity-based costing
Grenzplankostenrechnung (GPK)
Lean accounting
Resource Consumption Accounting Standard costing
Throughput accounting
Transfer pricing
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