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Accounting
Managerial Accounting
Introduction to Managerial Accounting
A. DEFINITION, PURPOSE,
ACCOUNTING
CONCEPTS
AND
SCOPE
OF
MANAGERIAL
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.
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 shareholders value.
Concepts
1. Accountability
Managerial Accounting
Introduction to Managerial Accounting
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.
Management Advisory Services
Managerial Accounting
Introduction to Managerial Accounting
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 companys 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.
Managerial Accounting
Introduction to Managerial Accounting
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.
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.
Management Advisory Services
Managerial Accounting
Introduction to Managerial Accounting
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
organizations 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 users 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.
Management Advisory Services
Managerial Accounting
Introduction to Managerial Accounting
MANAGEMENT ACCOUNTING
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
Managerial Accounting
Introduction to Managerial Accounting
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 organizations mission.
Managerial Accounting
Introduction to Managerial Accounting
Managers make decision in all phases of their managerial functions. The
functions are illustrated as follows:
Planning
Decision
Making
Organizing and
directing
Controlling
The diagram below depicts the relationship of planning and controlling and its
relevance to management:
Goals
Objectives
Plans
Budgets
Actions
Revisions
Results
Feedback
Standards
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)
Managerial Accounting
Introduction to Managerial Accounting
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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