INTRODUCTION TO

MANAGEMENT
ACCOUNTING

What is management accounting ?

Provision of financial and non-financial

information to managers for cost accounting ,

planning and control and decision making
Management accounting can be subdivided

into :
- Cost accounting
-Management accounting for decision making

Cost Accounting
Cost accounting is concerned with the

ascertainment of cost of manufacturing a

product or giving a service and the way in
which costs can be controlled

Management Accounting
Management accounting is concerned with the

provision of information to people within the

organization to help them make better decisions
and improve the efficiency and effectiveness of
existing operations.

Function of Management Accounting

A cost and management accounting system

should generate information to meet the

following requirements. It should:
1- allocate costs between cost of goods sold
and inventories for internal and external profit
reporting;
2- provide relevant information to help
managers make better decisions;
3- provide information for planning, control,
performance measurement and continuous
improvement.

Differences between Financial accounting

and Management Accounting
Financial Accounting

Management
Accounting

Users

External persons who make

financial decisions

Managers who plan for and

control an organisation

Time Focus

Historical perspective

Future emphasis

Requirements

Must follow GAAP and

prescribed formats

Not need follow GAAP or any

prescribed formats

Report

Reports are published annually

or half yearly.

Reports are prepared daily,

weekly, monthly or quarterly
depending on needs.

Subject

Primary focus is on whole

organization

Focuses on segments of an
organization

Precision

Information must be reasonably

accurate for external parties

Estimates and approximations

are more useful than accuracy for
speedy decision making process.

Role of Management
Accountant
Planning
Helps to formulate future plans by providing

information to assists in deciding what products

to sell, in what market, etc.
Setting goals and developing methods in
achieving them.
Control
Aid control process by providing performance
reports which compare actual outcome with
planned outcome for each responsibility
centers.

Organizing
Represents the design and implementation of the

accounting system for better defining and

consolidating the relations between centers to assure
effective performance.
Motivating
Budget and performance reports produced have an

important influence on the motivation of personnel of

the organization.
Communication
Aid communication function. Installing and

maintaining an effective communication and reporting

system. (Eg. Who are responsible for carrying out
plans/budgets, what expected of them during the
budget period).
To ensure coordination between managers of different
department.

CHARACTERISTICS OF USEFUL INFORMATION

Relevance
Relevance is a key factor because of the flexible
nature of managerial accounting information
that can take any form management chooses.
Accuracy
Even though managerial accounting is based on
estimates and projections, information must be
as accurate as possible if it is to be of value.
Sound judgement and experience should
underlie any development of subjective data
Timeliness
The concept of timeliness simply means that
information should be as current as possible
because old information will not be
representative of present or future conditions.

 Understandability.
Information presented must focus on the users

of such information and hence should be clearly

understood. Typical users of accounting
information will not be trained accountants, so
any preoccupation with technical jargon will
adversely affect the use of the information.
Reliable
Information made available to managers are
reliable in that they are free from error or
biasness and accurately represents the events
of the organization.
Complete
Information that does not omit important
aspects of the underlying events that is
measures

Decision Making Model

1. Identify objectives
2. Search for alternative courses
ofaction
3. Gather data about alternatives

Plannin
g
process

4. Select alternative course of action

5. Implement the decisions

6. Compare actual and planned
outcomes
7. Respond to divergencies from plan

Control
process

The Decision Making process

Identify objectives specify the goals or objectives of the

organization so that it can provide a direction or some guiding aim

to enable the managers to assess the desirability of one course of
action over another.
Search for alternative courses of action search for a range
of possible courses of action or strategies that might enable the
objectives to be achieved.
Gather data about alternatives assess the potential growth
rate of the activities, the ability to establish adequate market
share, the cash flows for each alternative activity, etc.
Select appropriate alternative courses of action select
alternative that best satisfies the objectives of an organization and
those showing the greatest benefits after consideration of other
qualitative factors.
Implement the decisions the alternative courses of action
selected should be implemented as part of the budgeting process.
Compare actual and planned outcomes prepare
performance reports comparing the actual outcomes (actual costs
and revenues) and planned outcomes (budgeted costs and
revenues) at regular intervals.
Respond to divergences from plan take corrective action so
that actual outcomes conform to planned outcomes, or the plans
may require modifications if the comparison indicate that they are
no longer attainable.

Changing competitive environment

Prior to the 1980s :
many organizations in Western countries operated in a

protected competitive environment.

Barriers of communication and geographical
distance,and sometimes protected markets, limited the
ability of overseas companies to compete in domestic
markets.
There was little incentive for firms to maximize
efficiency and improve management practices, or to
minimize costs, as cost increases could often be
passed
on to customers.

During the 1980s:

Manufacturing organization began to encounter severe
competition from overseas competitors that offered highquality products at low prices
By establishing global networks for acquiring materials and
distributing goods, competitors were able to gain access to
domestic markets throughout the world
Privatization, intensive competition and an expanding
product range created the need for organizations to focus on
cost management and develop management accounting
information systems that enabled them to understand their
cost base and determine the sources of profitability for their
products, customers and markets

The Impact Of Changing Environment

Of Management Accounting Systems
During the past decade the use of

information technology (IT) to support

businesses activities has increased with
the development of electronic business
communication technologies (e-business,
e-commerce or internet commerce) These
developments are having a big impact on
business:
Consumers are becoming more discerning
when purchasing products or services
because they are able to derive more
information from the internet.
Cost saving from streamlining business
processes and generating extra revenues
from adept the use of on-line facilities.

Changing product life cycles

A products life cycle is the period of time from

initial expenditure on research and development

to the time at which support to customers is
withdrawn. Intensive global competition and
technological innovation combined with
increasingly discriminating and sophisticated
customer demands have resulted in a dramatic
decline in product life cycles. To be successful
companies must now speed up the rate at which
they introduce new products to the market.
Being later to the market than the competitors
can have a dramatic effect on product
profitability

Customer Satisfaction And New

Management Approaches

To compete in todays competitive environment

companies need to become more customer driven
and make customer satisfaction the top priority.
To provide customer satisfaction organizations
must concentrate on key success factors that
directly affect it. The key success factors are cost
efficiency, quality, time and innovation.
Organizations are also adopting new management
approaches in their quest to achieve customer
satisfaction. The new approaches are continuous
improvement, employee empowerment and total
value-chain analysis.

Key success
factors :
Cost efficiency ,
Quality, Time ,
Innovation

Continuous
improvement

Customer
satisfaction
is the top
priority

Total value-chain
analysis

Employee
empowerment

Key Succes Factors :

Cost efficiency keeping costs low and being cost

efficient provides an organization with a strong

competitive advantage.
Quality customers are demanding high quality
products. Companies are focusing on total quality
management (TQM) where all business functions are
involved in a process of continuous quality
improvement. It focuses on delivering products or
services of consistently high quality in a timely fashion.
Time organizations seek to increase customer
satisfaction by providing a speedier response to
customer requests, ensure on-time delivery and
reduce the time taken to develop and bring new
products to market.
Innovation companies must develop a steady
stream of innovative products and services and to
adapt to changing customer requirements.

Total value chain analysis

- Increasing attention is now being given to valuechain

analysis as a means of increasing customer
satisfaction
and managing costs more effectively.
Continuous Improvement
To compete successfully companies must adopt a
philosophy of continuous improvement, an ongoing
process that involves a continuous search to reduce
costs, eliminate waste, and improve the quality and
performance of activities that increase customer
value or satisfaction.Management accounting
supports continuous improvement by identifying
ways to improve and then reporting on the progress
of the methods that havebeen implemented.

Employee empowerment
Allowing employees to take such actions

without the
authorization by superiors has come to be
known as
employee empowerment. It is argued that by
empowering employees and giving them
relevant
information they will be able to respond faster
to
customers, increase process flexibility, reduce
cycle time
and improve morale.

IMPORTANCE OF INFORMATION
TECHNOLOGY
The use of information technology (IT) to support

business activities has increased dramatically

with the development of electronic business
communication technologies known as ebusiness, e-commerce or internet commerce.
These developments are having a big impact on
businesses. For example, consumers are
becoming more discerning when purchasing
products or services because they are able to
derive more information from the internet on the
relative merits of the different product offerings

E-commerce has provided the potential to develop new

ways of doing things that have enabled considerable

cost savings to be made from streamlining business
processes and generating extra revenues from the
adept use of on-line sales facilities (e.g. ticketless
airline bookings and internet banking). The ability to
use ecommerce more proficiently than competitors
provides the potential for companies to establish a
competitive advantage.
One advanced IT application that has had a
considerable impact on business information systems is
enterprise resource planning systems (ERPS). The
number of adopters of ERPS has increased rapidly
throughout the world since they were first introduced in
the mid-1990s. An ERPS comprises a set of integrated
software applications modules that aim to control all
information flows within a company

NATURE AND PURPOSE OF INTERNAL

MANAGEMENT REPORTING
Internal Management Reporting is a financial

data or other information accumulated to be

communicated to another within the business
entity.
The information assists others in the
managerial decision making process.
Examples expenses report, capital
budgeting analysis, other reports designed to
guide management rather than inform
outsiders.

GOALS OF INTERNAL MANAGEMENT

REPORTING
Implementing solid internal management reporting is one

of the most important steps a company can take to

effectively accomplish the following major goals:
Manage the business day to day creates tools that
managers can use to make good decision based on
relevant and accurate information, presented in a
timely fashion.
Align the incentives of employees with the
organization as a whole. Give employees goals that are
integrated with management reporting, so that their
progress is measurable, actionable and rewarded.
Create and manage a solid controls environment. Help
managers become comfortable with the multitude of
signoffs that they must complete throughout the year.

REFERENCES
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