TERM-II

Managerial accounting (management

accounting) is a field of accounting that
provides economic and financial
information for managers and other
internal users.

The activities that are part of managerial

accounting are as follows:
1 Explaining manufacturing and
nonmanufacturing costs and how they are
reported in the financial statements.
2 Computing the cost of rendering a service or
manufacturing a product.
3 Determining the behavior of costs and
expenses as activity levels change and
analyzing cost-volume-profit relationships
within a company.

The activities that are part of managerial

accounting are as follows:
4 Assisting management in profit planning and
formalizing the plans in the form of budgets.
5 Providing a basis for controlling costs and
expenses by comparing actual results with
planned objectives and standard costs.
6 Accumulating and using relevant data for
management decision making.

The management of an organization performs

three broad functions:
Planning
Directing and motivating
Controlling

Planning requires management to

look ahead, and
establish objectives.
These objectives are usually quite diverse,
but a key modern management objective
appears to be to add value to the business
under its control.
Value is usually measured by
the trading price of the companys stock
and
the potential selling price of the company.

Directing and motivating involves coordinating

diverse activities and human resources to
produce a smooth-running operation.
This function relates to the implementation of
planned objectives.
Most companies prepare organization charts to
show
the interrelationship of activities, and
the delegation of authority and responsibility
within the company.

Controlling is the process of keeping the firms

activities on track.
In controlling operations, management
determines
whether

planned goals are being met, and

what changes are necessary when there are
deviations from targeted objectives.

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Controlling

Due to increased global competition from

different countries, contemporary
business managers demand different and
better information than they needed just
a few years ago.
The factors on the following slides
contribute to the expanding role of
managerial accounting as we look toward
the next century.

Conventional management accounting

systems
Includes

budgeting, costing systems and financial

performance measurement systems
In wide use for many decades, and still be used
in many organisations

Technological Change Through

computer-integrated manufacturing
(CIM), many companies can now
manufacture products that are untouched
by human hands. Also, the widespread
use of computers has greatly reduced the
cost of accumulating, storing, and
reporting managerial accounting
information.

Quality Many companies have installed a total quality

control (TQC) system to reduce defects in finished
products. More emphasis is now put on nonfinancial
measures such as customer satisfaction, number of
service calls, and time to generate reports. Attention to
these measures, which employees can control, leads to
increased profitability.
In addition, many companies have begun using just-intime inventory methods (JIT), under which goods are
manufactured or purchased just in time for use. This
lowers the costs of holding and storing inventory.

Focus on Activities In order to obtain

more accurate product costs, many
companies are accounting for overhead
costs by the activities used in making the
product. Activities include purchasing
materials, handling raw materials, and
production order scheduling. This
development is called activity based
costing (ABC).

Service Industry Needs In some

respects, the challenges for managerial
accounting are greater in service
enterprises than in manufacturing
companies. In some companies, it may be
necessary for the managerial accountant to
develop new systems for measuring the
cost of serving individual customers and
new operating controls to improve the
quality and efficiency of specific services.

FINANCIAL
ACCOUNTING

MANAGERIAL
ACCOUNTING

Primary Users of Reports

External users, who are
Internal users, who are officers,
stockholders, creditors, and
department heads, managers,
regulatory agencies.
and supervisors in the
company.
Types and Frequency of Reports
Classified financial statements. Internal reports
Issued quarterly and annually. Issued as frequently as needed.
Purpose of Reports
To provide general-purpose
To provide special-purpose
information for all users.
information for a particular
user for a specific decision.

FINANCIAL
ACCOUNTING

MANAGERIAL
ACCOUNTING

Content of Reports
Pertains to entity as a whole
Pertains to subunits of the
and is highly aggregated
entity and may be very
(condensed).
detailed.
Limited to double-entry
May extend beyond doubleaccounting system and cost
entry accounting system to
data.
any type of relevant data.
Reporting standard is generally Reporting standard is relevance
accepted accounting
to the decision to be made.
principles.
Verification Process
Annual independent audit by
No independent audits.
certified public accountant.

Managerial accountants recognize that they

have an ethical obligation to their companies
and the public.
To provide guidance for managerial
accountants in the performance of their
duties, the Institute of Management
Accountants (IMA) has developed a code of
ethical standards, entitled Standards of
Ethical Conduct for Management
Accountants.

This code divides the managerial

accountants responsibilities into 4
areas:
competence,
confidentiality,
integrity, and
objectivity.

Each member has a responsibility to:

Maintain

an appropriate level of professional

expertise.
Perform professional duties in accordance with
relevant laws, regulations and technical
standards.
Recognize and communicate professional
limitations or other constraints that would
prelude responsible judgement or successful
performance of an activity.

Each member has a responsibility to:

Keep

information confidential except when

disclosure is authorised or legally required.

Inform

all relevant parties regarding appropriate

use of the confidential information.

Refrain

from using confidential information for

unethical or illegal advantages.

Each member has a responsibility to:

Mitigate
Refrain

actual conflict of interest.

from engaging in any conduct that would

prejudice carrying out duties ethically.

Abstain

from engaging in or supporting any

activity that might discredit the profession.

Each member has a responsibility to:

Communicate

information fairly and objectively

Disclose all relevant information that could
reasonably be expected to influence an intended
users understanding of the reports, analyses or
recommendations.
Disclose delay and deficiencies in information,
timeliness, processing or internal controls in
conformance with organization policy and/or
applicable law.