CHAPTER # 01

MANAGERIAL ACCOUNTING
Faculty: FJ Mohaimen

SUMMARY
Managerial accounting assists managers in carrying out their responsibilities, which
includes, planning, directing and motivating, and controlling. Since managerial
accounting is geared to the needs of the manager rather than to the needs of outsiders, it
differs substantially from financial accounting. Managerial accounting is oriented more
toward the future, places less emphasis on precision, emphasizes segments of an
organization (rather than the organization as a whole), is not governed by generally
accepted accounting principles, and is not mandatory.
The business environment in recent years has been characterized by increasing
competition and a relentless drive for continuous improvement. Several approaches have
been developed to assist organizations in meeting these challenges-including just-in-time
(JIT), total quality management (TQM), process reengineering, and the theory of
constraints(TOC).
JIT emphasizes the importance of reducing inventories to the barest minimum possible.
This reduces working capital requirements, frees up space, reduces throughput time,
reduces defects, and eliminates waste.
TQM involves focusing on the customer, and it employs systematic problem solving
using teams made up of front-line workers. Specific TQM tools include benchmarking
and the plan-do-check-act (PDCA) cycle. By emphasizing teamwork, a focus on the
customer, and facts, TQM can avoid the organizational infighting that might otherwise
block improvement.
Process Reengineering involves completely redesigning a business process in order to
eliminate non-value-added activities and to reduce opportunities for errors. Process
Reengineering relies more on outside specialists than TQM and is more likely to be
imposed by top management. The theory of constraints emphasizes the importance of
managing the organization's constraints. Since the constraint is whatever is holding back
the organization, improvement efforts usually must be focused on the constraint in order
to be really effective.
Most organizations are decentralized to some degree. The organization chart depicts who
works for whom in the organization and which units perform staff functions rather than
line functions. Accountants perform a staff function-they support and provide assistance
to others inside the organization.
Ethical standards serve a very important practical function in an advanced market
economy. Without widespread adherence to ethical standards, the economy would slow
down dramatically. Ethics are the lubrication that keep a market economy functioning
smoothly. The Standards of Ethical Conduct for Practitioners of Management Accounting
and Financial Management provide sound, practical guidelines for resolving ethical
problems that might arise in an organization.

Management accounting is concerned with the provisions and use of accounting

information to managers within organizations, to provide them with the basis in making
informed business decisions that would allow them to be better equipped in their
management and control functions. Unlike financial accountancy information (which, for
public companies, is public information), management accounting information is used
within an organization (typically for decision-making) and is usually confidential and its
access available only to a select few.
According to the Chartered Institute of Management Accountants (CIMA), Management
Accounting is "the process of identification, measurement, accumulation, analysis,
preparation, interpretation and communication of information used by management to
plan, evaluate and control within an entity and to assure appropriate use of and
accountability for its resources. Management accounting also comprises the preparation
of financial reports for non management groups such as shareholders, creditors,
regulatory agencies and tax authorities" (CIMA Official Terminology)
Aims
1. Formulating strategies;
2. Planning and constructing business activities;
3. Making decisions;
4. Optimal use of resources;
5. Supporting financial reports preparation; and
6. Safeguarding assets.
Traditional vs. innovative management accounting practices
In the late 1980s, accounting practitioners and educators were heavily criticized on the
grounds that management accounting practices (and, even more so, the curriculum taught
to accounting students) had changed little over the preceding 60 years, despite radical
changes in the business environment. Professional accounting institutes, perhaps fearing
that management accountants would increasingly be seen as superfluous in business
organizations, subsequently devoted considerable resources to the development of a more
innovative skills set for management accountants.
The distinction between traditional and innovative management accounting practices
can be illustrated by reference to cost control techniques. Traditionally, management
accountants principal technique was variance analysis, which is a systematic approach to
the comparison of the actual and budgeted costs of the raw materials and labor used
during a production period.
While some form of variance analysis is still used by most manufacturing firms, it
nowadays tends to be used in conjunction with innovative techniques such as life cycle
cost analysis and activity-based costing, which are designed with specific aspects of the
modern business environment in mind. Lifecycle costing recognizes that managers ability
to influence the cost of manufacturing a product is at its greatest when the product is still
at the design stage of its product lifecycle (i.e., before the design has been finalised and
production commenced), since small changes to the product design may lead to
significant savings in the cost of manufacturing the product. Activity-based costing
(ABC) recognizes that, in modern factories, most manufacturing costs are determined by
the amount of activities (e.g., the number of production runs per month, and the amount
of production equipment idle time) and that the key to effective cost control is therefore
optimizing the efficiency of these activities. Activity-based accounting is also known as
Cause and Effect accounting.

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 acitivities that drive costs, such as the provision of a service or
the production of a product component.