Management Accounting as One Type of Information  Accounting is one type of information.

The total
amount of information available to a manager include both monetary, but includes related
nonmonetary data.  Most accounting information, in terms of quantity of data, is operating
information. The mass of operating data flowing through an organization consist of streams of
information about production, purchasing and materials, payroll, plant and equipment, sales and
accounts receivable, and finance. Data in these streams provide the raw materials for financial
statements.  Management accounting is the process within an organization that provides information
used by an organization’s managers in planning, coordinating, and controlling the organization’s
activities.  Management accounting information is summary information. In order to understand it,
one needs to know something about the source of raw data used for summaries, but only enough to be
able to understand the result summaries
Types of Management Accounting Information and Their Uses Cost, Revenue, or Asset Construction
Uses Historical Data Future Estimates 1. Full External financial reporting (especially inventory and cost of
sales) Analyzing economic performance cost-type contracts Programming Normal pricing decisions 2.
Differential None Alternative choice decisions (including contribution pricing) 3. Responsibility Analyzing
managers’ performance Budgeting
5. Contrast between Management Accounting and Financial Reporting Dimension Management
Accounting Financial Reporting 1. Necessity Optional Required 2. Purpose A means to the end of
assisting management Produce statements for outside users 3. Users Relatively small group; known
identity Relatively large group; mostly unknown 4. Structure Varies according to use of the information
One basic equation: Assets = Equities 5. Principles Whatever is useful GAAP
6. Dimension Management Accounting Financial Reporting 7. Information Monetary and nonmonetary
Primarily monetary 8. Precision Many approximation Fewer approximation 9. Frequency Varies with
purpose; Monthly and weekly common Quarterly and annually 10. Timeliness Reports issued promptly
after period covered ends Delay of weeks, or even months 11. Entity Responsibility Overall

1. Similarities between Management Accounting and Financial Reporting  The same

considerations that make GAAP sensible for purposes of financial accounting are likely to be
relevant for purpose of management accounting.  Operating information is used both in
preparing the financial statements and in management accounting.
2. 8. Source Diciplines on Management Accounting  Economics  which deals with the
principles governing decisions on the use of scarce resource.  Social psychology  which
deals with the principles governing human behavior in organizations. Some economists and
some social psychologists criticize management accounting. Much of this criticism arises
3. because each group has the mistaken belief that management accounting relates solely to
their discipline.
Source Diciplines on Management Accounting  Economics  which deals with the principles governing
decisions on the use of scarce resource.  Social psychology  which deals with the principles governing
human behavior in organizations. Some economists and some social psychologists criticize management
accounting. Much of this criticism arises because each group has the mistaken belief that management
accounting relates solely to their discipline. One of the significant problems in the real world is give the
Uses of Management Accounting 1. Measurement of revenues, costs, and assets. 2. Control. 3. To aid in
choosing among alternative courses of action.

Full cost accounting measures the resources used in performing some activity.  Full cost of producing
goods or providing services = direct costs + indirect costs.  Direct costs = costs directly traced to the
goods or services.  Indirect costs = a fair share of costs incurred jointly in producing goods or services.
Full cost accounting measures the resources used in performing some activity.  Full cost of producing
goods or providing services = direct costs + indirect costs.  Direct costs = costs directly traced to the
goods or services.  Indirect costs = a fair share of costs incurred jointly in producing goods or services.
Alternative Choice Decisions  Differential costs of alternative possible actions are developed
Some General Observations  Different numbers for different purposes: Many different types of costs:
historical, standard, overhead, variable, fixed, differential, marginal, opportunity, direct, estimated, full,
etc.  Clarify which type you are talking about.  Accounting numbers are approximations  Working
with incomplete data  Accounting evidence is only partial evidence  People, not numbers, get things
done. How you use the numbers is as important as how the numbers are produced.
Different numbers for different purposes  Each of the several purposes previously described requires a
different accounting approach. Since these different numbers may superficially resemble one another, a
person not familiar with them may easily get confused. One of the most common sources of confusion is
the word cost. Cost could be defined as "... Everything a manager does, as well as many of the things he
does not do." Cost is a synonym of sacrifice and as such, controlling it and reducing it is a great concern
for managers. In management accounting, there are historical costs, standard costs, overhead costs,
variable costs, fixed costs, differential costs, marginal costs, opportunity costs, direct costs, estimated
costs, full costs, among others. Some of these are synonyms; others are not quite synonyms; still others,
although not synonyms at all, are used by some people as if they were. Accounting numbers should
always be interpreted within the context of the specific problem they are intended to help solve, rather
than in any abstract sense. Accounting numbers are approximations  Users of accounting information
must acquire an understanding of the degree of approximation present in the data. Some accounting
numbers (such as the amount of cash in the bank account) may be accurate within very narrow limits,
whereas others are only rough approximations. The degree of approximation is especially high in the
case of numbers used for planning purposes, because they are always estimates of what will happen in
the future. Working with incomplete data  In a management problem, we almost never have exactly
the information we would like to have. The person struggling with the problem usually can think of
additional information that, if available, would be helpful. There are many decision-making situations in
which pages of numbers are available but only a small portion of them is truly relevant to the problem at
hand and perhaps none of them is quite what one needs in order to solve it. The problem must be
solved, it is a fact of life.  Management decisions must be made and often cannot be delayed until all
pertinent information is available. We do the best we can with what we have and then move on to the
next problem. On the other hand, a decision should not be made if a vital, obtainable piece of evidence
is missing. Deciding whether or not to act on the available evidence is one of the most difficult parts of
managerial decision processes. "The art of business is the art of making irrevocable decisions on the
basis of inadequate information" Wallace B. Donham. Accounting evidence is only partial evidence 
Few, if any, management problems can be solved solely by collecting and analyzing numbers. Usually,
there are important factors that cannot be, or have not been, reduced to quantitative terms. Some
people act as if most problems could be solved by means of a numerical analysis. At the other extreme
are those who believe that intuition is the sure guide to a sound decision and therefore pay no attention
to numbers. Although the correct attitude is clearly somewhere between those extremes, there is no
way to describe precisely where it is. "The real trouble with this world of ours is not that it is an
unreasonable world, nor even that is a reasonable one. The commonest kind of trouble is that it is
nearly reasonable, but not quite. Life is nor an illogicality; yet it is a trap for logicians. People, not
numbers, get things done  An obvious statement about organizations is that they consist of human
beings. Anything that an organization accomplishes is the result of human actions. Although numbers
can assist the people in an organization in various ways, the numbers by themselves accomplish nothing.
But numbers do not talk back; they give the appearance of being definitive and precise. It is a
comforting illusion to imagine that the construction of a set of numbers is the same as acting on a real
problem. For instance three companies may use exactly the same system with entirely different results.
- In the first company, the system may be useless because management never acts based on the
information collected and the organization has become aware if this fact. - In the second company the
system may be helpful because management uses the information as a general guide for planning,
implementation and, control and has educated the organization to use it in the same spirit. - In the third
company, the system may be even worse than useless.