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CHAPTER 1

INTRODUCTION TO MANAGEMENT ACCOUNTING

MAZUIN MIHAD MAF320 SECTION 1

DEFINITION
COST ACCOUNTING : The establishment of budgets, standards costs and actual costs of operation, process, activities or products and the analysis of variances, profitability or the social use of funds. FINANCIAL ACCOUNTING : The classification and recording of monetary transactions of an entity in accordance with established concepts, principles, accounting standards and legal requirements and presentation of a view of those transactions during and the end of an accounting period. Provide information for external users. Eg: investors, government, banks. MANAGEMENT ACCOUNTING: Management accounting is concerned with the collection of data (from both internal and external sources), its analysis and processing into information, and the interpretation and communication of that information so as to assist management with planning, control and decision making.

MAZUIN MIHAD MAF320 SECTION 1

SIMILARITIES BETWEEN MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING


Both cost and management and financial accounting are similar in the following characteristics: Record keeping concerns with classifying , quantifying and gathering of information relating to business transactions. Performance evaluation measures performance and find any difference between actual and planned performance for further improvements. Decision making involves selecting the best course of action from a given set of alternatives. Stewardship principle responsible and accountable to all parties having an interest it. However, financial accounting is concerned primarily with the firms entire operation, whereas management accounting divides the business into well-defined responsibility units. Both the information is developed within the same general accounting system . i.e . Management Information System (MIS)
MAZUIN MIHAD MAF320 SECTION 1

DIFFERENCES BETWEEN FINANCIALACCOUNTING AND MANAGEMENT ACCOUNTING


Bases of Difference Accounting entity User Orientation Time frame Freedom of choice FINANCIAL ACCOUNTING Deals with the business s a whole. External reporting. Historical in nature. Restricted to Accounting standard policies and principles must follow GAAP. Objectivity in nature based on actual measurement. Reported quarterly/interim/once a year Used often
MAZUIN MIHAD MAF320 SECTION 1

MANAGEMENT ACCOUNTING Deals with segments of the business. Internal reporting. Futuristic in its approach. Complete freedom need not follow the Generally Accepted Accounting principle(GAAP). Subjective in nature based on judgment and estimates Reports are furnished periodically depend on the desires and needs of management Used less

Degree of precision Reporting frequency

Other disciplines

MANAGEMENT OF ORGANIZATION
Data
Raw material for processing i.e: facts,events andtransactions

Processed / analysed
Role of management Accountant

Report Management information (processed data meaningful to users)

Decision Making

Control

Planning

MAZUIN MIHAD MAF320 SECTION 1

Characteristic of good information


Relevant
Complete

Keep to the point


Sufficient to the need of the users/ decision maker

Accurate
Clear Confidence Communicated

Accurate enough to avoid


understandable Trusted by the users /managers

To the right person for him / her to do certain tasks


MAZUIN MIHAD MAF320 SECTION 1

LIMITATIONS OF MANAGEMENT ACCOUNTING INFORMATION


Failure to meet the requirements of useful information. The problem of relevant costs and revenue. Non-financial information. External information.

MAZUIN MIHAD MAF320 SECTION 1

THE ROLE OF INFORMATION TECHNOLOGY


1. 2. 3. 4. Processing capability Process quickly with online access, managers able to obtain instant information for planning, control and decision making. Accuracy in a condition that it is set-up and programmed correctly. May cause error if involve human during input data, error in software and so on. Volume and complexity (Data collection) Process large volume of data. Data file storage capacity. with database system, data can be structured and organized so as to make it readily accessible.

MAZUIN MIHAD MAF320 SECTION 1

5.

Computer software Managers access to the wide range of sotware for processing data and preparing management information. Eg spreadsheet used extensively for planning and forecasting. Speed of communication and network (Accessibility) Ability to link a number of users via networking. Improve the distribution of information. Data can be transmitted quickly to remote locations. Internet / intranet allow managers to access business data from laptop anywhere in the world.

6.

MAZUIN MIHAD MAF320 SECTION 1

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