Functions of Management Accounting

Slide 16.
Chapter 16
Functions of
management accounting
Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011
Slide 16.2
Definition of accounting
The process of
identifying,
measuring and
communicating financial information about
an entity.
To permit
informed judgements and
decisions by users of the information.
Slide 16.3
Management accounting
Identifying, measuring and communicating
for:
informed judgements and decisions by
internal users of the information.
Slide 16.4
Contingency approach
Control systems depend on
the external environment of the business,
the production technology,
the size of the organisation and
the corporate strategy.
Slide 16.5
Internal users questions (1)

Shall I invest in manufacturing more soap
powder, or do I switch resources into
toothpaste?
Information required:
Relative demand for each product.
Actions of competitors.
Costs of inputs (materials, labour).
Availability of suitable labour.
Slide 16.6

Shall I continue offering a television repair service
as support for my sales of televisions?
Market research on demand.
Sales with/without repair service.
What competitors are doing.
Cost of repairs.
Profit margin.
Slide 16.7

Is it cost effective to have three separate
locations at which my tenants can pay their
rent?
Cost of maintaining offices, staff.
Cost of reducing staff.
Rent payments may reduce, cost of
chasing.
Slide 16.8

Will this investment in a new factory pay for
itself over the next ten years?
Cost of investment.
Cost of capital (borrowing/raising equity).
Future cash flows.
Discounted cash flow.
Sensitivity analysis.
Slide 16.9
Strategic management accounting

Identification, Measurement and
Communication of cost data in situations
where the organization is being judged against
the performance of competitors.
Slide 16.10
Needs of internal users

Judgements
Is the performance of line managers
adequate?
Is this division performing at a high
standard?
Decisions
Shall we buy another delivery vehicle?
Slide 16.11
Management functions
Planning
Decision making
Control
Slide 16.12
Planning
Immediate future.
Longer term.
For example,
Sales.
Production.
Capital expenditure.
Slide 16.13
Decision-making
About resources.
About activities.
Financial matters, particularly cost.
Impact on employees.
Impact on competitors.
Slide 16.14
Control
Is outcome in accordance with the initial plans
and objectives?
Plans include costs and profit
Timely, relevant and accurate information.
Cost measurement.
Effective communication.
Organisational structure.
Responsibility and authority.
Cascade down/flow upwards
Slide 16.15
Organisation chart
Chair of the board of directors
Managing
director
Production
director
Production
supervisor
Personnel
director
Personnel
manager
Salaries and
wages
co-ordinator
Finance
director
Sales
director
Financial
controller
Sales
co-ordinator
Financial accounting
Creditors
ledger
supervisor
Debtors
ledger
supervisor
Credit
controller
Management
accountant
Project
accountant
Systems
accountant
Part of an organization chart for a manufacturing company, illustrating line

relationships within the overall finance function of the business
Figure 16.1
Slide 16.16
Decision-making
Identify the objectives of the proposed shop
in terms of target sales, target profit and
target return on capital employed.
Planning
Locate suitable premises to rent or buy.

Collect data about expected customers,
similar shops in the area, complementary businesses,
access and expected demand.
Decision-making
Evaluate the options and make a decision,

having regard to the objectives.
Implement the decision.
Control
Compare the actual outcome with the plan.

Decide how to deal with divergences from plan.
Figure 16.2
Managing a decision on the location of a new business

Slide 16.17
Directing attention
Keeping the score
Solving problems
Slide 16.18
Directing attention
Who should take action?
Whose responsibility is this loss?
Who is to be congratulated on this favourable
result?
Highlight those costs which have departed from
expectations
Fairness and timeliness.
Responsibility.
Recognise achievements.
Demonstrate accountability.
Slide 16.19
Keeping the score

How much?
How many?
Record-keeping and
monitoring accounting records against physical
quantities and measures.
Completeness and fairness,
matching costs to a time period,
matching costs to an item of output and
matching costs against revenue of the period.
Slide 16.20
Solving problems
Why did that plan go well?
Why did that action fail?
Which of these three choices is the best to
take?
Relevance
Choices
Base for understanding the problem.
Slide 16.21
Cycle of profit planning and control

Measuring
performance
Implementing
plans
Keeping the score
Solving problems
Environment
Directing attention
Objectives
Operating plans
Strategy
Figure 16.3
Stages in the cycle of profit planning and control

Slide 16.22
Language of management accounting

No standard set of wording.
CIMA guidance and definitions.
Use:
Quick checklist, Appendix 1.
Index.

Functions of Management Accounting

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Slide 16.

Internal users questions (1)

Internal users questions (2)

Internal users questions (3)

Internal users questions (4)

Strategic management accounting

Needs of internal users

Part of an organization chart for a manufacturing company, illustrating line

Locate suitable premises to rent or buy.

Evaluate the options and make a decision,

Compare the actual outcome with the plan.

Managing a decision on the location of a new business

Keeping the score

Cycle of profit planning and control

Keeping the score

Stages in the cycle of profit planning and control

Language of management accounting

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