Introduction to

Management Accounting

1
Definition
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 (economics resources).

2
The Institute of Certified Management
Accountants(ICMA), states "A management
accountant applies his or her professional
knowledge and skill in the preparation and
presentation of financial and other decision
oriented information in such a way as to
assist management in the formulation of
policies and in the planning and control of
the operation of the undertaking.”

3
Need For MA
Increasing complexity of Managerial
decisions
Increase in size & Problems of Corporate
entities
Different sets of information to different
levels of Management
Relevant & timely information to take
decisions
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Functions of MA
To provide relevant data
To provide qualitative as well as quantitative
information
Modification of data
Analysis & Interpretation
Assistance in planning
Facilitate in overall control

5
Scope
Financial accounting
Cost accounting
Tools & Techniques of financial analysis
Statistics
QT
Management reporting
Economics

6
Objectives of MA
Formulating strategy|strategies
Planning and constructing business
activities
Helps in making decision
Optimal use of Resources
Supporting financial reports preparation
Safeguarding asset

7
 Managerial Accounting and Financial
Accounting

Managerial accounting Financial accounting

provides information provides information
for managers inside an to stockholders,
organization who creditors and others
direct and control who are outside
its operations. the organization.

8
Management Accounting –vs- Financial
Accounting

Primary Users

MA: Internal managers of the business

FA: External - Investors, Creditors,

Government authorities

9
 Financial and Managerial
Accounting
Financial Accounting Managerial Accounting

Users of Accounting Information

Shareholders
Shareholders Management
Management
Creditors
Creditors
Government
Government
General
General Public
Public
Management
Management

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 Users of Accounting Information

Management Accounting Financial Accounting

External Users
Internal managers
Investors: Stockholders

Creditors:
Day-to-day operating decisions Suppliers
Long-range strategic decisions Bankers

Government Authorities
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Managerial Management
Reports

Accounting
Users: Management
Characteristics: Objective
Objectiveand
andsubjective
subjective
Prepared
Preparedaccording
accordingto
to
management
managementneeds
needs
Prepared
Preparedperiodically
periodically
or
oras
asneeded
needed
Business
Businessentity
entityor
orsegment
segment
12
 Financial Financial
Statements

Accounting
External Users and
Users:
Management
Characteristics: Objective
Objective
Prepared
Preparedaccording
according
to
toGAAP
GAAP

Prepared
Preparedperiodically
periodically

Business
Businessentity
entity
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Characteristics of Management Accounting
Information

Timeliness
Timeliness
Identify
Identify Decision-
Decision-
AAMeans Making
MakingAuthority
Authority
Meanstotoan
an
End
End

Measures
Measuresof of Oriented
OrientedToward
Toward
Efficiency
Efficiencyand
and Future
Future
Effectiveness
Effectiveness

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 Management Accounting and Financial
Accounting

Purpose of Information

MA: Help managers plan and

control business operations

FA: Help investors, creditors, and others make

investment, credit, and other decisions

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 Management Accounting and Financial
Accounting

Focus and Time Dimension

MA: Relevance, focus on future

FA: Reliability, objectivity, and focus on the past

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 Management Accounting and Financial
Accounting

Type of Report

MA: Internal reports not restricted by GAAP,

determined by cost benefit analysis

FA: Financial statements restricted by GAAP

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Management Accounting and Financial
Accounting

Verification

MA: No independent audit

FA: Annual independent audit by CAs

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Management Accounting and Financial
Accounting

Scope of Information

MA: Detailed reports on

parts of the company

FA: Summary reports primarily

on the company as a whole

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Management Accounting and Financial
Accounting

Behavioral Implications

MA: Concern about how reports

will affect employees behavior

FA: Concern about adequacy of disclosure

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 Role of Management Accountants
• Help management pursue the firm’s goals
• Internal consultants or business analysts
• Time spent interpreting data vs creating it
• Physically positioned in operating department
• Work on cross-functional teams
• Extensive face-to-face communications
• Actively involved in decision making
• Trusted advisors
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 Management Accountant’s Role as
Internal Consultant
Collects Prepares
and compiles standardized
information reports

Internal
Consultant

Interprets and Is Involved

Analyzes information In decision making

Management
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Management Accounting Change Drivers

Shift from a manufacturing-based

to a service-based economy

Increased global competition

Advances in technology

Changes in business processes

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 The Changing Business Environment

•• Growth
Growthof ofthe
theinternet
internet
•• Accelerated
Acceleratedpace
pacein
in
innovation
innovationof ofproducts
productsand
and Business environment
services
services changes in the past twenty
years
•• International
Internationalcompetition
competition

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Code of Ethics for Management Accountants

Follow
Followapplicable
applicablelaws,
laws,
regulations
regulationsand
andstandards.
standards.

Maintain
Maintainprofessional
professional
competence.
competence.
Competence
Competence

Prepare
Preparecomplete
completeand
andclear
clearreports
reports
after
afterappropriate
appropriateanalysis.
analysis.

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Code of Ethics for Management Accountants
Do
Donot
notdisclose
discloseconfidential
confidential
information
informationunless
unlesslegally
legallyobligated
obligated
to
todo
doso.
so.

Do
Donot
notuse
use
confidential
confidential
information
informationfor
for
personal
personaladvantage.
advantage. Confidentiality
Confidentiality

Ensure
Ensurethat
thatsubordinates
subordinatesdodonot
not
disclose confidential information.
disclose confidential information.

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Code of Ethics for Management Accountants

Avoid
Avoidconflicts
conflictsof
ofinterest
interestand
and
advise
adviseothers
othersofofpotential
potential
conflicts.
conflicts.

Do
Donot
notsubvert
subvert
organization’s
organization’s
legitimate
legitimateobjectives.
objectives. Integrity
Integrity

Recognize
Recognizeand
andcommunicate
communicate
personal
personaland
andprofessional
professionallimitations.
limitations.

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Code of Ethics for Management Accountants
Avoid
Avoidactivities
activitiesthat
thatcould
couldaffect
affect
your
yourability
abilityto
toperform
performduties.
duties.

Refrain
Refrainfrom
from Refuse
Refusegifts
giftsor
or
activities
activitiesthat
that favours
favoursthat
that
could
coulddiscredit
discredit might
mightinfluence
influence
the
theprofession.
profession. Integrity
Integrity behavior.
behavior.

Communicate
Communicateunfavorable
unfavorableasaswell
well
as favorable information.
as favorable information.

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 Ethics

Reliabilit
y
Trust Integrity

No regulation can be as effective in

ensuring reliability as high ethical
standards of accountants.

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Primary tasks / services performed by
Management Accountants….
Variance Analysis
Rate & Volume Analysis
Price Modeling
Product Profitability
Geographic vs. Industry or Client Segment Reporting
Sales Management Scorecards
Cost Analysis
Cost Benefit Analysis
Cost-Volume-Profit Analysis

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….Primary tasks / services performed by Management Accountants
Life cycle cost analysis
Client Profitability Analysis
Capital Budgeting
Buy vs. Lease Analysis
Strategic Planning
Strategic Management Advise
Internal Financial Presentation and Communication
Sales and Financial Forecasting
Annual Budgeting
Cost Allocation
Resource Allocation and Utilization

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Examples of Management Accounting
Statements

Process costing
Absorption costing
Marginal costing
Flexible/variable budget
Break-even analysis
Accounting Rate of Return
Payback method
Net Present Value/Internal Rate of Return
Standard costing
Limiting factor
Master budgeting (encompassing sales budget, production budget,
cash budget, etc
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Limitations of Management
Accounting
1. It is based on the information that is derived from
financial and cost accounting and management
accounting depends upon the accuracy of that
information and hence it is dependent on it.
2. Since management accounting requires knowledge of
subjects like economics, statistics, technology etc…
and hence management accountant needs to have full
information on all these subjects which is very difficult in
practice and hence in this age of specialization it is very
difficult to have such type of person who can handle
management accountancy with expertise.
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 It is subjective because of lack of certain rules and
hence it is more dependent on the person who is
handling the management accounting rather than on
anything else.
4. It is very costly and hence few organizations can
adopt it which limits its use.
5. It is still in evolutionary stage because it is a new
discipline and hence it will take time to develop into
more advanced stage like that of financial accounting.
6. In other words it is not an alternative to
management; it is only a tool that provides the
information to management so as to help them in
decision making.
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35
 Organizational Structure
Decentralization
Decentralizationis
isthe
thedelegation
delegationof
ofdecision-making
decision-makingauthority
authority
throughout
throughoutananorganization.
organization.

C o r p o r a te O r g a n iz a tio n C h a r t
B o a r d o f D ir e c t o r s

P r e s id e n t

P u r c h a s in g P e rs o n n e l V ic e P r e s id e n t C h ie f F in a n c ia l
O p e r a t io n s O f f ic e r

T re a su re r C o n t r o lle r
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 The Functions of Management

Planning Acting Controlling

Feedback

37
Partial Organization Chart – Callaway Golf Company

Chief
ChiefExecutive
Executive
Officer
Officer

Vice-President
Vice-President
Vice-President— Vice-President— New Chief Financial
Global Sales Manufacturing NewProduct
Product Officer
Development
Development

Plant Manager--
Manager——Pro Manager—Shaft
Carlsbad, CA Controller
Tour Relations Development
Plant

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 Differences Between Financial and
Managerial Accounting

Financial Accounting Managerial Accounting

1. Users External persons who Managers who plan for
make financial decisions and control an organization

2. Time focus Historical perspective Future emphasis

3. Verifiability Emphasis on Emphasis on relevance
versus relevance verifiability for planning and control

4. Precision versus Emphasis on Emphasis on

timeliness precision timeliness

5. Subject Primary focus is on Focuses on segments

the whole organization of an organization

6. Requirements Must follow GAAP Need not follow GAAP

and prescribed formats or any prescribed format

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Major Influences on Management Accounting

Advances in technology:
E-commerce
Enterprise resource planning (ERP)

Business process reengineering:

Just-in-time (JIT) philosophy
Lean manufacturing
Computer-integrated manufacturing
Six sigma

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