FIN704 Official Handouts

Definition of Management Accounting:

The Managerial Accounting is another name of Management Accounting so we have been using Management Accounting in our discussion throughout.

Management Accounting may be defined as the “Process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information (both financial & operating) used by the management to plan, evaluate and control within an organization and to assure use of and accountability for its resources.”

Management accounting, therefore, is an integral part of organization process. It provides information essential for:

•  Controlling the current activities of an organization
•  Planning its future strategies, tactics and operations
•  Optimizing the use of its resources
•  Measuring and evaluating performance
•  Reducing subjectivity in the decision making process and
•  Improving internal and external communication

The Concept:

Accountability:

Management accounting presents information measuring the achievement of the objectives of an organization and appraising the conduct of its internal affairs in that process. In order that further action necessary can be taken, based on this information, it is necessary at all times to identify the responsibilities and key result areas of the individuals within the organization.

Controllability:

Management accounting identifies the elements of activities which management can or cannot influence, and seeks to assess the risk and sensitivity factors. This facilitates the proper monitoring, analysis, comparison and interpretation of information which can be used constructively in the control, evaluation and corrective functions of management.

Reliability:

Management accounting information must be of such quality that confidence can be placed in it. Its reliability to the user is dependent on its source, integrity and comprehensiveness.

Interdependency:

Management accounting, in recognition of the increasing complexity of business, must access both external and internal information sources from interactive functions such as marketing, production, personnel, procurement, finance, etc. This assists in ensuring that the information is adequately balanced

Relevancy:

Management accounting must ensure that flexibility is maintained in assembling and interpreting information. This facilitates the exploration and presentation, in a clear, understandable and timely manner, of as many alternatives as are necessary for impartial and confident decisions to be taken. The process is essentially forward looking and dynamic. Therefore, the information must satisfy the criteria of being applicable and appropriate.

Evolution of Management Accounting:

The field of organizational activity encompassed by management accounting has developed through four recognizable stages.

Stage 1 – Prior to 1950, the focus was on cost determination and financial control, through the use of budgeting and cost accounting technologies.

Stage 2 – By 1965 the focus have been shifted to the provision of information for management planning and control, through the use of such technologies as decision analysis and responsibility accounting:

Stage 3 – By 1985, attention was focused on the reduction of waste in resources used in business processes, through the use process analysis and cost management technologies.

Stage 4 – By 1995, attention had shifted to the generation or creation of value, through the use of technologies which examine the drivers of customer value, shareholder value, and organizational innovation.

While these four stages are recognizable, the process of change from one to another has been evolutionary.

Cost determination and financial control

Information for management Planning and control

Reduction of waste of resources in business processes

Creation of value through effective resource use

Comparison of Financial Accounting with Managerial Accounting:-

Financial Accounting · Management Accounting · 1- Origin

Since 1497Double Entry book keeping System. From 19 th century.

2. Purpose

The main purpose of Financial Accounting is to prepare profit and loss account and balance sheet. The main purpose of management accounting is to provide detailed information.

3.

Target

Group

Reporting to owner and outside agencies Mainly to management

4.

Statutory

Requirements

These accounts have to be prepared according to the legal requirements of Companies Acts. Maintenance of these accounts is voluntary.

5. Analysis of · Cost · and · Profit

Financial account reveal the profit or loss of the business as a whole during a particular period. It does not show the figure of cost and profit for individual products, departments and processes. accounts show the detailed cost and profit data for each product line,department, process etc.

6. Period of

reporting

Financial Statements are prepared periodically, usually on an annual basis. Management Reporting is a continuous process that may be daily, monthly, as required by management.

7.

Control

Aspect

It lays emphasis on the recording of financial transactions and does not attach any importance to control aspect. It provides for a detailed system of controls with the help of certain special techniques like standard costing and budgetary control.

8. Nature

It is concenrned almost exclusively with historical records. The historical nature of financial can be easily understood in the context of the purposes for which it was designed. It is concenrned not only with historical costs but also with predetermined costs. This is because management accounting does not end with what has happened in the past.

9-Audit

There is an audit requirement of financial statements. There is no such audit requirements. Cost audit concept is getting importance in some countries.

10.

International

Standards

There are international standards to be followed. There are few guidelines issued by MAC(Management Committee).