Management Accounting

Introduction to Accounting • Process of identifying, measurement, classifying, recording, summarizing and interpretation of the transactions in terms of money to ascertain the result and financial position of business activities of particular period. • An art of recording, classifying, summarizing the transactions in financial terms to reflect financial position of whole transactions. • Accounting information is helpful in making decisions • Useful to managers, creditors, government, suppliers, customers • Increased scope of accounting with increase in the competition and business complexities. (C) 2011 Ghanendra Fago (M .Phil, MBA)

Users of Accounting • Almost all managers in every organization are better equipped to perform their duties when they have a reasonable grasp of accounting data. • Ultimately, all accounting information is accumulated to help managers like company president, a production manager, a hospital or school administrator, a sales manager, a shareholder, a small-business owner, a politician etc. • For example, a knowledge of accounting is crucial for decisions by government agencies regarding research contracts, defense contracts, and loan guarantees. • In fact, a survey of managers ranked accounting as the most important business course for future managers. (C) 2011 Ghanendra Fago (M .Phil, MBA)

Users of Accounting Information External users • Creditors • Government • Suppliers • Customers • Shareholders • Investors • Workers and Unions Internal users • BODS • Chairman • Managers • Employees (C) 2011 Ghanendra Fago (M .Phil, MBA)

Cost Accounting • Costs are the volume of resources sacrificed to produce goods and services. • Cost accounting is the system, which accumulates, classifies and interprets costs to use in performance evaluation and decision-making • Deals primarily with the accumulating cost data needed by the management to control the current operations and plan for future. • Provides accurate and timely information needed to help the business and control costs. • Generally, both financial accounting and management accounting use costs accumulated and classified by the cost accounting for external and internal purposes. • Traditionally, focused in manufacturing cost only but at present it is also used in non-manufacturing concerns for cost control. (C) 2011 Ghanendra Fago (M .Phil, MBA)

Objectives of Cost Accounting • To ascertain cost per unit of different types of products • To ascertain the element of costs • To disclose sources of wastages and prepare report for control • To provide requisite data for fixation of price • To exercise effective control of inventory • To provide useful data for financial decision • To organize cost reduction programme • To advise management for future policies and projects (C) 2011 Ghanendra Fago (M .Phil, MBA)

Financial Accounting • Financial accounting concerns with the preparation of financial statements and reports like income statement and balance sheets of specific periods for external users to show the financial position of the company. • It is a summarized form of the overall financial position of company. It provides information for external users like shareholders, creditors, suppliers, government etc. • The branch of account, which develops information for external decision makers like shareholders, creditors, government, suppliers etc. (C) 2011 Ghanendra Fago (M .Phil, MBA)

Objectives of Financial Accounting • To keep systematic records of financial transactions • To ascertain the results of operations • To reveal the overall financial positions of organization • To report past performance and future prospects (C) 2011 Ghanendra Fago (M .Phil, MBA)

Management Accounting • Management accounting is the branch of accounting, which is concerned with supplying relevant information to managers at appropriate time to enable them to take decisions in organization. • It is the process of accounting, which generates accounting information from both financial accounting and cost accounting and provides essential accounting information to all departments concerned. • Management accounting is the process of identifying, measuring, analyzing, interpreting and communicating accounting information to department concerns to meet organizational goals and objectives. (C) 2011 Ghanendra Fago (M .Phil, MBA)

Definitions of Management Accounting ‘Management accounting is concerned with the accounting information that is useful to management.’ – Robert Anthony ‘information used for formulation of strategy, planning and controlling activities, decision making, optimizing the use of resources, disclosure to shareholders and others external to entity, disclosure to employees and safeguarding assets.'" - CIMA "… the process of identifying, measurement, accumulation, analysis, preparation and communication of financial information used by management to plan, evaluate and control within the organization and assure appropriate use and accountability for its resources." • National Association of Accountants (USA) “Traditionally management accounting systems have focused mainly on reporting financial measures. However, in response to the changing environment management accounting system have began to place greater emphasis on collecting and reporting non-financial quantitative and non-qualitative information necessary in formation of strategy.” Colin Drury (C) 2011 Ghanendra Fago (M .Phil, MBA)

Objectives of Management Accounting • Providing information to the managers the for decision making and planning in revenue and cost projection of organization • Assisting managers in interpretation of financial data that are not understand by internal users • Management accountants are crucial in the most of the case that they become an integral part of management team in the overall management providing necessary information. • Assisting managers in directing and controlling operations through its attention in their function • Motivating managers toward the achievement of organization's goals • Measuring the performance of managers, subunits and employees within organization • Assessing the organizations competitive position, and working with the other managers to ensure organization's long term competitiveness (C) 2011 Ghanendra Fago (M .Phil, MBA)

Role of Managerial Accounting • In pursuing its goals, an organization acquires resources, hires people, and then engages in an organized set of activities. • It is up to the management team to make the best use of the organization's resources, activities, and people in achieving the organization's goals. • Planning • Directing operational activities • Controlling • Decision Making (C) 2011 Ghanendra Fago (M .Phil, MBA)

Accounting's Position in the Organization • Line authority is authority exerted downward over subordinates. All subunits of the organization that are directly responsible for conducting these basic activities are called line departments. • Staff authority is authority to advise but not command. It may be exerted downward, laterally, or upward. Their principal task is to support or service the line departments. Staff activities are indirectly related to the basic activities of the organization. • The top accounting officer of an organization is often called the controller or, especially in a government organization, a comptroller. This executive, like virtually everyone in an accounting function, fills a staff role that the accounting department does not exercise direct authority over line departments. • Rather, the accounting department provides other managers with specialized services including advice and help in budgeting, analyzing variances, pricing and making special decisions. (C) 2011 Ghanendra Fago (M .Phil, MBA)

Distinctions between Controller and Treasurer • Many people confuse the offices of controller and treasurer. The Financial Executives Institute, an association of corporate treasurers and controllers, distinguishes their functions as follows: Controllership 1.Planning for control 2. Reporting and interpreting 3.Evaluating and consulting 4. Tax administration 5.Government reporting 6.Protection of assets 7.Economic appraisal Treasurership 1.Provision of capital 2. Investor relations 3.Short-term financing 4.Banking and custody 5. Credits and collections 6.Investments 7.Risk management (insurance) (C) 2011 Ghanendra Fago (M .Phil, MBA)

Contd. • Management accounting is the primary means of implementing the first three functions of controllership. • The treasurer is concerned mainly with the company's financial matters, the controller with operating matters. The exact division of accounting and financial duties varies from company to company. In a small organization, the same person might be both treasurer and controller. • The controller has been compared with a ship's navigator. The navigator uses specialized training to assist the captain. Without the navigator, the ship may founder on reefs or miss its destination entirely. The navigator guides and informs the captain as to how well the ship is being steered, but the captain exerts the right to command. This navigator role is especially evidence in the first three functions listed for controllership. (C) 2011 Ghanendra Fago (M .Phil, MBA)

Scope of Management Accounting • Financial accounting • Cost accounting • Budgeting and forecasting • Economics, management, finance • Inventory control • Statistical tools • Interpretation of data • Reporting to management • Behavioural issues • Decision analysis and information system (C) 2011 Ghanendra Fago (M .Phil, MBA)

Disadvantages of Management Accounting • Authenticity of information • Requires knowledge of different subjects • Decision by intuition • Not an alternative to administration • Costly • No specific procedures • Possibility of resentment/dislike (C) 2011 Ghanendra Fago (M .Phil, MBA)

ACCA/CA -The responsibility of these professional bodies is to provide assurance concerning the reliability of financial statements. CIMA-One of the main purposes of the CIMA was to establish management accounting as a recognized, professional discipline, separate from the profession of public accounting. ICWA CMA Professional Certifications (C) 2011 Ghanendra Fago (M .Phil, MBA)

Historical Evolution of Management Accounting 1880 - 1925 Most of the product-costing and internal accounting procedures used in this century were developed. 1925-1950s Emphasis of inventory costing for external reporting. 1950s/60s Effort to improve the management usefulness of traditional cost systems. 1980s/90s Significant efforts have been made to radically change the nature and practice of management accounting. (C) 2011 Ghanendra Fago (M .Phil, MBA)

Today’s Economic Environment • Global Competition • Growth of the Service Industry • Advances in Information Technology • Advances in the Manufacturing Environment • Theory of Constraints • Just-in-Time Manufacturing • Computer-Integrated Manufacturing • Customer Orientation • Total Quality Management

Global Competition Vastly improved transportation and communications have led to a global market for many manufacturing and service firms. Growth of the Service Industry As the traditional smokestack industries have declined in importance, the service sector of the economy has increased in importance.

Advances in Information Technology Two significant advances relate to information technology. • Computer-integrated manufacturing • The availability of personal computers, spreadsheet software, and graphics packages

Advances in the Manufacturing Environment The theory of constraintsis a method used to continuously improve manufacturing activities and nonmanufacturing activities. Just-in-time manufacturingis a demand-pull system that strives to produce a product only when it is needed and only in the quantities demanded by customers. Computer-integrated manufacturing is the automation of the manufacturing environment.

Customer Orientation • Firms are concentrating on the delivery of value to the customer. • Accountants and managers refer to the value chain as the set of activities required to design, develop, produce, market, and deliver products and services to customers.

Total Quality Management • Continual improvement and elimination of waste are the two foundation principles that govern a state of manufacturing excellence. • A philosophy of total quality management, in which managers strive to create an environment that will enable workers to manufacture perfect (zero-defect) products, has replaced the acceptable quality attitudes of the past.

Professional Ethics/Code Of Conduct of Management Accountant • As professionals, managerial accountants have an obligation to themselves, their colleagues, and their organizations to adhere to high standards of ethical conduct. • In recognition of this obligation, the National Association of Accountants has developed the following ethical standards for managerial accountants.

Competence Managerial accountants have a responsibility to: • Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills. • Perform their professional duties in accordance with relevant laws, regulations, and technical standards. • Prepare complete and clear reports and recommendations after appropriate analysis of relevant and reliable information.

Confidentiality Managerial accountants have a responsibility to: • Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so. • Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitor their activities to assure the maintenance of that confidentiality. • Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third parties.

Integrity Managerial accountants have a responsibility to: • Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. • Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically. • Refuse any gift, favor, or hospitality that would influence or appear to influence their actions. • Refrain from either actively or passively subverting the attainment of the organization's legitimate and ethical objectives. • Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. • Communicate unfavorable as well as favorable information and professional judgments or opinions. • Refrain from engaging in or supporting any activity that would discredit the profession.

Objectivity Managerial accountants have a responsibility to: • Communicate information fairly and objectively. • Disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of reports, comments, and recommendations presented.

Comprehensive Questions Q.1 What are the major differences between financial and managerial accounting? In what ways are the two fields of study similar? Q.2 “Management accounting helps create value of the firm through profit planning, decision making and control of the activities of the organization” With the light of this statement explain how management accounting creates value of the firm. The objectives of management accounting are to provide data and information to assist the different level of management, in planning, decision making and controlling operations. Discuss. Q3."Managerial accounting provides economic information to facilitate the management process of planning, decision-making and control". Explain and illustrate this statement. Q4. Discuss management accounting and its role in planning controlling and decision making process. Q5. Discuss the role of management accounting in overall management process of a business. Q.6 Discuss the major current trends that are causing role of management accounting today. Q.7 Discuss treasurership and controllership functions of chief executive officer (CFO). (C) 2011 Ghanendra Fago (M .Phil, MBA)

Management Accounting