The Nature of Management Accounting

1. 15 The Nature of Management Accounting

2. Financial Accounting • Focuses on preparation of FS required by GAAP. • Prepared for use by external users. • Provides an overall picture of an entity’s financial condition and results of activities.

3. Management accounting • Process that provides info used by managers for: • Planning, implementing, and controlling. • Applies to all organizations. • Management needs more detailed info. • Accounting systems provide operating info needed for operating decisions. • Managers are interested in summaries. • In general, management accounting is summary information.

4. Certified Management Accountants (CMA) • Professional designation for management accountants. • Four part exam, continuing education, code of ethics. • Administered by Institute of Certified Management Accountants, affiliated with Institute of Management Accountants (IMA).

5. Accounting Jobs • Management accountant: • Members of an organization who design and operate management accounting system. • Controller • Highest level accountant; has financial and management accounting responsibility reports to Chief Financial Officer (CFO). • Treasurer • Responsible for cash management, that is, raising cash when needed by borrowing, issuing stock or issuing bonds and investing excess cash.

6. Management vs. financial accounting (page 1 of 6) • Necessity • Financial Accounting (FA): SEC (or banks or suppliers) requires publicly traded companies to publish financial statements according to GAAP. • Management accounting (MA) is optional. • Purpose. • FA: Produce financial statements for outside users. • MA: Help managers plan, implement and control.

7. Management vs. financial accounting (2 of 6) • Users. • FA: faceless group, external users, present or potential shareholders. • MA: Known managers who influence information needs. • Underlying structure. • FA: built around: Assets = Liabilities + Stockholders’ Equity. • MA: 3 purposes each with its own set of concepts and constructs (addressed later).

8. Management vs. financial accounting (3 of 6) • Source of principles. • FA: GAAP. • MA: whatever managers believe useful. • Time orientation. • FA: historical, tell it like it was. • MA: future/decision oriented, tell it like it will be. (However, past is often a good predictor of future.)

9. Management vs. financial accounting (4 of 6) • Information content. • FA: summary of primarily monetary events • MA: non-monetary as well as monetary info. • Information precision. • FA: Uses approximations but as a generalization is more precise than MA. • MA: Management needs info rapidly to be useful in decision making and therefore precision is sometimes sacrificed.

10. Management vs. financial accounting (5 of 6) • Report frequency: • FA: Publicly traded, SEC: quarterly, with more detailed info annually. • MA: Up to management. • Report timeliness. • FA: Usually, several weeks to months after fiscal close of accounting period. • MA: Quickly to be useful for decision making.

11. Management vs. financial accounting (6 of 6) • Report entity. • FA: Organization as a whole. • MA: Relatively small parts (responsibilities centers such as departments, product lines, divisions, subsidiaries as well as organization as a whole.) • Liability potential. • FA: May be sued by shareholders if believed to be misleading. • MA: Used internally unlikely to give rise to legal liability.

12. Similarities • Most elements of financial accounting also found in management accounting. • Same considerations that make sense for GAAP also make sense for MA. • Systems are designed to reduce redundancies and provide info for both FA & MA. • Both are used for decision making, one by investors and one by managers, so there are similarity of uses.

13. Types of management accounting info and their uses • Purposes of MA system: • Measurement of revenues, costs, and assets. • Control. • Aid decisions among alternative courses of action. • For each purpose there is a set of principles and generalizations.

14. Characterization of Management Accounting Reporting • Historical information: • Score keeping (How are we doing?) or • Attention directing (What problems require looking into?) • Future estimates: • Problem solving (What is best way to deal with a problem?) • Influencing impact (influences actions of managers).

15. Measurement • Full cost accounting measures resources used in performing some activity. • Full cost of producing goods or providing services = direct costs + indirect costs. • Direct costs = costs directly traced to goods or services. • Indirect costs = fair share of costs incurred jointly in producing goods or services.

16. Control • Costs (also, revenues and assets) are identified to and measured by responsibility center. • A manager heads each responsibility center. • Corrective action can only be taken by individuals. • To help identify problems (and opportunities) actual costs are measured and compared to a benchmark (budget, last year, industry average).

17. Alternative choice decisions • Differential costs of alternative possible actions are developed. • Management may only consider direct costs for some short run decisions.

18. Databases • Spreadsheets: • Two dimensional arrays of data. • Database systems: • n-dimensional arrays and tailor made reports. • Allows linkages among data, various manipulations and sorts of data, and quickly available reports to help decision making.

19. General observations on MA • Different numbers for different purposes. • Many different types of costs: historical, standard, overhead, variable, fixed, differential, marginal, opportunity, direct, estimated, full, etc. • Clarify which type you are talking about. • Accounting numbers are approximations. • Best that we can with incomplete data. • Accounting evidence is only partial evidence other factors help make decisions. • People not numbers get things done. How you use the numbers is as important as how the numbers are produced.

20. 15 End of Chapter 15