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MANAGEMENT ACCOUNTING: Overview

(Williams)

Accounting language of business
Primary objective provide information that is useful for
decision-making process
Accounting information means by which we measure and
communicate economic events

To understand and use accounting information, in making
economic decisions, one must understand the ff
Nature of economic activities that accounting
information describes
Assumption and measurement techniques involved
in developing accounting information
Information that is most relevant for making various
types of decisions

TYPES OF ACCOUNTING INFORMATION:
Financial, management, tax, etc.

Financial accounting: information describing the financial
resources, obligationsm and activities of an economic
entity ; general purpose accounting information

Management accounting:
- managerial
-development and interpretation of accounting
information intended specifically to assist the
management in operating the business
-managers use this information in setting the
companys overall goals, evaluating the performance of
depts and individuals, deciding whether a new line of
products and making virtually all types of managerial
decisions

Management Accounting Information
-internal decision makers employed by the enterprise
(management) create and use internal acctg info not only
for exclusive use inside the org but also to share with external
decision- makers; Info NOT made available to external
decision makers include:
-Long-range plans
-Research and devt results
-Capital budget details
-Competitive strategies
-Closely guarded corporate secrets


Users of Internal Accounting Information

Every employee of the enterprise uses internal accounting
info; examples: Board of Directors, CEO, CFO, Vice Presidents
(info.sys, HR, treasurer,etc), business unit managers, plant
managers, store managers, line supervisors

All enterprises follow rules about the design of their acctg info
sys to ensure integrity of acctg info and to protect the
enterprises assets. There are no rules, however, about the
type of internal reports or type of acctg info that can be
generated

Objectives of Management Acctg Info

The objectives begin at the general level with the objectives
and mission of the enterprise; these general org. goals create
a need for info. The enterprise gathers historical and future
info from both inside and outside the enterprise and external
resources. This info will be used by decision makers who have
authority over the firms resources and who will be evaluated
and rewarded based on their decision outcomes.

Characteristics of Management Acctg Info
TIMELINESS acctg info needs to be timely in order
to plan for and control ongoing business processes;
competitive environment demands immediate access
to info computer databases; constant monitoring
and control of ongoing activities

IDENTITY OF DECISION MAKER info must be
provided to those who have decision-making
authority to correct problems

ORIENTED TOWARDS THE FUTURE the purpose in
creating and generating it is to affect the FUTURE
for the best interest of the enterprise (with its goals
objective, mission)

MEASURES OF EFFICIENCY AND EFFECTIVENESS
acctg info measures efficiency and effectiveness of
outputs and inputs/ resource usage; money as
common unit

MANAGEMENT ACCTG INFO means to an end, not
an end in itself; the ultimate objective is to design
and use an acctg system that helps management
achieve the goals and objectives of the enterprise


CAREERS IN MA
A public accountant serves many clients while a management
accountant works for one

Chief Financial Officer (CFO) or controller chief accounting
officer of an org; controller used to emphasize the fact that
one basic purpose of acctg data is to aid in controlling
business operations; part of top management; responsible for
running the business, setting the objectives and seeing that
objectives are met

AREAS OF SPECIALIZATION IN MA

Financial Forecasting financial forecast (budget) plan of
financial operations for some future period; much like
financial reporting, except that the accountant is estimating
FUTURE outcomes rather than reporting past results; provides
financial goals; comparison of results with forecast amounts is
a means of performance evaluation

Cost Accounting knowing the cost of each business
operation and of each manufactured product for efficient
management; interpretation of cost data

Internal Auditing study of the internal control structure and
evaluation of efficiency of many different aspects of
companys operations; not independent of the org; do not
perform independent audits


(Drury - Thomson)

AAA - Accounting is the process of indentifying, measuring
and communicating economic information to permit informed
judgments and decisions by users of the information

acctg provides both financial and non-financial information
that will help decision makers to make good decisions

Management acctg is concerned with the provision of
information to people within the organization to help them
make better decisions and improve the efficiency and
effectiveness of existing operations

Financial acctg is concerned with the provision of information
to external parties outside the organization




DIFFERENCES:

Legal requirements : there is a statutory requirement for
public limited companies to produce annual financial accounts
regardless whether or not management records are useful;
management acctg is optional and info is produced if benefits
of use of such info exceed the cost of collecting it

Focus on individual parts or segments of the business:
FInancial acctg reports to describe the whole of the business;
management acctg focuses on small parts -cost and
profitability of products, services, customers and activities;
also measures economic performance of decentralized
operating units - divisions and departments

Standards: Financial Acctg statements must conform with the
legal requirements and principles established by regulatory
bodies for the uniformity and consistency needed for external
financial statements, and for inter-company and historical
comparisons to be possible; management accountants are not
required to adhere principles and the focus is on serving
management needs and providing info that is useful to
managers relating to their decision-making, planning and
control functions

Time dimension: financial accounting reports what has
happened in the past in an organization while management
accounting is concerned with future info as well as past info
with decision concerned with future events and management
therefore requires details of expected future costs and
revenues

Report frequency: a detailed set of financial accounts is
published annually and less-detailed accounts are published
semi-annually while management requires info quickly if it is
to act on it, then it reports in various activities which is to be
prepared at daily, weekly or monthly intervals

Planning & Control
1. Identify objectives
2. Search for alternative courses of action
3. Gather data about alternatives
4. Select alternative courses of action
5. Implement the decisions
6. Compare actual and planned outcomes
7. Respond to divergencies from plan

Planning: 1-5
Controlling: 6-7


Identifying Objectives

Economic theory normally assumes that the firms seek to
maximize profits for the owners of the firm, but some writers
believe that businessmen are content to find a plan that
provides satisfactory profits rather than to maximize profits.

bounded rationality - people have limited powers of
understanding and can deal with only a limited amount of
information at a time, they tend to search for solutions only
until the first acceptable solution is found

satisficing - behavior where the search is terminated on
finding a satidfactory, rather than the optimal solution

Any excess benefits after meeting the minimum constraints
are seen as being the object of bargaining between the
various groups - shareholders, employees, customers,
suppliers and gov't (Cyert and March )

It is simplistic to say the only objective of a business firm is to
maximize profits, other managers seek to build a power base,
an empire, security and the removal of uncertainty regarding
the future may override the pure profit motive.

The view adopted in MA is to maximize the value of future net
cash inflows (future cash receipts less cash payments) or to be
more precise the present value of future net cash inflows,
hence maximizing shareholder value.

Search for Alternative Courses of Action
The search for alternative courses of action involves the
acquisition of info concerning future opportunities and
environments; most difficult and important stage of the
process

Gather Data about Alternatives
Management should assess potential growth rate of activities,
the company's ability to establish adequate market shares and
the cash flows for each alternative for various states of
nature.

state of nature - uncontrollable factors such as economic
boom, high inflation, recession, the strength of competition,
etc

long-run or strategic decisions - dictate the firm's long-run
possibilities and the type of decisions it can make in the
future; concern of top management

short-term or operating decisions - concern for lower-level
managers; based on today's environment and resources
present;y available to the firm, determined byt he quality of
the firm's long-tem decisions

Selecting Appropriate Alternative Courses of Action

Decision-making involves choosing between competing
alternative courses of action and selecting the alternative that
best satisfies the objectives of an organization.

objective: to maximize future net cash flows
incremental analysis of the net cash benefits for each
alternative should be applied, alternatives are ranked in terms
of net cash benefits

Implementation of Decisions

The selected alternative courses of action should be
implemented as part of the budegeting process

budget - financial plan for implementing the various decisions
that management has made ;expressed in terms of cash
inflows and outflows, sales revenues and expenses, then
merged together into a unifying statement

master budget - a unifying statement of the organization's
expectations for future periods; consists of a budegeted profit
and loss account, cash flow statement and balance sheet

budgeting process - communicates to everyone in the
organization the part that they are expected to play in
implementing management's decisions

Comparing Actual and Planned Outcomes and Responding to
Divergencies from Plan

*final stages

control- managerial function which consists of the
measurement, reporting and subsequent correction of
performance in an attempt to ensure that the firm's
objectives and plans are achieved

performance reports - prepared by accountants to monitor
performance, consisting of a comparison of actual outcomes
(actual costs and revenues) and planned outcomes (budgeted
costs and revenues) issued at regular intervals; should provide
feedback

management by exception- highlight activities which dont
conform to plans, so managers devote scarce time to them

effective control requires corrective action, or unattainable
plans may be required to be modified

A product's life cycle is the period of time from initial
expenditure on research and development to the time at
which support to customers is withdrawn. To compete
successfully, companies must be able to manage their costs
effectively at the design stage, have the capability to adapt to
new, different and changing customer requirements and
reduce the time to market new and modified products.

A cost and management accounting system should generate
info to meet the ff requirements. It should:
1. allocate costs between cost of goods sold and inventories
for internal and external profit reporting
2. provide relevant info to help managers make better
decisions
3. provide info for planning, control and performance
measurement


(Weetman Pearson)

Management is a collective term for all those persons who
have responsibilities for making judgements and decisions
within an organisation. Because they have close involvement
with the business, they have access to a wide range of
information (much of which may be confidential within the
organisation) and will seek those aspects of the information
which are most relevant to their particular judgements and
decisions.

Management accounting is a specialized branch of accounting
which has developed to serve the particular needs of
management.

In decision making, profit margins is related to the effective
use of assets. The profit margins will be improved either by
improving sales or by controlling costs, or through a mixture
of both. Assets will be used more effectively if they create
more profit or higher sales. Achieving these targets requires a
range of managerial skills covering sales, production and asset
management. Identifying the relevant costs and revenues,
measuring the achievement of targets and communicating the
outcomes within the organisation are all functions of
management accounting. The chief executive will need to
form judgement on whether the decisions taken are likely to
satisfy investors and maintain their confidence in the
management team.

contingency theory - describes the process of creating a
control system for a given set of purposes

The traditional approach to management accounting has been
to regard internal decision makers as inward looking. This has
led to developing techniques for identifying, measuring and
communicating costs where only internal comparisons have
been thought relevant.

However, the later years of the twentieth century brought an
increasing awareness that company managers must be
outward looking.

strategic management accounting- applies to the
identification, measurement and communication of cost data
in all these situations where the organisation is being judged
against the performance of
competitors.

Management accounting is concerned with reporting
accounting information within a business, for
management use only.
Management takes its widest meaning in describing
all those persons (managers) responsible for the day-
to-day running of a business.
The managers of a business carry out functions of
planning, decision making and control.
Management accounting supports these
management functions by directing attention,
keeping the score and solving problems.
The contingency theory of management accounting
explains how management accounting methods have
developed in a variety of ways depending on the
judgements or decisions required.
Strategic management accounting pays particular
attention to the provision and analysis of financial
information on the firms product markets and
competitors costs and cost structures, and the
monitoring of the enterprises strategies and those of
its competitors in these markets over a number of
periods.

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