Management

Accountancy
MM/EBM 2153

Warunika N. Hettiarachchi
 Learning Outcomes of the Module
• Describe the role of Management Accounting within an
organization.
• Interpret the various cost concepts that are fundamental to the
language of management accounting.
• Describe how costs behave and use this information in a range of
decision contexts.
• Distinguish those revenues and costs that are relevant in different
decision situations and use this information to make a variety of
operational decisions.
• Critically evaluate the features of different budgeting systems and
be able to formulate appropriate budgets and calculate and analyze
budget variance analysis.
• Understanding standard costing and variance analysis and
application for management
• Identify and apply various service and product costing methods.
Evaluation methods
• Mid exam - 20%
• Presentation - 10%
• Class Room Quizzes - 10%
• End exam - 60%
100%
Recommended Readings
• Drury, C. (2012)Management Accounting. Thomson Learning,High
Holborn House: London.
• Drury, C. (2006) Management and Cost Accounting. Thomson
Learning, High Holborn House: London.
• Walther, L. M.,&Skousen, C. J. (2013)Introduction to Managerial
Accounting.bookboon .com.
• Pandi, I. M. (2010) Management Accounting.Vikas Publishing house:
New Delhi.
• Lucey, T. (2003) Management Accounting. DP Publication: London.
• Lucey, T. (1998)Costing.Letts Educational, Aldine Place, London.
• Maheswari, S. N.,& Mittal,S.N. (2012)Management Accounting
Principles & Practice(2012). Sultan Chand & Son: New Delhi.
• Bagavathi, R. S. N. P. (2006)Management Accounting, Sultan Chand &
Son: New Delhi.
Management Accountancy
MM/EBM 2153

Introduction
Learning Outcomes of the session
• Definitions for Financial Accounting, Cost Accounting &
Management Accounting
• Distinction between Financial Accounting and
Management Accounting
• Functions of Management Accounting
• Nature of Characteristics of Management Accounting
 Accounting System
• Accounting is often called the “Language of Business”
as it is the means of communicating financial
information which is intended to be useful in making
decisions by economic entities.
• An economic entity may be an individual, a business, a
government agency, a university, a hospital or the total
economy of the nation.
Cont;
• Who are doing Accounting?

• Who are using accounting information?

 Stakeholders

• Managers/ board of directors

• Employees
• Investors/owners/shareholders
• Suppliers/ Creditors
• Customers/ Debtors
• Government
• Lenders/Banks/Finance companies
Accounting
• The process of designing and operating an
information system for collecting, analyzing
and recording business transactions and
summarizing and communicating the
results of these transactions to users to facilitate
the making of economic decisions.
• The process of identifying, measuring and
communicating economic information to permit
informed judgments and decisions by users of
the information.
(American Accounting Association)
Financial Accounting, Cost Accounting &
Management Accounting
•Financial Accounting
The field of accounting that develops information for
external decision makers such as stockholders, suppliers,
bank and government regulatory agencies (internal
decision makers also use)
Ex: Financial Statements
• Management Accounting
The process of identifying, measuring, accumulating,
analyzing, preparing, interpreting and communicating
information that use by management to plan, evaluate
and control within an entity and to assure appropriate use
of accountability for its resources.
-Chartered Institute of Management Accounting
Ex: Quantity purchase under each item, analyzing and
interpreting data based on geographic locations, cost
analysis by separate units
• Cost Accounting
Cost accounting is the part of management accounting
which establishes budgets, standard costs and actual
costs of a product, department, operation or process
and the analysis of variances, profitability or social use
of funds
Ex: XYZ PLC engages in operations in the garment industry.
Cost of a ready-made garment item is given below.
Raw material – fabric 400
Labour cost – cutting and sewing 200
Overhead expenses 200
Unit cost of product 800
 Accounting System

Financial Management
Accounting Accounting
Reports Reports

External and
Internal Decision
Internal Decision
Makers (Managers)
Makers
 Differences Between Financial and
Management Accounting
Financial Accounting
Purpose of To provide general-purpose
Reports information for all users.
Main objective is External
reporting.
Primary Users of External users. stockholders,
Reports creditors, investors and
regulatory agencies.
And internal users
Frequency of Less flexible.
Reports/time Classified financial statements.
span Issued quarterly and annually.
Management Accounting
To provide special-purpose
information for a particular user
for a specific decision.
Main objective is providing
information for decision making
on operations
Internal users. officers, department
heads, managers, and supervisors
in the company (managers at
various levels)
Flexible. Internal reports. Varying
from hourly to 10-15 years.
Issued as frequently as needed.
 Financial Accounting Management Accounting
Freedom of Constrained by generally accepted No constraint or legal requirement
choice/ Legal accounting principles.
requirement
Minimum requirement for the sole
proprietorship
Compulsory requirement for
incorporated companies. Ex:
Companies Act
Time focus Past orientation. Generally based Future orientation. Historical and
on historical data forecasted data are used
frequently
Reporting Financial statements are prepared Management decide the reporting
entity/unit concerning the whole business as a unit and may be very detailed.
one unit.
Scope covered Field is more sharply defined. Field is less sharply defined.
Light use of other related Heavy use of costing, accounting,
disciplines. economics, decision sciences and
behavioral sciences
 Management Accounting (MA)
Management accounting information are using for:
• Decision making
• Formulating strategy
• Planning and controlling activities
• Optimizing the use of resources
• Disclosure to shareholders and other external
parties
• Safeguarding assets
Management Accounting, Decision Making,
planning and Control
 Functions of MA

The basic function of management accounting is

to assist the management in performing
its functions effectively.

The functions of the management are planning,

organizing, directing and controlling.

Management accounting helps in the

performance of each of these functions in the
following ways:
 Cont;

(i) Provides data: Management accounting serves as a vital source of data

for management planning. The accounts and documents are a repository of a
vast quantity of data about the past progress of the enterprise, which are a
must for making forecasts for the future.

(ii) Modifies data: The accounting data required for managerial decisions is
properly compiled and classified. For example, purchase figures for different
months may be classified to know total purchases made during each period
product-wise, supplier-wise and territory-wise.

(iii) Analyze and interpret data: The accounting data is analyzed

meaningfully for effective planning and decision-making. For this purpose
the data is presented in a comparative form. Ratios are calculated and likely
trends are projected.
 Cont;
(iv) Facilitates control: Management accounting helps in translating given
objectives and strategy into specified goals for attainment by a specified time
and secures effective accomplishment of these goals in an efficient manner.
All this is made possible through budgetary control and standard costing
which is an integral part of management accounting.

(v) Uses also qualitative information: Management accounting does not

restrict itself to financial data for helping the management in decision making
but also uses such information which may not be capable of being measured in
monetary terms. Such information may be collected form special surveys,
statistical compilations, engineering records, etc.

(vi) Serves as a means of communicating: Management accounting

provides a means of communicating management plans upward, downward
and outward through the organization. Initially, it means identifying the
feasibility and consistency of the various segments of the plan. At later stages
it keeps all parties informed about the plans that have been agreed upon and
their roles in these plans.
 Scope of MA
(i) Financial Accounting: Management accounting is mainly concerned with the
rearrangement of the information provided by financial accounting. Hence,
management cannot obtain full control and coordination of operations without a
properly designed financial accounting system.

(ii) Cost Accounting: Standard costing, marginal costing, opportunity cost

analysis, differential costing and other cost techniques play a useful role in
operation and control of the business undertaking.

(iii) Revaluation Accounting: This is concerned with ensuring that capital is

maintained intact in real terms and profit is calculated with this fact in mind.

(iv) Budgetary Control: This includes framing of budgets, comparison of actual

performance with the budgeted performance, computation of variances, finding
of their causes, etc.

(v) Inventory Control: It includes control over inventory from the time it is
acquired till its final disposal.
Cont;
(vi) Statistical Methods: Graphs, charts, pictorial presentation, index numbers
and other statistical methods make the information more impressive and
intelligible.

(vii) Interim Reporting: This includes preparation of monthly, quarterly, half-

yearly income statements and the related reports, cash flow and funds flow
statements, scrap reports, etc.

(viii) Taxation: This includes computation of income in accordance with the tax
laws, filing of returns and making tax payments.

(ix) Office Services: This includes maintenance of proper data processing and
other office management services, reporting on best use of mechanical and
electronic devices.

(x) Internal Audit: Development of a suitable internal audit system for internal
control.
 MANAGEMENT ACCOUNTANT

Management accountant is the person who designs the

management information system for the organization,
operates it by means of interlocked budgets, computes
variances and exhorts others to institute
corrective measures.
 Contemporary Developments in
Managerial Accounting
Due to increased global competition from such
countries as Japan and Germany, contemporary
business managers demand different and better
information than they needed just a few years
ago.
The factors on the following slides contribute to
the expanding role of managerial accounting as
we look toward the next century.
Cont;
• Technological Change — Through
computer-integrated manufacturing
(CIM), many companies can now manufacture
products that are untouched by human hands.
Also, the widespread use of computers has
greatly reduced the cost of accumulating,
storing, and reporting managerial accounting
information.
 Cot;
• Quality — Many companies have installed a
total quality control (TQC) system to reduce
defects in finished products. More emphasis is
now put on nonfinancial measures
Ex: customer satisfaction, number of service
calls, and time to generate reports.
• Attention to these measures, which employees
can control, leads to increased profitability.
Cot;
5-29

Just-in-Time Inventory and Production

Management- No materials are purchased and no
products are manufactured until they are needed.

The primary goal of a

JIT production system is
to reduce or eliminate
inventories at every
stage of production.
Cont;
• Focus on Activities — In order to obtain more
accurate product costs, many companies are
accounting for overhead costs by the activities
used in making the product. Activities include
purchasing materials, handling raw materials,
and production order scheduling. This
development is called activity based costing
(ABC).
Cont;
• Service Industry Needs — In some respects,
the challenges for managerial accounting are
greater in service enterprises than in
manufacturing companies. In some companies,
it may be necessary for the managerial
accountant to develop new systems for measuring
the cost of serving individual customers and new
operating controls to improve the quality and
efficiency of specific services.
Cont;
A Final Comment — Not long ago, the
managerial accountant was primarily engaged in
cost accounting – collecting and reporting
manufacturing costs to management. Today,
the managerial accountant’s responsibilities
extend to cost management – providing
managers with data on the efficient use of
company resources in both manufacturing and
service industries.
Cont;
• New trends in Accounting
Ex: Environmental Accounting
HRM Accounting
Social Responsibility Accounting
 Limitations of MA
• Based on Financial and Cost Records
Accuracy and validity of MA largely based on the
accuracy if financial and cost records maintained.
• Personal Bias
Analysis and interpretation of MA fully depending upon
the capability of the analyst and interpreter. Hence,
personal prejudices and bias of an individual can affect
the objectivity and effectiveness of the conclusions and
recommendations.
• Lack of Knowledge and Understanding of the
Related Subjects
Financial accounting, cost accounting, statistics,
economics, marketing, psychology and sociology are the
related disciplines of MA. More benefits of MA can
derive if the management accountant has thorough
knowledge over related subjects. If not so, the success of
MA system is questionable.
• Costly Installation
The cost of installation of MA system is very high. Small
business organization can not bear the cost.
• Broad Based Scope
The scope of MA is very wide since it considers both
monetary and non-monetary transactions of the business
organization. The limited knowledge and experience of
the management accountant can lead to prepare the data
unreliable and undependable.
•Preference to Intuitive Decision Making
MA is a tool to give advice and facilitate the management
for decision making. The actual decisions, their
implementation and follow up action are the due of the
management. majority of the management accountant and
top level executives prefer their past experience and
intuition in making business decisions.
Thank You